Industry Leaders Forum: The Biggest Tech Challenge of 2023, Part 2
By John San Filippo
Finopotamus has assembled a panel of experts in a new recurring series called The Industry Leaders Forum (ILF). Each month, we’ll ask the panel a broad technology question and share their informative responses. Due to unprecedented response, we’ve divided the first ILF installment into three parts. Respondents are presented in alphabetical order by company.
Part 2 includes responses from:
For January 2023, Finopotamus asked our panel:
What is the single biggest technology challenge facing credit unions in 2023?
Jon Ungerland, CIO, DaLand CUSO
2023 is already shaping up to be the year of CBDCs (central bank digital currencies), and this topic will bubble up to the top of the technology challenges list for the community and retail banking players. Of course, the nascent digital currency sector hasn’t made it past the “great cryptocurrency crisis moment” yet. More exchanges will fall (like FTX) and consumers will become increasingly literate in the new financial dialects of digital money. Congealing legal clarity and impending regulation might slow the inevitable merger of money and the internet (likely just long enough for paying players in D.C. to ensure they control emerging markets).
In fact, banking institutions need only look to current pilots or conversations at DAVOS 2023 to surmise (as Bank of America has, apparently) that CBDCs will catalyze market energy around digital assets. This presents challenges on multiple fronts (i.e., technological, strategic, financial, operational), but the core challenge will be technological in nature.
CBDCs have rocketed to the top of the priorities list for The Federal Reserve bank and dozens of other nation-states trying to maintain competitiveness and relevance of their central bank and sovereign currencies. These national and global banking institutions are focusing on next-gen, distributed ledger databases and networks for currency/settlement. Legacy banking networks and systems are increasingly archaic, which is to say expensive, comparatively inefficient, and increasingly risky.
If we were going to say the quiet part out loud, most banking data processors and banking databases have been dated and amazingly disparate for quite some time (over a decade) compared to tech, strategies, and operations in other sectors. Savvy institutions have already invested in migrations to modern cores (and have improved control over data and capacity to interface to emerging forms of money-data).
It’s increasingly difficult to disguise the technological deficit of banking data and systems in a world where dozens of legitimate, private, decentralized networks for the storage and movement of value have sprouted up all around legacy banking (e.g., Bitcoin, Ethereum, XRP, ADA, ALGO, HBAR, USDC, etc.). So plentiful, efficient, and secure are the next-gen competitors to Society for Worldwide Interbank Financial Telecommunications (SWIFT) that 2022 was the year many global corporations and sovereigns dared to start looking past the Dollar/SWIFT system (in earnest) and into new technological horizons for more efficient, secure, and cost-effective global liquidity movement (see BRICS, Saudi Arabia, China, etc.).
Bottom line: If central bankers and governments are looking past the paradigms of Dollar/SWIFT dominance (monopoly), and exploring integration to distributed ledger networks like Bitcoin, Ripple, Ethereum, etc., retail and community banking institutions looking to remain in the money business will need to rise to the challenge of bridging (quite literally technology, data, and operations) the legacy world of centralized finance data to the new realms of decentralized financial networks. 2023 would be a good time to get started overcoming the disparate state of your banking data. Centralize, control, and make ready to connect to the future of money (merged with the internet).
Joseph Akintolayo, CEO, Deposits
In 2023, credit unions will be faced with a huge challenge - the successful implementation of a digital transformation to enhance personalized member experiences, increase security, and provide cost-efficient payment solutions. This transformation will require a comprehensive approach to understanding customer needs and developing innovative solutions that leverage technology. Credit unions must meet this challenge all while expanding member relationships and operating under thinning margins and staffing shortages.
Credit unions must be able to identify cutting-edge technology and develop strategies that can help them remain competitive and ahead of the curve. Digital technology enables credit unions to expand their reach and increase profitability, while also using data to provide the personalized service and transformed physical touchpoints that customers desire. Additionally, credit unions must also remain vigilant in safeguarding their members’ data and protecting their payment systems from cyberattacks. In many cases, limited resources can slow this technology adoption rate.
