Do We Need Better System Integration or Fewer Systems to Integrate? (Gonzo Banker)

I read an article ”Do We Need Better System Integration or Fewer Systems to Integrate?” by Terence Roche, co-founder of Cornerstone Advisors and contributor to Gonzo Banker. In the article he says, “If I were to go to most bankers today and ask them what one thing they would do to improve their systems environment, a large number would say better integration of the systems they are using. Ten years ago, if I had asked them that same question, the majority probably would have said - hang on to your hats here - better systems integration. Despite a lot of focus on middleware, application programming interfaces (APIs) and other tools, this issue has never stopped being top of mind with system users.”

He goes on to suggest that the solution is not better system integration, but rewriting systems following the design principle of other industries - customers and employees use a common system and the front-end experience is the start point? He cites Amazon, Uber and FedEx as examples of other industries to follow. 

I accept the author’s premise that banking systems need to be built around the front-end member/customer experience first and then the back-end that credit union and bank employees access and use to support the member/customer. From that point forward I will argue the opposite as it relates to the solution he proposes, rewriting the many banking technology solutions into a single platform. 

He rightly points out that back-end banking systems (their core processing systems) were written 20 to 40 years ago and are based on antiquated technology. They were designed before self-service or member/customer facing solutions were even a twinkle in the eyes of the developers. They were batch systems designed to process transactions. 

Unlike Amazon, Uber or FedEx, the level of innovative solutions (third party and homegrown), complexity, high level of expertise required to create and deliver these solutions and the ongoing regulation that must be overcome is limited, compared to what banks and credit unions face.

To expect a company with a single banking technology platform to develop, deliver and support all the technology solutions to meet the needs of their customers, regulators and employees is not practical. There are several core data processing companies that have gone down that road with very limited success. 

Why not build a single member/customer and employee user interface (UX) platform that accesses all these diverse systems and databases and let the diverse systems and databases do what they do best, process transactions? The result is a single member/customer and employee UX with integration to all of the credit union’s/bank’s front-end, back-end systems and supporting services. How data is input, retrieved and used would be dependent upon how the credit union or bank design their user interface (UX). Designed around business rules, workflows, and decision matrixes, this UX using today’s technology can be built around drag and drop and customization menus. Work that can be done not by credit union/bank IT programmers, but by the new banking team of the future:

1. Data analyst - Google has even created a new name for this position, Data Scientists
2. User experience designer - Must be able to tell your story in a simple and in an intuitive way
3. Algorithmic risk specialist - Identifies risk through multiple data sets without requiring input from the users
4. Predictive analytics - Provides services, solutions and expected responses at just the right time, "the magic second" of opportunity.
5. Behavioral psychologist - Must understand your members or customers, their desires, buying and behavioral patterns. The future of bank marketing is behavioral patterns not demographic profiles
6. Social media expert - The person that develops the message and engages your members and customers

The sheer complexity, services integrations and number of technology front-end and back-end banking systems make a single rewritten system with the required specialization and ongoing regulatory compliance almost impossible. A single system is a utopia that will not happen.

Credit Unions to their credit are actively designing a standard interface protocol “Credit Union Financial Exchange” (CUFX) led by the CUNA Technology Council that will help facilitate integration between technology solutions. A UX platform integrated with the credit union’s or the bank’s front-end, back-end and outside services have a much higher probability of success and is a realistic goal to achieve omnichannel implementation than a rewritten single technology platform.

For your enjoyment, a fun cartoon about and OmniChannel Banking. It hits the mark. 

Putting the Digital Banking Puzzle Together

Digital banking is a relatively new term that encompasses ATMs, mobile banking, online banking and has expanded to include essentially all banking channels except for the branch. Like most iterations, digital banking started as a single solution, ATMs, but really gained traction as a term when online banking and mobile banking were introduced.

The result of this iterative process has been the implementation of a "collection" of technology solutions that are intended to allow credit union members and bank customers to digitally interact conveniently and effectively with their financial institution. Let's call this Digital Banking 1.0

Problems with Digital 1.0 are abound. The first problem is a lack of strategic planning and thinking as the new technology solutions and channels were introduced. The agenda and digital innovation are being driven by the major national banks that either have the resources to develop the technology or have acquired the technology. Everybody else is following, trying to keep up. As a result, there is no digital strategy, it is all reactionary, and digital implementation is a hodgepodge of disconnected solutions.

I was having lunch yesterday with a couple of friends and a discussion about banking began. How exciting I must be as a lunch companion. A question was asked, "Who has an account at a credit union or small bank?" They are both in the millennial generation and confirmed that they both have an account with either a credit union or small bank. I asked, “do you also have an account with a major national bank?" Again they both said they do. I then asked, “who do you prefer to do business with?" They both expressed a preference to for their credit union or community bank; however, both of them almost exclusively use the major national bank. I asked why? They both said, "Because they make it easy to do business with them." 

The credit union and community bank were their preferred financial institution because they provided better loan and deposit rates, better in-branch personal service, and they knew their names, but at the end of the day that is not enough to win their business. Why, because it is not easy enough to do business with the credit union or community bank. Both are relatively new to the Atlanta area. When they moved, their big national bank made the transition easy. To this day, neither one of them have set foot in their new branch locations. The lack of a comprehensive digital strategy sent these two high value customers to a large national bank.

