Leveling the Playing Field with Technology

BY JAMES MARKS, MARKS BAUGHAN & CO

Technology, as a competitive factor, favors creativity more than size of bank or quantity of investment dollars. It levels the playing field for all financial institutions.

Technology is increasingly posited as the factor that will finally and conclusively tilt the competitive playing field to the advantage of the largest financial institutions. The rising cost of technology leads many to conclude that only the largest banks will be able to afford the ongoing investment in systems and software. That certainly seems like a reasonable conclusion in an industry—banking—where the primary function is management of bits and bytes of information, of data in accounts.

The facts, however, suggest that the opposite is true — that the rising importance and cost of technology is a leveling factor in banking competition. Since banking technology is widely available at a reasonable cost, access to the full range of technology is economically available to all but the smallest banks.

Consider, for example, how easy it is for banks of all sizes to offer Internet banking and bill payment to their customers. Or the ability to access funds through debit cards and ATMs. These are the two most notable technology innovations of the last 20 years and are widely available at a reasonable cost to banks of all sizes.

Technology, as a competitive factor, favors not size or investment capacity but rather creativity and in-sight into how to use changing modes of communication and increasing analytic capabilities to an institution’s best advantage. No individual bank, no matter how large, can effectively spend enough on technology to make a conclusive difference.

The only companies that can make this investment are the specialist providers of financial technology, who can spread their investment among a multitude of users and clients. These banking software and outsourcing providers can quickly and cost-effectively put the best technology available in the hands of nearly every bank. In addition, these providers and their diverse client bases benefit from a feedback cycle in which the best ideas from many different minds can be incorporated into product development and refinement, giving the providers an ability to create software and systems that are superior to what any individual bank can create on its own.

The result is that technology, far from being a knockout punch for the largest banks, becomes a means to enable fairer competition between institutions of unequal size. Banks of all sizes have numerous options in choosing their core processing soft-ware or services provider—for loan origination, asset/liability management, customer relationship management, human resources or any other aspect of bank management.

For most functions, banks can in-stall software, run it on a hosted basis as a subscription service or outsource it completely. Increasingly, banks can enter new businesses immediately and on a variable-cost basis, outsourcing entire operations like mortgage or consumer lending or trust to a third-party provider so that the bank can focus on its customers and their needs. This eliminates an investment in the associated technology as a barrier to competitive entry.

In this environment, the winners will not be the banks that can throw the most money at technology; it will be the banks that can foresee the implications and potential for change presented by technology and act quickly and decisively to alter their operations to take advantage of these insights.