Financial institutions are facing existential risks — in changing demographics, the high interest rate environment, talent shortages, and disintermediation of financial services from bank providers. With headwinds like these, some financial institution leaders might be tempted to hunker down rather than accelerate transformational change within the institution.
The ones that will thrive are pursuing technology and talent to make themselves more efficient and attractive to customers.
If the Paycheck Protection Program showed financial institutions anything, it was that being able to respond quickly yields growth and opportunity, along with the chance to better serve communities, even during the deepest recession since World War II. According to FDIC researchers, community banks that invested more in technology before 2020 saw higher increases in both loan and deposit growth than those with less investment.
Three technology trends increasingly deserve attention from financial institutions, even amid economic uncertainty. These trends address institutions’ desire to efficiently attract and maintain new business despite the short-term picture, and they will likely hold the key to success in the future.
The first trend is the increased use of APIs (application programming interfaces) and process automation. Many financial institutions are on board with automating manual tasks and have moved to digitalize some processes, such as origination. Automating the process of collecting and making decisions on loan applications has helped many of our customers cut a significant amount of time from commercial loan requests to funding. And when the origination platform is interoperable with other automated business processes, executives and leaders gain strategic insights into real-time portfolio monitoring, board reporting, etc.
RPA (robotic process automation) and increased interoperability can also help banks and credit unions with staffing challenges. Some institutions will be running on a lean staff by strategy, while others are having trouble hiring and retaining experienced talent. In either case, financial institutions that focus on RPA and interoperability make the most of their staff’s skills and time.
Actionable Data Insights
The second trend vital for banking success can also amplify RPA benefits — the increased use of the public cloud and advanced data analytics. Many financial institutions understand that moving key data-intensive processes to the cloud is critical for increased digitalization and efficiency.
In addition, using the cloud to build a good, actionable data and analytics platform means better information about customers or members. It allows for improved personalization while keeping human capital the same. For example, a business customer’s shrinking deposit account balances could trigger an automated email message marketing short-term loans to that customer.
Community financial institutions are built on relationships, but disconnected, legacy systems make it difficult to examine relationships in a timely manner.
Notably, the cloud and data analytics can bring the power of data to bear to move institutional workflow faster. Rather than using one technology tool for workflows and another for reporting, bringing the two together can allow data generated in the workflow to drive future workflows. That’s a shift in paradigm financial institutions need to be prepared for.
When a financial institution knows how long it takes to approve a loan and has a handle on application abandon rates, it can compare the KPIs to fintechs and other competitors to then identify roadblocks in existing processes. Another example: when a bank or credit union understands how long it takes to identify a fraud case, it can focus on reducing false positives to improve the customer experience and protect the institution.
Distributed Ledger Technology
Finally, financial institutions looking for long-term success will want to learn more about and track distributed ledger technology and products derived from it, such as stablecoins and Central Bank Digital Currencies (CBDCs).
Financial institutions should be thinking about the impact when, not if, the U.S. has a digital dollar. Again, thinking back to the PPP, consider the trouble the federal government faced distributing money to those who needed it. Consider the number of parties involved and the amount of fraud that resulted. A digital dollar would probably solve many of those challenges.
The Long Game
We tend to overestimate the impact of technology in the short run and underestimate it in the long run. Many financial institutions are using legacy core systems and legacy processes that require transformational investments. It will prove fatal for some institutions to underestimate the impact of APIs, intelligent automation, data analytics, the cloud, and these other foundational technologies.
Recession or not, the faster institutions act to throw off anchors that are slowing their progress and growth, the more they will ensure their survival — and their ability to thrive.