By Mitch Razook, President & COO and Ruth Razook, Founder & CEO
RLR Management Consulting, Inc.

What should the number one challenge be for financial institutions in 2018 and beyond? Facing Disruption! Sure, FI’s have started tipping their toe in the water, talking about the disruption to the financial industry, however few have ventured into it. What do we mean?

Global investments in FinTech more than tripled in 2014, reaching more than $12 billion. In comparison, banks spent an estimated $215 billion on IT worldwide in 2014, including hardware, software, and internal and external services. Established Financial Service providers are starting to engage with FinTech providers to provide the emerging innovations. Banks must embrace change. And that change right now is the digital revolution, not merely preparing for the regulators and waiting for the next interest rate hike.

RLR Management Consulting performed a nationwide survey in 2017 of over 50 Financial Institutions (FIs) to determine the knowledge, readiness and strategic thoughts of the financial institution marketplace. In this survey, we asked participants to share insights into where they saw challenges and opportunities for their FI moving forward. Results from that survey included:

• • 72% of FIs have their Online Banking Product provided by their core provider, while 26% have Online Banking provided by a third party, and 2% created and managed by IT staff (scary)
  • 65% of FIs have their Mobile Banking Product provided by their core provider, while 33% have Mobile Banking provided by a third party, and 2% created and managed by IT staff (scarier)

We saw a slight increase in the number of third party organizations outside of core providers for online and mobile banking solutions. The increase was between 5% and 10% in both areas. Fintech providers are consistently trying to provide products and services that decouple the digital experience from the cost. There are several new entrants to the space over the last twelve months.

Question: How differentiated would you say your online and mobile banking interfaces are versus those of your competition?

6% use the same platform as their competitors
63% said our functionality is basically the same as everyone else
27% said our functionality is a little different than everyone else
2% said our functionality is markedly different than everyone else
2% said our functionality is vastly different than everyone else

Some common platform challenges the FI have were noted:

• • FIs find it difficult to differentiate themselves from a service perspective as they move towards a more outsourced and ASP service environment for their core services
  • Transaction per item fees make up an increasing percentage of core providers monthly revenue (transaction activity can make up as much as 50% of the invoice from core providers)
  • FIs can be dissuaded from unique solutions by high interface fees or potential degradation of service

The digital experience continues to increase in importance:

• • Traditional old school payment methods show decline over the last 5 years
  • Use of card payment types, both debit and credit, continue to increase dramatically
  • Electronic payments are still a minority but show nearly 50% growth over the last 7 years
  • New technology payment capabilities continue to enter the marketplace and compete for share

Question: Does your FI have a specific strategy related to online commerce and shopping via the Internet?

• • 23% said yes
  • 77% said no

Not good. Banks need an online commerce and shopping transaction strategy!

• • There has been a “bricks to clicks” shift in consumer and commercial behavior:
  • 75% of retail growth has been online since 2000
  • 8% of all retail sales have been online
  • Consumers (especially millennials) will trade off location tracking for a 20% coupon at their favorite restaurant during happy hour
  • A strategy offers a convenient one-stop-shopping experience that responds to the shoppers’ path to purchase
  • Blend the offering between commercial and retail clients

Question: How concerned are you regarding emerging third party and alternative transactions providers?

• • 60% said somewhat
  • 23% said very
  • 11% said not too much
  • 6% said extremely

While some Fintech and alternative transaction providers are increasingly looking to partner, others are trying to displace FIs in the marketplace.

Disruptors are trying to build a case for the “Open Bank Movement”:

• • They are trying to push the ‘archaic financial institution framework’ by encouraging the adoption of more digital technologies
  • The Open Bank Project is an open source API and App store for Banks that empowers FIs to securely and rapidly enhance their digital offering using an ecosystem of 3^rd party applications and services

Bottom line for FIs – You need to get with the program and consider developing your strategy to become part of the Digital Revolution