Mobile Banking Attracts Deposits; Does It Aid Their Exit?

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Mobile banking channels, which banks have used to attract deposits, are helping deposits flow out faster as rates rise, a May research paper shows. 

The combination of higher interest rates and technology means that banks with robust mobile banking capabilities have also seen more deposit runoffs — even before the spring banking crisis — according to researchers from Columbia University, the University of Chicago and the National Bureau of Economic Research.  

They found that mobile banking has increased the sensitivity of deposits to interest rates, reducing their stickiness: it’s easier for customers to shop rates, open accounts and move funds. The paper refers to the slow or gradual pace of deposits leaving banks as “deposit walks” versus deposit runs, where many customers overwhelm a bank with withdrawal requests.

“Average deposits have become more sensitive to changes in the federal funds rate in the last decade,” they found. This is “particularly pronounced for banks with a digital platform and banks with a brokerage account.” 

In the study, banks were considered digital if their mobile application had at least 300 reviews, and as having brokerages if they report brokerage income in their call report. In the study, 64% of banks that had between $1 billion and $250 billion in assets — admittedly a wide swath — were considered digital. The impact of digital bank channels on deposits appeared in third quarter 2022 as deposit growth between digital and nondigital banks diverged; a quarter later, digital banks began losing both insured and uninsured deposits. 

“Whatever happened in the banking system in late 2022 and early 2023 was not just about the flight of uninsured deposits,” they wrote.

A 400 basis points increase in the federal funds rate leads to deposit decline of 6.4% at banks that don’t have a brokerage and aren’t considered digital, compared to 11.6% for digital banks with a brokerage. They also found that digital banks slowed their “deposit walks” by increasing deposit rates and their overall deposit betas.

Although larger banks with brokerages certainly could have more rate-sensitive customers than smaller banks without brokerages, the researchers attempted to account for that adding another analysis: internet usage among depositors. 

“We find that banks’ deposit outflows are more pronounced in markets with higher internet usage, but that this is only the case for digital banks (regardless of whether they report brokerage fees or not),” the researchers wrote.

Digital banking capabilities contributed to the rapid failure of Silicon Valley Bank, Signature Bank and First Republic Bank, according to testimony from bank officials and regulators. Silicon Valley Bank customers “sought to withdraw nearly all” of the bank’s deposits in less than 24 hours, said Federal Deposit Insurance Corp. Chair Martin Gruenberg in May 18 testimony to the U.S. Senate. He added that “the ease and speed of moving deposits to other deposit accounts or non-deposit alternatives with the widespread adoption of mobile banking” is a development that has increased the banking industry’s “exposure to deposit runs.”

First Republic Bank’s run was “exacerbated” in part by “recent technological advancements that allow depositors to withdraw their money almost immediately,” said former First Republic Bank CEO Michael Roffler in May 17 Congressional testimony. The bank experienced $40 billion in deposit outflows on March 13, after the failures of Silicon Valley and Signature, and a total of $100 billion in withdrawals in the ensuing weeks. 

Not everyone is concerned about the impact of mobile apps on deposits and its implications on bank stability. Ron Shevlin, managing director and chief research officer of Cornerstone Advisors, believes that a small percentage of banks will face notable deposit exits, with most banks able to keep funds stable. Additionally, he points out that banks benefited from having digital and mobile banking channels, especially in the earliest days on the coronavirus pandemic. 

“I don’t think it’s that big of a problem because I think a lot of financial institutions are fairly sophisticated in looking at this,” he says. Banks aren’t just looking at account closures to study deposit outflows; they also analyzing changes in account behavior and transactions. “This is not super new behavior anymore. It’s been in the making for 15 to 20 years.”

Both Shevlin and Luigi Zingales, one of the authors on the paper and a professor at the University of Chicago Booth School of Business, see digital transformation as an inevitability for banks. Zingales points out that apps — not branches — will shape the next generation’s experience with banks. As more community banks become digital banks, he says they may need to adjust their assumptions and expectations for how these capabilities could alter their deposit base, costs and overall balance sheet.

