A pervasive blitz of technology innovation, coupled with changing customer dynamics driven by millennials, is forcing regional and mid-tier lenders to evolve.

The inherent advantages that regional financiers once enjoyed from being close to their customers and communities are rapidly dwindling. Multiple factors are responsible for this change, such as the inability of smaller banks to keep up with larger banks' technology advances around key differentiator like customer experience. Additionally, there is increasing competition from non-banking players, such as fintechs and technology firms, which are building an increasingly prominent place in the financial services space today.

To succeed in this challenging environment, smaller lenders will have to innovate and/or re-assess their operating models — and the time to act is now.

Captive asset financiers, face their own unique set of challenges, most of which are related to different industries their parent organization operates in. The dynamics in these industries, like an economic slowdown in the recent past (agriculture and mining), have had a direct impact on the new business volumes the captives are generating. Additionally, the technology and operations divide between smaller captives and big banks is widening quickly. The advent of products such as usage-based billing, which demand significant technology investment, further complicates matters for captives, and compels smaller captives to go the vendor program route.

For niche asset financiers, therefore, the big question is: How do we keep up with the technology spend and capital resources that our larger competitors bring to the table? Technology is fast eroding the niche spaces these companies have traditionally operated in, and regional lenders will continue to struggle with the mounting costs of the IT investments required to keep up.

The answer to this dilemma, in our view, is in renovating the operating models that exists at regional banks: While lenders are spending bulk of the transformation dollars in the front end, it is the middle and back office, which needs the same amount of attention. Partnerships with strategic vendors who bring cutting-edge digital technologies as a service to create ‘managed services’ business models might be the answer here.

Regional lenders will benefit from state-of-the-art digital technologies, delivered at significantly lower implementation and maintenance costs. Think of it as applying usage-based concepts to technologies like artificial intelligence. Amazon Web Services (AWS) is already doing this at scale for cloud storage services.

By embedding digital technologies such as robotic process automation (RPA), natural language understanding (NLU), and intelligent business process management suite (iBPMS) workflow tools, smaller lenders can incorporate cutting-edge technologies into the very DNA of their operations. In our opinion to drive this scale of transformation in the middle- and back-office, there is a need to establish deep and strategic vendor partnerships.

As bigger banks continue to relentlessly chip away at market share, regional asset financiers and smaller captives must realize that investing in technology is no longer optional. And while there will always be demand from customers for a "personal touch," the challenge facing regional lenders today is how to effectively address this demand through digital channels.