Rise of the Quantum Machines

A new technological revolution on the horizon is poised to disrupt the financial services industry: Quantum Computing.

While broad commercial applications of quantum technologies are likely several years away, experts predict that practical applications of quantum computing in the banking industry may only be three to five years away. Various industry leaders at Goldman Sachs Group and JPMorgan Chase & Co. have already begun experimenting with quantum computing and are preparing for the inevitable “quantum supremacy.”

What is Quantum Computing?
IBM defines quantum computing as a “rapidly emerging technology that harnesses the laws of quantum mechanics to solve problems too complex for classical computers.” Classical computers operate on a binary system, processing “bits” of information as either zeros or ones. In contrast, quantum systems process quantum bits or “qubits” of information as either zeros, ones, a combination of zeros and ones, or any value in between. As a result, the processing power of quantum systems will be well beyond what a binary system could ever process.

However, because quantum computing relies on the laws of quantum mechanics, the answers produced by quantum calculations will be probabilistic instead of determinative. Binary systems operate by processing a limited data set via specific processing instructions to deliver a singular answer. In contrast, quantum systems operate by processing multiple units of data, resulting in a narrowed range of possible answers instead of a singular answer. Practically speaking, this means that teams must run calculations through quantum systems multiple times to narrow the universe of possible answer to a functional range.

While results from quantum systems may sound less reliable, it ultimately depends on their use. In many cases, binary systems will be better and never need to be replaced by quantum systems. However, quantum computing will be revolutionary when it comes to eliminating certain possibility ranges associated with incredibly complex problems.

What is Quantum Supremacy?
“Quantum supremacy” sounds ominous, but it simply refers to the point in time where quantum systems can perform calculations beyond the scope of classical computers in a reasonable amount of time. Although developments in quantum computing are promising, quantum supremacy is not likely to occur until the end of this decade. One of the challenges is assembling a single quantum system with the requisite qubits that outperforms a classical, binary computer. Some companies have almost achieved this, but developers have yet to develop a reasonably sized quantum system for commercial applications. So while quantum supremacy is currently only theoretical, it is not so far off in the future.

Benefits and Risks of Quantum Computing
Quantum computing gives early adopters a competitive advantage. Insights gleaned from quantum computing can help banks make better decisions, reduce risk, increase profits and provide better customer service. An IBM report identified a few use cases that are likely to improve financial services:

  • Targeting and Prediction: According to an IBM report, 25% of small to medium sized banks lose customers because their offerings don’t target the right customer. Quantum computing can help financial institutions break down their complex data structures to develop better predictive models that offer products and tailored services more effectively to customers.
  • Trading Optimization: Equity, derivative, and foreign exchange markets are complex environments, and trading activities are growing exponentially. The complex and fast-paced nature of these markets require exceptionally fast models to help investment managers optimize customer portfolios. Quantum computing can help give investment managers the tools necessary to deliver better services to customers, such as improving portfolio diversification or rebalancing portfolio investments to meet a customer’s investment goals.

Although the benefits of quantum computing are numerous, they do not come without risks. In particular, quantum computing poses a serious threat to cybersecurity controls. Encryption techniques used to secure accounts and networks are immediately at risk upon quantum supremacy. Currently, banks use complex encryption algorithms to secure user accounts, transactions and communications. Breaking through current encryption algorithms is virtually impossible and highly impractical. However, threat actors leveraging quantum technologies have the potential power to break through these classical encryption methods. Although this threat is currently only theoretical, leaders in quantum computing are already working on quantum cryptography to get ahead of this potential cybersecurity threat.

How to Prepare for Quantum Supremacy?
While broad adoption of quantum systems and products is unlikely until later this decade, banks can anticipate quantum products and solutions emerging in the next few years. In anticipation of this quantum revolution, financial institutions should:

  • Start Talking About Quantum Computing: Financial institutions should begin preparing to implement and leverage these technologies immediately given that product breakthroughs are likely within the next five years. Financial institutions should also consider potential partnerships with leaders in quantum computing such as IBM, Microsoft, and others. The sooner financial institution boards and executives can put a quantum strategy in place, the better.
  • Start Talking About Quantum Encryption: Financial institutions with significant data repositories should begin thinking about the cybersecurity risks associated with quantum computing. Chief information security officers should begin thinking about how their institution will safely transition their data repositories from classical encryption to quantum encryption in the near future.

