August 22, 2022
Today’s show is about the future of community banking. That future doesn’t look bright, unless some things change, and quickly.
The U.S. is unusual in having very large numbers of small depository institutions – nearly 10,000 community banks and credit unions. Many serve major urban markets, but a great many focus on smaller communities. Their customers can, of course, access financial services online from out-of-area providers, but local institutions play a unique role. They deeply understand the needs of the people who live and work nearby. They are adept at lending to small enterprises – their customers often include multiple generations of local small businesses. They provide both money and talent to support the government functions and nonprofit organizations that underpin local quality of life. When they go away, therefore, their towns may be put at risk. Jobs may disappear. Young people may pack up and head to bigger cities with more economic opportunity. Mainstreet businesses may get boarded up. Part of America’s heritage can be lost.
My guest today is on the front lines of shaping the future for these institutions. He is David Foss, Chairman and CEO of Jack Henry. Jack Henry is one of the three big tech firms that provide the core IT processing systems used by the overwhelming majority of small and regional financial institutions in the United States and beyond.
Those institutions face tough times ahead, driven by the digitization of finance. Their competitors – larger banks as well as fintechs – simply have better technology. That gives them a big advantage both in the front-end user experience that is expected by today’s customers, and also in back-end operational efficiency – including for regulatory compliance. These challenges are rapidly intensifying as technology change accelerates and also as demographic change remakes the market. Remember, millennials are now the largest generation that ever lived, and they are all digitally native. Banks and credit unions that have a seemingly robust base of baby boomer and GenX customers will find their markets shrinking, unless they can appeal to millennials too. They are fighting historic tides of change.
They simply need better technology, and this is what Jack Henry is working on. In our conversation, Dave explains the current state of the market and the steps his firm is taking to help their customers make the leap.
The key, in their view, is that community institutions need to be able to work with fintech and regtech firms as vendors and partners. This means they must have the ability to “plug in” those providers via APIs. Jack Henry’s strategy is to make this easy for its customers, even when they choose solutions that compete with its own offerings.
In our conversation, we talk about what today’s customers expect from financial technology; about what this digitization process will look like; about the complexity of the challenge, given the extreme variation in current core processing systems and institutional sophistication; and about what is likely to happen to the considerable number of institutions that don’t have the technical capacity to use digital tools, or don’t even see the need.
One key is that Dave thinks community institutions can gain competitive advantage over larger providers by leveraging their traditional strengths in delivering personal service – but making it highly tech-enabled – in contrast with the fully automated systems that are increasingly relied on by big banks.
Dave and I also talk about AIR’s project with the National Bankers Association, Inclusiv and Visa, aimed at solving these challenges for Minority Depository Institutions (MDIs) and Community Development Financial Institutions (CDFIs). We hope this initiative will lay out a digitization roadmap that other banks and credit unions will be able to follow.
Crucially, Dave shares his thinking about one of the most important pieces that’s still missing from the picture, which is that regulators must become comfortable with institutions using public cloud computing. Until banks and credit unions move into the cloud, they will continue to be hamstrung in their efforts to modernize. Simply put, the best digital technology is not designed for on-premise IT systems. To compete, small institutions will need to capture the cloud’s massive advantages in efficiency, security, and of course, nimbleness.
Regulators are increasingly concerned that outdated technology threatens the future of community banks and credit unions. Some are even starting to predict that new regtech tools will prove themselves superior to traditional compliance methods, so that in the next few years, examiners will not be criticizing banks for adopting new compliance solutions, but rather will criticize them for not adopting it. As technology improves, reliance on outmoded systems will increasingly fall short of regulators’ expectations regarding both compliance and safety and soundness. Jack Henry plans to be a big part of this solution.
America is increasingly divided, politically and culturally. People lament the rising animosity between the red and the blue, the coasts and the heartland, the cities and the countryside. One way to counter the forces of polarization is to nurture healthy rural economies. Community banks are a key ingredient in that effort. We need to help them stay competitive.
More on David Foss
David Foss is Board Chair and Chief Executive Officer of Jack Henry & Associates, Inc. He joined Jack Henry in 1999 when he arranged the sale of BancTec’s financial solutions division to the company. Foss has more than 30 years of financial services experience.
More for our Listeners
Meanwhile, we have great podcasts coming up. We’ll talk with Sunayna Tuteja, the first-ever chief innovation officer of the Federal Reserve System. We’ll talk with former Treasury Department official Jessica Renier, who is now at the International Institute of Finance. We’ll have Circle CEO Jeremy Allaire back again, along with Tomicah Tomilson of Haun Ventures. And we’re going to talk with the one and only Simon Taylor, on all things crypto and defi.
This month I’ll be in Aspen for the Moonclave conference on crypto. In September I’ll be back at Compliance.ai. And we’ll of course be at Money 20/20 in October, and the Singapore Fintech Festival in November – all back in person again!
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