“I think what you need to do is be much more vigilant in how you invest your assets. In the past, you had this natural edge and now this natural edge is much smaller. And if you think you have this natural edge and you take a lot of duration risk, you get creamed,” he says. “I think the [solution] is not to resist technology — to some extent, it’s irresistible. The [solution] is learning to live with a new technology and understanding that the world has changed.”

Risk issues like these will be covered during Bank Director’s Bank Audit & Risk Conference in Chicago June 12-14, 2023.

How to Identify the Right Partner — Beyond a Solution

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The decision to outsource a function or task is often a difficult one for banks. Executives need to consider many different factors. And once they decide to outsource, the search for the perfect vendor partner begins. An array of different solution partners often exist for banks to choose, so how can executives select the right partner for their needs?

Bankers should begin by evaluating vendors by inquiring into their implementation process — not solely by reviewing their technology. The key is to ask important questions early. Implementation is often filled with pain points and obstacles that banks and their partners must address; it is easy to forget about the huge implications of implementing new technology and processes. As the bank sheds older processes, how can their new partners help them connect the dots to ensure the end result for employees and customers improves?

Before the Process Begins
Bankers may need to ask themselves some hard questions before they begin the search for a partner. This process will disrupt the current status quo. Is their organization truly ready for changes associated with an implementation?

Usually, the people making partner decisions are not the ones who will have to work with the new technology on a regular basis. Bring the day-to-day employees into the conversation early: they can provide insights about how processes work today and management can give them with a realistic understanding of what the implementation process will look like. These employees have a unique perspective that might trigger additional questions that decision-makers had not thought to ask before.

There are two discussion-driving questions bankers can ask potential vendor partners to help when deciding on which solution is going to work best for their organization.

1. How do I get from Point A to Point B?
The goal is to uncover as many pain points as possible and discuss how the potential partner will work with the bank to solve them. Every implementation is going to have challenges, but many potential vendors do not mention challenges during the sales process without direct questions from the bank. Getting a good idea of what the overall process looks like helps prepare banks for where issues may arise. Executives should ask questions like:

• How does this new process pull data or connect to user information within the core?
• Are all processes automated? Does any human intervention need to occur?
• How does the vendor update the core to keep a single source of truth?

2. How strong is your project management?
Before bankers even have these conversations with a potential partner, they need to make sure they have a good understanding of the technology and workflow changes that will happen. Similarly, bankers need to ensure that their potential partner understands the realistic impact those changes will have on the institution. Shared empathy and understanding will provide both partners with a better implementation process.

Vendors typically have their own project management methodology. It is important to learn what that is and evaluate whether or not it will work for the bank’s team. Bankers should ask questions like:

• Who does the vendor project team consist of?
• Is there a timeline of key deliverables and accountability?
• What are the typical challenges that stall similar projects?
• How does the vendor help the bank overcome these challenges?
• Can they provide a sample testing plan?

Good partners will create and communicate a realistic timeline with drop dead dates to make sure that everything remains on target. Finding a partner that will be open and honest is priceless when it comes to ensuring a smooth implementation.

At the end of the day, the bank is going through a transformation. The ultimate goal is to provide the organization or the end user with better technology or an improved experience — maybe both. Doing due diligence and asking the hard questions early prepares the bank for a better implementation process. Working to understand all the implications that come with integrating new systems and a new partner will set banks up for success and help executives choose the right partner — beyond just a solution.

The First Considerations in a Bank-Fintech Partnership

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A version of this article was originally published on April 3, 2023, as part of a special report called “Finding Fintechs.”

USAA Federal Savings Bank was among the first banks, if not the first bank, to launch mobile deposit capture to its customer base in 2009, long before such technology was widespread.

In the years since, $111 billion USAA has invested heavily in its mobile banking app, enabling its customers to complete a range of banking transactions, open new accounts, chat with a virtual assistant, apply for a loan or start an insurance claim. The San Antonio bank earns consistently high marks among its peers for its mobile and digital banking offerings, often topping far larger brands like JPMorgan Chase & Co. in customer satisfaction ratings.