2022 Technology Survey: Complete Results

Bank Director’s 2022 Technology Survey, sponsored by CDW, surveyed 138 independent directors, chief executives, chief operating officers and senior technology executives of U.S. banks below $100 billion in assets to understand how these institutions leverage technology in response to the competitive landscape. The survey was conducted in June and July 2022, and primarily represents banks under $10 billion in assets. Members of the Bank Services program have exclusive access to the full results of the survey, including breakouts by asset category.

The survey finds that most respondents (81%) say their bank increased its 2022 technology budget over last year, reporting a median 11% increase. Banks have primarily prioritized investments in new technology features and updates in areas like security, or where customers frequently interact with the bank, like payments or digital loan applications. 

Leveraging technology to create a more competitive and efficient organization requires internal know-how, and directors and executives find this to be a key area for concern: 48% worry about an inadequate understanding within the bank of emerging technologies. Forty-five percent say they’re worried about their organization’s reliance on outdated technology. 

While directors aren’t involved in day-to-day decisions about the bank’s technology, the board needs to align technology with strategy and ensure that the bank has the resources it needs to achieve its goals. Forty-two percent of respondents say their board has at least one member they would consider to be an expert in technology, including digital transformation, user experience or data analytics. 

Click here to view the complete results.

Key Findings

The Competitive Landscape
Fifty-six percent of all respondents view local banks and credit unions as their top competitive threat, followed by big and superregional banks, at 46%. One-third worry about competition from big tech companies such as Apple, while an equal number are concerned about competition from digital, nonbank business lenders. 

Hit-or-Miss on Digital Applications
Nearly half of respondents say their bank has a fully digital process for opening retail deposit accounts, with larger shares representing banks over $1 billion reporting as much. Far fewer respondents report a fully digital process for retail loans, small business deposits or loans, or commercial loans. 

Generational Divides
Just 25% of the directors and executives surveyed say their bank has the tools it needs to effectively serve Generation Z (16-25 years old), and half believe their institution can effectively serve millennials (26-40). Eighty-five percent say as much about Generation X (41-56), and 93% say this of baby boomers (57-75). 

All-In on the Cloud
Eighty-eight percent say their bank uses cloud technology to generate efficiencies internally; 66% use application programming interfaces (APIs), which allow different applications or systems to exchange data. Robotic process automation (32%) and artificial intelligence or machine learning (19%) are far less commonly used. 

New Frontiers
Three-quarters say their board or leadership team has discussed risks or opportunities related to cryptocurrency or digital assets in the past 18 months. Sixty-four percent say the same of banking as a service (BaaS), and 69% say that of environmental, social and governance issues. Cannabis, on the minds of 58%, has been more commonly discussed at banks under $5 billion of assets. 

Views on Collaboration
More than half of respondents view technology companies as vendors only, as opposed to collaborating with or investing in these firms. Thirty-nine percent, primarily representing banks over $1 billion in assets, say their institution has collaborated with technology providers on specific solutions. Twenty percent have participated in a venture fund that invests in technology companies, and 11% have directly invested in one or more of these companies. 

2022 Technology Survey Results: Investing in Banking’s Future

In mid-July, at the peak of second quarter earnings, large regional banks showed off an array of technology initiatives. 

Providence, Rhode Island-based Citizens Financial Group, with $227 billion in assets, highlighted a new mobile app for its direct-to-consumer digital bank. And $591 billion U.S. Bancorp in Minneapolis realized the benefits of its ongoing investments in digital payments capabilities over the years, reporting $996 million in payments services revenue, or a year-over-year increase of nearly 10%.

Community banks, with far fewer dollars to spend, have to budget wisely and invest where it makes the most sense. For many, that means prioritizing new technology features and updates in areas like security, or where customers frequently interact with the bank, like payments or digital loan applications.

Bank Director’s 2022 Technology Survey, sponsored by CDW, delves into some of these strategies, asking bank senior executives and board members about the concerns and challenges that their institutions face, and where they’ve been investing their resources in technology.

Eighty-one percent of respondents say their bank increased its 2022 technology budget over last year, reporting a median 11% increase. Asked where their bank built more efficient processes by deploying new technology or upgrading capabilities in the past 18 months, 89% named cybersecurity as a key area for investment, followed by security and fraud (62%). During the same time period, 63% implemented or upgraded payments capabilities to improve the customer experience; 54% focused on enhancing digital retail account opening.

