The banking industry is evolving, and financial institutions are under pressure to adapt to remain competitive. Innovation has perhaps never been so important as it is now. But for many banks, the challenge of innovating within the constraints of existing legacy infrastructures makes innovation difficult. So how can these banks innovate to stay in the game?
To address this challenge, banks should consult the experts. The FinTech Forge is a team of financial service industry experts who facilitate innovation partnerships between financial institutions and FinTechs. The FinTech Forge structured programming is designed to help financial institutions innovate to unlock new business value in the age of digital disruption. To experience this process firsthand, I recently participated in a FinTech Forge innovation design sprint between a large core banking software vendor and their bank partners.
Throughout the event, I helped a number of bankers move through the FinTech Forge design process. We began by mapping out end user and business needs, as well as the technology constraints of their existing legacy systems. Next, we identified and defined the key areas we wanted to focus on for improvement. We then moved through an ideation process and selected the most feasible solutions to maximize value while minimizing demands for time and resources.
As as co-founder of a financial technology company, Abe, this experience gave me a new appreciation for why it’s so difficult for banks to make the shift from business as usual to real innovation. Banks recognize the need to remain competitive by bringing to market best-in-class features and experiences for their customers, but because they rely on large and slow-moving core banking software vendors, they aren’t very nimble in their ability to innovate. They are limited by what they can and can’t do within the technological constraints of their existing legacy infrastructure.
Because core banking software vendors optimize for profit and market share, they typically build one-size-fits-all solutions. But not all banks are alike, and the back office operations that works for a bank with $6B in assets may not work for a bank with $600M in assets. The adoption of a one-size-fits-all solution forces banks to design their operations around their software, instead of the software being designed to fit the bank’s particular operations. Often, back office employees will develop their own workaround processes to make their workflow fit within the existing legacy systems. These are generally inefficient and time-consuming and drain productivity and employee morale.
The majority of banks find it difficult to innovate because they can’t afford to divert internal resources away from their core business. However, innovation doesn’t have to be an all-or-nothing proposition. Small innovation wins that don’t require drastic overhauls or heavy investment are possible. Through the FinTech Forge’s structured programming, we were able to help banks find a way to be more innovative now without going through a complete digital transformation.
Innovating Within Legacy Systems
The participating banks felt all sorts of pain trying to do simple tasks within their existing mash-up of legacy systems and self-created workarounds. Once we were able to map out end user and business needs as well as the technological constraints of their existing legacy systems, we identified several areas for improvement.
During the event, the FinTech Forge team and I helped solve the following problems:
- A bank that continued to miss out on revenue because they couldn’t identify cross-selling opportunities between the Commercial Lending and Cash Management departments.
- A bank with a back-office team who spent an extraordinary amount of time closing accounts instead of finding ways to retain customers.
- A bank that constantly lost money in court because they struggled to keep up with the demands of Regulation E compliance.
- A bank that constantly missed placing new debit card orders whenever a new account was opened.
To address these problems, a member of each of the participating banks sat down with the software team’s product manager to discuss potential solutions. They worked to establish a compromise between an ideal long-term solution that would take significant time and resources to implement and doing nothing at all. Through the FinTech Forge programming, we developed a phased innovation approach in which we identified quick, low-cost ways to alleviate pain points right now while planning ideal future solutions that required more time and resources.
For example, for the bank that continually missed placing debit card orders for new customers, the solution to their problem was as simple as moving a button in the bank’s customer onboarding workflow. We found that debit cards weren’t being ordered for new accounts because the new account onboarding process was clunky and confusing; bank employees were unable to tell if debit card orders had been placed or not. By altering a single step of the workflow — changing the placement of one button — we established a more logical workflow that more clearly confirmed placement of new debit card orders. The bank was able to quickly and easily solve one of their most costly problems without having to undergo a complete digital transformation.
Unlocking Small Innovation Wins
Innovation — be it large-scale or small — is about unlocking new value by increasing revenue, decreasing costs, improving operating efficiency, delivering an enhanced customer experience, and reducing risk. Contrary to popular assumption, banks are capable of accomplishing these goals within the constraints of their existing legacy systems. All it takes is structured collaboration and a little help from the experts.
You don’t need a complete digital transformation. Aim for small innovation wins.
According to a survey by Mayer Brown, financial services institutions are increasingly collaborating with FinTechs to unlock new business value. Organizations like the FinTech Forge are helping to bridge the gap between these traditional institutions and young, nimble FinTechs, outlining best practices for collaborative innovation that benefits both parties.
Banks that are struggling with complex legacy infrastructures shouldn’t give up on innovation. While it may seem daunting to develop and implement the ideal solution to a complex problem, that shouldn’t be the goal — at least for now. Instead, through structured collaboration and partnerships, banks should aim for incremental innovation through a phased approach. By addressing pain points now and worrying about more costly solutions later, banks can take a more nimble approach to innovation that unlocks new business value today.