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.
Given these complexities, organizations that leverage a clear strategy in mapping their own unique constellation of FinTech and digital solutions will be best positioned to offer differentiated digital customer experiences.
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.
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:
When assessing whether to buy, build, or partner, ask yourself:
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.
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.