Expect Funding Wars, Tech Troubles in 2023

Back in January 2022, rising interest rates looked increasingly likely but weren’t yet a reality. In Bank Director’s 2022 Risk Survey, bank executives and board members indicated their hopes for a moderate rise in rates, defined as one percentage point, or 100 basis points. Of course, those expectations seem quaint today: In 2022, the Federal Reserve increased the federal funds rate’s target range from 0 to 0.25% in the first quarter to 4.25% to 4.5% in December — a more than 400 basis point increase.

A year ago, anyone looking at recent history would have been challenged to foresee this dramatic increase. And looking ahead to 2023, bankers see a precarious future. “We’ve never seen more uncertainty, on so many fronts, across the entire balance sheet,” says Matt Pieniazek, CEO of Darling Consulting Group. “Let clarity drive your thought process and decision-making, not fear.” 

While we can’t predict the future, we can leverage the recent past to prepare for what’s ahead. Here are three questions that could help boards and leadership teams plan for tomorrow. 

How Will Rising Interest Rates Impact the Bank?
Despite the rapid rise in the federal funds rate, just a handful of banks pay savings rates north of 3%: These include PNC Financial Services Group, which pays 4%; Citizens Financial Group, at 3.75%; and Capital One Financial Corp., at 3.3%. Most still pay the bare minimum to depositors, averaging 0.19% as of Dec. 14, 2022, according to Bankrate.

Pieniazek believes this will change in 2023. “[Banks have] got to accept that they were given a gift [in 2022].” Because of an environment that combined a rapid rise in rates with excess liquidity, banks were able to delay increasing the interest rates paid on deposits.

Funding costs are already beginning to reflect this changing picture, rising from an average 0.16% at the beginning of 2022 to 0.64% in the third quarter, according to the Federal Deposit Insurance Corp. 

“The liquidity narrative is changing,” says Pieniazek. “Our models are projecting that there’s going to be substantial catch-up.” Typically, deposits start to get more competitive after a 300 basis point increase in the federal funds rate, he says. We’re well past that.

That means banks need to understand their depositors. Pieniazek recommends breaking these into three groups: the largest accounts, which tend to be the smallest in number and most sensitive to rate changes; stable, mass market accounts with less than $100,000 in deposits; and account holders between these groups, with roughly $100,000 to $750,000 in deposits. Understand the behaviors of each group, and tailor pricing strategies accordingly. 

Will Banks Feel the Pain on Credit?
“Most banks are cutting their loan growth outlook in half for 2023, versus 2022,” says Pieniazek. Bank executives and boards should have frank discussions around growth and risk appetites, including loan concentrations. “Are we appropriately pricing for risk? And are we letting blind adherence to competition drive our loan pricing as opposed to stepping back and saying, ‘What is a fair, risk-adjusted return for our bank?,’ and level-set[ting] our loan growth outlook relative to that.” 

Steve Williams, president and co-founder of Cornerstone Advisors, sees less weakness in bank balance sheets — credit quality remained pristine in 2022 — and more concern for shadow banks and fintechs that have grown through leveraged, subprime and buy now, pay later loans. If these entities struggle, it could be an opportunity for banks. 

“The relationship manager model, in certain segments, has great runway,” says Williams. But that doesn’t mean that banks can simply ignore the disruption that’s already occurred. “We’ve been telling our clients, ‘Don’t dance in the end zone and be cocky,’ because … these blueprints for the future are still there,” he explains. “If we’re going to fight the funding war, we’ve got to do it in modern terms.” That means continuing to invest in technology to deliver better digital services. 

How Will the Tech Fallout Impact Banks?
It’s been a rough year for the tech sector. Valuations declined in 2022, according to the research firm CB Insights. Talented employees lost their jobs as tech firms shifted from a growth mindset to a focus on profitability. 

“Tech has never been cheaper than it is right now,” says Alex Johnson, creator of the Fintech Takes newsletter. “There [are] ample opportunities to snap up tech companies in a way that there just has never been.” 

Many banks aren’t interested in investing in, much less acquiring, a tech company, according to the bank executives and board members responding to Bank Director’s 2023 Bank M&A Survey. Just 15% participated in a fintech-focused venture capital fund in 2021-22; 9% directly invested in a fintech. Even fewer (1%) acquired a technology company during that time, though 16% said it’s a possibility for 2023. 