Leveraging technology to create a more competitive and efficient organization requires internal know-how, and directors and executives find this to be a key area for concern: 48% worry about an inadequate understanding within the bank of emerging technologies. Forty-five percent say they’re worried about their organization’s reliance on outdated technology.

While directors aren’t involved in day-to-day decisions about the bank’s technology, the board needs to align technology with strategy and ensure that the bank has the resources it needs to achieve its goals. Forty-two percent of respondents say their board has at least one member they would consider to be an expert in technology, including digital transformation, user experience or data analytics.

Following on the heels of Bank Director’s 2022 Compensation Survey, which found technology talent in demand, the 2022 Technology Survey indicates that most banks employ high-level executives focused on technology, particularly in the form of a chief information security officer (44%), chief technology officer (43%) and/or chief information officer (42%). However, few have a chief data officer or data scientists on staff — despite almost half expressing concerns that the bank doesn’t effectively use or aggregate the bank’s data.

Key Findings

The Competitive Landscape
Fifty-six percent of all respondents view local banks and credit unions as their top competitive threat, followed by big and superregional banks, at 46%. One-third worry about competition from big tech companies such as Apple, while an equal number are concerned about competition from digital, nonbank business lenders.

Hit-or-Miss on Digital Applications
Nearly half of respondents say their bank has a fully digital process for opening retail deposit accounts, with larger shares representing banks over $1 billion reporting as much. Far fewer respondents report a fully digital process for retail loans, small business deposits or loans, or commercial loans.

Generational Divides
Just 25% of the directors and executives surveyed say their bank has the tools it needs to effectively serve Generation Z (16-25 years old), and half believe their institution can effectively serve millennials (26-40). Eighty-five percent say as much about Generation X (41-56), and 93% say this of baby boomers (57-75).

All-In on the Cloud
Eighty-eight percent say their bank uses cloud technology to generate efficiencies internally; 66% use application programming interfaces (APIs), which allow different applications or systems to exchange data. Robotic process automation (32%) and artificial intelligence or machine learning (19%) are far less commonly used.

New Frontiers
Three-quarters say their board or leadership team has discussed risks or opportunities related to cryptocurrency or digital assets in the past 18 months. Sixty-four percent say the same of banking as a service (BaaS), and 69% say that of environmental, social and governance issues. Cannabis, on the minds of 58%, has been more commonly discussed at banks under $5 billion of assets.

Views on Collaboration
More than half of respondents view technology companies as vendors only, as opposed to collaborating with or investing in these firms. Thirty-nine percent, primarily representing banks over $1 billion in assets, say their institution has collaborated with technology providers on specific solutions. Twenty percent have participated in a venture fund that invests in technology companies, and 11% have directly invested in one or more of these companies.

To view the high-level findings, click here.

Bank Services members can access a deeper exploration of the survey results. Members can click here to view the complete results, broken out by asset category. If you want to find out how your bank can gain access to this exclusive report, contact bankservices@bankdirector.com.

Banking’s Single Pane of Glass

Imagine looking at all the elements and complexities of a given business through a clear and concise “single pane of glass: one easily manageable web interface that has the horizontal capability to do anything you might need, all in one platform.”

It may sound too good to be true, but “single pane of glass” systems could soon become a reality within the mortgage industry. Underwriters, processors, loan originators and others who work at a mortgage or banking institution in other capacities must manage and maintain a plethora of different third-party software solutions on a daily basis.

It’s complex to simultaneously balance dozens of vendor solutions to monitor services, using different management console reports and processes for each. This cumbersome reality is one of the most significant challenges bankers face.

There are proven solutions and approaches to rationalizing these operational processes and streamlining interactions with customers, clients and new accounts. In the parlance of a technologist, these are called “single panes of glass,” better understood as multiple single panes of glass.

That does exist if you’re talking about a single product. Herein lies the problem. Heterogenous network users are using single third-party platform solutions for each service they need, with a result that one would expect. Too many single panes of glass — so much so that each becomes its own unique glass of pain.

