How mid-market banks should approach technology selection to drive differentiated digital experiences 

Today’s mid-size ($20B-$50B AUM) and regional banks ($50B-$100B AUM) find themselves in a unique spot: big enough to require competing with larger banks on digital customer products but too small to absorb the consequences of strategic technology blunders when it comes to investing in them. The situation has only been exacerbated by the influx of FinTech investment during the pandemic, offering niche digital experiences and the widespread rapid adoption of digital banking.  

Driven by stiff competition, spending on IT initiatives for North American banks is expected to continue strong growth over the coming years. According to Insider Intelligence, IT spending growth through 2025 will be nearly double digits per year.

Led by cybersecurity, mobile banking, and ever-increasing customer experience improvements, technology innovation in banking will continue to be robust. For mid-size and regional banks, the stakes of the industry’s digital transformation are high: 1 in 5 adults have switched their primary bank in the last two years, and more than half of millennials would now switch banks simply for a better mobile app. The ever-changing technology landscape poses an existential threat to those institutions which are unable to adapt. But there’s also significant opportunity if investment dollars are spent wisely. According to one estimate, for every $100 billion in assets that a bank has, personalizing its customer interactions can lead to as much as $300 million in revenue growth. 

Consequently, in this highly competitive and rapidly evolving digital environment, mid-sized banks must make difficult choices and trade-offs as they decide where to invest their limited IT funds. The most pressing question they face? Do we buy, build, or partner for the technology solutions and products needed to orchestrate a seamless end-to-end digital customer experience and drive new revenue opportunities? 

In some cases, it may make the most sense for banks to buy technology solutions that are pre-built and can be configured to meet their needs. 

When banks are looking to innovate or need unique technology solutions, they can invest in the resources and skill sets required to successfully build and maintain custom technology solutions to enable their business needs. 

Other banks may opt to partner with software companies or FinTechs to leverage their industry experience with a partner’s product development capabilities to enter competitive markets or expand niche business lines.  

The answer will vary not only bank by bank but also across products, experiences, and services offered within.

A simple prioritization approach to evaluate this decision has banks focusing their investment capital on building unique products and offerings which drive the highest revenue per customer in areas they can differentiate, while choosing to buy, build or partner for software elsewhere: 

In what follows, we will discuss what banks need to consider in making the Buy, Build, or Partner decision. 

Benefits and considerations of buy, building, and partnering  

Once a bank determines its priorities for IT investments (table stakes, sustain customer value, optimize revenue, and/or drive margins), it can begin to focus on the tactical approach toward achieving priorities—analyzing the benefits and considerations of each choice:

Buy a custom technology solution: Sustain customer value

Benefits

• Accelerates speed to ROI by leveraging pre-built solutions designed to meet a specific need—leading to improvements in employee efficiency and fulfillment while offering timely products and services to meet increasingly digital client expectations.
• Delivers benefits of tech enablement without having to invest in people and processes required to develop and maintain custom applications.
• Improves cost-effectiveness if the solution meets a specific business need and minimal customization is required. This, in turn, requires less specialized skillsets and capabilities.

Considerations

• Less control over the product road map, meaning banks are dependent on the software vendor to provide required features and functionality at its prioritization and timeline for capabilities that have become table stakes.
• Drives more commoditized experiences, leading to less differentiation in the market which makes it harder to achieve organic growth.
• Banks with a niche or nuanced business line will need to customize, which requires specific skillsets and can lead to ongoing maintenance issues and difficulties with upgrades and enhancements.

Build a custom technology solution: Drive margins

Benefits

• Promotes internal innovation, allowing cross-functional teams to develop custom solutions tailored to specific business requirements—which maximizes efficiency gains and reduces cycle times.
• Gives more control over all aspects of the product development lifecycle and what features/functionalities are prioritized on the product roadmap, resulting in smoother implementations, greater adoption, and control over the evolution of key business solutions.
• Avoids ongoing external costs for enhancements and maintenance.

