Nelly Rezny is EVP Business Solutions Group, Americas, Temenos
I was not surprised to see new Economist research illustrating the bullishness of American banks when it comes to investing in technology. The headline number for the US market, that 90% of North American banks consider technology to be the biggest trend impacting their industry, only leaves me wondering what the other 10% are prioritizing.
It may be tempting to say “So what? Haven’t banks been investing in technology for years now?” Yes, but the step change I’m seeing is the force of commitment. Until recently, banks have been content to just keep pace with the rest of the digital finance and payments space. That has largely meant innovation around the fringes. Now we’re starting to witness modernization at the core.
For many years, big banks have considered this too difficult and too risky. Most core banking systems of US banks were installed in the 1970s, and have been heavily customized over many years. You cannot easily innovate on such foundations.
That is still true. What’s changed is the evidence that customers are now calling the shots. For many, especially those born into the digital age, traditional banking is an anathema to modern life. What matters to them is convenience and experience, more so than institutional longevity. It explains why fintech startups have been so successful in recent times. It is estimated that by the end of this year almost $10tr of digital payments will be processed by fintechs globally, growing to nearly $15tr by 2027. Neobanking is on a similar trajectory – worth almost $5tr today, growing to just over $9tr by 2027. Their success can be put down to a ruthless focus on serving their customers with highly personalized and easily accessible financial services, in a way that banks so far have been unable (or unwilling) to do.
That’s now changing. It has to. Banks can no longer ignore this insurgency into their market.
But modernization is easier said than done. Banks can’t simply rip and replace their core systems, like swapping out an engine on a classic car. The reality is to take a step-by-step approach, transforming individual business units one by one. It may sound like a slower way of doing things, but in practice it can be done fast – with SaaS and the new breed of SaaS enterprise services. Such an approach provides options to run cloud-delivered services next to existing technology and progressively decommission existing functionality in existing systems.
Payments is a good place for banks to begin. For starters, it is where banks face significant competition, as the early data point shows. And then there’s the new opportunity of FedNow. Similar instant payments systems around the world have a record of strong adoption. The UK’s Faster Payments regularly processes close to 400m instant payments every month. In Brazil, $260 billion worth of instant payments are processed monthly via Pix. This should persuade US banks to not simply enable FedNow, but to enact first-mover advantage.
Convera is one US payment provider that they’ll be chasing down. It has recently announced it will replace its legacy payment processing system with Temenos’ cloud-hosted platform in a bid to grow the $110 billion in B2B payments it processes annually.
In that story lies clues to the question of the ‘right technology’ that banks now need. In my conversations with executives, five criteria have emerged. First, it has to be SaaS. Not simply cloud, which (if run privately) doesn’t negate infrastructure costs, and doesn’t provide true elasticity. Only with a SaaS deployment can a bank offload its IT obligations and overheads in a meaningful way that releases budget and resources, and enables scalability at will.
Next is a platform approach; an end-to-end ecosystem of pre-composed capabilities that can be switched on when needed. Shopping around for niche solutions and then stitching them together is a false economy.
That leads to priority number three; a microservices and API architecture that enables capabilities to be extended and integrated with third-party solutions. This puts banks in the driving seat, not the technology vendors, and ensures the flow of future innovations.
Number four is trust in your technology partner. Trust is important for any business relationship, but when money is the product, it carries even more weight. None of the above matters without trust. Its abstractness makes it hard to define. Some will judge trust by a partner’s scale, others by what their customers say, or their expertise in navigating regulations across different jurisdictions, or perhaps their track record for innovation. In truth, trust is the evidence of all these things.
The fifth and final criteria is a global vendor mindset. Increasingly, US banks are looking beyond their shores for the technology they need. Until now, many have been reluctant to do so, partly because US financial services are heavily regulated and it takes time for newcomers to prove their viability. But I’m now sensing more of a willingness for US banking executives to think globally about their technology partnerships. They have seen how Asia and Europe are such hotbeds of financial innovation, and recognize there are expertise and skills to leverage there. There is one example of a US based global payments disruptor that launched its ‘Buy Now Pay Later’ offering on Temenos Banking Cloud, having seen how popular the concept had become across Europe and Asia. Since 2020, it has issued more that 200m loans to 30m customers, and was described by their CEO as the fastest start to a product in the company’s history. This is the sort of innovative, global mindset that US banks will have to match if they are to stay competitive.