Moreover, USAA has done this in an almost entirely digital environment. Because its core customer base — deployed military members and their families — tends to move frequently, the bank has barely any branches, and has poured significant resources into its digital offerings and customer service capabilities. Its core market is a small one, but keeping their specific needs at the center of its strategy has worked to USAA’s benefit, says Ron Shevlin, managing director and chief research officer at Cornerstone Advisors. He likens USAA’s strategy to a bull’s-eye, with deployed military members in the center, and retired service members and their family comprising the outer rings.

“They designed everything about their business as if they were serving the active deployed military member,” Shevlin says. “The reality is that by serving the bull’s-eye, they’re able to attract and serve the outer rings.”

That’s why Shevlin cites USAA as an example of what it means for a bank to have a strong digital strategy. When it comes to financial technology, a successful strategy begins before thinking about specific technologies or even using the word “technology,” Shevlin and others say.

Instead, banks can start by thinking about their core audience and how they can differentiate their organization in the marketplace, and using those principles as a guiding North Star. In turn, that can help communications between chief technology officers and the rest of the bank’s leadership, as well as decisions around staffing and prioritization of different problems.

A little over a third of bankers who participated in Bank Director’s 2022 Technology Survey expressed concerns that their bank was unable to identify specific technologies that would help achieve its strategic goals. A quarter also said they were concerned about an inability to identify specific companies or resources needed to achieve those goals.

“Rather than thinking of technology as a pillar or a piece of your strategy, you should come up with those strategic objectives. And then technology is a ribbon that goes throughout those strategies,” says John Behringer, a financial institutions leader and risk consulting partner at RSM US LLP.

Community banks may lack the talent they need to set up successful technology partnerships. Many community bankers also wear multiple hats, so they may not be able to focus on partnerships. Another crucial conversation to have around this time is how much staff the bank can dedicate to the success of this project. Under-resourcing these projects from the beginning can complicate the rest of the work — like due diligence, implementation and continued oversight — leading to underwhelming and unsatisfactory results for the institution. And banks that don’t have enough staff to manage these projects may need to bring in external consultants, which adds costs.

Shevlin recommends banks cultivate their internal competency for digital partnership collaborations throughout the bank — not just among finance and IT employees. A bank that wants to grow through fintech partnerships will need a number of experts in-house that can find, negotiate, bid, deploy, scale and monitor these new vendor relationships.

Ultimately, it’s the senior leadership team that develops a technology strategy in consultation with outside experts and internal ones, and with approval of the board of directors.

The chief technology or chief information officer is often responsible for managing and developing the bank’s technological resources, among their other duties. When it comes to larger strategic goals, this responsibility will likely include advocating for the bank’s technology needs before the board and other senior leadership. To do so successfully, that person needs to be able to tie those particular needs back to the bank’s core vision for what it wants to achieve, Behringer says.

For example, a chief executive or director may feel the bank has enough IT staff, not necessarily realizing that those employees are largely handling help desk tickets and other basic maintenance, not working on big-picture strategic needs. When communicating with the rest of the bank’s leadership, senior technology officers might emphasize the need for in-house staff working on initiatives that move the needle on strategy, while discussing the possibility of outsourcing or automating the more rote tasks needed to keep the lights on, Behringer says.
“Come back to, ‘What’s our vision? What do we view as kind of core to who we are?’” he says. “That’s where I think the CEO can do a better job. A lot of times with management, technology is an afterthought.”

Technology executives should also be mindful not to get too deep into the weeds and keep tech discussions focused on how they tie to broader business objectives.

“A CIO or CTO, even just talking to the executive team, has to translate the tech speak into business operational impact and dollars and cents: ‘What’s this going to cost us, and what’s this going to do,’ without going into mind-numbing levels of detail about the technology,” Shevlin says.

When considering broader staffing needs required to put strategic tech initiatives into play, it may be useful for banks to segment staff into those dedicated to running the bank and those dedicated to growing the bank, while improving efficiency and profitability. One centralized group should take responsibility for integration into the bank’s core, while another should have ownership for the results of fintech partnerships, Shevlin says.

Banking as a service and embedded finance are another story entirely, and banks that are getting into those areas should ideally have entire departments or business units dedicated to that. “You really have to understand that’s not your garden-variety fintech partnership,” Shevlin says. “That’s a whole new set of products and services.”