Considerations

• Banks need to have the right skills and capabilities to develop custom products or it will not realize the intended value—and end up creating unusable products. Finding and retaining the right resources to not only build but also maintain and support custom technology solutions is a hurdle that mid-market and regional banks must address to experience the full benefits of custom technology solutions.
• A mature DevOps, testing, and release process must be in place to successfully develop and maintain custom products. Otherwise, custom applications will have issues that could lead to unacceptable downtime

Partner with a technology provider: Optimize revenue

Benefits

• Get the most value out of well-established business lines or products (e.g., digital wallets). Partnering with mature technology applications can enable banks to experience the benefits of the time invested in developing and evolving established products to fill specific industry needs.
• Allows a bank to have more direct input to the features on the product roadmap, which leads to exclusive access to features and functionality to help get ahead in the market.
• Provides access to resources and skillsets that fulfill specialized business needs. When speed to market is a factor—and custom development is not possible—banks can partner with product engineering firms to access resources and skillsets unavailable internally to implement needed products.

Considerations

• Exposes you to partnership risks such as misaligned visions, competing priorities, and the need for additional governance. This can slow progress and jeopardize the technology solution’s efficacy.
• Exclusivity issues often arise during partnerships regarding which partner owns the intellectual property being developed and how the technology application can be brought to market. A bank may partner with a fintech on a specific solution but may also want exclusive access to avoid a competitor leveraging the technology—which in turn limits the vendor’s revenue potential and can cause conflicts.

Questions for choosing the right path

When assessing whether to buy, build, or partner, ask yourself:

1. How important is differentiation to achieving value from technology investment?
   Understanding the impact that differentiation will have on the targeted outcomes will help avoid being late to market or implementing solutions that don’t satisfy their intended purpose or create unique opportunities.
2. Do we have the resources internally to achieve the expected outcomes?
   Without the proper resources and skills in place, future enhancements, ongoing maintenance, and proper system administration and end user support will be jeopardized.
3. Will an out-of-the box solution solve our needs?
   Customizing an out-of-the-box solution can address specific needs, but it adds additional risks related to ongoing maintenance and enhancements.
4. How will the solution be enhanced and maintained?
   To extract maximum value from a software solution, it must be enhanced to meet evolving business needs while being updated at regular intervals to address bugs and add new features. Organizations that cannot perform or handle these tasks will not be able to leverage all the value the technology solution has to offer.
5. Is the solution native to the bank specifically or is does it address a common need?
   Understanding the software options available to solve niche or specialized needs is important because of the significant risk in customization of a managed or SaaS software solution.
6. Can we sustain our culture while emphasizing innovation?
   There are organizational and cultural impacts to being innovative that require proper infrastructure and governance to be successful otherwise banks risk investing in technology solutions that are not sustainable or effective.
7. How much risk is the bank willing to take on to find the perfect solution?
   The amount of acceptable risk should be carefully evaluated to avoid excess costs and delays in ROI realization.
8. What is the financial impact of the software application?
   And what are the opportunity costs of making the wrong decision? The effect of making the wrong technology decision can cost a bank significant sum of money in capital outlay, but also affect the businesses capacity to generate revenue which ultimately exacerbates making the wrong choice of technology solution.

How to apply a decision framework

To avoid making the wrong decision, each key technology solution should be evaluated through a build, buy, partner decision framework. This framework should be driven by the vision set by bank leadership and discussed by key stakeholders to reach a consensus. To start, banks must assess your appetite for custom development, maturity of key digital experiences, and the necessary capabilities and resources to drive sustainable value from the technology application selected.

With market conditions and the competitive landscape changing so rapidly, utilizing a buy, build, or partner decision framework can help identify where strategic investments will have the biggest impact while also highlighting potential risks.

The following build, partner or buy decision framework can be leveraged to provide guidance for executives who are faced with making these high impact decisions every day.

Bank executives should support each decision with a detailed business case, inclusive of effort, time, costs, and quantified value. Once approved, the business case should then be shared with the organization’s execution team to provide transparency and guidance for implementation.

Conclusion

Now is the time to apply this framework. Customer expectations have changed, open banking is on the rise, and many big banks—that have the resources, skillsets, and infrastructure needed to integrate necessary technologies—are likely well ahead on their digital journeys.

With the right decision framework, mid-market banks can make their digital experiences a reality—allowing them to bring products to market faster, nimbly adapt to market changes, and make technology investments to maximize organizational value and power their success in this new era of banking.