- Key insight: Bankers, particularly at the midsize and regional level, should be on the lookout for more opportunities to develop networked solutions to common problems, such as know-your-customer operations and fraud detection.
- What's at stake: Delivering modern financial services that businesses and individuals increasingly expect requires banks to maintain an ever-expanding array of sophisticated technology solutions. But most of these technologies cannot efficiently be developed by a single community or regional bank or, at times, even by the largest national bank.
- Forward look: Networks do not diminish competition. Indeed, they enable it.
Keeping the U.S. financial system vibrant, safe, and responsive to the needs of businesses and individuals requires a diverse banking sector, with institutions of many sizes and, in many cases, different specializations. We are fortunate to have such a financial system.
At the same time, the expectations of those customers continue to evolve. Delivering the personalized and modern financial services that businesses and individuals increasingly expect requires banks of every size to maintain an ever-expanding array of
Technology vendors have played and will continue to play a critical role in helping banks meet these challenges. Indeed, their ingenious solutions have advanced everything from small-business loan processing to construction lending and the use of cash flow data in underwriting. But, some technology solutions by their nature present a unique challenge: their value depends not just on the software alone but on the strength of the network behind them. Unlike point solutions that can be deployed by a single institution, network-based solutions become more effective as participation grows. In some cases, they cannot function at all without a robust network.
That is where shared infrastructure can create what I like to call "synthetic scale." By spreading the cost and complexity across institutions, networks give community and regional banks access to capabilities they could not efficiently build on their own. Just as importantly, they allow banks to devote scarce capital and talent to the areas where they actually differentiate — local relationships, sound underwriting, and service to their customers and communities.
Opportunities for network solutions abound. Consider know-your-customer processes: Great advances in know your customer could be achieved if the banks participated in a shared KYC network, allowing information to be exchanged through a trusted third party with appropriate governance, privacy protections, and regulatory safeguards.
Or fraud detection, for example, which is far more effective when banks can identify patterns across many institutions rather than just within their own organizations. Further, that concept is increasingly consistent with the regulatory direction of travel, as federal banking agencies
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The same is true for anti-money-laundering efforts, third-party risk management, payments and even some aspects of cybersecurity. In many of these cases, the value comes not from the technology alone but from the network of participating institutions. Simply put, some problems are better solved together than separately.
Networks can emerge in a variety of ways. Banks themselves have historically dabbled with networks, sometimes successfully. Trade associations, for example, enable banks to address shared regulatory, legislative and government-related issues.
They can also emerge indirectly from successful technology vendors. As adoption grows, a network naturally forms around the platform, creating value that extends well beyond the underlying technology itself. Other vendor-driven solutions can be explicitly network-oriented at their core.
Some of the earliest and most successful network models were created by Visa and Mastercard, where participating banks shared in the networks' successes in a variety of ways, traditionally by way of a profits interest and some governance opportunities. Those models demonstrated that banks could collaborate to build shared infrastructure while continuing to compete vigorously for customers. More recently, other business models have taken these incipient models a step forward.
The history of banking is filled with examples of institutions becoming stronger by sharing infrastructure while continuing to compete vigorously for customers. Networks do not diminish competition. Indeed, they enable it.
Regional and mid-sized banks should devote meaningful executive attention to identifying and developing such value-enhancing networks. Whether through a dedicated position or office or consortium of participating institutions, someone must own the responsibility of working on ideas where collaboration creates more value than competition. Networks do not emerge on their own. They require leadership, governance, and a sustained commitment from participating institutions.
Networking is no longer a nice-to-have, it's a must-have. Regulators and others serious about preserving a vibrant and diverse banking system should embrace the next generation of bank networks. Doing so is not simply about making banks more efficient. It is about ensuring that regional and community institutions remain strong enough to continue serving the small businesses, middle- and lower-income communities, and rural areas that depend on them.