It’s also a good idea for bankers to make sure they’re fully utilizing the technology they already have, says Enrico Camerinelli, a strategic advisor at Aite-Novarica Group. The more technology a bank introduces, the more robust its backend systems need to be to handle that, he says.

“Banks need to leverage, as much as possible, the existing investments they have,” he says. “Technology is not necessarily always innovation in the sense of always building new things on top of old stuff.”

Legacy technology written in older programming languages doesn’t necessarily need to be scrapped as long as the bank is able to still maintain that infrastructure. In many cases, the
issue is not so much with older programming languages as it is with a lack of internal expertise about the language or tech in question.

“It’s not necessarily the software per se, but it’s the fact that it’s at risk of being unmanaged,” Camerinelli says. “That is the risk.”

Bankers can work on a broader strategy by mapping out whether a particular item on the to-do list is internal or external facing, or if it relates to a credit opportunity, mobile banking, the retail bank, a back-office function or some other function. Initiatives aimed at creating efficiencies within the organization can be just as meaningful as those intended to boost revenue or customer acquisition.

It may also help for bankers to think about setting measurable goals, within reasonable timeframes, as part of that strategic road map. For customer-facing technologies, tangible metrics could include adding more customers, growing market share or increasing the number of customers using digital banking or the bank’s mobile app.

“There should definitely be a growth target, from both the perspective of the percentage of customers that are in that bull’s-eye plus the percentage of revenue that is being generated by that segment,” Shevlin says. He adds that executives should be realistic in setting those goals, though, saying, “It’s never going to be 100%.”

Breaking larger projects into smaller chunks or tasks can also help keep teams motivated and on track when tackling strategic initiatives, says Laura Merling, chief transformation and operations officer at $26 billion Arvest Bank Group in Bentonville, Arkansas.

“You’re not shortcutting something, but you’re saying, what can be done in small chunks to show progress,” Merling said in an August 2022 conversion with Bank Director. “A lot of times in a bank, something might be a very long project that’s going to take 18 months to roll out. I don’t ever want a big aha at the end. What I want to see is incremental progress, which means figure out what you can roll out in 30 days, 60 days, 90 days, so that you have consistent progress. And then you measure it.”

Tech initiatives that serve an internal function can still be linked to some measurable outcome, but Behringer says that doesn’t necessarily have to be head count or expense reductions. Instead, bankers might look at improving the average time it takes to clear a particular task and once that’s accomplished, think about how they can deploy those fulltime employees more smartly. “I don’t like to just focus on cost-cutting,” he says.

Bank Secrecy Act and Anti-Money Laundering Act compliance may be one example of a function where a bank can digitize some part of the process and create internal efficiencies. Behringer describes one client that previously took about four hours to close out a suspicious activity report investigation because the BSA analyst needed to spend about three of those hours pulling data from various places. The firm built a bot that could automatically pull that relevant data for the analyst and was ultimately able to make that person’s job less mundane and repetitive. After making that change, a BSA analyst can now close out about eight alerts in a work day instead of two.

“That employee’s job satisfaction just went through the roof because they’re doing what they like to do, versus doing administrative tasks,” he says.

Bank Director Managing Editor Kiah Lau Haslett contributed to this report.

Fintechs Offer Many Opportunities for Banks. But How Do You Decide?

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Another version of this article was originally published on April 3, 2023, as part of a special report called “Finding Fintechs.” 

As part of his job, Clayton Mitchell once bought a list of global financial technology companies from a data provider. It had 7,000 names on it. 

“I can’t do anything with this,” says the managing principal in the risk consulting practice of Crowe LLP, who advises banks on partnering with fintech companies. “Figuring out the winners and losers is a bit of a needle in a haystack approach.” 

Banks that want to partner with technology companies or buy software from a vendor face the same sort of tsunami of options. On the one hand, fintechs offer real promise for community banks struggling to keep up with bigger institutions, credit unions and other competitors — a chance to cut costs and increase efficiencies, grow deposits and loans, and give customers quicker and easier ways to do business with the bank. 

But in the midst of economic uncertainty, banks face real risks in doing business with early-stage fintechs that might consolidate or even go out of business. So how do you choose? 

