Small Banks Focus Their Innovation Efforts on Payments
PREMIUM — With recent developments in the payments ecosystem like PayPal’s $2.2 billion acquisition of iZettle, or Adyen’s IPO announcement, it’s safe to expect payments-focused innovation from banks and FIs as well.
A recent report by PYMNTS titled “Innovation Readiness Playbook,” showed that 80% of the small FIs and banks surveyed listed payments technology as the top area of focus for the next three years. Among the top-rated innovators, that number rose to 86.7%.
The report, released last week, surveyed banks and FIs in the US with assets ranging from $500 million and $1 billion in assets.
But with legacy core systems, it becomes hard for a bank-especially smaller ones- to compete with the likes of PayPal, Amazon or Google on the innovation front. Flexible IT infrastructure is key for innovation. In fact, it’s one of the major distinctions that separates fintechs from banks, in which case fintechs have it much easier. For instance, PayPal CEO Dan Schulman, just last week, named its open platform as the primary reason the payments company is able to create new services and products.
One way for banks to address the issue of legacy v. flexible infrastructure is through sandbox capabilities, the report said. This capability is typically provided by the bank’s core system processors. However, many core processors lack the ability to incorporate sandboxing in their infrastructures. According to the “Innovation Readiness Playbook,” only 16% of the FIs surveyed had core payments systems that allow sandboxing.
Sandbox capabilities enable FIs to test, experiment and scale products, programs and services in a closed environment with a limited set of consumers for real-time feedback before releasing it to market. The report shows that 43% of sandbox users were commercial banks, 31% credit unions, 11% community banks, 11 % bankers banks and 3% were corporate credit unions.
Sandbox or no sandbox, smaller banks are typically dependent on core processors for their innovation efforts. So the more flexible a core processor’s IT infrastructure is, the easier it is for a bank to innovate. The report shows that among the high scorers in the innovation department, 60% of the FIs attributed their success with innovation to their core processing systems.
The report also showed the FIs that performed high on innovation, dedicated a big portion of their budget to innovation- some as high as 50%. Their innovation strategy usually consisted of four categories: planning, funding, infrastructure, and speed.
Aside from payment technologies, other areas of focus most commonly listed by FIs and Banks included mobile payments, user experience, data analytics and authentication, and more. See the graph below.
The report doesn’t list FIs and banks by name.
