For bank investors, it would be a huge mistake to invest in a bank that doesn't prioritize investing in technology. Yes, there is mobile banking and online bill pay, but those technologies are ubiquitous. The real competitive advantage will come to banks that use modern technology internally to improve efficiency.
The banks that invest in efficiency are the banks that investors should be excited about.
What does this technology actually look like?
Understanding why technology is so critical is easy in many industries. It's obvious, for example, how a new machine can make the manufacture of widgets faster, more consistent, and cheaper. These improvements not only make manufacturers more profitable, but also improve the quality of the products they sell. It's a short-term and long-term win.
Recently, American Banker Magazine broke down how banks are spending their technology budgets. The top items on most bank budgets are improving mobile banking and online banking. This is not altogether surprising, given the rapid growth banks have seen in these channels over the past several years.
But just below those two consumer-facing technologies, there is a trove of initiatives that will be critical to banks in the future. The next-highest line item is in data analytics. The potential for banks in this arena is utterly tremendous. Think about it: Banks know where you shop, how much you earn, how much you save, how much you owe. Banks know about your family, your home, and your job.
All of that data, properly analyzed, is a gold mine. It will identify easy cross-sell opportunities and match new customers with perfectly designed financial products. It will be used to unearth bad loans before they go bad. It will be used to maximize profitable customer relationships and make unprofitable ones break even or better. Internal data will make processes faster, operations cheaper, and results more predictable.
The challenge is that all of that data is typically stored in disparate systems across the bank. The bank's deposit and loan software can't talk to the customer relationship management software, which can't talk to the accounting and management systems. With modern analytical software, those barriers are broken down. But without the investment in the technology that makes this possible, all of that opportunity is wasted.
Be wary of banks that are stuck in their ways
Banking is a relationship business. It always has been, and it always will be. Even so, don't think that investing in modern financial technology isn't absolutely critical for banks to compete in the future. The world is changing, and banks must adapt to keep up.
Take for example the investment bank salesperson. In the past, bond salesmen were the only link between these banks and their customers. Want to win market share and find new clients? These pros would hit the phones and drive revenue. They were the face of the bank, managing these relationships as the boots on the ground.
Today, though, that job is changing. With modern trading platforms and secure networks, the salesman, so expert at building relationships, isn't as critical. What is more critical is network speed, security, and reliability. The product is not simply access to the capital markets or the currency markets; it's all about a platform where self-service is the norm. For the largest clients, those salespeople still operate in much the same way; however, for middle-market and smaller customers, the salesperson is being replaced by the technology. It's happening in a similar way on the retail side in the form of low-cost Internet brokerages.
Banks that fail to adopt these new technologies could suffer in another, very serious way: cyber attacks. The world of digital finance offers a lot of convenience for the customer, but it's also a huge opportunity for modern-day bank robbers. If a bank lags its peers in technology investment, it's not unreasonable to worry that the bank has a higher risk of being hacked. That is particularly true of midsized and smaller community banks.
Technology is a broad field that is growing on countless fronts. But for banks and bank investors, we can look for something specific.
First, consumers demand modern features like mobile banking and online banking. These customer-facing technologies are simply not optional. Second, investors should look for the banks that optimize their efficiency by taking advantage of modern analytics, process management, and platforms.
The next time you're reading a bank 10K, look for any mention of that bank's investment in technology. It could give you a clue as to how that bank's efficiency will look not only today, but also in the future.
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