This was a chance discussion, ............how often do you think this happens every day? The data is clear, according to the millennial disruption index study, Chase, Citi, BofA and Wells Fargo are among the ten least loved brands by Millennials. According to FICO's Forging Lasting Banking Relationships with Millennials, 68% of Millennials use Chase, Citi, BofA or Wells Fargo as their primary bank. Only 15% use a credit union and only 9% have a regional bank as a primary bank. More Millennials bank at national banks than any other generational group (55% for Gen X and 43% for Boomers). Why, because the big national banks have a digital strategy and are leading the market with the implementation of their strategy. 

It is past time for credit unions and banks to move into Digital Banking 2.0. You have lost

tremendous ground to the big national banks when it comes to the next generation of most profitable banking members/customers. It is not too late, remember they want to do business with credit unions and smaller banks; you just have to win their business by making it easy and convenient to do business with you.

How do you make it easy and convenient to do business with you?

1. By making digital banking a highest priority
2. By developing a digital banking strategy
3. By allocating the resources necessary to implement your digital strategy
4. By mastering social media communication
5. By treating digital banking as its own P&L channel, and not a channel to drive members/customers to the branch or call center
6. By quite asking the question was is the ROI. That is simply a question to stop moving forward. By the way, Forrester analysts have developed a concrete ROI for mobile banking of 15.7%, if that information helps you feel better

The first step is to assign or hire a digital banking executive to lead your credit union or bank into Digital Banking 2.0 

Credit Union’s and Bank’s Race Against Digital Darwinism

By Brian Solis

Digital Darwinism is a fate that threatens most organizations in almost every industry. Because of this, businesses not only have to compete for today but also for the unforeseeable future. Digital Darwinism is the phenomenon when technology and society evolve faster than an organization can adapt. There are many reasons for this of course. Every fabric of a company is strained due to internal and external influences. The challenge lies amongst the very leaders running the show today. Their mission and the processes and systems they support today may already be working against them. The financial services industry is quickly dividing into two groups:

1. Digital Leaders -  those financial institutions that have a digital strategy and embrace change
2. Digital Darwin’s - those financial institutions that face distinction through the lack of adapting to change

Technology is now part of life among those who live an active digital lifestyle. Connected consumers or Generation-C  or Information Age Generation as they are often referred represents a growing subset of consumers as a whole. They’re simply more connected than everyone else. As a result, they’re more informed and empowered. And, their expectations, at the same time, are soaring. They demand attention, personalization, and efficiency… their way.  And, they require that your values match their own. This goes beyond expectations. This is about entitlement.

To compete, to thrive, requires new perspective…now. It also necessitates transformation of the digital and philosophical kinds. Time is ticking. As customers and employee behavior evolve and once your competitors set out to address them, you’re reactions and actions seal your destiny and legacy.

The answer to digital Darwinism is digital transformation. Digital transformation is the use of technology and methodology to address shifts in behavior by upgrading or overhauling processes and systems that amplify existing and unforeseen opportunities.

Sounds easy right?

The real story is that most credit unions and banks aren’t ready to face this challenge. Turmoil exists inside as CIOs wrestle with existing roadmaps and managing legacy departments. Managers manage against dated procedures skillsets. Marketing, sales and service teams are missing customer touch points and needs because they’re unaware of new windows or customer suppositions.

Investing in technology is not the answer. That’s a reflex or a tactic. Building upon the house of cards that is your existing IT infrastructure is also not the answer. Investing in digital transformation to earn newfound relevance is the goal and the solution.  Now’s not the time for a wait and see mentality. If the culture of your organization is risk averse, one that waits for others to take the first step, trust me when I say that first mover advantage is indeed an advantage.

Capgemini and MIT Sloan set out to learn more about the challenges that face organizations, leaders and what they’re doing (or not doing) to adapt. In the seminal report released in 2012, “Digital Transformation: A Roadmap,” the team found that all companies surveyed face common pressures from customers and employees and as such, digital transformation is now inevitable. Successful digital transformation as validated by the report does not come from implementing new technologies but instead from transforming the organization to take advantage of new possibilities that new technology provides.

Yes, it’s complicated, challenging, and terrifying.  But it takes courage in the face of VUCA, volatility, uncertainty, complexity and ambiguity, to not only solve problems but admit that they exist. It also takes vision to see a new direction and leadership to unite teams and show the way.

The key to digital transformation according to the report, is “re-envisioning and driving change in how the credit union or bank operates. That’s a management and people challenge, not just a technology one.”

Everything begins with fixing what may not appear broken today. Start by assesses the experiences your members/customers are having today and how their online and mobile behavior is affecting decision-making. Then, re-think and redesign your member/customer journey. Examine how the current infrastructure of your organization can optimize performance or where it hinders it. The answer lies in new technology, processes and business models.

So what’s the answer?

