FedNow is a new faster payments service for the US. After years of development, it will finally go live in 2023, and yet in conversation with an American friend, I found out that only one in 10 US banks are ready for this. Why?
Well, the issue lies in change. (A friend recently joked that they were resigning from being a bank teller because there was too much change.)
The challenge for many banks, particularly for smaller US banks and credit unions, is that the structure for enabling real-time payments involves IT systems change. In order to make systems, or systemic, changes creates risk and cost which, if possible, will be avoided. Making systemic change creates both risk and cost — something banks would prefer to avoid. These are the reasons why most banks have never upgraded or changed their back office systems.
But what does this mean if we cannot respond to change? We see the fintech world take off, with thousands of start-up innovators around the world — do we sit back and do nothing? Of course not — we must try to change. Obviously, the start-up has the advantage of zero legacy, so it can change things fast; but banks can change too — and some are changing dramatically.
Just look at JPMorgan Chase (JPMC). CEO Jamie Dimon has doubled-down on tech investments, so much so that this year the bank is spending $12bn on technology. Half is on keeping the lights on and half on innovation. That’s $6bn on new things, which is significant when you think that most start-ups struggle to raise millions.
And JPMC is not alone. Most big banks, and even some medium-sized banks, are spending billions on innovation.
The problem is that innovation is not about budget, but about ideas and execution. So many large banks that I talk to treat innovation as a project, programme or feature. They create a function, a chief digital officer, and give that function a budget. They delegate the future.
However, this is not the way to the future. Digitalisation is not a project or function with a budget — it is a fundamental change of culture and thinking.
It’s funny how often I have this conversation, pointing out that ‘transformation’ has nothing to do with technology. It is all about mindset, thinking and culture. This is why you cannot delegate it to be a project or programme. It is a reinvention of the bank to be truly digital from the ground up.
The challenge is not easy, however, as most banks were born physical. Digital was then added on top and cemented in place over the years because of core IT systems that are hard to adapt.
the bank needs to be able to adapt fast and in real-time
Most firms overcame this issue by using middleware and apps to make it look like the back office core system worked, but that sticking plaster is no longer good enough. The bank end [back end?] needs to be built as a digital native core, with data in the cloud and application programming interfaces connecting the cloud core to the smart apps in the front office.
But, coming back to the main tenet of this perspective, the bank needs to be able to adapt fast and in real-time, and have a culture of digital at the core. The whole organisation needs to understand that digital is all about structure and operations that are supported by software and servers, rather than the traditional way of running the business with buildings and humans, with software and servers on top.
This is why, when I heard that only one in 10 American banks will be ready for FedNow, I knew that we still have a long way to go. Digital change needs to happen overnight, not over days, months and years. If you don’t get this, then you will be left behind. More importantly, it shows that leadership is deficient because they don’t understand that ‘digital’ is a mindset, not a project.