To remain competitive in today's digital environment, banking as a service (BaaS) platforms like Deposits.inc are a strong ally for credit unions to build differentiated banking products that deliver value to their customers. Our plug-and-play financial technology kits enable credit unions and their small business members to launch and scale fintech in days or weeks, not months and years. Our mission is to empower communities with a financial operating system that unlocks efficiency, growth, and economic inclusion.
Ashish Garg, CEO, Eltropy
Everyone right now is dealing with fraud at some level. It is high on the list for most financial institutions, and community banks and credit unions have come to realize that this problem is not going away. Two-factor and multi-factor authentication have quickly become the standard method for preventing and fighting fraud, and community financial institutions are using these secure authentication tools so their members can not only access their accounts, but also know who is reaching out to them. What the savvy credit unions will be doing more of in 2023 is blending commonly used technologies into the strength of multi-factor authentication tools. This blending of the old and the new, essentially, gives their members peace of mind while also creating an effective digital and in-branch communications strategy that will have staying power over time.
Bryce Deeney, CEO, equipifi
Member data activation (or, putting your data to work) is the single biggest technology challenge credit unions face, and the most impactful investment they can make. In a year like 2023, consumers face macroeconomic changes and shifting financial needs while taking a need-it-now approach to solutions. Whoever delivers first gets the engagement.
In previous years, cardholders – especially millennials and Gen Z – turned to fintech apps for everything including budgeting, getting financial health scores, transferring money, and accessing flexible financing like buy now, pay later. Direct-to-consumer fintechs have caused significant erosion to the relationship between credit unions and their members. For example, 70% of buy now, pay later (BNPL) users would have preferred a solution from their financial institution. Yet in 2023, as BNPL continues its record growth, members still must turn to direct-to-consumer fintechs.
To compete, credit unions must stay ahead of their members’ financial needs and do so with agility. Data will show credit unions how members are purchasing and paying, and signals about their overall financial health. Keep a pulse on member needs and select key partnerships with B2Bank fintechs and CUSOs to roll out a solution catered for your members before a fintech takes your place.
Amber Harsin, CEO, Prodigy
Legacy software is a critical issue for many financial institutions as it poses a significant risk to business continuity.
First and foremost, legacy software is outdated, meaning that it is no longer supported by the vendor and may not be compatible with newer technologies. This can lead to a host of problems, including system crashes, data loss, and decreased efficiency. For financial institutions, whose operations rely heavily on technology, any disruptions to their systems can have a significant impact on their bottom line.
Additionally, legacy software is typically not designed with modern security features in mind. This means that it may not be able to protect against current and emerging cyber threats, putting sensitive financial data at risk. Furthermore, as vulnerabilities in legacy systems are discovered, there is typically no way to patch them, leaving financial institutions open to potential breaches.
Another risk associated with legacy software is compliance. Financial institutions are subject to a wide range of regulations and standards, including those related to data security, privacy, and consumer protection. Legacy software may not be able to meet these requirements, leaving institutions at risk of non-compliance, which can result in significant fines, legal penalties, and reputational damage.
In today's fast-paced digital environment, financial institutions must be agile to stay competitive. They need to be able to quickly adapt to new technologies and market trends, but legacy software can make this difficult. Its rigid architecture and lack of scalability can prevent institutions from taking advantage of new opportunities, which can harm the credit union’s long-term growth.
Finally, legacy software can be costly to maintain. As the software ages, it becomes harder to find skilled professionals who can work on it, and the cost of maintaining it can skyrocket. This not only affects the bottom line, but also limits the resources that institutions have available to invest in other areas such as innovation and development.
In conclusion, legacy software is a major risk to business continuity for financial institutions as it poses several security, compliance and scalability challenges, and legacy software is costly to maintain. It is crucial for financial institutions to address legacy software issues by planning and implementing a modernization strategy that focuses on maintaining business continuity while keeping costs down. Upgrading to modern software solutions will help financial institutions to stay competitive and safe.