Snatching up laid-off talent could prove more viable for banks: 39% planned to add technology staff in 2022, according to Bank Director’s 2022 Compensation Survey. Many tech workers, scarred by last year’s layoffs, will seek stability. Over the last 10 to 15 years, “tech companies were the most valued place for employees to go; they were paying the highest salaries,” says Johnson. “It’s a huge, almost generational opportunity for banks, when they’re thinking about what their tech strategy is going to be.”

But what about vendors? The number of startups working with banks proliferated over the past few years. Amid this volatility, Johnson advises that banks sort out the “tourists” — opportunistic companies working with banks to demonstrate another avenue for growth — from providers that prioritize working with financial institutions. In today’s tougher fundraising environment, “if you’re a fintech company, you’re basically pulling back from all the things that you don’t think are core to what you do.” 

2023 could make crystal clear which tech companies are serious about working with banks.

Evaluating Digital Banking In 2023

Platforms that offer future flexibility, as opposed to products with a fixed shelf life, should be part of any bank’s digital transformation strategy for 2023, says Stephen Bohanon, co-founder and chief strategy and product officer at Alkami Technology. Chatbots and artificial intelligence can deflect many simple, time-consuming customer queries — saving time and costs — but digital channels can go further to drive revenue for the organization. To do that, bankers need to invest in data-based marketing and account opening capabilities.

Topics include:

  • Platforms Vs. Products
  • Sales Via Digital Channels
  • Advantages of Live Service

Renew, Recharge and Reassess Customer Service

As interest rates rise and the retail housing market cools down, lenders are bracing for an uncertain environment.

While banks cannot control the market, they can control how they respond and future-proof their business. Successful navigation in these unchartered waters requires institutions to reassess traditional product, service and industry boundaries in order to capture and create new sources of value. Digital transformation and innovation will remain an important strategic priority in 2023 and beyond — however, it is now equally important for institutions to provide lasting value to customers through personalized, highly tailored services.

The slowing housing market creates a unique opportunity for financial institutions to revisit and refresh these fundamentals, including exploring how they can deliver a more personalized experience. As banks remain focused on their roles as financial intermediaries, this time of challenge can also be a time of opportunity to strengthen existing relationships and expand loyalty with customers. Lenders can also take advantage of a slower market by implementing new automation strategies to further streamline their mortgage loan process. Successful institutions will recognize that this slower pace enables them to recharge, rethink and renew their focus on providing customers a superior experience.

Accelerating personalization and building loyalty is critical in today’s increasingly competitive financial services market. The answer isn’t just faster, more automated technology; financial institutions must adapt a hyper-personalized approach. According to a recent NCR study, 60% of U.S. banking consumers want their primary financial institution to provide personalized financial advice. Many Americans are facing an uncertain financial future and don’t believe their financial institution is providing the necessary support.

To successfully deliver that personalized experience, institutions must leverage data to provide more relevant, timely support. That means more effectively gathering and analyzing data to yield insights that ultimately help the bank connect with the customer. Banks should have the most accurate and complete picture of their customer’s economic health, which allows them to make meaningful suggestions and provide impactful advice. Consumers can then look to their data enabled and informed banker as a guiding force helping them build a more stable financial future.

Anticipating customer needs and catering to them with personalized offerings allows banks to generate increased revenue, all the while meeting customer expectations around personalized experiences. According to the 2019 Accenture Global Financial Services Consumer Study, one in two consumers wants personalized banking advice based on their circumstances. They want an analysis of their spending habits and advice on handling money. Additionally, 48% of respondents indicated that personalized banking data, such as spending, would help them change how they used their money.

A 2021 Capco research report found that 72% of customers say personalization is highly important in today’s financial services landscape. This number increases for younger generations: 79% of Gen Z customers say it is critical their financial institutions provide more personalized offers and/or information to help them reach their financial goals.

Customers provide banks with a lot of information about themselves across their interactions. Banks can use this data carefully, employing technology like artificial intelligence to anticipate customer needs. Anticipating and then proactively acting on those needs is crucial to creating an effective, personalized experience. Banks can also position products with sensitivity, effectively demonstrate their understanding of their customer’s unique needs or suggest curated products that demonstrate a knowledge of that customer’s specific financial needs and ultimately, build lasting loyalty.

Banks should also consider the way they approach economic distress in a manner that doesn’t weaken customers’ future foundation. Institutions should examine their interactions with both the rental market and the single-family ownership market. Banks need to think in terms of households, not consumers. Consider the household and heads of households instead of thinking of them as consumers.

There is an opportunity in this moment for institutions to create more personalized offers that are relevant to their customers. To succeed, banks must take operational steps to authentically personalize offerings to their customers, using technology in a way that’s fair and compliant.