The problems banks face making a digital transformation are legion. In Bank Director’s 2022 Technology Survey, 45% of responding CEOs, directors, chief operating officers and senior technology executives said they worried about reliance on outdated technology. Forty-eight percent worried their bank had an inadequate understanding of the impact of emerging technologies. And 35% believed their bank was unable to identify the solutions it needs.

Historically, small and midsized banks have relied on their core processor to identify and vet companies for them. About half of Mitchell’s customers continue to rely on the bank’s core processor exclusively to find and vet technology companies for them. Cornerstone Advisors’ annual “What’s Going On In Banking” survey of community banks found this year that 55% of respondents didn’t partner with a fintech startup in 2022; 20% had partnered with one fintech; 16% with two and the rest with three or more. But Mitchell thinks the opportunities to go beyond the core are better and more feasible for small and community banks than ever, if the bank follows due diligence. “Sometimes you have to solve problems quicker than the core will get it to you,” he says. “There’s a growing appetite to go outside the core.” 

The big three core processors — Fiserv, FIS and Jack Henry & Associates — have started offering newer, cloud-based cores to connect with a greater variety of technology companies, plus there are ways to add additional layers to core systems to connect useful technological tools, using what’s known as application programming interfaces. “There are different layers of technology that you can put in place to relegate the core platform more into the background and let it become less of a focus for your technology stack than it has historically been,” says Neil Hartman, senior partner at the consulting firm West Monroe. 

In combination with technological change, leadership among banks is changing, too. The last three years of the pandemic taught banks and their customers that digital transformation was possible and even desirable. “We’re seeing more progressive bank leadership. Younger generations have grown up in digital environments and with the experiences of Amazon and Apple, those technology behemoths, and are starting to think about their technology partnerships a little more aggressively,” Hartman says. He adds that banks are beginning to reckon with the competition coming from the biggest banks in terms of digital services. “That’s trickling down into the regional and community bank space,” he says. 

Fintechs, likewise, are adjusting to banks’ sizable regulatory compliance obligations, and they’re maturing, too, says Susan Sabo, the managing principal of the financial institutions group for the professional services firm CliftonLarsonAllen LLP. Many fintechs have upgraded their structure around risk management and controls to ensure they’ll get bank customers. “With the onset of the pandemic, I do think it allowed many fintechs to reset and reinvest, and they did start to build some traction with banks,” Sabo says. 

Still, many banks hesitate to use an alternative to the big three core processors or switch the bulk of their lending and deposit gathering capabilities to a fintech, she says. They’re sticking to fintechs that offer what she calls ancillary solutions — treasury management, credit loss modeling and other types of platforms. But even that has been changing, as evidenced by the success of the fintech nCino, which sells a cloud-based operating system and had its initial public offering in 2020. Sabo recommends using proper due diligence to vet fintech companies. It’s also important to consider cybersecurity, data privacy and contractual issues. And last but not least, consider what can go wrong.

One big hurdle for smaller banks is the cost of using third-party solutions. “Nothing about technology is ever cheap,” Sabo says. “Even things as simple as, ‘We need to refresh all of our hardware,’ becomes a massive investment for a [community] bank. And if you’re held to your earnings per share each quarter, or you’re held to your return to your investors each quarter … you may keep putting it off. Many banks are in a situation where they’re anxious about their technology because they haven’t invested along the way.”

Talent is another large obstacle banks face. Small banks, especially those in rural areas, may struggle to find the staff to make the technology a success. Information technology departments often aren’t equipped with strategic decision-making skills to ensure a fintech partner will meet the bank’s big-picture goals.

And banks that want to leverage data analytics to improve their business will have to hire data scientists and data engineers, says Corey Coscioni, director of strategic alliance and business development at West Monroe. “You’re going to need to build some level of internal capabilities,” he says.

The Promise and the Pitfalls of Real-Time Payment Networks

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The introduction of real-time payment networks, like the Federal Reserve’s FedNow and The Clearing House Payment Company’s RTP, has been touted as a significant advancement in payment processing — and rightfully so. The ability to make payments in real-time is a feature that consumers and small and medium businesses increasingly see as mere table stakes.