According to the report, executives are mindful when approaching digital transformation, recognizing that focusing on any one area would miss the point. Capgemini and MITSloan discovered that digital transformation is unfolding in three key areas: 

1. Member/Customer experience
2. Operational processes 
3. Business models

The study also identified nine elements that defined each of the three pillars. They are as follows:

Customer Experience

1. Customer understanding
2. Top line growth
3. Customer touch points

Operational Process

1. Process digitization
2. Worker Enablement
3. Performance management

Business model

1. Digitally-modified business
2. New digital business
3. Digital globalization

Successful enterprises pursuing digital transformation incorporated several elements, in their own way, as the building blocks for technology, process, and business model investments. Interesting, and not a surprise though, that no company in the sample had fully transformed or embraced all nine elements. Of course they haven’t. This is leadership not management and the vision required to move forward is as elusive as the leaders who will lead digital transformation.

To come full circle, the report also outlines the challenges facing organizations to take the first steps toward relevance.

1. Lack of impetus rises to the top. Why change when the business is performing wonderfully as is? If the company is not experiencing pain, then it’s difficult to prescribe a painkiller. As the report notes, this skepticism often results in the investment of processes that prevent digitally focused experiments and ultimately business changes.
2. Regulation and reputation rightfully plague certain businesses, especially those in financial and healthcare. There’s a piercing fear of regulatory sanction. At the same time, there are reputational considerations that may carry a far more devastating outcome should something go wrong. However, there is hope. The study found the companies here are evaluating digital investments based on four criteria:             
         i. Economics       
        ii. Burning platforms     
       iii. Strategic foundation investments     
       iv. Low risk investments. Sometimes answers appear through every step you                  make, no matter how small.
3. Missing skills can prove fatal if not addressed sooner than later. Many executives use “professional judgment” to make important decisions about the future. Their competitors however are harnessing the power of big data to embrace analytic-based decision-making. Social media, mobile, big data, are just a few of many technologies disrupting businesses. I refer to this as the “Wheel of Disruption.” New skillsets are required to understand new tech, bring about change from the top-down and also to reverse mentor from the bottom-up.
4. Culture issues are often the chokehold of digital transformation. Sometimes, as the report notes, legacy leadership is part of the dead weight that prevents successful transformation and long-term viability. The best answer may in fact be to hire new leaders for their fresh perspective and the culture it can create. Successful enterprises also empower front-line workers to make autonomous decisions.
5. IT difficulties are often lacking in infrastructure and capabilities.  Personally, I see this as a significant challenge and to address it requires that the IT function undergo an overhaul starting with mission and purpose. You can’t lead transformation against the current technology roadmap. With CMOs estimated to outspend their CIO counterparts, IT should replace the “I” for information with innovation. You cannot innovate, adapt, or thrive if you build on top of legacy systems that prevent true integration or at least match how employees and customers connect and communicate outside the organization. 
   One executive was frank on the subject, “We have through the last 50 years proliferated our IT systems and applications. We don’t retire systems. We just add on top of them, which creates a tremendous amount of expense and complexity.”
6. Decision-making is slow, sluggish and often painful. Governance issues are rooted in the inability to get find and share actionable information across the enterprise. To do so requires changes in processes and decision-making enterprise-wide. Without a top-down approach, existing governance dampens the winds of change, thus creating coordination and collaboration issues. One group may solve problems but they cannot or will not collaborate with other units. The channel conflict is real and it must be addressed through an overarching, longer-term vision.
7. Vision is commonly nearsighted. No two visions are equal as they are measured by distance and loftiness. Sometimes vision is incremental and not enough. As the study notes, “Unless senior executives establish a transformative vision of the future, managers in the rest of the firm will tend to locally optimize within their own spheres of authority.”

Challenges exist in every organization. It is how leadership addresses them now and over time that defines their fortune and legacy. This is not a time for the spaghetti theory where stakeholders randomly throw pasta on the wall to see what sticks. This is about an investment in transformation to meet or exceed customer and employee expectations at every step of their journey. It takes vision. It takes courage. It takes resilience. Without it, organizations will continue to make the same mistakes as they always have. 

Technology isn’t the answer; it’s an enabler.

The real value of digital transformation pays its dividends in the short-term, but its true prize is one that remains out of reach. The goal is to create a culture of empowerment, agility, innovation, and engagement. Technology is not the answer in of itself. Technology is a way of life and business. Its impact on society is only accelerating. If you do not adapt, you will fall to digital Darwinism. You are competing as much for relevance as you are market share. By re-imagining your company’s direction and how it works, technology (and people) become part of the solution instead of the problem. This increases revenue, cuts costs and improves competitive advantages.

How Apple Watch Will Change the Face of Banking

Credit unions and bankers, I have good and bad news for you with the introduction of

Apple Watch. The good news, your members/customers will have another way to interact with your credit union or bank. The bad news, your members/customers will have another way to interact with your credit union or bank.

Apple Watch introduces a whole new interaction channel, wearable technology. Just like the ATM, computer, mobile phone, and tablet; wearable technology is the next technology channel that your members/customers expect and will want to be able to use to interact with your financial institution. 

What makes wearable technology and Apple Watch in particular different, is the small display surface available on Apple Watch. Apple recognized this limitation and went back to the future to create a digital crown, similar in concept to the Blackberry roller-ball. Using the crown on the side of the watch allows interaction without covering the display surface. 

