You see a twenty-something in the local coffee shop, eyes fixed on her smartphone or tablet. She swipes her finger, taps the screen and...guess what? She just paid for her latte. But she probably didn't use a community bank or credit union for the payment. And that's a problem.

Today, technology has become ubiquitous. Consumers are eager to adopt smartphones and tablets and regard these devices as enablers that make their lives simpler, easier and better.

Each day, millions of people interact with Amazon, YouTube, Hulu and Facebook; three-year-old kids know how to swipe the screen on an iPad; business people in a growing number of cities are paying their cab fares using Square.

But when these same people walk into a community bank or credit union branch, we ask them to step back 30 or 40 years technologically because the industry is still using transaction-based core systems that are decades old and ill-equipped to deliver the kind of personalized experience and channel flexibility that consumers demand.

No wonder our industry has seen the most valuable parts of our business being steadily picked-off by newer and nimbler competitors.

Many core vendors share much of the blame for being slow to address emerging technologies and consumer needs in a comprehensive way. Most have failed to update their long-established systems because rewriting a core system to take advantage of today's standards and technologies is a costly, massive and risky undertaking.

Disruptive change is needed if community banks and credit unions are to continue fulfilling their traditional and vital role at the center of peoples' financial lives, supporting the small businesses and consumers that drive the economy and fuel the American Dream.

As consumers become more digitally sophisticated, banks and credit unions must rebuild their technology infrastructure to do more than simply post transactions. They must embrace real-time, relational systems and open collaborative platforms that will allow them to differentiate themselves, know more about the person and leverage that knowledge to provide customized services and more convenient delivery channels for customers.

Smaller financial institutions generally recognize that new technology is needed to level the playing field between themselves and their competitors. But many leaders of these institutions tell me they cannot afford to upgrade their technology because of other pressures up and down their income statements - from margin compression, reduced fee income and regulatory costs to the challenges of commoditization and the emergence of non-traditional competitors.

Of course, this argument completely misses the point. New technology is not an alternative to addressing other concerns - it is the key to solving them. And even institutions that cannot afford to upgrade their technology today should be focused on strategies that will enable them to do so in the near future rather than later.

One of the smartest strategies is to take advantage of opportunities for collaborating with each other.

Collaboration can take many forms - from sharing services, resources and facilities to sharing technology costs. Collaboration can also involve bringing together peers, user groups, members and others through online workshops, portals and other forums to share insights, ideas and best practices.

Collaboration can even extend to sharing core enhancements. Vendors such as Open Solutions are beginning to offer platforms that let customers post and share applications that take care of common problems or opportunities. Collaboration paves the way for community-based financial institutions to:

* Reduce costs in areas that do not differentiate their institution;

* Facilitate investment in areas that do differentiate them, such as upgrading technology and enhancing customer/member service;

* Innovate faster and at lower cost by turning the best ideas from throughout the community into deployable solutions;

* Enhance the competitive position of the institution and the entire industry.

The ubiquity of technology and the needs of the digitally connected customer have forced financial institutions everywhere to take a fresh look at the role of enterprise systems in meeting the demands of a business model that's been under pressure for many years. The good news is that the latest technology is available today to ease these pressures and, through collaboration, it is possible to reduce costs and bring these systems online quickly.

Technology and collaboration are the catalysts that will drive the next phase of growth for community-based financial institutions. They will not only help us connect with today's digital consumer, but also enable us to stand up to the regulatory and competitive challenges that have been holding our industry back for far too long.


Louis Hernandez is chairman and CEO of Open Solutions, a core banking software provider based in Glastonbury, Conn. He also speaks and writes on issues impacting smaller financial institutions and businesses.