Fintech: Friend or Foe in Digital Transformation?

Digital transformation is a critical area of focus for financial institutions seeking to stay competitive by enhancing the customer experience and optimizing efficiencies in the back office.

But banks and credit unions have help with their digital transformation plan.

Financial technology firms have invested millions of dollars and hired the industry’s top tech talent to develop innovative digital solutions to meet the needs of today’s financial consumers. And community and regional financial institutions typically don’t have the resources and expertise in-house to develop technology to compete with the largest banks and leading fintechs, while also performing their core mission of serving their customers’ daily financial needs.

Despite this, these same financial institutions often view fintechs as the enemy — part of a zero-sum game designed to take away market share and profits from traditional banks and credit unions.

To survive and thrive, banks must learn from the successes (and failures) of these firms. In fact, it often makes sense to (gasp!) partner with fintech, particularly those vendors offering innovative digital technologies to help streamline and automate back-office processes or provide a seamless (white labeled, of course!) front-end banking experience.

In this final article of our series, we discuss these opportunities and share best practices for partnering with third-party providers to help you begin your digital transformation. We also share important steps to take to minimize third party risks throughout the vendor due diligence and management stages of the relationship.

If you missed our previous articles in this digital transformation series, make sure to check out Meeting your customers’ needs through digital transformation” and Achieving digital transformation of the back office.”

Partnering with fintech adds complexity and challenges

                                              “30-Plus Days Later: VyStar Members Still Experiencing Online, Mobile Issues”

This was the Credit Union Times headline on June 14, 2022, after a weeks-long online and mobile banking outage at VyStar Credit Union enraged members. The Jacksonville, Florida-based credit union recently had implemented a new third-party home banking solution, and the incident resulted in negative press and a substantial reputational hit.

Although the reasons behind the outage have not been disclosed, this incident is a stark example of the potential pitfalls any institution faces when deciding to work with a third-party technology vendor.

Of course, the risks vary depending on whether you are implementing back-office automation or a new front-end application to improve the customer experience.

“They do differ a little bit,” says Megan Hudson, director of cyber advisory services at HORNE. “You have the same risk from a financial data perspective, but in the customer facing applications you have a much higher reputation risk because you’re dealing with customer also interacting with and relying on the data.”

Cybersecurity is a particularly fraught area of risk — one that should be looked at carefully during the initial vendor due diligence stage.

“Data breach concerns are huge because your customers see these incidents in the news every single day,” Hudson says. “If a breach impacts a vendor you have partnered with, now you’re affected as well. That’s why proper vendor due diligence is so important, because you’re taking on that vendor’s security protocols — and their reputation — as your own.”

Beyond cyber risk, there are other challenges with partnering with third-party providers. They include poor integration with your legacy technology stack. The growing use of application programming interfaces (APIs) is making integration more streamlined and efficient, but factors such as the sophistication and flexibility of the provider, as well as your current technology stack, will determine whether the integration is clean and efficient, or require a clunky, resource-draining workaround.

Additional challenges arise when institutions try to do too much at once without prioritizing their technology projects accordingly. Proper resource allocation and cost control are driving factors of whether a transformation project will have success.

It’s also important to consider compliance risk whenever implementing a new technology solution or partnership with an outside vendor, by including compliance and legal staff early in the vendor review process. And don’t forget: Even if you outsource your transformation to a third party, you will still need in-house team members to manage the relationship and run the software, ensuring regular updates and maintenance are performed in a timely manner. That’s where talent acquisition and retention become so important, especially these days when tech talent is at such a premium, particularly in financial services.

Three keys to successful third-party vendor relationships:

 How can you ensure your partnership with a fintech will be a success? Follow these three best practices, and you will be on the right path:

  1. Commit to open and honest dialogue. Before you decide to bring in a new vendor to help implement your vision for digital transformation, begin with having a serious discussion with your current third-party technology vendors. Explore whether their product roadmap is in line with your vision for digital transformation. Are they able and prepared to support you? Are you satisfied with their current service levels and responsiveness? Do their current products meet your immediate and future needs?
  2. Explore the market. If your current vendors don’t meet your future strategic needs, explore whether there are better and more visionary solutions available. Ask your colleagues at other banks and credit unions what solutions they use and how satisfied they are. Create a short list of candidates, then be sure to check with your core system provider whether it can support integrations to these solutions.
  3. Conduct thorough vendor due diligence. Once you’ve compiled your short list of solutions, the real work begins. Be sure to vet all potential vendors upfront for all potential risks, including financial, cyber, operational and reputational.

Remember that vendor management doesn’t end with the initial due diligence. Hudson recommends creating a multi-disciplinary IT steering committee that is engaged in driving digital transformation strategy and implementation at the enterprise level.

“Due diligence should not be left to just one person,” Hudson says, “It needs to be looked at from different angles. Your IT steering committee should include not only technology staff, but also key experts from accounting, marketing and HR, as well as the executive level so that the overall strategy and risks can be looked at from a big picture, holistic view.”

HORNE is here to help

Evolving technology. Emerging fintech competitors. Rapidly shifting regulations. As your world grows more complex, your choice of who to trust becomes even more important. At HORNE, we’ve helped financial institutions across the nation grow and thrive. We can do the same for you.

Whether it’s helping you address cyber risk and regulatory compliance, or supporting your next technology implementation with our experts’ deep project management experience, HORNE’s Financial Institutions team is here to help guide you on your digital transformation journey. Contact us today.

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