Call it a good start. The problem is Apple Watch is still highly reliant on manual scrolling and swiping to interface with the technology. That is a concept that is left over from the PC, mobile phone and tablet. 

Yesterday when Apple introduced Apple Watch it, was the "first generation". Remember the iPhone:

• iPhone (1st generation)
• iPhone 3G
• iPhone 3GS
• iPhone 4
• iPhone 4S
• iPhone 5
• iPhone 5C
• iPhone 5S
• iPhone 6
• iPhone 6 Plus

The first generation Apple Watch is undoubtedly going to be a long list of future versions of Apple Watch and other wearable technology solutions. What does that mean? It means reliance on manual scrolling and swiping to interface with the technology will evolve to voice, virtual assistant and behavioral predictive technology. For credit unions and banks it means another technology solution that must be incorporated into their channel strategy. A technology solution in which the rules will rapidly evolve.

It is exciting times for fintech providers and consumers, but I am not sure credit unions

and banks feel that same level of enthusiasm. The milestone marker just changed and many credit unions and banks are still trying to adjust to mobile technology. Moore's law suggests that the pace of technological change doubles every two years. 

Most credit unions and banks have not been able to fully assimilate the mobile space and the opportunity mobile presents. How are those same credit unions and banks going to handle wearable technology such as Apple Watch?

The fact is the pace of technological change and the costs associated with the technology is beyond the scope and capability of all but the largest national and regional banks. Credit unions and banks, ...... the walls are closing in on you and your corner is looking dark. How can you change the game and give your credit union or bank an opportunity to survive and thrive?      

Through cooperation. Technology solutions and non-member/non-customer facing operations do not have to be owned, controlled and executed by each credit union or bank. Credit unions and most banks simply cannot keep up with the technological change and the costs associated with technology solutions. Instead, a new cooperative entity needs to be created to handle all technology and non-member/non-customer facing operations. Through the use of shared resources true economies of scale can be achieved, but it must include both technology solutions and back-office operations in order to realize the full true cost savings. It may be radical thinking, but based on the prognosis for credit unions and banks, it may take radical action to change the paradigm. Sometimes radical surgery is required to save the patient.

The time to act is now. Remember Moore's law, the pace of technological change doubles every two years. You are already behind and you do not have time to wait before the next technological leap occurs.  

   

Now Hiring ...... The Banking Team of the Future

If you are the CEO or executive of a credit union or bank you are facing a rapid transformational change as a result of technology and the emergence of non-traditional financial service providers. Credit unions and banks are struggling to understand the impact of this new environment, and how to succeed. Combine these factors with increased margin pressure and consolidation and you have a recipe for credit union and bank opportunity and failure.

Is there any doubt that emerging technology and rapidly increasing and evolving member/customer expectations has and will continue to change the way banking is conducted? Do you believe that banking as we know it today will look the same in five years? If you answered "no" to either of those questions, then it is time to rethink your credit union's or bank's strategy. Your credit union's or bank's viability may hinge upon your and your executive team's vision; how to address the changing market conditions. It is time to reevaluate your vision, perspective and hiring to meet the revolutionary changes occurring and about to occur in the financial services market. 

If you believe technology is and will become increasingly more important to your credit union's or bank's strategy, one of the first questions you must address is, "how is your credit union or bank going to afford the technology resources required to compete?" Citi, BofA, Wells Fargo and Chase have the resources, but I can assure you, long-term your credit union or bank does not. 

One of the complexing statistics discussed in a previous article I wrote titled, "Who's on First? The Contradiction of Millennial Research", Chase, Citi, BofA and Wells Fargo are among the ten least loved brands by Millennials, yet 68% of Millennials use Chase, Citi, BofA or Wells Fargo as their primary bank. Only 15% use a credit union and only 9% have a regional bank as a primary bank. More Millennials bank at national banks than any other generational group (55% for Gen X and 43% for Boomers). Why is that the case if Millennials don't like the brand? 

The answer is simple, the four national banks have such a lead in technology implementation that credit unions and other banks cannot catch up. Who do you want to bank with, the original or a "copycat me too" provider that is 6 to 24 months behind? This is not good news for credit unions and most banks. You cannot afford the resources necessary to:

1. Identify
2. Purchase or build 
3. Implement 
4. Support/upgrade

the technology solutions nor can you catch up. Add to this to the fact that you cannot out branch the national bank's branch network and you have to ask, "how do you compete?" Price or a niche? Boutique banking? In my last article titled, "Credit Union and Bank Premature Death Proclamation" I identified a way credit unions and banks can compete. 

Through cooperation. Technology and non-member/non-customer facing operations do

not have to be owned, controlled and executed by each credit union or bank. Instead, a new cooperative entity can be created to handle all technology and non-member/non-customer facing operations. Through the use of shared resources true economies of scale can be achieved, but it must include both technology solutions and back-office operations in order to realize the full true cost savings. It may be radical thinking, but based on the prognosis for credit unions and banks, it may take radical action to change the paradigm. Sometimes radical surgery is required to cure the patient.

For those credit unions and banks that are ready to move forward, your hiring and team must change. The easiest step is identifying new technology solutions. The second easiest step is purchasing new technology solutions. Most credit unions and banks have handled the first two parts reasonably well. Implementation, that is a whole different ball game. Most credit unions and banks create a project team, identify a wish list, send out a request for proposal, review the proposal, purchase the solution, test the solution and then put it out to their members or customers. 

