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  • Writer's pictureJohn San Filippo

Jack Henry Connect 2022: To Niche or not to Niche?

By John San Filippo

Lee Wetherington is the senior director of corporate strategy at Jack Henry. In a session at this week’s Jack Henry Connect conference called “Establishing & Serving Your Niche,” Wetherington discussed the ins and outs of focusing on one or more narrow market segments.

Industry Disruption Versus Ecosystem Disruption

To level set, Wetherington began by clarifying the difference between industry disruption and ecosystem disruption. “Usually what we're referring to is industry disruption, but that's different than the ecosystem disruption we're also experiencing now,” he stated. “I want to make sure you understand the difference.”

Lee Wetherington

He said that if your financial institution is like most, it conducts an annual strategic planning session. “And what do you do? You do SWOT analysis,” he said, referring to the common practice of examining strengths, weaknesses, opportunities, and threats. “You identify your strengths and weaknesses. You map those against opportunities and threats, but all of that is circumscribed by what's going on in your industry. What are the threats in our industry? What are the opportunities in our industry? That's all good and well until you don't have an industry anymore.”

According to Wetherington, the boundaries that have long defined the financial services industry are dissolving at an increasing rate, brought on by the current wave of embedded finance. “If you have non-charter third parties who have embedded financials, chartered financial stuff into their native user experiences, where exactly is the boundary that defines your industry and who exactly are you competing against, and are you even playing the right game anymore? Certainly the big techs that have made forays into financial services are not playing the same game you're playing,” he explained. “Their goals are different. What they're willing to give away and lose up front to get to a different goal is different than the average financial institution. So you must still do your SWOT analysis. That is based on the presumption of having an industry that is necessary, but it's no longer sufficient.”

Wetherington told the audience that today’s financial institutions need to have “a much wider lens,” noting that dealing with ecosystem disruption requires “a new kind of strategy.”

He continued, “If you're the average Gen Y or Gen Z couple, you've got 30 to 40 financial service provider relationships in various forms. So in that context, the question is not how you can get them to abandon 39 other financial service providers and bring it all home back to the credit union or the bank. No, that's ridiculous. That's delusional. That will not happen. The strategic question is: How do you achieve and retain first app status in that otherwise fragmented constellation of financial service provider relationships and apps?” One way, he said, is by identifying and serving one or more niche market segments.

Is Niche the Answer?

“You can continue to try to be most things to most people in the markets that you're playing in,” he told the audience. “The question here is, can you be most things to most people and compete at the same price points that entities much bigger than you, who are being most things to most people, offer? Is that viable? And for the super majority of financial institutions, it's not a viable strategy. That gets you back to ‘innovate and differentiate’ and get really good at being the right things for some people, instead of most things to most people.”

That said, Wetherington admitted that serving a niche may not be right for every institution. He said he spoke with one credit union that is convinced that, long term, the only institutions that survive will be those greater than $10 billion in assets. “Because they have a geographically circumscribed charter, they do not want to be niche. In fact, they call their strategy anti-niche,” he said. “They want to be the best at being most things to most people and differentiate, not on product service differentiation. They want to differentiate on being most things to most members in ways that are differentiated by service, price, speed, and convenience.”

Either way, he said, financial institutions need to make a conscious decision about respective niche strategies.

Niche Strategies

Wetherington pointed to a recent Jack Henry Strategic Benchmark Survey of its bank and credit union customers. When asked which niche segments those polled plan to pursue in the next two years, 85% identified at least one segment. The breakdown of these segments was:

  • Business focused, 55%

  • Demographic focused, 40%

  • Professional focused, 35%

  • Banking as a service, 17%

  • Agricultural, 17%

  • Private banking, 16%

  • None, 15%

  • Cannabis banking, 8%

“You've got to decide,” said Wetherington. “What niche are you going to pursue? How are you going to define niche? Because there are a lot of community financial institutions who still say, ‘hey, Lee, you skinny little hick, my little community where our credit union is or where our community bank is, that is our niche, right?’ But how do you define community if community is not necessarily exclusively geographically defined anymore?”

Niche Meets Digital

Niche strategy inevitably intersects with digital strategy. “We're in the digital-first era,” explained Wetherington. “What are you doing with that? If you get really good on executing and putting together just the right bundle of innovative features that differentiate you from everybody else for a particular segment or sub segment, how do you take that more broadly geographically using a digital-first approach?”

According to Wetherington, some institutions will pursue a specific niche by launching a separate digital brand. He told of one Jack Henry bank customer that launched a digital brand to pursue high-end RV financing at a national level.

“The question is, if you know exactly what your niche is and you know what the pain points of that niche are and the needs of that niche are, that's when you now decide what bundle of products, features, and innovations will best serve or target that niche,” he continued. “That segues you immediately into embedded fintech strategy.”

Wetherington said the biggest challenge for financial institutions is deciding which technology to embed. “There's literally over 10,000 fintechs in the world. There are over 6,000 fintechs in the United States,” he said “Even if you have a very narrowly and specifically defined niche, how do you begin to identify the best fintech that offers the specific one, two or three feature functions or innovations that are going to differentiate your niche strategy and its execution?” He recommended a division of Bank Director called FinXTech as a partial solution.

“They have a list of about 700 to 800 fintechs that are vetted more closely than any other sort of fintech vetting process that I know of because each one has to demonstrate first a successful and tested partnership with a chartered financial institution,” he explained. “So you go from 10,000 right away to seven or eight hundred, and guess what? They're all categorized.”

The Three Pillars of Niche Success

According to Wetherington, there are three pillars of a successful niche strategy:

  • Remain laser focused:

    • Doing something different, doing it better, sticking with it

    • Understanding you can't be all (or even most) things to all customers/prospects

  • Simplify your execution and operation to the extreme:

    • Leverage right infrastructure, tech and partners to create seamless, differentiated experiences that are uniquely valuable to your customers (or their kids)

    • Beware your own “fragmentation” by way of off-site links to third parties and janky single-sign-ons (SSOs) that create a radically disjointed UX

    • Migrate from bolt-ons to embeds

  • Key on efficiency and cost-controls (and be willing to invest to get there).

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