These networks give banks a way to enable faster, more efficient payments that may very well present subsequent opportunities for growth and innovation that could help them compete with the payment apps, digital banks and biller direct sites that have been eating into their bottom line. As Douglas Brown, president of NCR Digital Banking, points out, “Real-time payments offer a unique opportunity for community banks to innovate and differentiate themselves from their competitors.”

However, the promise of these networks does not come without risks, and it’s critical for community banks to understand the whole picture. While the networks themselves are efficient, banks must understand that the networks are essentially nothing on their own. Institutions must layer specific digital banking tools on top of them to create any kind of customer experience. As Chris Nichols, director of capital markets of SouthState Bank, has noted, “Real-time payment networks are rails, not products. They are simply the infrastructure that allows payment transactions to occur in real time.” (SouthState Bank is a unit of Winter Haven, Florida-based SouthState Corp., which has $44 billion in assets.)

Just as an oil pipeline to your front door won’t help you fill your car with gas without the help of a refinery, FedNow and RTP will not produce fruit for banks unless they are paired with a technology stack built specifically to accommodate them.

This lack of native interfaces that are compatible with real-time payments could put community banks at a significant disadvantage when competing with larger banks and fintech startups that have invested heavily in creating seamless user experiences. As Nichols states, “Fintechs and big banks are already miles ahead when it comes to user experience, and they’re not sitting still.”

Bank customers don’t care about crude oil; they want gas. It’s the gas that allows them to get in their cars, go places and have experiences. This presents a challenge for community banks, which may not have the resources to create interfaces that connect their digital banking platform to these networks — much less build a compelling and competitive user experience.

The cost of implementing and maintaining a real-time payments system can be a significant burden for community banks. And while the Federal Reserve has promised that FedNow will be affordable and accessible for all banks, smaller institutions may still struggle to meet the costs of implementation. This could be a problem if community banks are forced to compete with larger institutions that have more resources and can more easily afford to implement and maintain a functional, experience based real-time payments system.

It’s critical that community bankers not walk blindly into the shiny light reflected from these new networks. It’s more imperative than ever to explore partnering with a technology provider that is specifically prepared to turn these networks into experiences.

Four Questions to Ask When Considering a Payments Partner:

  1. What networks and vehicles do you plan to leverage to allow us access to consumer real-time payments? Who is managing those relationships?
  2. What mitigations do you have in place if we initiate a real-time payment through RTP and the recipient institution uses FedNow, and vice versa?
  3. What updates have you made to the consumer facing user interface to best leverage these new networks?
  4. What risk management policies and procedures have you put in place to keep your customers and bank safe?

If your payments partner doesn’t have a good answer for these questions, it may be a red flag.
In conclusion, community banks need to act now to ensure that they are well-positioned to avoid the pitfalls and capitalize on the opportunity that the future of real-time payments offers. Develop a plan — not only to ensure your bank’s technology provider is ready, but also to ensure that your infrastructure, policies, procedures, executive team, and customers are all on the same page. Do this, and real time will be a good time.

Strategy Before Structure

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Imagine this scenario: A bank executive meets with an innovative and forward-thinking tech leader and is immediately taken in by their offering. They think it would make a lot of sense for their bank and ask the tech leader to meet with the rest of the bank team, who are similarly impressed. They do their due diligence and find that all of the tech company’s customers give them glowing reviews.

They move forward, and after some time and effort the product launches. Everyone is excited … until the product falls completely flat and ends up doing nothing to help the bank do business better. What happened?

Unfortunately, too many banks work with vendors without considering whether their products actually fit into the larger strategy of their bank first. Instead, they do the opposite: They mold their strategy around the technology vendor they end up working with.

In these situations, the principle of strategy before structure is really important. Are the actions you and your bank are taking defined by your strategy? Or is your strategy being driven by your vendors? It should always be the former.

One example that comes to mind is banks investing a lot of time and money into online lending or account opening, only to be disappointed when they are met with mostly fraud and spam. Often, this is because they never built out an online marketing strategy for the software to support the new technology. Conversely, we know banks that have experienced tremendous results through the same channels — when it was part of a deliberate strategy to go online.