Nailing the Customer Experience in a Digital Upgrade

To get your bank’s people ready for a technology upgrade, you need to do two things: educate front line staff so they become ambassadors for the new tech and help customers learn how to use it. Sounds easy, but in many cases, financial institutions don’t have the right tools to nail their digital customer experience through a technology upgrade.

Start with developing your training and development assets for staff training into the bank’s technology project plan and each rollout. Your staff needs to time to become familiar with the new technology; launching training two weeks prior to go-live won’t set them up to successfully help customers access the new services. Project managers and executive sponsors should develop and test a digital banking curriculum in advance of rollout and begin training front line staff on how to use the tech before launching it to the public.

The seemingly logical approach is to ask the bank’s learning and development group to create some new tech training in the learning management system (LMS). But that often doesn’t work. Traditional LMSes often aren’t tooled for digital experiences; static learning content struggles to drive digital fluency among employees. And tedious training approaches or topics can foster an aversion to LMS training among staff. Banks investing in their digital products and services may want to consider a modern solution that’s tooled for teaching tech.

Game-based learning that uses built-in incentives and an employee’s inherent motivation, as well as interactive role-plays and visually appealing learning modules, are often the most effective way to help today’s employees retain essential information. These innovative elements can make the difference in a bank’s training system and subsequent customer interactions.

And as your staff tries out the tech, either in-house or after launch, be sure to explicitly ask and encourage for their feedback on the digital experience. What can be improved? Which features are hard to understand or non-intuitive? What additional features and functions are desired? Where do they stumble when using the tech?

Endicott, New York-based Visions Federal Credit Union created a digital advisory board made up of a dozen rank-and-file employees who meet monthly to discuss consumer behavior trends, review prospective vendor partnerships and provide feedback on the institution’s use of consumer technology.

“They’re not necessarily managers, VPs or SVPs,” says Tom Novak, vice president and chief digital officer at Visions Federal Credit Union. “They’re day-to-day employees that are in the know about what’s happening in technology, social media and typical consumer lifestyles. They understand why people are on TikTok more than Facebook, or why they use Venmo instead of traditional PayPal mechanisms.”

Your team will also need the right tools to support your customers after their training. Consider providing them with access to technology walk-throughs and simulators, so they can easily find quick tips and features to help customers calling in or visiting a branch. Ensure your learning solution provides staff with support in the flow of work, so they can help customers on demand.

Finally, allow your customers to “test drive” the tech before they commit. Change is hard on your customers too. Your institution needs to be prepared to coach them along the journey — whether that’s a new digitally based product or service or an upgrade from a prior solution that they have grown comfortable with over time. Give them a chance to try it out, and provide them with a safety net through easy-to-use, shareable technology walkthroughs and simulators to make learning easy.

While financial institutions of all sizes are making significant investments to transform their technology to meet the ever-changing needs of their customers, the biggest hurdle often comes in right at the end. To achieve success in your technology upgrade, your bank will need to leverage the power of your people through a well-considered deployment strategy that places intuitive learning and technology support squarely at its center. New, innovative learning and development tools make these processes — and ultimately, the digital transformation — less intimidating, engaging, fun and flexible.

Creating Breakthrough Value: Crafting the Right Technology Strategy

Banking is becoming more invisible, more embedded and less conscious to consumers. Finding ways to capitalize on this banking shift will continue to be one of the industry’s defining evolutionary challenges.

And it all begins with crafting the right technology strategy.

In this episode of Reinventing Banking, a special podcast series brought to you by Bank Director and Microsoft Corp., we talk to Nikhil Lele, Global and Americas Consumer Banking Leader from EY. He brings his expertise as a former core technologist to expand on how banks can digitally transform by using the correct data.

Lele also touches on three fundamental pillars that banks can build on to drive digital adoption: growth and strategy ambition, incentivized leadership and talent, and having the right capabilities.

The business model of banking is changing. Listen here to find out how to stay proactive in that change.

This episode, and all past episodes of Reinventing Banking, are available on Bank Director.com, Spotify and Apple Music.

Why Banks Should Offer Real-Time Payments for Business Customers

Faster payments are the next phase of the digital revolution in banking. The race toward real time is well underway — more than 200 U.S. financial institutions already send and receive real-time payments. Those that cannot do so must start soon or they will be left behind.

