SRM Report: FIs Need a Fintech Blueprint
By Roy Urrico
Finopotamus aims to highlight white papers, surveys, analyses and reports that provide a glimpse as to what is taking place and/or impacting credit unions and other organizations in the financial services industry.
Memphis, Tenn.-based SRM (Strategic Resource Management) recently released a report, "Why Every Financial Institution Needs a Fintech Blueprint.” Contained within are insights on the many challenges credit unions and banks face in adopting new technology, as well as competition from banking industry outsiders.
The report authored by two of SRM's experts — Prakash Natarajan, managing director, payments strategy; and Jeff Ostheimer, director, fintech advisory services — suggests the market is evolving so rapidly that even financial institutions (FIs) possessing an existing digital strategy may be overdue for a refresh.
"The operational changes imposed on financial services by the pandemic served as a wakeup call for banks and credit unions," said Ostheimer. "Today's financial institution must deeply understand the behaviors of its current and prospective customers and members, determine which products to implement based on the organization's strong suits and opportunities, and prioritize accordingly. A fintech blueprint has never been more important."
Banking-as-a-Service Gains Momentum
The report also explores why credit unions and smaller banks are embracing banking-as-a-service (BaaS), a comprehensive strategy supported by embedded finance. “BaaS sponsors share their data and infrastructure with non-banks. It can be a great source of deposits and revenue for the BaaS sponsor, but it also creates a need for tighter vetting of potential partners. Many of the banks entering BaaS have less than $10 billion of assets.”
SRM suggests there are many considerations necessary before embarking on a strategy that includes embedded finance. “FIs must first define their approach and make sure it aligns with return on investment (ROI) and return on assets (ROA) goals.”
In addition, the report states, “A customer assessment is also integral to determine ideal partners and whether there is a suitable runway to expand and scale the business. Consider going to a payments hub that manages ACH, wire transfers, and credit/debit operations. Review your infrastructure, tech architecture, and APIs (application programming interfaces) to make sure they are in good shape.”
Developing a Sidecar Core Strategy
The report specified, “At its core, banks and credit unions have three primary duties: collecting deposits, extending loans, and facilitating payments. The most successful FIs will tap into products and services that incorporate all three of those functions.”
At the same time, the report said It is worth noting that the banking industry is moving to multi-core, “such that cores need to integrate with other line-of-business specific cores/platforms.”
The report noted a lack of core system flexibility can tie an FI’s fortunes to its provider’s roadmap.
That is one reason some FIs have adopted a “sidecar core strategy,” according to the report, where they turn to middleware firms to add niche products while leaving the underlying core platform in place; or a “lifeboat core strategy” that establishes separate systems of record. “In each case, the premise is to reduce dependence on the legacy core system without bearing the operational and customer experience risk that accompanies a full-scale core replacement.”
Another option, conveyed the report, involves adding a middleware layer to manage the API connections that increasingly serve as the mechanism used by next-generation solution providers to overcome the core’s limitations. “These maneuvers can help credit unions and banks quickly adapt to changing market conditions and shifts in consumer attitudes. Rather than waiting an extended period to turn to an alternative core with better APIs, an FI can gradually migrate data over time.”
Next Steps for Building a Fintech Blueprint
The report advised credit unions and banks can take several fundamental steps to evaluate their fintech blueprint, realizing that it makes little sense to try and bolt legacy processes onto a new system.
Key considerations include:
· Start by defining the customer journey. Identify products and services that “touch” and “interact” with clients, then focus on back-end capabilities such as core banking to fill out that blueprint. “Payments is one of the dominant user interactions that must be carefully evaluated for cross-core engagement.”
· Then select your core and ecosystem focus. “The next steps, including the partners you work with and your timelines, will help guide the decision-making process along the journey. As you evaluate partners, be diligent about selecting vendor products that are aligned with the envisioned customer journey and your strategic roadmap for capability and tech-stack.”
· Align the organization to the customer journey. Consider conducting an employee talent/skills assessment. Evaluate your institution’s capabilities and whether it makes sense to develop platforms in-house, partner with third parties, or pursue an acquisition. And conduct a periodic refresh of your fintech landscape to identify functions and areas you are falling behind on due to vendor constraints and explore options to eliminate those dependencies.
· Execute your strategy. Once an organization understands its direction and needs, go out and source the developers and tech strategy talent required to begin the journey. “A recent wave of layoffs in the tech sector could provide hiring opportunities that didn’t exist even a year earlier.”
The SRM report recommended other considerations when putting together a fintech roadmap, including understanding the incompatibility of a digital environment and silos; the importance of streamlining the organization, not shortchanging risk and operational readiness assessments; and building clearly defined strategies.
“Banks and credit unions would be ill-served to sit idle when it comes to developing and implementing a fintech blueprint. Larger banks and fintech companies are investing in innovative platforms, and many are already applying those innovations to improve the financial circumstances of their customers. Open banking, as witnessed in Europe and elsewhere, has the ability to transform how people buy and sell goods and services, while real-time payments will expedite how people transfer funds.”
These changes, added the report, will fundamentally change consumers’ mindsets over the next few years. “The time is now to assess your FI’s strengths and weaknesses, both in terms of tech functionality and staffing know-how. Use your findings to adjust or overhaul your institution’s internal structure and reevaluate third-party partnerships to get your house in order before moving forward on an innovation journey.”
SRM maintains it has helped more than 1,000 financial institutions add value to their bottom line in areas such as payments, digital transformation, core processing, digital assets, and overall operating efficiency.