Modernize. Or Die.
Recent client engagements have renewed my conviction that Banks must modernize. Or die.
Over the course of the last 20 years, banks have either consolidated and gotten bigger, or closed up shop to the point that there are roughly 40% fewer of them in the U.S. today. The same is true for credit unions.
In 2019 I wrote that this trend, if it continues unabated, will “mean a championship round between a handful of large-scale fintechs versus the top 50 banks.” It’s worth considering an updated view of the data driving that belief.
In that piece, I shared that PayPal’s 2018 annual report showed 267M active users. Today? 426M. A 60% increase. Total payments volume? Then: $578B. Today: $1.25T. That’s Trillion with a ‘T.’ A 116% increase. As of December 2018, PayPal was holding $20B of its customers’ cash. Today, it’s $36B. An 80% increase. With $76B in assets, PayPal would be a top 50 bank. If it were a bank. *wink*
PayPal offers direct deposit to users’ PayPal Balance accounts, and a Mastercard-branded debit card so users can pay at POS wherever its QR code payments system isn’t accepted. I can pay bills via PayPal. In effect, I could do all the day-to-day banking/payments I need to do with that one, on-device relationship.
When I wrote that article in 2019, Apple Card hadn’t yet been announced. The combination of its bar-setting cardholder-acquisition experience with enhanced Apple Cash rewards propelled it from zero to nearly 7M users in the three years since. Many of my clients took proper notice. Some in the industry dismissed it as uncompelling. Coming Spring 2023, Apple is expected to release a savings account for Apple Cash, which can be supplemented by funds from linked bank accounts. I’d wager that direct-deposit access isn’t far behind.
You needn’t be a Nobel-prize winning futurist to see a major trend taking shape. I’ve said before that payments are the gateway to the rest of the relationship financial institutions will have with the consumers they serve. These challengers to your status quo represent more than just market pressure to innovate.
Even if you are running a top-50 Bank with all the advantages that entails, you can’t ignore this. So, how should you respond? What does ‘modernize or die’ mean?
Consider these suggestions:
Recognize the trend and its threat to your business. Understand that consumer expectations can shift rapidly. Some will point out that we still write a lot of checks today. They may say, ‘Relax. Consumers don’t really change that fast.’ Well, Apple and PayPal don’t ‘relax.’ And the break-neck pace of consumer adoption of their services (even by some folks who might still write a check or two), shouldn’t give anyone in your C-suite ‘relax’ vibes.
Evaluate your technology stack in terms of its ability to allow you to rapidly respond to market needs with maximum control, flexibility, and operational and cost efficiency. Can you build a new financial product without limits and release it quickly? Does your current banktech stack enable your ideal response to shifting consumer demand? If your answer is ‘no’, then…
Migrate from monolithic, legacy technologies and the limits they place on your business to modern, cloud-native, microservices architecture that solves for those decades-old limitations. A modern technology stack that takes full advantage of cloud-native computing means your institution can de-risk iteration and delivery of innovative new products and services.
The flexibility of a modernized tech stack also extends to deployment. That big-bang weekend cutover is no longer necessary. Forward thinking institutions who’ve already committed to this transformation are recognizing the opportunity to stand up new systems in parallel to their legacy systems. They’re starting with new products and new customers to de-risk a mass migration. Your back book can transition over time.
Integration to major channels as well as downstream dependencies remains a key aspect of any modernization initiative. Access to a full-suite API ecosystem is critical to realizing the benefits of digital transformation across every endpoint, and in any edge case.
One more: I’ve heard some clients share concerns about finding talent to run newer technology. It’s sometimes an excuse not to move. I’d suggest the talent you need to attract is more likely to come to your institution if they know you’ve adopted the technologies that interest them, challenge them, and keep them relevant. Also, keep in mind the folks you have on staff to run that system developed four decades ago are going to want to retire someday soon, if they haven’t already given notice.
Digital transformation in banking isn’t a matter of if, but when. And how many. i.e. How many of you will be standing when it’s done. Given my respect for community financial institutions as the backbone of the economy (and, yes, even the big guys), I hope it’s all of you.
Your immediate goal with such a transition may be to drive scalability, flexibility and control, resilience, and operational efficiency. Just keep in mind the greater good, which is to modernize. And not die.
