As technology budgets gradually rise to meet today’s digital challenges, community banks are finding that there are more and more demands on those dollars, from core system upgrades to emerging offerings. What can you do to make the most of your IT investment?
By Karen Epper Hoffman
Technology is essential not only to reaching out to customers, but also to how banks manage their own operations. So, it’s hardly surprising that bank information technology spending will grow to $114.9 billion by 2021, according to Celent.
Total spending on bank IT will increase an average of 4 percent per year for the next three years, the financial services technology research firm reports. Despite this greater commitment, community banks often struggle with a number of factors: leaving tech-buying decisions solely to their IT departments, thin budgets, overlooking the return on their investment and simply not focusing on the technology that would best suit their bank and customers.
Despite all that, technology decisions loom larger than ever for financial institutions. The pressure to upgrade existing systems and implement new applications and services is therefore driving community banks to consider their options more carefully and plan more strategically.
“Institutions have to become technology, digital and cybergovernance specialists to keep up with the fast pace of change. It’s a bit of a constant information overload.”
—Brad Bolton, Community Spirit Bank
“The overall landscape is paved with all sorts of new challenges,” says Brad Bolton, president and CEO of $145 million-asset Community Spirit Bank in Red Bay, Ala. “Institutions have to become technology, digital and cybergovernance specialists to keep up with the fast pace of change. It’s a bit of a constant information overload.”
Indeed, today’s customers have come to expect an “always-on” experience. “That can be difficult for smaller institutions to offer,” Bolton says. “The solutions that assist in offering the experience today’s customer wants are often very costly. These costs are not ones that can be passed on to the customer. They expect it to be free, because that is the new normal.”
As community banks rely so greatly on their relationships with their core vendors, Bolton points out that it can often be difficult to integrate new technologies. “So what your customer base is wanting, you may or may not be able to fully offer,” he says.
Paul Schaus, president and CEO of CCG Catalyst Consulting Group, says he keeps hearing the same thing from his bank clients. “No matter the size, it’s really about how they can create differentiation when they all buy the same [technology]. They’re all looking for something new,” he says.
Core of the issue
U.S. core banking vendors—chiefly FIS, Fiserv and Jack Henry & Associates—have been hard at work in recent years rapidly updating and expanding their offerings, often through strategic acquisition. Most recently, they’re working on allowing easier integration with outside financial technology software, which had previously stymied community banks, according to Schaus and other industry experts. “They will become more agnostic, allowing banks to customize the end-client experience,” he says. “[Core vendors] realize they need to create more flexibility. It’s all about the end-client experience.”
Indeed, there’s “a lot of money flowing to the applications and middleware sides” of IT for community banks, he adds.
John Buhrmaster, president and CEO of $475 million-asset 1st National Bank of Scotia in Scotia, N.Y., says he constantly bugs his community bank’s IT vendors to keep up with the latest innovations. “They’re doing a good job with existing systems, but as far as new products, that’s where it gets trickier,” he says.
Being a smaller bank, 1st National Bank of Scotia often must wait for months or years after signing up to get up and running with emerging payments or fintech offerings, as vendors usually prioritize larger bank customers, Buhrmaster says. The community bank has been on the waitlist to offer Apple Pay for years and has yet to queue up to offer customers the increasingly popular Zelle payments service. “Our vendor is just not ready yet. They’re triaging it,” Buhrmaster says, adding that it’s typically the larger bank customers that will become more profitable more quickly, so there is a business rationale.
On the other hand, 1st National Bank of Scotia’s core vendor has done a bang-up job getting the community bank up to date with online and mobile banking, web offerings and debit cards, all of which the bank just upgraded last year. “We are keeping up with the Joneses with our existing [customer-facing] technology there,” Buhrmaster says,“but you always want something new and better. We’re always requesting enhancements.”
Buhrmaster sits on the enhancement review committee for 1st National Bank of Scotia’s core vendor. “Core vendors are beginning to realize that they cannot be all things to all people, even despite their mergers and acquisitions over the past 10 years,” he adds. “And so many fintechs are moving at lightning speed.”
Mike Carter is the executive vice president of Strategic Resource Management, an independent advisory firm for financial institutions. He says many community banks struggle with their IT decisions because they are “pursuing technology upgrades without an underlying strategic roadmap, making tactical decisions often based on a limited set of options and … upgrading to technology that is newer than what the bank had, but is still too dated to provide a competitive advantage.”
“Many banks will say they have a strategy, but what they really have is a tactical guidepost with a limited horizon or focus. Instead, they should have a strategy that is built on the idea of digital transformation.”
—Mike Carter, Strategic Resource Management
“Many banks will say they have a strategy,” Carter says, “but what they really have is a tactical guidepost with a limited horizon or focus.” For example, he points out that a bank may upgrade its online and mobile banking products based on a strategy with parameters limited to online and mobile channels. “Instead, they should have a strategy that is built on the idea of digital transformation,” he adds.