Building a Strategy
If the above scenario hits a little too close to home, you are not alone. But in order to keep it from happening again, there’s a few things to keep in mind moving forward:

1. Understand what is out there. It’s important for bank executives to understand what is available when it comes to new technology. Your team should be speaking with and engaging with tech leaders to understand what is possible.

You should also be speaking to other banks to find out what they are doing. Identify a banker in a different state or market where your institution doesn’t compete and ask them what tech stack they are using, both successfully and maybe not so much.

From there, take the information you gather back to your institution’s drawing board. Think about your bank’s strategy and use what you now know is possible to advance it.

2. Work with transparency. When working with vendors, it’s common for banks to be secretive about their evaluation process and which vendors they are considering. In my opinion, this is the wrong way to go about it. Working with vendors should resemble World Wrestling Entertainment’s Royal Rumble: Everyone is in the same ring and the last person standing wins.

This is the best way to ensure complete transparency and get the management team the clarity they need to make a decision. It also allows vendors to work together and balance off each other, rather than handicapping them by asking them to design a system without knowing all the pieces in play. We have seen scenarios where two seemingly competing vendors can actually come together to form a better total solution.

In my opinion, this is also the best way to cut through the noise and see who really understands your bank and strategy the best. Ask your vendors to explain the differences between them and the other organizations you are reviewing and compare notes.

3. Run a pilot program. When it’s possible, your bank should implement new tech products first as a mini or pilot program.

Find a division in your bank — or maybe even just a single banker — and let them try out the
product first. If that’s not possible, ask the vendor if they can set up a sample instance or use dummy data in a workshop before going live.

These kinds of tests allow your institution to agree on the success criteria and see if the vendor can meet them, before spending the time and energy to go live on a large scale. Any vendor worth working with should have no problem offering such an option.

With these tips in mind, bankers can be empowered to move forward with new technology and services that will actually deliver on their promises of helping their business and customers — rather than fall flat from the start.

Effectively and Realistically Embracing Embedded Fintech

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Banks continue to face shrinking margins, skyrocketing customer expectations, technology advancements and an increasingly crowded competitive field — challenging boards and executives with how to stay relevant and prominent in their customers’ financial lives.

Exacerbating the issue is that players from outside industries, such as major retailers and tech companies, continue to attempt to infiltrate the financial services landscape by offering banking and payment services that directly compete with existing banking relationships. To overcome these challenges, more banks are evaluating embedded fintech to extend their brand and presence into new areas of customers’ lives. Meanwhile, some are also considering embedded finance, which may sound similar but is, in fact, very different.

To determine the best path forward in banking — one that enables quick innovation, deposit growth and a stronger foothold in customers’ financial lives — bankers should first gain a clearer understanding of embedded fintech versus embedded finance and then identify an effective way to pursue their chosen path.

Clearing Up Confusion: Embedded Fintech Versus Embedded Finance
While these terms often get thrown around interchangeably, they have very different meanings and implications for banks. According to Cornerstone Advisors, embedded finance is the integration of financial services into nonfinancial websites, mobile applications and business processes. In other words, processes that used to occur within the bank ecosystem now happen extraneously.

Cornerstone defines embedded fintech, on the other hand, as the integration of fintech products and services into financial institutions’ product sets, websites, mobile applications and business processes. This option is all about banks and fintechs working together toward a common goal. Banks maintain customer relationships and provide new tools and technology based on customers’ needs, all within the bank-owned, regulated environment.

Embedded fintech may seem like the natural path, but executing a strategy may be easier said than done. For example, one-to-one fintech integrations have long burdened banks. The integrations, contracts and ongoing partnership management require time, money and resources — often more than are available in-house. It’s no surprise that banks have struggled to effectively implement new technology at scale.

A New Path Forward: Collaborative Banking
There is another option: pursuing an embedded fintech strategy through a collaborative banking approach that involves using application programming interfaces, or APIs, to connect fintechs to banks through a third-party platform. The key is that the platform should tokenize, normalize and anonymize customer data, allowing the customer to turn on fintech solutions without sharing personal identifiable information. This ultimately reduces liability and risk while positioning banks to become the bridge to a secure marketplace of customer-facing apps.

