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2021 – The year small banks finally create happy customers, and make more money in the process

2021 is going to be less awful in more ways than you expect. It will be the year banks finally begin to figure out how to make customers’ online experience good, while saving money in the process.

The issue is as simple as converting to the cloud. You’ve probably done it by moving from Microsoft Exchange Server email or ditching an adobe download. Yet this hasn’t happened in banking, because almost all banks under $50bn have been scared to change legacy systems, resulting in the picture below:

Changing data storage providers is hard, but money talks. A number of banks have finally figured out that moving their data to cloud data storage can potentially:

  • Save 50-75% vs. the cost of legacy systems
  • Make it easier to merge, because no contract cancellation fees (which routinely run several million dollars)
  • Improve security due to constant upgrades vs daily batching
  • Allow easy integration of new features in weeks – no more hiring QTWO or other software engineers to duct-tape together a PPP application or deposit product that doesn’t fit Jack Henry’s template. This affects everything from loan applications to online experience to money transfers. It mostly affects small banks, and won’t happen overnight, but just making the change is like flipping a switch for improving internal processes.

To quote a CEO of a $500 million bank I spoke with last week “It’s a competitive disadvantage to stick with Jack Henry”

What do all those bullet points above mean?

  1. If you own bank shares in a converting institution, expect your bank to drop 1-3% more to the bottom line in coming years.
  2. Because the customer experience will be far better, regional banks will have an easier time keeping customers that might go to JP Morgan or Chime.
  3. If you bank with a small bank, many of you will waste less time on needless nonsense in late 2021 and beyond.
  4. Banks that continue to nickel and dime will merge or lose share (Regions, Key, Wells etc)

Who are the cloud providers? Neocova, FinXact, Finacle and Temenos are a few. The legacy providers may create their own product as well. Whether Fiserv et al will be nimble with disruption like Adobe, or resistant like Blockbuster Video, remains to be seen.

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