WRONG, WRONG, WRONG. Implementation is the most important part and the least effectively executed part of the equation. You see...... it is not about the technology. It is about what you do with the technology. If the same people that have been implementing and supporting your core banking and network solutions are the same people implementing your member/customer facing solutions you are doomed to failure. 

The team you need to hire today is very different than the team any credit union or bank has hired in the past. The banking team of the future must include experts that cover six different areas of responsibilities:

1. Data analyst - Google has even created a new name for this position, Data Scientists
2. User experience designer - Must be able to tell your story in a simple and in an intuitive way
3. Algorithmic risk specialist - Identifies risk through multiple data sets without requiring input from the users
4. Predictive analytics - Provides services, solutions and expected responses at just the right time, "the magic second" of opportunity.
5. Behavioral psychologist - Must understand your members or customers, their desires, buying and behavioral patterns. The future of bank marketing is behavioral patterns not demographic profiles
6. Social media expert - The person that develops the message and engages your members and customers

Radical, maybe. Logical, absolutely. What are you waiting for?               

Credit Union and Bank Premature Death Proclamation

Your credit union or bank may not be walking dead, but may be on life support with the need for immediate attention. This is the second part of a two part blog, providing a solution to a problem all credit unions and community banks face. So how does your credit union or bank compete in today’s fast evolving financial services market? 

A major challenge credit unions and community/regional banks must overcome is how to achieve economies of scale without being forced into a merger or sale. Economies of scale, including the ability to quickly introduce technology solutions that will drive member or customer engagement, reducing operational costs and technology expenses.

The financial services market has undergone tremendous change over the past 10 years, which is only accelerating with new non-traditional banking entrants and technology innovation. As innovation and demand for customer facing solutions increase, so will the budget necessary to offer those solutions. As credit unions and banks continue to introduce complex products and product variations the operational costs associated with running a credit union or bank increase.

Credit unions and banks operate in a tightening margin business, with expectations of their members and customers that they offer leading edge technology solutions and new products, which increase operational costs. Economies of scale that the mega banks and large regional banks enjoy are not available to credit unions and community banks.

Unless this scenario changes, long-term credit unions and community banks face a bleak future, or they will need to identify small unserved niches, or be willing to meet only parts of their member’s or customer’s financial service expectations. These are not great options, so how can credit unions and banks change the emerging scenario? By thinking WAY OUTSIDE THE BOX.          

Credit unions and banks that do not want to be merged or acquired by larger credit unions or banks must find ways to achieve economies of scale. How? Through cooperation.

Cooperation sounds like it should be uniquely credit union orientated, but it does not have to be. Technology and non-member/non-customer facing operations do not have to be owned, controlled and executed by every credit union or bank. Instead, a new cooperative entity can be created to handle all technology and non-member/non-customer facing operations. Through the use of shared resources true economies of scale can be achieved, but it must include both technology solutions and back-office operations in order to realize true cost savings.

Technology solutions and the cloud environment have progressed to the point that shared resources do not mean services, products, or user experience need to be the same. Data does not have to be shared and policies do not need to be uniform. The opportunity exists with the right technology solutions and true committed cooperation to allow multiple financial institutions to share resources while remaining and appearing completely independent from each other.

Radical??? Yes, but the consequences of not adjusting your credit union’s or bank’s business model have been well documented. Credit unions have wandered into this arena on a limited basis. Is it easy, ........ no but what is easy that is worth pursuing. Now is the time to make it happen.   

Why Your Credit Union and Bank Are Walking Dead!

Chances are your credit union or bank is walking dead! To understand why, it is important to retrace U.S. banking history and regulatory change that occurred in 1994.

Throughout the history of the U.S. much of the world has deployed a banking system that is different than ours. Until the late 1900s the U.S. banking system was primarily an agrarian unit bank system, while a branch banking system was deployed throughout Canada, United Kingdom and Europe. In fact branch banking was not legal in many states until as late as 1993 and was highly discouraged by many other states through onerous regulation.  It was not until 1994 when most interstate banking prohibitions were repealed by the Riegle-Neal Interstate Banking and Branching Efficiency Act, paving the way for a nationwide branch banking model.

The “stated” goal of The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (IBBEA) was the return to a balance between the benefits of a state bank charter versus a federal bank charter.  Among other notable changes, the Act stipulated that a federally chartered bank wishing to expand must first undergo a review of its Community Reinvestment Act (CRA) compliance. 

We can debate the real purpose of the IBBEA, but my opinion is it was to replace unit banking with branch banking, to pave the way for the creation of a limited number of mega banks and to help redistribute wealth in a stealth and politically palatable manner. IBBEA enabled the very thing Americans fought for over two centuries, the concentration of banking and political power by a limited number of people or institutions.  

