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Closing the tech investment gap: How mid-tier banks can get ahead

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When it comes to choosing a bank, customers indicate that a leading digital experience is one of their top two deciding factors — bested only by product pricing and offers, according to recent Kearney research. The sophistication of a bank’s digital operations is no longer a nice-to-have; instead, digital innovation has become table stakes in the war for customers.

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While most mid-tier banks understand the growing role digital plays in all parts of their operation, they’re struggling to keep pace with their larger counterparts. Top-tier banks have invested billions in new technology, acquiring fintechs and developing their own in-house solutions. Meanwhile, mid-tier players remain encumbered by legacy systems, which demand most of their IT budget and resources. The result is a growing digital divide between global and regional banks.

The good news is that despite the hurdles, digital transformation is possible for mid-tier banks — and perhaps at less cost than many expect. We’ve helped regional and super-regional banks reduce their legacy IT costs to free up resources for innovation and strategic partnerships. Doing so levels the playing field for mid-tier banks and enables them to acquire the digital capabilities they need to stay competitive.

The double-edged sword of legacy systems

The reliance on legacy systems presents dual challenges for mid-tier banks. First, older systems are typically less amenable to continuous improvement and delivery models that can help manage quality and increase responsiveness. The legacy systems bog down go-to-market efforts, which are often a competitive differentiator for fintech firms. Legacy systems also lack the capabilities required to support the evolving needs of bank employees and customers, including rapid onboarding and integration with partners and third-party systems.

What’s more, maintaining legacy technology is expensive. Smaller banks find themselves allocating most of their IT budgets to security and maintenance, which leaves little for digital advancement. For example, a Kearney study shows that banks with $100 billion or less in assets dedicated just a third of their IT budget to innovation.

That pales in comparison to what top-tier banks set aside for digital investment. JPMorgan Chase, for instance, spends $12 billion annually on digital efforts, including funding a team of 50,000 in-house technologists. Such resources have helped big banks widen the digital gap between themselves and their smaller peers and increased the imperative for mid-tier banks to innovate if they want to retain and win customers.

From maintaining to transforming

Fortunately, many regional and super-regional banks recognize the need to invest in digital. In a recent Kearney survey, for example, mid-tier banks ranked digital payments as one of their top areas of strategic importance. The need for innovation, of course, touches every aspect of the organization, from IT operations and business process automation to the retail customer experience. So how do mid-tier banks find the resources to move forward?

We’ve discovered that the solution is not rooted in spending more or through incremental selective investments. Instead, the key is to drive focused transformation that simultaneously improves productivity and digital capabilities. For example, we helped financial service clients save up to 30% of their IT budget via:

  • Reducing IT complexity with automation. This includes automating IT workflows as well as processes across the organization.
  • Optimizing IT operating models. Consider right-sizing IT to save even more and implement agile development concepts to improve time to market.
  • Improving supplier spend management. With third-party spend accounting for up to 35% of banks’ total cost structure, creating more conscious spend management systems can pay off.
  • Reducing IT demand. The flipside of optimizing operating models is finding ways to decrease the demand for IT assets and services.

The combination of these efforts frees up budget and resources that banks can direct toward innovation. Notably, the result goes beyond cost savings, facilitating the sustainable transformation of banks’ IT operations — one that’s focused on the future.

Partnering for success

Even with significant cost savings, mid-tier banks may still struggle to acquire fintechs or build on their own. However, using freed-up IT resources to support partnerships with third-party innovators enables smaller banks to punch above their weight class in a new digital world.

Such partnerships can help regional banks move past the limitations of their legacy platforms. Even better, they often provide banks with digital solutions more quickly, allowing them to leap the digital gap and land precisely on what customers want. Partnering creates a basis for mid-tier banks to compete with larger banks while defending against fintech challengers.

The digital imperative for financial service is only growing stronger. Mid-tier banks can — and must — compete at a higher level, even with relatively fewer resources. Rethinking legacy systems and operations along with exploring innovative partnerships can help regional banks do just that.

Hemal Nagarsheth is an Associate Partner at Kearney. In this role, he is a senior leader in the Financial Institutions Group with particular focus on the intersection of technology and innovation with banking and payments.

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Source: https://bankautomationnews.com/allposts/center-of-excellence/closing-the-tech-investment-gap-how-mid-tier-banks-can-get-ahead/

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