How can banks fix this problem? Simply put, people need a single view of their purposed reality. Every source of information and environment, although different, needs to feed into a single API (application program interface). This is more than possible if banks use artificial intelligence and machine learning programs and API frameworks that are updated to current, modern standards. They can unify everything.

Ideally, one single dashboard would need to be able to see everything; this dashboard wouldn’t be led by vendors but would be supported by a plethora of APIs. Banks could plug that into an open framework, which can be more vendor-neutral, and you now have the option to customize and send data as needed.

The next hurdle the industry will need to overcome is that the panes of glass aren’t getting any bigger. Looking at pie charts and multiple screens and applications can be a real pain; it can feel like there isn’t a big enough monitor in the world to sift through some data spreadsheets and dashboards effectively.

With a “single pane of glass” approach, banks don’t have to consolidate all data they need. Instead, they can line up opportunities and quickly access solutions for better, seamless collaboration.

Focusing on one technology provider, where open-source communication can make integration seamless, might be a good adoption route for bank executives to consider in the short term while the industry adapts to overcome these unique challenges.

How Technology Fosters Economic Opportunity and Success

Is your bank promoting financial literacy and wellness within the communities you serve?

The answer to that question may be the key to your bank’s future. For many community financial institutions, promoting financial wellness among historically underserved populations is directly linked to fostering resilience for individuals, institutions and communities.

Consider this: 7 million households in the United States didn’t have a bank account in 2019, according to the Federal Deposit Insurance Corp.; and up to 20 million others are underserved by the current financial system. Inequities persist along racial, geographical and urban lines, indicating an opportunity for local institutions to make an impact.

Many have already stepped up. According to the Banking Impact Report, which was conducted by Wakefield Research and commissioned by MANTL, 55% of consumers said that community financial institutions are more adept at providing access to underrepresented communities than neobanks, regional banks or megabanks. In the same study, nearly all executives at community institutions reported providing a loan to a small business owner who had been denied by a larger bank. And 90% said that their institution either implemented or planned to implement a formal program for financial inclusion of underserved groups.

Technology like online account origination can play a critical role in bringing these initiatives to life. Many forward-thinking institutions are actively creating tools and programs to turn access into opportunity — helping even their most vulnerable customers participate more meaningfully in the local economy.

One institution, 115-year-old Midwest BankCentre based in St. Louis, is all-in when it comes to inclusion. The bank partnered with MANTL to launch online deposit origination and provide customers with convenient access to market-leading financial products at competitive rates.

Midwest BankCentre has also committed $200 million to fostering community and economic development through 2025, with a focus on nonprofits, faith-based institutions, community development projects and small businesses for the benefit ofr historically disinvested communities. The bank offers free online financial education to teach customers about money basics, loans and payments, buying a home and paying for college, among others.

Midwest BankCentre executives estimate that $95 out of every $100 deposited locally stays in the St. Louis region; these dollars circulate six times throughout the regional economy.

In a study conducted in partnership with Washington University in St. Louis, researchers found that Midwest Bank Centre’s financial education classes created an additional $7.1 million in accumulated wealth in local communities while providing critical knowledge for household financial stability.

“When you work with a community banker, you are working with a neighbor, friend, or the person sitting next to you at your place of worship,” says Danielle Bateman Girondo, executive vice president of marketing at Midwest BankCentre. “Our customers often become our friends, and there’s a genuine sense of trust and mutual respect. Put simply, it’s difficult to have that type of relationship, flexibility, or vested interest at a big national bank.”

What about first-time entrepreneurs? According to the U.S. Bureau of Labor Statistics, approximately 33% of small businesses fail within 2 years. By year 10, 66.3% have failed.

Helping first-time entrepreneurs benefits everyone. Banks would gather more deposits and make more loans. Communities would flourish as more dollars circulate in the local economy. And individuals with more paths to economic independence would prosper.

For Midwest BankCentre, one part of the solution was to launch a Small Business Academy in March 2021, which provides practical education to help small businesses access capital to grow and scale.

The program was initially launched with 19 small businesses participating in the bank’s partnership with Ameren Corp., the region’s energy utility, with a particular focus on the utility’s diverse suppliers. And 14 small business owners and influencers participated in the bank’s partnership with the Hispanic Chamber of Commerce of Metro St. Louis. Midwest BankCentre teaches small businesses how to “think like a banker” to gain easier access to capital by understanding their financial statements and the key ratios.