Peter Cherpack, executive vice president and partner at Ardmore Banking Advisors, says larger and more acquisitive community banks are willing and able to invest much more in their IT strategy with an eye toward growth and cost savings, as opposed to basic upgrades. “Smaller community banks may barely be profitable and cutting back, even on IT spending, or any spending at all,” he says. “They’re only buying what can promise them a return … or to meet a compliance requirement.”
In line with the investment trend indicated in Celent’s report, a 2018 Gartner report projects that overall bank technology spending will increase 4.4 percent this year, but nearly two-thirds of spending will go to maintaining existing systems rather than implementing new technology.
Bolton points out that community banks are continually updating internet banking, mobile banking applications and their websites, as well as adding digital wallet products like mobile payment and p2p. However, he says Community Spirit Bank and other institutions face obstacles including cost, compliance and the extra cost from vendors associated with those actions, which can be significant to a community bank.
“Many of the fringe benefits you would like to offer have to be considered carefully,” Bolton says. “The cost of the new technology versus the actual user penetration can be very difficult to measure. You oftentimes have just enough people who want it that you feel you need it. But you might not ever see the product or service really take off, and yet you still have to carry the expense.”
Demands of core system upgrades and regulatory compliance aside, community banks are still focused on innovating and working with smaller vendors to integrate innovations, Schaus says. “Progressive banks are focused on what will make clients happy. Traditional banks are still more geography- and convenience‑focused.”
Progressive community banks are increasingly analyzing data to determine which technologies will best appeal to customers and which will be useful to employees or the bank. “The traditional core banking [services] are getting cheaper,” Schaus says, adding that they are no longer the end-all, be-all of community banks’ IT efforts. “The biggest issue we hear from banks is, ‘How do we differentiate ourselves?’”
Indeed, Carter points out that consumers today no longer rely on going to their community bank for financial services. “They no longer have to come to any bank to get much of what they want. They can get it from fintechs and leave their bank to perform the functions of a glorified accounting system. No banker wants to see that sort of commoditization of financial services,” he says.
Chris Nichols, chief strategy officer of CenterState Bank in Davenport, Fla., which has $16 billion in assets after its most recent acquisition, points out that while he and his colleagues try to make decisions based on quantitative information, “it’s never totally clear-cut.” For example, with emerging payments technology investments, there is an initial upfront cost and a transaction cost, so it can be difficult to calculate the savings. “But our customers need to make payments somehow, and it ends up as a net savings … and moves us into a new platform. All these aspects can be seemingly subjective,” Nichols adds.
John Macaluso, senior vice president of business development for bank solutions at Fiserv, sees community banks investing in both branch and non-branch channels to provide multiple ways of engaging their customers. These investments can take the form of upgraded digital platforms, particularly mobile and customer-experience platforms, such as interactive teller machines, video teller machines and tablets. “Community banks are deploying technology that supports a reimagined branch experience,” he adds.
Brendan McGowan, chief technology officer for Safe Systems, Inc., says he is seeing community banks “more wisely invest in technologies that allow them to focus on their core business, instead of allocating valuable personnel to manage the burdens that slow them down.”
Bigger banks, bigger budgets
Larger community banks with commensurately bigger IT budgets can afford to be more aggressive in their IT implementation, but that should not imply that the planning and decision-making process is any easier.
Chris Nichols, chief strategy officer for CenterState Bank in Davenport, Fla., says as the community bank’s IT budget has increased, it is spending more on its back office, cybersecurity and network stability.
“Banks have to spend more on technology.”
—Chris Nichols, CenterState Bank
“We live in a world where banks have to spend more on technology,” he says, adding that as CenterState Bank expands, it increasingly needs to consider IT for efficiency, client onboarding, emerging payments, digital loan processing and online account opening. “While these all will lower our costs in the long run … initially, they all come at a cost upfront.” And all of those expenses come out of the same pot of IT money.
CenterState Bank has an innovation committee and a strategic realization department to prioritize projects and take suggestions from bank staff in any department or line of business. As with all institutions, Nichols points out that there are key compliance or upgrade initiatives that must get done, but beyond that, a bank’s chief strategy officer and their team have the opportunity to review any key projects thrown on the table and decide how to allocate their scarce resources.
First and foremost, the team and bank leadership must weigh the business opportunity of any potential technology implementation: the potential risk, return, investment and how many customers or employees would utilize it. Nichols says CenterState Bank typically uses a scorecard to boil down the pluses and minuses of each option, especially if it will touch multiple areas of the business, but ultimately “much of that subjective alchemy boils down to vision.” “A lot of projects are difficult to prioritize,” he adds.
Karen Epper Hoffman is a writer in Washington state.