It used to be something that wasn’t mentioned in polite company, but those days are now over. Bank technology, especially the technology used to process credit card disputes, is outdated. It hasn’t been substantially upgraded for decades. And both banks and bank customers are suffering because of it.
There are five major reasons why outdated banking technology has become a drag on traditional banks.
First and foremost, perhaps, is the emergence of digital banking and challenger banks. These online alternatives are proving to be extremely popular with Millennials and Generation Z – whose business the veteran financial institutions will eventually have to attract in order to remain viable in the long run. Millennials and Gen Z, of course, are especially tech-savvy. Millennials were the first generation to have had internet access while in grammar school, and Gen Z is the first demographic to have been born after the invention of the smartphone. They are acculturated to do everything online on their pocket devices, and every study confirms, therefore, that they seek out alternatives to traditional businesses that require their physical presence at a particular location, especially when they have to wait before being able to get their business done. That’s bad news for big banks, since it’s typical for big banks.
True, banks are culturally conservative. They don’t change long-established on a whim, especially technology. After all, millions and millions of files will have to migrate seamlessly from one platform to another. There is no room for failure. Which is why all big banks everywhere are now busy planning their all-digital future.
The second reason is that fiat currency now faces competition from digital currencies. Unlike old-fashioned cash, cryptocurrency is acquired, held, traded, and spent outside of the traditional banking infrastructure. Combine that with the low percentage of Millennials and Gen Z who currently hold credit cards and their natural tendency to gravitate to digital solutions and banks face a major challenge. The planned launch of Libra, Facebook’s own cryptocurrency, will only intensify the competition.
The third reason is alternative payment systems. And not just PayPal, the highly touted ApplePay and, of course, Amazon Payments and Google Wallet, but also Payoneer, Payza and Skrill, among others. These are user-friendly solutions for anyone with a smartphone, and not just Millennials and Gen Z.
The fourth reason is that outdated technology is quickly becoming unaffordable. In comparison with other industries, which take advantage of new technological advances to increase automation and reduce operating expenses, the financial sector has slipped far behind. Ever-increasing operating expenses compromise the profitability of traditional banks in an increasingly competitive environment. Bank executives know that, and so do industry analysts who now address it in their reports. According to McKinsey, for example, the 15 largest American banks waste $3 billion annually on credit card dispute processing, which results from deficiencies in standardization, knowledge and software, not to mention substandard customer service.
All of this brings us to the fifth and final reason why banks will have to grapple with their archaic technology and methodology: Fintech solutions are now reaching maturity. Banks are naturally cautious about making changes to their existing digital systems. But fintech incorporates new approaches – like artificial intelligence – that banks will be obliged to deploy to enable them to leapfrog ahead and thus compete and remain profitable in the long run.
The World FinTech Report 2018, prepared by Capgemini and LinkedIn in cooperation with Efma, sums it up cogently: “Traditional financial institutions have a vast customer base and deep pockets, but with legacy systems holding them back.”
Fintech will ensure that banks will no longer have to worry about that.
Aaron Lazor is the CEO and co-founder of Finscend.