US retail banking: Gap growing between giants and community players

By Michael McCaw | 4 November 2018

The gap between the product and service offerings of the US’s biggest retail banks and its smaller community players is set to become much more pronounced, says Tyrone Canaday, managing director and global head of innovation at Protiviti – the New York based consultancy.

 “You look at the budgets and the amount of investment some of the smaller players are able to make and you compare those to the big incubation centres some of the larger players have – they have annual budgets set aside of hundreds of millions of dollars for different types of technologies and there’ll be smaller players with just a couple of million,” he says. “There’s certain things they can do and get topical effects with robotics but it’s more of a first step in automation in which they graduate from night-scripting to robotics.”

The pace of innovation within fintech markets is increasing, and larger banks are capitalising on the benefits of working with smaller, agile players on the basis of outward looking distributed operating models, in which the bank will work more with fintechs and external data sources to grow.

Community banks are attempting to embrace technological innovation with several exploring robotics to carve competitive advantage from their data. But funding, skill sets and other resource restrictions are limiting their potential, says Canaday.

The resource hurdles can spiral into cultural limitations at community banks, says Canaday.

“You can find some efficiencies through different types of technology but for that level of investment – and especially if you’re not growing – it’s difficult to build a business case when it’s more of an efficiency play,” he says.

“And it’s got to be a quick win because you might have an aging board that’s always done things in a certain way and they don’t really know technology or the benefits so you’ve got to show them something that’s quite and has a top return on investment. Otherwise, the investment just won’t happen.”

For the country’s community banks- whose share of bank lending markets fell by 40% from 1994 to 2015, according to research by Harvard Kennedy School - it can be difficult to even get projects involving third-party, specialist fintech players, off the ground.

“On both sides – and vendors are saying the same thing – is onboarding or procurement. They want to do these things but the processes for them even to get started it can take as long as six months even to get through the vendor review process.”

For the bigger banking players, the complete opposite is the case, with commercial and strategic relationships with the fintech community becoming far more entrenched and sophisticated.

“It’s not just the build-buy decision anymore, now you’ve got these build-buy-partnership-invest decisions now. A lot of the banks are creating investment arms or venture arms where they’re looking to incubate some of these fintechs and own a piece of them and when they exit they’ll make a slice on it.”

“There’s a lot of these open platforms like you’re seeing in places like BBVA, or USAA where they’ve got open APIs and they’re letting innovative third parties come in, play with their code – they’re exposing their code, not production code, they put challenges out there and say ‘here’s our source code, do something innovative with it.,” says Canaday. “Maybe on the UX side, or on side time of process. If they come back with something they like they’ll push them through their innovation process where they sandbox it, they prototype it, pilot it, then they launch it."

Collectively, however, banking and payments are well ahead of other sectors, says Canaday, in terms of embracing artificial intelligence and applying technological initiatives to data analytics and customer engagement.

“The things that AI can do, it’s kind of scary and it’s exciting at the same time,” he says. “Banking and payments are the leaders at the minute because of the customer interaction and customer experience. In financial services it’s starting to hit insurance, asset management – they have a lesser degree of customer experience – that’s why insurance is right on the next wave, asset managers are starting to get into it with things like robo, some of the things they’re starting to do around private wealth but you’re starting to see those investments being made.”

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