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Cost considerations of technology choices

May 4, 2016 / Consumer Banking / Technology

When it comes to selecting technology solutions and services, do banks pursue opportunities that sacrifice quality? It might be an unpopular opinion, but many times the answer is “yes.”

Those financial institutions that take the least-costly route are often the same ones that have compliance issues, bad audits, technology performance issues and upset customers within a year, all because they focused on getting something for the best price instead of the best quality. There’s an old saying, “Pay me now or pay me later,” which implies that if you choose the latter, you’ll wind up paying more. Unfortunately, that phrase has become a reality for many banks today.

Consider, for example, a bank that cuts corners on auditing for compliance and Community Reinvestment Act (CRA) exams. When those examiners come in, they’re going to spend weeks looking for shortcomings. Of course, you always hear about the bank that failed its compliance exam and is now under consent order, while the service provider that failed the bank typically makes a quiet exit, stage left.

I’ve seen banks issue a Request for Proposals (RFP) on various technologies and asked myself, “Is there genuine interest or is this simply a test to see who will provide the lowest price?” And I would say that more than a third of the time, it’s an exercise to find the cheapest offering. This is detrimental in a couple of ways. First, focusing on driving down costs without goal setting will alienate the technology provider, who would otherwise be more invested in the successful outcome of the bank’s strategies. Second, by seeking the lowest-cost customer-facing solution, such as an online banking platform (which is a primary driver of customer satisfaction), a bank limits the products and services it can offer because the technology is not as robust.

Technology purchases also require a forward-thinking mindset. One example that comes to mind: a bank renewed its contract with its current service provider, not thinking about new products and solutions they would need as their business model was changing. Further, they did not review the contract terms and conditions well enough. Now, not only is the bank unhappy with its solution, but the associated contract includes terms that incur a hefty fee should the bank want to move to a different solution. By hurrying to renew a contract without taking time to read the fine print, the bank was responsible for hundreds of thousands of dollars in avoidable expenses.

This reality and the associated problems are easily avoided or eliminated if proper financial checks and balances are put in place on the front end. If a bank is looking at spending funds on one of its primary business lines or one of its key businesses, why in the world would it simply focus solely on the best price? We all recognize the need for financial restraint and quality financial management, but this is often taken too far, simply so the functional business executive can report to his or her CEO that the choice manages to save the bank a relatively few bucks. Fine, but at what cost? Eventually, paying the lowest dollar amount inhibits a bank’s ability to compete with others.

Well-disciplined and insightful management teams understand that cutting corners rarely leads to success, which explains why some banks are much more effective at evolving and adapting than others. The most effective leadership wisely allocates resources (and without fear when necessary) to ensure the right service or solution is obtained and implemented. We should applaud the organizations that achieve efficiency without sacrificing quality, but there are still many banks that operate with a penny wise and pound foolish mentality and we would be doing a great disservice to our industry by denying this. Now and in the future, those financial institutions will be simply holding on and in turn, holding the industry back. They are less innovative, less profitable, less customer-focused and frankly, less successful.

So in the end we hope that, regardless of where a bank is and what their situation is, they should consider not focusing on the best price, but rather on the best solution offered to drive out their goals.

Mr. Razook is president and chief operating officer of Palm Desert, Calif.-based RLR Management Consulting Inc. (RLR), which serves banks in four primary categories: technology, regulations/compliance, operations and M&A. He can be reached at [email protected].