Technological disruption has forced the hands of community banks and credit unions to step up and digitize.
In the face of a pandemic that saw nationwide lockdowns, banking software providers are helping their clients digitize for a better customer experience. Smaller banks might have to move to the cloud and adopt an open banking approach to integrate up-to-date third-party solutions into their platforms to stay competitive in an evolving industry.
The pandemic created an environment where financial institutions needed to support their local communities in a branchless capacity without compromising on service. Many saw an increase in their digital banking services and consumers are now more likely to use online banking services than ever before. BAI, a nonprofit that produces insights on the financial services industry, found in its research that 52% of customers are using digital banking applications more since the start of the pandemic and that 87% of consumers plan on maintaining their increased digital usage after the pandemic.
Benjamin Metz, head of digital at Jack Henry & Associates, says fintech disrupted the financial services industry and propelled it into the future. He says fintechs like Venmo and Square took over consumer lending, and big banks and fintech partnerships are increasingly becoming the norm. Last year, Goldman Sachs and Amazon partnered to provide lines of credit up to $1 million to merchants selling on the Amazon platform.
Metz says that without these big changes, community banks and credit unions had not been pushed to make digital progress. He also says these institutions recognize that they need to go digital to stay competitive, but there are challenges ahead.
Most of the banking system in the US was built before the internet, and the current payments and banking infrastructure is still mostly legacy. Matt Ellis, Chief Revenue Officer of Apiture, a digital banking solutions provider, says legacy software impacts an institution’s ability to innovate quickly. He also says fintechs are entering the financial services market at a rapid rate and stealing consumers away from their primary institutions. Without the ability to keep up with modern-day solutions, financial institutions run the risk of losing key pieces of the customer experience to these competitors.
Moreover, community banks and credit unions get the short end of the stick because they neither have household names to attract big fintech partnerships, nor do they typically have the in-house technological resources to compete with either incumbents or fintechs on their own. This is where providers like Jack Henry come in.
Jack Henry has helped many of its regional and community banking clients move their core software to the cloud. As of this week, over 430 financial institutions have deployed Jack Henry’s Banno Digital Platform to 4.8 million users nationwide, including at least 114 banks and 51 credit unions.
“We want the community financial institutions to be able to compete on a level playing field against Square, PayPal, Citibank, etc.,” says Metz. He believes that moving to the cloud levels the playing field and allows community banks and credit unions to cherry-pick the solutions they want to integrate into their platforms.
Simmons Bank is one of Jack Henry’s core banking clients. In October 2019, they launched mobile banking with Jack Henry’s Banno platform -- just in time for the pandemic. The move saw customers use the platform and its digital services more frequently over the course of lockdown, with a 30% increase in digital users and 38% increase in digital transactions.
Alex Carriles, chief digital officer at Simmons Bank, loves Banno’s native integration with Jack Henry’s core software, but what sealed the deal was Banno’s seamless integrations with third-party softwares.
“Some of our solution providers are outside of the Jack Henry family.” says Carriles. “And we wanted to be able to really interconnect all of those solutions within our mobile and online banking solutions.”
For example, Simmons uses a different card platform to manage their credit cards than the one offered by Jack Henry. However, Carriles says the bank was able to integrate their third-party card platform into their mobile and online banking applications using Banno’s APIs, with no inconvenience to their customers.
Carriles says that this flexibility is key in today’s digitization efforts, an opinion echoed by Milind Pathak, senior director of US core banking platforms and integration at fintech Finastra. The company successfully migrated its Fusion Phoenix core banking system customers to Microsoft Azure within the last year. In total, 62 community banks and credit unions migrated their Finastra cores to the cloud.
Pathak estimates there are about 2,000 fewer credit unions in 2020 than there were in 2012. He adds that about 1600 of those had assets less than $200 million -- but credit unions with larger assets, between $200 million - $500 million, increased by 40% in the same time frame.
“[Credit unions] need to find a way to grow,” says Pathak. “And the only way they can do this is by thinking about changing the way they do their business.”
Pathak says in order for smaller financial institutions to survive, they need to make new revenue streams and increase their customer and member share in the market. The most obvious way to grow is to make better use of the technology and software that’s available.