Efforts like these might explain why, according to the Banking Impact Report, 69% of Hispanic small business owners and 77% of non-white small business owners believe it’s important that their bank supports underserved communities. Accordingly, non-white small businesses are significantly more likely to open a new account at a community bank or credit union: 70%, compared to 47% of white small businesses.

This can be a clear differentiator for a community bank: a competitive advantage in a crowded marketplace.

For today’s community banks, economic empowerment isn’t a zero-sum game; it’s a force multiplier. With the right strategies in place, it can be a winning proposition for the communities and markets within your institution’s sphere of influence.

Where Banks Can Find Tech Talent

Even as the labor market cools, the need for tech talent remains particularly acute. The problem for banks is that they compete not just with other banks, credit unions and financial technology companies for data scientists, software engineers and product designers. 

“The reality is, when we start talking about engineers, designers, product individuals, every company on the face of the planet is hiring those types of talents,” says Nathan Meyer, head of innovation strategy at $545 billion Truist Financial Corp. 

That’s why Meyer and several other bankers are turning to the Georgia Fintech Academy, a unique program that trains college students across the University System of Georgia for technology jobs in financial services. Students in 26 institutions such as Georgia State, Georgia Tech and Kennesaw State, totaling 340,638 enrolled as of fall 2021, can work toward a certificate in financial services from a mix of nine undergrad courses and six graduate level courses. They might be majoring in computer science or business and taking those classes as electives. To complete the certification work, they need to finish three classes and complete an internship. The goal of the program is to help students find jobs in financial technology with employers across the nation. 

Normally, Generation Z students don’t gravitate to a career at Truist, BankSouth in Greensboro, Georgia, or Ally Financial, all of which are involved in the program, says Tommy Marshall, executive director of the Georgia Fintech Academy. Nor have they heard of the fintechs that have used the program, such as core providers FIS, Fiserv, or U.S. Bancorp’s payment processor Elavon. “If you say Square or CashApp, they’ll say yes, or Venmo, they’re there,” he says. 

Banks could improve their message to attract college students, says Meyer. “We’ve just started to do a better job around telling the story of banking, and helping students understand why it’s important,” he says. 

And the need is great. Marshall estimates that bigger banks are hiring 800 to 1,000 people from college campuses every year for technology jobs. Meyer says that Charlotte, North Carolina-based Truist needs to hire hundreds of software engineers annually and adds that even the business side of banking needs people who have an understanding of technology, as well as people who can articulate the technology needs to upper management. 

And it’s not just big banks that are hiring. Even community banks are looking for tech talent as they transform digitally. Kim Kirk, the chief operations officer for $2 billion Queensborough National Bank & Trust Co. in Louisville, Georgia, is looking for application program management and business intelligence folks. When she started working at the bank more than six years ago, a lot more employees performed mundane, clerical tasks. The bank’s business intelligence director now focuses on getting a better handle on customer information across the different departments and visualizing that data. “The talent you need is quite a bit different than what you needed maybe even five years ago,” Kirk says. 

This fall, she hopes to work with Fintech Academy students on a way to use predictive analytics to foresee when a customer is going to close an account. “We really need a way to be able to get a 360-degree view of our customers,” she says. 

Meyer, meanwhile, was interested to the program as a way to recruit racially and ethnically diverse prospects to Truist, so the bank’s employee base looks like the communities it serves. Truist has its heaviest branch concentration in the Southeast, following the consolidation of SunTrust Banks and BB&T Corp. in 2019, but it also crawls up the Eastern Seaboard into Washington, D.C., New Jersey and Pennsylvania. Marshall estimates that 71% of the students in the Fintech Academy belong to minority racial or ethnic groups and a third are women, due to the nature of the schools inside the Georgia university system. In its three years of operation, the Georgia Fintech Academy has placed 1,600 students in internships or jobs.

Although Marshall says other universities offer certificates in fintech, they’re mostly associated with graduate degrees or executive-level education, and won’t nearly meet the demand for talent. Outside of Georgia, the Centre for Finance, Technology and Entrepreneurship in London has noncredit courses, and Duke University, The Wharton School at the University of Pennsylvania and New York University all have programs. 

“There’s no other school system in the United States of America doing anything like what we’re doing now,” asserts Marshall.

