Don’t Trust Your Future to Your Core Vendor

Rather than wait for innovation to come from their core vendors, banks need to stake out their own vision for the future.

It’s become too easy for small and medium-sized banks to depend on innovation coming from their core vendors. Most of these institutions have limited resources for developing their own solutions; and whatever dollars they can throw at new innovations are dwarfed by the amounts that the big banks can commit.

However, integrating new innovations from a variety of vendors is excessively difficult and expensive thanks to layers of complex, aging IT infrastructure. It’s much easier to just go with your core vendor’s product portfolio to save the dollars and headaches.

Even the regulatory environment is pushing banks to simply accept their core vendors’ offerings. There are good reasons for regulators to demand that banks tighten up their vendor management in today’s cyber security environment. But banks are responding by consolidating their vendors to satisfy regulators, making themselves more reliant than ever on a handful of vendors.

A strategy for the future

The dependence on core vendors that is being fostered in the industry is killing the skills that banks will need to succeed in the future.

Firstly, over-reliance on the core vendors dissuades a bank from creating and following through on its own vision for the future. The core vendors are not trying to differentiate your offerings from your competitors’. Coming up with solutions that have a broad appeal across the industry their business. They want solutions that will be bought by a large number of their customers. So if you wait for your core vendor to deliver an innovation, you’ll just be adopting the same technology as the other banks in your market.

Many banks are also making the same mistake as the core vendors: they’re trying to provide solutions for the broadest possible range of customers. Most small and medium-sized banks are content to specialize in nothing. They want to be a bank for everyone, serving all consumer and commercial segments. So why would their vendors look to offer a bank something unique if the bank isn’t trying to differentiate itself?

Developing and executing a future strategy is a skill, and banks are losing that skill waiting for core vendors to give them solutions that make them into carbon copies of their competitors. To break this trend, banks will need to create a strategy for specializing in servicing a specific segment. They need to understand the needs of that group, and figure out how to fulfill those needs better and more efficiently than other banks in their market. They can then pick and choose the solutions that work best for that defined group of customers, and integrate them for a convenient and seamless experience.

Integration and vendor management

Banks are losing other skills as well. Leaning on the core vendors means that banks can circumvent the challenges of integrating new solutions from various vendors and managing those vendors. Being able to face those challenges – rather than circumvent them – is going to become central to banks’ success.

That’s because digital innovation in the future is going to be impossible for one technology vendor to tackle. The digital world will grow too large too fast as the number of customer touch points explodes. Within the next few years, watches, cars, and TVs are going to be digital platforms for consumers to perform banking tasks. How will banks and their vendors keep up with all of these new channels?

The technology behind the mobile devices that we all use today will continue to evolve too, raising the bar for mobile customer experiences. Customers will expect to be able to be able to get an immediate quote for an auto loan by simply asking Siri on their Apple Watch while they’re standing in the car lot.

The pace of change in the digital technologies that customers rely on more and more for their banking is going to snowball. No single vendor is going to have all the answers across all of these touch points.

So banks will need to look to different vendors for the best experiences for their customer segments, and will need to be seasoned experts at managing those different vendors and integrating their solutions. Relying on one vendor to deliver everything will leave a bank without that expertise or the ability to meet their customers’ expectations.

The core vendors’ need to change too

Banks must know the needs of their most important customer segments and find ways to differentiate their offerings for those segments. That will require a flexible IT architecture that can easily integrate and share data between different solutions. The legacy systems that most banks are running don’t fit that description, and banks will need to invest in upgrading them. They will also have to invest in hiring and training talent that specializes in systems integration. That talent and flexible architecture will be the foundation for delivering a bank’s future vision.

Rather than being a one-stop shop for banks’ technology needs, the major core vendors could also help deliver that foundation of flexibility and talent. Up until now they’ve acquired whatever startups delivered new innovations and provided those solutions to the banks as part of that one-stop shop strategy. It’s unlikely that they will be able to do that in the future though. The number of fintech startups will continue to grow, and the major core vendors will face increasing competition for acquiring them from both foreign vendors and technology giants like Google and Apple now entering the market.

That means the big four vendors will need to focus on optimizing their platforms for integrating the best solutions from different providers instead of trying to acquire all of those providers. And they could make their position even stronger by hiring and training the talent to help banks with those integrations. If the big four vendors don’t provide the flexibility and assistance that banks need to realize their visions of the future, then banks better start looking harder at some of the other core providers entering the US market right now.

Paul Schaus is president of CCG Catalyst, a bank consulting firm. Contact him at consultant@ccg-catalyst.com