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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/

Fintech

Deals and dollars: European fintechs land $1.7B in funding rounds

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European fintechs fared well in funding rounds this week, with neobank N26 nabbing $900 million and banking infrastructure company Euroclear collecting $824.5 million. N26’s series E funding round brought the bank’s valuation to more than $9 billion. Third Point Ventures and Coatue Management led the funding round for the Berlin-based bank, and were joined by […]

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Source: https://bankautomationnews.com/allposts/retail/deals-and-dollars-european-fintechs-land-1-7b-in-funding-rounds/

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Umpqua focuses on ‘human-digital’ banking strategy amid merger

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Umpqua Bank is cultivating its “human-digital” strategy as it approaches a partnership with Tacoma, Wash.-based Columbia Bank that will boost its market share on the West Coast. “Our human-digital initiatives remain critical to our long-term strategy as our customers continue to engage with us through digital channels at an accelerated pace,” Cort O’Haver, president and […]

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Source: https://bankautomationnews.com/allposts/retail/umpqua-focuses-on-human-digital-banking-strategy-amid-merger/

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Klarna Adds Online Trip Planning with Inspirock Acquisition

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Does COVID have you dreaming up your long-awaited vacation? Consumer payment services firm Klarna’s latest acquisition may be of help.

The Sweden-based company snapped up Inspirock, an online trip planning service, for an undisclosed amount. Klarna CEO and Co-Founder Sebastian Siemiatkowski described the addition of travel planning “a natural extension of the benefits Klarna brings to payments and shopping.”

Founded in 2012, Inspirock leverages AI to help its customers explore a destination’s offerings and create personalized itineraries utilizing local expertise. On an annual basis, the California-based company sees 25+ million customers each year.

The integration will allow Klarna’s 90 million customers to use the Klarna app to pay for a trip in installments. In addition to the payment aspect, Klarna will also help users plan for their trip. Inspirock matches travelers’ preferences with over 230 million data points to optimize their travel itinerary and discover hidden gems.

“For customers, this makes the whole journey from inspiration to planning and preparing for a trip simpler, less stressful, and more fun, while enabling our retail partners to better reach and engage with their audiences by offering more personalized content,” said Siemiatkowski.

Combining travel planning with its existing payment capabilities inches Klarna towards becoming more like a super app. Founded in 2005 and with $3.7 billion in funding, Klarna offers buy now, pay later options to help users avoid credit cards while enjoying payment flexibility. Klarna also offers a shopping app to provide users with a holistic shopping experience– from payments to shipment tracking– and a rewards club it describes as the “vibeyest community in shopping.”


Photo by JESHOOTS.COM on Unsplash

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Source: https://finovate.com/klarna-adds-online-trip-planning-with-inspirock-acquisition/

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Finastra partners with Bakkt to offer crypto services to community banks, credit unions  

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Financial services software provider Finastra has tied up with Atlanta-based crypto exchange Bakkt to offer digital asset trading solutions and services to community banks and credit unions. The partnership will let smaller financial institutions enable customer access to a digital asset marketplace and wallet services offered by Bakkt, the two firms announced last week. Bakkt, […]

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Source: https://bankautomationnews.com/allposts/crypto-defi/finastra-partners-with-bakkt-to-offer-crypto-services-to-community-banks-credit-unions/

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