Bank Director magazine’s third quarter 2022 issue has an additional article for subscribers on what banks are doing to attract and retain technology talent. 

Opportunities — and Questions — Abound With Blockchain

Blockchain technology could add almost $2 trillion in gross domestic product to the global economy — and $407 billion in the U.S. — by the end of the decade, according to a 2020 PwC study. The digital ledger’s potential to build efficiencies, speed and trust isn’t limited to the banking industry, with PwC identifying five broad areas for transformation across various sectors, including improvements to supply chains, identity management to counteract fraud and faster, more efficient payments.

An increasing number of banks, large and small, are exploring opportunities for their institutions in a blockchain-based world. I focused on how two banks are using blockchain to build a payments niche in the third quarter 2022 issue of Bank Director magazine. New York-based Signature Bank launched a blockchain-based payments platform, Signet, in 2019. The $116 billion bank collaborated with Tassat Group on the initiative. Now, Tassat works with banks such as $19 billion Customers Bancorp, in Reading, Pennsylvania, to deliver payments services to commercial clients via a private blockchain. 

Another group of banks has taken a more collaborative approach, launching the USDF Consortium in January 2022. The five founding banks include $7 billion NBH Bank, the Greenwood Village, Colorado-based subsidiary of National Bank Holdings Corp., and $57 billion Synovus Financial Corp. in Columbus, Georgia, along with the blockchain technology company Figure Technologies and the investment fund JAM FINTOP. The group wants to make the industry more competitive with an interoperable, bank-minted stablecoin, a digital currency that’s pegged, one-to-one, to fiat currency or another physical asset.

Rob Morgan, who recently took the helm at USDF after leading innovation and strategy at the American Bankers Association, says that the banks are working together to answer key, competitive questions. These include philosophical ones, such as: “What is a bank’s role in a digital, tokenized economy?” They’re also answering questions specific to blockchain, including how can banks use a technology that has fueled the rise of cryptocurrency and apply it to traditional financial products? 

Creating a more efficient, faster payments system looks like the logical first step for these organizations, but other use cases could run the gamut from building better loan and identity verification processes to conform with know your customer and anti-money laundering rules. 

Given the nascency of blockchain applications, bank regulators are still getting up to speed. “From a legal and regulatory standpoint, [we are] working with the regulators to get them comfortable with this technology,” says Morgan. “Broadly, we have seen a changing posture toward cryptocurrencies for the regulatory agencies,” citing communications from the Comptroller of the Currency and the Federal Deposit Insurance Corp. that underscore expectations that banks work with their regulators before engaging in activity related to digital assets, including stablecoins. “We’re working really closely with the regulatory agencies,” says Morgan, to “make sure that they are totally comfortable with what we’re doing before moving forward and making these products live.”

For banks considering blockchain initiatives, Rachael Craven, counsel at Hunton Andrews Kurth, emphasizes the need for robust business continuity and incident response plans, as well as recovery protocols. “As with any emerging technology, operational failures, cyberattacks … should definitely be things that stay top of mind for banks,” she says. And working with a third party doesn’t let a bank off the hook for a compliance snafu. “Banks ultimately own the risks associated with any regulatory or compliance failures,” she says.

One potential murky area tied to blockchain centers around the technology’s immutability: Once the transaction data — or block — is added, it can’t be amended or reversed. Erin Fonté, who co-chairs Hunton’s financial institutions corporate and regulatory practice, sees potential conflicts with consumer protections under Regulation E, which governs electronic transfers of money via debit card, ATM or other means. “There’s nothing in Regulation E that exempts cryptocurrency transactions,” says Fonté. “You cannot forget the applicability of existing regulations to potential crypto or blockchain transactions.” 

Sara Krople, a partner at Crowe LLP, recommends that banks consider their current competitive strengths and strategic goals when discussing potential opportunities and risks with blockchain. Signature Bank started its Signet platform after consulting with its commercial client base; Customers Bancorp was pursuing a competitive moat with its niche serving companies in the digital assets sector. “Make sure it makes sense for you strategically and that you’ve thought through the risks,” Krople says. Many banks will partner with blockchain vendors, as Signature and Customers did. Banks should examine the controls and processes they’ll need, and determine whether they’re comfortable with the risk. 