Why you ask would politicians want to enact branch banking? Three reasons:

1. Unit banking compared to branch banking is a highly unstable banking system that creates unnecessary risk 
2. Allowed for wealth redistribution through the Community Reinvestment Act (CRA)
3. The creation of mega banks to compete in a global economy 

Why is unit banking unstable? Instability of unit banks is caused by their inability to effectively manage resources in two major areas:

1. Diversification - Portfolio across a multiple local or regional economies and market conditions
2. Economies of scale - Operational and technology costs

IBBEA created the opportunity for wide open intrastate and interstate banking, resulting in bank mergers, acquisitions and the creation of mega banks, “banks too big to fail”. So what does this have to do with why your credit union or bank is walking dead?

First, the U.S. banking system has moved from a unit bank to a branch bank system. Virtually all credit unions and community banks still follow the unit banking model. Oh sure, you may have a few branches and some of them may even cross state lines, but the fact remains, virtually all credit unions and community banks have a very difficult challenge managing their loan and deposit portfolio. For example:

• Inability to move high liquidity from one geographical region to a high growth geographical area that needs the liquidity to lend and generate profit
• Diversification against economic downturn in in one geographical area offset, but high growth in other areas

Nationwide branch banking and the creation of the mega bank eliminates these problems, which results in an opportunity to create a much more stable banking system. A banking system the politicians and regulators seek to embrace.

The second reason virtually all credit unions and community banks are walking dead is because of a cost structure that is inherent in a unit banking system. A major motivation of bank acquisitions and mergers was to achieve economies of scale, both from a technology and operational standpoint. 

As we all acknowledge technology is a critical to the growth and survival of all financial institutions. As the pace of change accelerates the costs associated with buying and maintaining technology solutions grows. What was your IT budget 10 years ago compared to today? Back office processes and operations while important; add little to help financial institutions grow and are also a big expense to the bottom-line. Economies of scale cannot be accomplished by unit or small banks and credit unions, especially compared to the economies of scale achieved by mega and large regional banks.

As the U.S. banking environment shifted from a unit banking model to a branch banking model in the late 1990s, how is your credit union or bank adjusting to the new realities of the market? Added a few branches, added some “me too” technology solutions? Is that competing or is your credit union or bank walking dead?  

Digital Banking ... The New Checking Account?

Back in the old days credit unions and banks aggressively marketed to get your checking

account. The reason, banks and credit unions determined that the financial institution that held your checking account was your primary place for banking. While your checking account may not be profitable, all the other banking services and products you used were profitable. 

Fast forward to today. An analysis over five years by Digital Insight of their customer data showed that highly engaged members/customers that used multiple digital banking services are 51% more profitable than members/customers who do not actively utilize online or mobile banking. In addition, members/customers who actively use digital banking services correlate to having higher account ownership, balances, retention, and debit card purchases when compared to offline bankers. It is evident that those members/customers using multiple digital banking services become more “profitable” and engaged, when compared to the offline banking segment.     

The digital channel provides increased opportunity to reach your member/customer wherever they are, at any time. Therefore, the more solutions they actively use, the more engaged they become. By reaching members/customers through multiple digital touch points including emails, banners and prompts, financial institutions can cross-promote complimentary offerings to lead their members/customers to products and services that best fit their needs.

As credit unions and banks struggle with margin compression and seek new revenue sources the answer may lie with your digital strategy. Two of the first considerations when developing a digital strategy:

1. How can digital be used to create a better member/customer experience?  
2. How will it add to the bottom-line?

Most credit unions and banks begin to address question one, although most often in a disjointed piecemeal fashion, reacting to what Wells Fargo or Bank of America are offering.    

Regarding the question most credit unions and banks view digital banking as an expense to the bottom-line.

How do you go 180 degrees from expense to revenue? By developing and implementing a strategic omnichannel and digital banking plan that defines digital as its own self-supporting channel with specific and measurable P&L requirements and performance objectives. Move digital from being a channel designed to drive traffic to the branch network. Digital banking needs to be able to stand on its own.

Branches are not going away, but over time they will fill a different role than they do today. If you have any doubt, look at the enormous success of the branchless USAA Bank (66 billion in assets) or ING Direct Bank that was recently purchased by Capital One for nine billion dollars (US operations) and Scotiabank for 3.1 billion dollars (Canadian operations). They are digital channel only financial institutions, and the list is growing. 

The successful implementation of a sound omnichannel and digital banking strategy is what can set credit unions and banks apart and create a financial model that will set the path forward.

Digital banking is not an expense, it is the new checking account that drive relationship profitability. 

The Digital Divide - The Difference Between Banking Opportunity and Failure

I was reading an article today in Credit Union Management written by Lisa Hochgraf, subtitled, Seven steps to success with your largest 'branch'. The article does a good job

identifying a problem all credit unions and community/regional banks face. "Bank of America has 6,000 branches, Wells Fargo has 3,000 and TD Bank has 1,300." You can’t out-branch them. How is your credit union or bank going to compete?" It is a great question. Unlike many articles of its kind, it goes on to offer seven steps credit unions and banks can follow to make the most of e-delivery. 

Here is the problem. The subheading, Seven steps to success with your largest 'branch' implies that digital channels are another form of a branch. In fact, the largest branch. That is the approach most credit unions and banks take today. They consider digital banking as another branch or an extension of the branch network. That perspective will result in digital banking channel failure.   

