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It’s Hard for Bankers to Make Good Technology Purchase Decisions

FNBB is in the final stages of making a decision regarding our primary core system. Like any other financial institution, FNBB needs a system to process deposit and loan accounts, operate a general ledger for the holding company and numerous subsidiaries and interact with Netlink, our connection for our customer financial institutions.  Unlike a commercial bank, we do not need the technology to operate retail locations, ATMs, online and mobile banking and so on.  Still, our decision process is not substantively different than what any commercial bank goes through to make a decision.  The steps are essentially as follows:

  • Do a deep dive into what each department really needs. What feature / function do we need regardless of whether it exists in our current core?
  • Brainstorm what the future needs will be. For example, how will the advent of multiple faster payment options affect the future core needs? Is there an effort to target younger demographics?
  • Research potential vendors to create a short list of systems that you will evaluate.
  • Provide a detailed list to each vendor of the most important core elements for your institution.
  • When you meet with the vendors (in-person or online) insist that they show how the specific elements you documented would get executed using their system (this is a critical step that nearly every institution neglects).
  • Calculate the cost of ownership for each system you are evaluating, over a fixed period of time, using an apples to apples methodology.
  • Pick a vendor and execute an agreement in sufficient time for you to get up and running on that system before your contract term on the existing system expires

This is by no means an exhaustive list, just a summary.  But a small group of FNBB team members representing the key areas that interact with a core have been working on this for months.  The contract will likely be for 6 years, so it’s important to get it right.

As I was perusing my news feed, I came across an article from our friends at Cornerstone on this very topic.  Titled “It’s Dreadful Being a Buyer of Bank Technology”, the article details the frustration many bankers experience while going through the vendor evaluation and selection process.  And it rang true as FNBB had personally experienced many of the specific pain points that the Cornerstone article describes.  Steve Williams from Cornerstone outlined the following issues facing FIs that have to make tech purchases:

  • Banking functional requirements are deep and wide – One of the vendors that FNBB looked at is a new “cloud-based” system. They touted their flexibility to customize the system in any way needed. Yet, it had no G/L; “you can just license any G/L and integrate”. Oh goody … Turns out there are many hundreds, perhaps thousands of standardized options in your current core. Regardless of the frequency you use any feature, you always know that when you access that option, it performs the necessary tasks associated with it. Cloud systems have to be told what to do and while it might be fanciful to acquire a customized system, most FIs lack the design or programming resources to do so.
  • The fintech is not standardized in delivery of feature / function – There are lots of fintechs touting lots of fancy new “shiny objects”. However, there are few standards around which you can build a comprehensive set of services that have been curated from multiple vendors, each one offering a unique part of the service. Perhaps we will get to a “plus-n-play” environment at some point, but that is certainly not in the foreseeable future.
  • Traditional vendors are “forced” to defend margins – You probably have a system offered by one of the larger core vendors. And it’s a good bet that that vendor is a publically traded company. They live and die by the quarterly earnings call. Therefore, they inherently have less motivation to think long term.

I am paraphrasing Steve’s article in my comments above, you can read the full article here – https://gonzobanker.com/2022/05/its-dreadful-being-a-buyer-of-bank-technology/?utm_campaign=2022%20GonzoBanker%20Newsletters&utm_medium=email&_hsenc=p2ANqtz-8Q40ms-QMO3Bi128OBXC7TChFjmyPdPIgaPnE6amwfRbIHTh8fvT6WqhIgWoc7iaYdmWX2juH1q0EP5agP2H2ZFLekrY4x_izYOQkWbD1LGYx3f3c&_hsmi=213558710&utm_content=213558881&utm_source=hs_email&hsCtaTracking=e3408c46-8d89-472f-bea8-bf525f4cc8dc%7C224a0c73-8122-41f7-8e8f-23e388104e81

So what should be your approach?  I know that some bankers are so overwhelmed with the magnitude of this decision, they elect to just stay with their current vendor by default.  Now if you fully review your needs and your current vendor is the best choice, then lucky you!  However, I will quote the great Teddy Roosevelt, “In a moment of decision, the best thing you can do is the right decision, the next best thing you can do is the wrong decision, the worst thing you can do is nothing”.  I agree.  Inertia is not a strategy. We should carefully examine all of the relevant data and make an informed decision.  So what are the elements that should go into our decision?  Again, I will pull some excellent advice from the Cornerstone article:

  • Set realistic expectations – There is a lot of new technology coming. Some of it is not “ready for prime time”. You have to be realistic about how mature new systems would be.  Steve says it this way, “Vendors can be part of transformation, but transformation cannot be simply purchased”.
  • Prioritize proven integrations and ease of configuration – Just because a vendor says something can be interfaced doesn’t mean it is a standardized or easy process. You must exercise extreme due diligence to verify all of the integration issues so you are entering into the relationship with “eyes wide open”.
  • Beef up your internal IT capabilities – Maybe you are a small community bank and you cannot spend the same amount of money that larger institutions do on IT. Fine. At least work with vendors that provide outsourced IT services.  Form a collaborative effort with area institutions with whom you have a good relationship and share IT resources.  Having your own IT resources that can pierce through the marketing jumble and identify feature and function that advances the FIs goals is critical.
  • Tie fintech spend to expected outcomes – This might be financial but I think a better example might the “virtual branch”. How many customers are using online and mobile banking as their primary access to your institution?  How many total customers?  That yields a current percentage of the virtual branch to total customers. If you feel that number should be higher, then what technology would you need to deploy to achieve that goal?  This is not a game where we are just buying technology for technology’s sake.  Strategize about exactly what outcomes you want.
  • Create a way to monitor the tech roadmap each quarter – My best advice here is to take all of the fintech issues that you feel should be tracked and assign this out to all of the officers of the bank. Sally is focusing on crypto currency. Bill is covering mobile banking. Henry is tracking Banking as a Service (BaaS), and so on.  Each quarter, you have each officer give a brief update about what is going on in their assigned area and you discuss as a group how these changes align with your tech strategic plan.

Now, let me state that just because many of the newer technologies are not fully baked or standardized is a reason for you to avoid them.  You should absolutely check them out. You might find some that are ready for prime time. But at the very least you will be aware of what they offer at a point in time and it’s likely that some years in the future, you would find them to be more likely a fintech partner you would choose.  Similarly, just because your core is an established vendor that has been around for decades doesn’t mean that they are not innovating.  Fiserv recently bought FinXact, a cloud-based core system and Jack Henry recently announced that they were going to devote significant resources to converting their flagship SilverLake system into a cloud-base core option.  These developments and many more like it are signs that fintechs new and old are working towards enabling the technologies that community bankers will need to effectively compete in the years to come.

One last point, one of the biggest challenges that bankers face in doing a comprehensive job of evaluating major technology decisions is that you have a job and duties that may limit your ability to fully focus on all the elements of a technology evaluation. For that reason, it may be prudent to employ a consultant to head up the technology evaluation process.  There are numerous organizations that focus on providing this type of service but FNBB is using Profit Resources, Inc. (PRI), based in Monroe GA.  Our consultant, Mike Neale, has been instrumental in managing the process, understanding our requirements, interfacing with the vendors (incredible how much time is spent in communications with vendors that Mike took off our plate), and a detailed analysis of the vendors that we looked at including a true apples to apples cost of ownership financial analysis.  PRI has well earned their fee with the diligent effort on assisting us in making a sound technology decision.

For more information on PRI, you can contact Dave Koto at dkoto@profitresources.com or 800-576-2374.