New Demands Demand New Technology

I have always been fascinated by the US financial services market. I’m struck by its differences more than its similarities.

At one stage in my career, this was a lived experience as I had some American banking clients, but as that was a long, long time ago, I have been keen to catch up with some of the latest in-market goings on.

Therefore, I was delighted when I recently spoke with Riaz Syed, the CEO of Infinant, a US-based new banking technology company, on the Demystify Podcast. We delved into the current trends and some historical ones that have influenced the sector today.

Technology has advanced dramatically in the financial sector since the 1950s, when computers were first introduced to hold banking transactional records previously written down in large ledger books and, before that, on stone tablets.

As new technologies emerged, the financial sector quickly identified opportunities to utilise them. Computing power offered more reliability and enabled faster access to customer information than was humanly possible.

Access to machines became a powerful enabler, a competitive advantage. It allowed financial institutions to think beyond their current operations and explore growth opportunities, new markets, innovative propositions, and mergers to form larger businesses.

As the price of the technology tumbled, smaller organisations such as regional and community banks could buy in and access that competitive advantage. In the US, technology has helped the industry expand enormously.

In 1954, the financial services sector accounted for a mere 4% of the US’ GDP, reflecting a post-war economy still heavily reliant on manufacturing and agriculture. However, the US economy’s landscape has dramatically transformed over the decades, with the financial services sector playing a pivotal role. By 2023, its contribution was between 20% and 25% of the total GDP.

It evolved from a supportive role in a primarily industrial economy to a cornerstone, powered by the vast and sophisticated financial system that underpins it. As the industry has expanded, it has changed. Mergers and acquisitions have resulted in fewer players but a much greater physical footprint. According to the FDIC, in 1954, there were 13,323 banks in the US, with 6,346 branches. As of its latest published 2023 figures, there were 4,306 banks serviced by 69,997 branches. After massive growth in the number of branches, the trend is now moving downwards. The peak branch year was 2012, with 82,965.

Fewer banks mean greater competition, and the downward trend in branch numbers nods to changes in customer behaviour, much of this driven by technology. It’s incredible to think that in 2012, mobile banking was in its infancy. The launch of the iPhone in 2007 had fired the starting gun, but for most banks, it was a slow start. They had only just come to terms with the quirks of internet banking.

As smartphone adoption gathered pace, banks eventually caught up with their customers by offering mobile apps. Most did not go beyond basic transactional functionality, falling short of delivering a digital-first customer experience.

Ironically, for a sector that has flourished because of technology, banking struggled to keep pace with customers as they have been busy becoming more digital. Banking cores, which used to be at the cutting edge when first installed in the 1950s and 1960s, have aged, becoming change inhibitors. A need for continued investment in these platforms further compounded this inertia. The vast sums of money companies have invested in their platforms and the risks associated with change have slowed everything down.

But things are changing rapidly, driven by new technologies and new approaches.

Riaz told me: “If you look at the monolithic cores, they have hard-wired customer UX, accounts, cards, and payments as core components. First, fintechs took the UX from the core. Then, cards were pulled from it with the Cards-as-a-Service wave. Next was payments, with the proliferation of Payments-as-a-Service providers with their own UX, which left just accounts on the core. That was until the Banking-as-a-Service (BaaS) market took advantage of technology developments in virtual account ledgers that changed the game, lifting end-user accounts above the core to innovate while maintaining bank operating accounts on the legacy core.”

However, regulations have caught up, as these BaaS fintechs were not the holders of the banking licence but had become the de facto owners of the customer, leaving customers to deal with an unlicensed entity. The regulators rightly insist that ownership of the customer must remain with the licensed entity.

Regional and community banks need the flexibility offered by fintechs. Due to the digitalisation of banking, these organisations, which have tended to serve a geographic footprint, now need to play in a digital world. They must consider new go-to-market strategies as they look to grow their deposits or non-interest fee income through embedded banking, BaaS, or launching a new digital brand.

Due to billion-dollar budgets, national banks have been able to develop their digital platforms, offering features and functionality that have been out of reach of the smaller banks, who have built their mobile experiences on lower-cost, less feature-rich platforms typically provided by their core providers. In the fight for deposits, multinationals had the edge. New emergent platforms now allow these smaller banks alternative channels for growth, levelling this competitive playing field.

By understanding the potential of the ‘as-a-service’ paradigm and the technologies involved, experienced professionals such as Riaz have developed new platforms that sit above a bank’s core through a cloud-based services architecture, freeing banks to explore new growth opportunities. According to Riaz, “Infinant’s ‘hollowing out the core’ platform, Interlace, allows banks to modernise without replacing their core or standing up a sidecar, thus mitigating the risks and costs of change.”

Companies like Infinant mean that most, if not all, banks, no matter what size, can now explore embedded finance opportunities, new digital brands, and other BaaS propositions, all done under bank control.

This new wave of technology will dramatically change the face of banking, offering speed and flexibility and, most importantly, leaving the core where it is, doing its job and slowly being hollowed out.

New demands have demanded new technology. This is banking technology, but more than before, it is banking technology plus.