The financial services industry is undergoing a transformational change as a result of technology and the emergence of non-traditional financial service providers. Credit Unions and Banks are struggling to understand the impact of this new environment, and how to succeed in it. Combine these factors with increased margin pressure and consolidation and you have a recipe for credit union and bank opportunity ......... or failure.

I have identified how the failure will occur; follow the path most credit unions and banks

are currently on regarding digital banking. Do you remember the story of the Pied Piper of Hamelin? How many times have the companies that break away from the pack gone on to great results? Apple, e-Bay, Amazon to name a few. 

Digital banking cannot be simply a collection of disparate e-solutions that a credit union or bank test and then march out to the members/customers. A piecemeal of solutions that may or may not interface with each other. If your credit union or bank has multiple digital solutions (mobile banking, online banking, new loan origination, new mortgage origination, existing member/customer new account opening, new member/customer new account opening and on-boarding) have you gone to the website and tried to use it. Can your members/customers get immediate approval, do they have to submit information to the branch or administration office, can they log-in once and get access to all digital services, are there workflow rules, is there a decision engine, and are documents available and able to be signed electronically? If the answer to "any one" of these questions is no, then you have created a poor member experience that someone else has solved or is about to solve. 

Digital banking and the ultimate result, omnichannel banking is a huge undertaking. It requires a well thought-out and defined digital strategy that has the executive team and board buy-in. The leader needs to be part of the executive team because digital and omnichannel banking is the new future.

Digital banking is not another branch. It is a completely different channel that needs to be self-supporting and fastest growing channel in your bank or credit union. Digital banking needs to be its own P&L center and not be a channel to direct members/customers to a branch. Don't force members/customers to go where they do not want to go! Don't blame it on "Know Your Customer" or other regulatory issues or constraints.   

So the next time you talk or hear about your bank or credit union refer to digital banking as another branch or branch extension cringe and do something about it. Credit unions and banks face a great opportunity or failure. Where do you want to be when the music stops and you want to find an open chair?

The Holy Grail of Digital Banking Solutions

Credit unions and banks, what is your vision of the "holy grail of digital banking solutions"? I know you are busy, but have you really taken the time to consider what

your member or customer facing digital solutions should look like, how they would operate and interact with your current operation? 

Just to give you a kick-start here is a link to some of my thoughts on the subject.    

http://bit.ly/omnichannel_digital_banking

What does digital banking mean to you? Is it simply online and mobile banking? Is it 24/7 365 day access to all the products, services and support your credit union or bank offers? Is it something in the middle? 

If it is in the middle can you define it? On a scale of one to ten, ten being highest implementation, where does your credit union or bank fit regarding it's digital implementation compared to your expectation? Can your credit union or bank meet your digital solution expectation? If so what will it take? 

Does your holy grail of digital banking exist? If so can you identify it? If it is not out there why do you think that is the case? Can a single technology provider deliver your all encompassing solution? If not, how do you tie multiple solutions together to accomplish your desired goal?  

I hope if you are still reading this blog, most won't be, and that you will take the time and provide your feedback and thoughts. It could be the first step in developing the "holy grail of digital banking solutions".

Considering a Core Data Processing System Conversion - Think Twice

A Microsoft white paper in 2008 said the banking market is ripe for a massive conversion

of legacy core data processing systems (core banking system), most of which were architected and built in the 1970s and early 1980s. 

Earlier this year another prominent consulting group came out with a similar prediction. Close to ten years into the forecasted massive core conversion prediction, ..... it hasn't happened. Heck, even the local TV weatherman would have trouble keeping his job with a forecasting track record this off the mark. 

With all these predictions of banks and credit unions rushing to upgrade or replace their core banking systems, why hasn't it materialized? First we need to understand what is driving the desire to change core banking systems. Before we get there, we need to develop a common understanding of what comprises a core banking system. 

Even defining a core banking system isn't that simple. Just what is a core banking system? The answer depends on whom you ask. This seemingly simple question is complicated by a dizzying array of products and vendors in the market today. Many vendors describe their products almost entirely in terms of end-state benefits, dangling promises of real-time processing, service oriented architectures (SOA), and “bank in a box” solutions that offer end-to-end integration. As a result, the definition of core banking systems varies widely. 

Some credit unions and banks only seek to refresh an ageing MIF/CIF (Member/Customer Information File) or GL (General Ledger). Others believe a core banking system is much more comprehensive solution and is the  backbone of a credit union or bank. A core banking system that supports a wider range of systems, applications and databases as credit unions and banks wrestle with business, member/customer and regulatory demands. A core banking system may support member/customer relationship management (MRM/CRM), business process management (BPM), business intelligence (BI), business rules, risk and fraud management, anti-money laundering (AML), online and mobile banking, treasury, finance resource planning (FRP), asset liability management (ALM), general ledger (GL), regulatory compliance, transaction throughput, interest and fee calculation, parameterized product setup, transaction clearing and many other functions. The first thing a credit union or bank needs to do is define, "what is the executive team's definition of a core banking system".

Back to the first question, "what is driving the desire to change core banking systems"? 