Krople adds that banks should also identify one or more internal stakeholders who can take ownership for blockchain and bring the organization up to speed on its potential. Before Customers Bancorp launched its Customers Bank Instant Token [CBIT] platform, it formed an employee-level committee that spent months reviewing the associated risks. That resulted in a “best in class BSA review process” that provides speedy onboarding for clients while also ensuring the safety of the bank, according to Chris Smalley, the bank’s managing director of digital banking. 

Legal, risk and compliance processes should meet the needs of the emerging technology, says Krople. Among the questions banks should consider, she says: “Who’s going to monitor it for security? How do you know the transactions are process[ed] the way they’re supposed to? Who’s reading the smart contracts for you? You need somebody to be able to do those things.” 

A bank’s needs will differ by use case, Krople adds. “There’s a huge amount of opportunity, but you need to make sure people have thought through all the steps you need to implement a process.”

Creating a Winning Scenario With Collaborative Banking

The banking industry is at a critical crossroads.

As banks face compounding competition, skyrocketing customer expectations and the pressure to keep up with new technologies, they must determine the best path forward. While some have turned to banking as a service and others to open banking as ways to innovate, both options can cause friction. Banking as a service requires banks to put their charters on the line for their financial technology partners, and open banking pits banks and fintechs against each other in competition for customers’ loans and deposits.

Instead, many are starting to consider a new route, one that benefits all parties involved: banks, fintechs and customers. Collaborative banking allows institutions to connect with customer-facing fintechs in a secure, compliant marketplace. This model allows banks and fintechs to finally join forces, sharing revenue and business opportunities — all for the good of the customer.

Collaborative banking removes the regulatory risk traditionally associated with bank-fintech partnerships. The digital rails connecting banks to the marketplace anonymize and tokenize customer data, so that no personally identifiable information data is shared with fintechs. Banks can offer their customers access to technology they want, without having to go through vendor evaluations, one-to-one fintech integrations and rigorous vendor due diligence.

Consider the time and money it can take for banks to turn on just one fintech today: an average of 6 months to a year and up to $1 million. A collaborative banking framework allows quick, more affordable introduction of unlimited fintech partnerships without the liability and risk, enabling banks to strategically balance their portfolios and grow.

Banks enabling safe, private fintech partnerships will be especially important as consumers increasingly demand more control over their data. There is a need for greater control in financial services, granting consumers stronger authority over which firms can access their data and under which conditions. Plus, delivering access to a wider range of features and functionality empowers consumers and businesses to strengthen their financial wellness. Collaborative banking proactively enhances consumer choice, which ultimately strengthens relationships and creates loyalty.

The model also allows for banks to offer one-to-one personalization at scale. Currently, most institutions do not have an effective way to accurately personalize experiences for each customer they serve. People are simply too nuanced for one app to fit all. With collaborative banking, customers can go into the marketplace and download the niche apps they want. Whether this means apps for the gig economy or for teenagers to safely build credit, each consumer or business can easily download and leverage the new technology that works for them. Banks have an opportunity to sit at the center of customer financial empowerment, providing the trust, support, local presence and technology that meets customers’ specific needs, but without opening up their customers to third-party data monetization.

While many banks continue attempting to figure out how to make inherently flawed models, such as banking as a service and open banking, work, there is another way to future-proof institutions while creating opportunities for both banks and fintechs. Collaborative banking requires a notable shift in thinking, but it offers a win-win-win scenario for banks, fintechs and customers alike. It paves the way for industry growth, stronger partnerships and more control and choice for consumers and businesses.

Insights Report: Technology Tools Enhance Financial Wellness

https://www.bankdirector.com/wp-content/uploads/Insights-FIS-Digital.pdfIn a March 2022 survey, Morning Consult found that just 23% of U.S. adults could handle a major, unexpected expense. At a time when Americans are worried about rising prices for everything from cars to gas to groceries in today’s inflationary environment, lower-income individuals who earn less than $50,000 annually feel this financial anxiety most deeply. Yet, even people in higher income brackets are worried: Only 47% of those earning $100,000 or more believe they could handle such an expense, according to the market research firm.

Financial wellness is often conflated with financial inclusion. These informative tools can play an important role in helping lower-income customers, but everyone needs a trusted advisor to meet their financial goals, whether that’s saving for retirement, eliminating debt or creating an emergency fund.