In this model, banks and fintechs work together instead of competing. What used to be banks’ biggest disruptors become a source of revenue. The bank remains the center of customers’ financial lives, deposits stay with the institution and new opportunities are sent back to the bank, leading to account acquisition and growth. Fintechs benefit by having a more effective path to market, including a distribution channel and customer acquisition and monetization model.

Increasingly, customers are in tune with data sovereignty and privacy and are increasingly wary of the risks involved with sharing personal information with technology providers. They’re looking for options to help manage identity, consent, data normalization, permissioning and data anonymization. Collaborative banking does this and more, presenting unprecedented flexibility and choice that allows customers to easily try out new technology and innovations through their financial institution. This empowers them to find and leverage the solutions that best meet their individual needs. Plus, they are able to manage all of their data and finances through a single, convenient location with a holistic view.

Embedded fintech via collaborative banking represents a new opportunity for banks to deliver needed technology and innovation to their customers in a safe, efficient and compliant way. Banks become the gateway to a secure marketplace of fintech apps, driving digital adoption, deposits and loans. This approach removes the time, money and burden of ongoing contract and partner management, along with the pressure to develop technology in-house. Customers benefit from a wider access to financial tools as well as greater control and choice over their data. Banks that embrace this path are primed to create new revenue streams, expand wallet share and strengthen customer relationships.

Reimagining A2A Transfers in a World of Real-Time Payments

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In today’s world of payments, speed matters.

Consumers increasingly expect faster everything, demands that are driven by the proliferation of peer-to-peer (P2P) payments enabling individuals to quickly send money to a friend or pay for products and services. The access, speed and convenience of faster or real-time payments are becoming the norm — that means greater opportunity for financial institutions to differentiate the money movement experiences they deliver to their customers. One area slower to initiate real-time speed is in traditional account-to-account, or A2A, transfers.

A2A transfers happen when a customer transfers funds between their own accounts (brokerage, crypto, savings and checking) held at two different financial institutions: for example, transferring funds from a savings or brokerage account to a separate checking account. Too often, consumers must rely on outdated processes such as traditional Automated Clearing House methods that can take days to complete, ultimately impacting time-sensitive investment opportunities and on-time bill payments.

“Today, consumers are accustomed to being able to quickly send money to friends and family using various P2P payment platforms. But moving money between your own accounts is still a lengthy and inefficient process,” says Yanilsa Gonzalez-Ore, senior vice president, North America head of Visa Direct.

Surveyed U.S. consumers own, on average, 8 financial accounts and conduct 15 transactions between them a year, accounting for $3 trillion in annual money movement via A2A transfers, according to a survey by Visa and Aite Group. This diffusion of their financial picture can result in the subsequent need to optimize finances and investments across those accounts — compounded by the desire and expectation that they can do it with ease anytime, anywhere.

We also found that 90% of surveyed U.S. consumers want the flexibility of real-time transfers between their financial accounts. And 70% of surveyed U.S. consumers said they prefer card-based real-time payments for transfers.

“Two factors that are driving customer demand today are user interface simplicity and real-time money movement,” says Gonzalez-Ore. “Disrupting the A2A space and delivering real-time payments can be a win-win for any financial institution. You may receive deposits faster, and in turn, you’ll potentially see higher retention from those clients by meeting their demand. There are potential benefits for everyone in the ecosystem.”

Younger demographics tend to be a step ahead when it comes to technology adoption and digital experiences. Quick gratification is the expectation for millennial and Generation Z customers. This matters now because there will likely be an overall demographic shift in the U.S., propelled by a transfer of wealth across generations. Banks should think about how they can expand their own money movement offerings in the ever-changing payments landscape.

“We will likely see more and more demand for faster, more seamless transfers and transactions,” says Gonzalez-Ore.

Driving Profits in Digital Banking

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In a rapidly evolving digital landscape, it can be tricky for financial institutions to figure out how to best generate profit from their digital initiatives. According to Stephen Bohanon, co-founder and chief strategy and product officer at Alkami Technology, a good starting point is also one of the most overlooked sources of revenue growth: existing customers. Bank leaders can also look at their competition to understand where to invest in technology.

  • Investing in the Front End
  • Evaluating Transaction Data
  • Expanding Wallet Share