The existing core banking systems are rigid and inflexible because of the complexity, age

of the design and multiple platforms, which makes it hard to understand, run and change. Changing the platforms to comply with regulatory requirements and to respond to round-the-clock digital banking needs is difficult. Driving the desire to change core banking systems are six common themes that can be easily identified:

1. Total cost of ownership: The cost of running core banking platforms is considered to be too high. Cost reduction is needed to restore the competitiveness of credit unions and banks.
2. Complexity: The complexity of core banking platforms and processes is seen as a very big challenge. This complexity has a significant impact on the ability of the IT team to track down issues. The cost of running, updating and changing the platform increases because of the complexity. The challenge is exacerbated in many organizations by the need to support and maintain multiple platforms, sometimes as a result of past renovation initiatives.
3. Age: Most organizations have aging systems that are forty years old or are even older. Keeping legacy platforms current requires ongoing investment in compliance, security, flexibility, functionality, and speed to market. Finding ways to retain skills and knowledge of the legacy technologies and the systems themselves is also a challenge.
4. Regulations and compliance: Regulations and compliance are consistently reported as a significant challenge. The pressure is exacerbated by the speed at which bad news travels because of instant social media communication. The cost and time of making compliance changes is also a major challenge.
5. Batch-focused systems: Most core banking platforms are basically batch systems. Adapting them to support the always-on channel solutions of mobile and internet banking and making the credit union/bank appear to be functional round the clock is a significant challenge.
6. Support for front office digital channel: According to the Microsoft white-paper, the majority of credit union and banking executives believe that core banking platforms will inhibit the development of front office solutions, rather than enable them. 

Many credit union and bank leaders plan to implement transformation strategies that specifically address front office digitization. Banking leaders who plan to transform the core banking platform for front office digitization expect to enable front office change by implementing enterprise middleware platforms and portals that use well-defined system interfaces.

So maybe the "big bang" is not going to happen after all. Their is growing consensus that

a migration plan is the best approach to deal with the deficiencies of core banking systems. In my opinion, as an past executive of a core banking system vendor, there has been very little progress made by North American core banking system providers towards architectural modernizing of their core banking systems. Oh sure, they have added new JAVA or .Net presentation layers, but the fact remains, the core architecture and application stack remains essentially that same as it was 30 to 40 years ago. How does that saying go, ............ "it is like putting lipstick on a pig".  With such a stunning lack of progress why would any credit union or bank what to upgrade its core banking system. In the year 2014 would you upgrade your 2000 Chevrolet for a 2005 Ford?

Is it surprising, then, that while the industry has been talking about legacy modernization and predicting growth in the numbers of banks and credit unions replacing their legacy core banking systems since the early 2000s, most banks and credit unions have hesitated and put off a core conversion? Despite all the media and consultant reports that core conversion are about to bust loose, it hasn't happen. Many credit union and bank leaders wish to evolve the architecture of their core banking platform as a strategy to achieve their objectives. The adoption of enterprise-wide enabling technologies such as business rules engines, master data management, analytics and business process management are seen as significant reasons for their wish to move to a more flexible architecture. Surrounding legacy systems with a multichannel and omnichannel architecture that has strong process and workflow capabilities; externalizing specific banking services such as MRM/CRM, payments, origination, document management and others, and ultimately migrating the remaining legacy system code to a different platform.

With the lack of modernizing progress that most North American core banking system

vendors have made, I believe it is smart business to evaluate middleware and portal solutions before making a core banking system change. In fact, I will go on record and suggest that "with the technology tools currently on the market, the smart money is investing in those solutions and solutions that can overcome most of the weaknesses of the legacy core banking system". This could make core banking system conversion obsolete, or at least, buy multiple years to allow existing or new core banking system vendors to prove their worth with open, modularized, and modern architected systems. 

In my opinion there are two obstacles that still need to be addressed with a migration instead of replacement strategy. The most difficult is batch focused systems. Batch processing is a legacy from the 1960s. In today's modern world, batch processing should be an obsolete term in core banking systems. I can assure you, despite what you may be told, all the core banking systems utilize some form of batch processing. In a 24/7 365 always on world, batch processing is the enemy of the desired member/customer experience. Members and customers want, expect and should get real-time access and transaction processing with up to the second accurate information. The core banking systems are not architected to support online, real-time processing 24/7, 365 access and processing. 

The second challenge of a migration strategy involves integrating all these systems, applications and channels and orchestrating banking processes from front to back – especially given multiple underlying operating systems and communication protocols. Even if you can get them to communicate, do the systems work together to provide a unified user experience. 

What does core banking systems have to do with omnichannel banking? It is the reason we are talking about omnichannel banking instead of already having implemented it. Omnichannel banking's implementation obstacle is the legacy and disparate technology solutions that are not able to support omnichannel banking.  Omnichannel banking is the seamless convergence of all credit union member and bank customer interaction channels delivering a consistent and uninterrupted experience, regardless of what or how many channels a member/customer uses to connect with the credit union or bank. Omnichannel banking is an “end goal”, not a product, service, or marketing campaign. Omnichannel is the breaking down of silos that exist with most traditional financial services providers. It is the entire member/customer experience. It is how credit unions and banks interact and reach out to their members/customers, both digitally and within the brick and mortar of their buildings. 

Almost all the core banking system platforms do not support an omnichannel banking strategy, therefore a core banking system change is not likely going to help you implement that strategy. But the good news is there are options that will work!