John San Filippo
Jack Henry Connect 2022: Ecosystem Disruption and Financial Fragmentation
By John San Filippo
At this week’s Jack Henry Connect conference, the company assembled a team of its in-house experts for a panel discussion called “Gradually, Then Suddenly. Strategies for Ecosystem Disruption and Financial Fragmentation.” The discussion was led by Director of Corporate Strategy Nicole Harper and included:
Senior Analyst-Corporate Strategy Jennifer Geis,
Corporate Strategy Analyst Carlos Lopez
Senior Director of Corporate Strategy Lee Wetherington
Managing Director, Corporate Strategy-Fintech/Crypto Pete Glyman
“More than ever, we feel that we need to be responding to the gradual changes taking place in our market before our eyes before that gradual becomes suddenly and changes banking for better or for worse forever,” Harper told the audience. “We also know that to navigate the ecosystem disruption and financial fragmentation that's taking place, we must move relentlessly forward.” She called on financial institutions to go beyond strategic prioritization to “ruthless prioritization” to make the wisest technology choices.
Jack Henry Customer Research
Geis framed the discussion by highlighting a recent survey of Jack Henry banks and credit unions that addressed priorities. “The intent of the study is really to identify what the top strategic priorities are for our bank and credit union CEOs specifically,” she said. “We really wanted to get down to exactly what you said, what keeps you all up at night. What are your big concerns?” She said the survey was conducted in February and March of this year.
Geis said the first question on the survey was: “What are your top three strategic priorities?” The top priority among respondents was not, perhaps surprisingly, related directly to technology. It was loan growth. This was followed by creating efficiency in operations, and then adding digital products and features. According to Geis, loan growth was a common theme throughout the survey responses.
The survey also asked CEOs about their top three concerns, which were talent acquisition, interest margin compression, and fraud and security.
When asked about competition, most CEOs did not point to other financial institutions as they might have 10 years ago. Instead, they identified fintechs and Big Tech as chief competitors.
According to Harper, many of these challenges are overshadowed by the “ecosystem disruption” currently facing banks and credit unions. She asked Wetherington on the difference between industry disruption and ecosystem disruption.
“The disruption that we have historically invoked when we gather together to talk about challenges generally and new competitors specifically – that’s industry disruption,” said Wetherington. “Typically, we've developed our strategy within the context of chartered financial institution competition and services, right? What we're experiencing now, in addition to industry disruption, is ecosystem disruption.” He said an ecosystem disruption is a “different animal” due to innovations in the tech stack.
“Underneath financial services, you have things like banking as a service, payments as a service, deposits as a service, which in affect allows chartered entities to rent their charter capabilities and embed them into non-charter third parties,” he continued.
Wetherington asked the audience, “What is the boundary defining our industry? I would submit to you that it functionally does not exist anymore. And that's what we mean by ecosystem disruption. When your industry dissolves into an ecosystem that is coming into full contact with other ecosystems, and you all begin offering kind of the same stuff. When those boundaries dissolve, that’s ecosystem disruption. This is a first time for us all in our working lifetimes to experience the dissolution of industries into ecosystems.”
Wetherington predicted that over the next five, 10 or 15 years, these ecosystems will evolve into new industries with new boundaries. “What this all means in the short term is that you've got to do a different kind of strategy work,” he said. “In addition to the industry strategy work that we've all been doing, you've got to take a wider lens. You've got to understand that the entities that you're competing with now are playing a completely different game than the one you guys have been playing against each other in our financial services industry.”
Crypto Is Key
Harper then turned to Glyman to ask how digital currency fits into this ever-changing environment.
“It's a really exciting time when you look at what blockchain technology is bringing to our industry,” said Glyman. “A lot of the innovation is happening outside of these walls in the decentralized finance world. A lot of what we're seeing around payments to a degree is being created because [fintechs] are looking to disintermediate banks and credit unions with payment options. For your financial institution, if you're not preparing to be able to offer payments over crypto rails, you're missing out.” He said financial institutions need to position themselves to compete in this new world.
“[Fintechs] are going to large businesses that are spending millions of dollars a year in wire fees for international remittance and saying, we're going to do that for you for free. And if you give us your deposits, we'll give you a 6-7% yield,” he said. “That's really hard to compete with. That's a very compelling case and they can do that because they're moving money on-chain, low cost, real time.”
According to Glyman, financial institutions should be positioning themselves as the “on ramps” and “off ramps” between fiat and digital currencies for their accountholders. “I would recommend leaning into it, participating, getting involved in conversations,” he said, “because I think we're in this holding pattern right now, but once there's guidance, it’s going to take off like wildfire and I think you're going to want to be prepared for it.”
Cannabis as a Niche, for Example
When the discussion turned to niche market segments, Lopez mentioned cannabis banking as a segment with a unique and urgent need for effective financial services. “One niche that we're tracking very, very closely is cannabis banking,” he said, noting that the legal (at least at the state level) cannabis business generates tens of billions of dollars each year.
“It's incredibly high growth industry. Not only that, but the average transaction size for dispensary is $25 to $50,” noted Lopez. He said that according to a recent study, lack of adequate financial services is one of the biggest concerns across the entire cannabis industry.
“Most of these operators are cash only, and that's a huge obstacle,” he said, adding that because of the nature of the product and the all-cash nature of the business, cannabis operations are 10 times more likely to be robbed than other businesses.
“They're sitting on piles of cash they cannot move,” said Lopez. “They need payroll services. They need compliance tech. They also just need access to loans.” According to Lopez, these needs represent opportunity for forward-thinking financial institutions.
Lopez acknowledged that cannabis banking does face scrutiny at the federal level, but he believes the SAFE Banking Act, which would allow financial institutions to serve the cannabis industry, will be passed sooner rather than later.
To conclude the session, Harper asked each panelist to reduce their advice to financial institutions to only three words. Their responses were:
Geis: Payment strategy prioritization.
Lopez: Speed, risk-taking, analytics.
Wetherington: Curate, optimize, differentiate.
Glyman: Jack Henry crypto.
·Harper: Purpose, intention, ecosystem.