Americans may be struggling but they trust their banks, according to Morning Consult, which recommends financial institutions acknowledge financial stress, demonstrate empathy and provide “actionable guidance” for their customers.

The rapid digital acceleration occurring in financial services today has changed how banks maintain and build customer relationships, as well as deliver advice. “Banking relationships have become digital relationships,” says Maria Schuld, division executive, Americas Banking Solutions at FIS.

Financial education isn’t new to the industry, and personal financial management tools have been around for years. But technologies like artificial intelligence can help institutions deliver more meaningful insights to their customers. What’s more, younger consumers have a greater need for financial advice; a recent online WalletHub survey of 350 respondents found that young people are three times more likely to seek a complete view of their financial health, compared to consumers aged 60 or more. Being Gen Z’s first bank could lead to larger relationships as their lives change. “Once you establish that relationship early on,” says Schuld, “you have a very strong chance of being able to retain that relationship as their financial needs grow.”

To download the report, sponsored by FIS, click here.

Unlocking Banking as a Service for Business Customers

Banking as a service, or BaaS, has become one of the most important strategic imperatives for chief executives across all industries, including banking, technology, manufacturing and retail.

Retail and business customers want integrated experiences in their daily lives, including seamlessly embedded financial experiences into everyday experiences. Paying for a rideshare from an app, financing home improvements when accepting a contractor quote, funding supplier invoices via an accounting package and offering cash management services to fintechs — these are just some examples of how BaaS enables any business to develop new and exciting propositions to customers, with the relevant financial services embedded into the process. The market for embedded finance is expected to reach $7 trillion by 2030, according to the Next-Gen Commercial Banking Tracker, a PYMNTS and FISPAN collaboration. Banks that act fast and secure priority customer context will experience the greatest upside.

Both banks and potential BaaS distributors, such as technology companies, should be looking for ways to capitalize on BaaS opportunities for small and medium-sized enterprises and businesses (SMEs). According to research from Accenture, 25% of all SME banking revenue is projected to shift to embedded channels by 2025. SME customers are looking for integrated financial experiences within relevant points of context.

SMEs need a more convenient, transparent method to apply for a loan, given that business owners are often discouraged from exploring financing opportunities. In 2021, 35% of SMEs in the United States needed financing but did not apply for a loan according to the 2022 Report on Employer Firms Based on the Small Business Credit Survey. According to the Fed, SMEs shied away from traditional lending due to the difficult application process, long waits for credit decisions, high interest rates and unfavorable repayment terms, and instead used personal funds, cut staff, reduced hours, and downsized operations.

And while there is unmet demand from SMEs, there is also excess supply. Over the last few years, the loan-to-deposit ratio at U.S. banks fell from 80% to 63%, the Federal Reserve wrote in August 2021. Banks need loan growth to drive profits. Embedding financial services for SME lending is not only important for retaining and growing customer relationships, but also critical to growing and diversifying loan portfolios. The time for banks to act is now, given the current inflection point: BaaS for SMEs is projected to see four-times growth compared to retail and corporate BaaS, according to Finastra’s Banking as a Service: Global Outlook 2022 report.

How to Succeed in Banking as a Service for SMEs
There are three key steps that any institution must take to succeed in BaaS: Understand what use cases will deliver the most value to their customers, select monetization models that deliver capabilities and enable profits and be clear on what is required to take a BaaS solution to market, including partnerships that accelerate delivery.

BaaS providers and distributors should focus on the right use case in their market. Banks and technology companies can drive customer value by embedding loan and credit offers on business management platforms. Customers will benefit from the increased convenience, better terms and shorter application times because the digitized process automates data entry. Banks can acquire customers outside their traditional footprint and reduce both operational costs and risks by accessing financial data. And technology companies can gain a competitive advantage by adding new features valued by their customers.

To enable the right use case, both distributors and providers must also select the right partners — those with the best capabilities that drive value to their customers. For example, a recent collaboration between Finastra and Microsoft allows businesses that use Microsoft Dynamics to access financing offers on the platform.

Banks will also want to focus on white labeling front‑to-back customer journeys and securing access to a marketplace. In BaaS, a marketplace model increases competition and benefits for all providers. Providers should focus on sector‑specific products and services, enhancing data and analytics to enable better risk decisions and specialized digital solutions.

But one thing is clear: Going forward, embedded finance will be a significant opportunity for banks that embrace it.