The rise of mobile and digital commerce has created a need for speed and certainty of payment. Bank customers want to be able to pay whoever they want, whenever they want, using a device of their own choosing. But in practice, there are many flavors of fast. It’s important to clarify exactly what we mean by real-time payments and faster payments.

Real-time payments are payments that are initiated and settled almost instantly. A real-time payments rail is a digital infrastructure that facilitates real-time payments 24/7. A crucial characteristic of a real-time payments rail is that it is always available, bringing payments into line with a digital world that never sleeps. In the U.S., there are currently two real-time solutions:

  • The Clearing House has offered its real-time payments platform (RTP) to all federally insured U.S. depository institutions since 2017.
  • The Federal Reserve is currently developing FedNow, a new service that will enable individuals and businesses to send instant payments, due for launch in 2023.

Both real-time solutions are “open loop,” which means that the payment is connected to a bank account rather than a prepaid balance. This is important: It creates the potential for payments to reach every bank account in the U.S. and beyond.

Faster payments, such as Nacha’s Same Day ACH, are payments that post and settle faster than traditional payment rails but not instantly. For example, both Mastercard and Visa offer push payment solutions that message transactions in seconds but do not settle as quickly.

In practice, all real-time payments are faster payments, but faster payments are not always real time.

Although many payments, such as mortgage installments, are non-urgent, the transformational potential of real-time for banks and their business customers is enormous. Real-time technology marks the biggest advance in electronic payments in 40 years and heralds a new era where payments can be an opportunity for banks to add real business value.

Connectivity. Banks can offer business customers access to a growing real-time network that offers uninterrupted transaction processing. But real-time payment also enables two-way messaging, including request for payment, payment confirmation, credit transfer and remittance advice. Each of these features removes friction and can enhance the relationship between companies and their customers.

Cash flow. Businesses can adopt “just in time” cash management and pay creditors exactly on time. In the U.S., 82% of small businesses that fail do so because of cash flow problems; real-time payments signals a new era of easier cash management. A real-time picture of its cash position allows a small business can be sure it can meet its short-term commitments, minimize borrowing and optimize its use of surplus cash.

Certainty. Real time account-to-account settlement allows business customers to have payment certainty and reduces payment failures, streamlining business processes to reduce costs and increase efficiency.

Innovation. With almost 60 million Americans participating in the gig economy and up to 90% of Americans considering freelance or consulting work, innovation allows people to be paid immediately for the work they’ve done. Real-time payment makes “day pay” a practical reality.

Customer expectations. The tech giants have redefined the customer experience. Real-time payments present a unique opportunity for banks to catch up with a fintech approach to business banking by coupling it with simplified account opening, accelerated credit decisioning and synced accounting packages.

Real-time payment processing is a pivotal innovation in banking that should be included in every bank’s digitalization strategy. But there’s a lot to consider. A payment never happens in isolation; it’s always part of a larger business workflow. Many mission-critical bank systems are batch based, so there will always be integration issues and challenges. Moreover, there are peripheral systems, such as fraud detection, that banks must choreograph with payment movements. And as real-time payments build momentum, banks should be prepared to manage burgeoning payment volumes.

Getting started in real-time payments is never easy, but it’s a lot easier with expert help. Banks should work with their payments partners and build a road map to success. Managed services can offer a fast route to industry best practices and empower a bank to start with a specific pain point — receivables, for example — and progress from there. But every bank must start soon, for the race towards real time is accelerating.

4 Keys Banks Need to Unlock Value From Artificial Intelligence

Banks of all sizes are tuning up their technology to better compete for customer loyalty by focusing on areas involving consumer interactions. But bank leaders need to understand that artificial intelligence, or AI, alone can’t revolutionize the customer experience.

In order for AI investments to elicit instant, human-like understanding and communication, banks must combine AI technology with:

  • Access to quality data.
  • Customer experience solutions that support responsiveness, natural interaction and context retention.
  • Security for enrollment, authentication and fraud detection — indispensable in the context of retail banking.

Data
Quality and Access
Data is the fuel driving AI-based experiences. That means the quality of the available data about the user for a specific use case and the ability to access this data in a real-time, secure fashion are mission-critical aspects of an AI investment.

Unsurprisingly, increasing the quality of data and providing seamless, secure access to this data has been a challenge that banks have grappled with for years.

But institutions must overcome these data utilization hurdles in order to offer an AI-based experience that is better than mediocre. The best outcome? Users will no longer suffer through disjointed experiences or delayed satisfaction caused by siloed data, multiple data connection hops and antiquated back ends that haven’t been modernized to today’s standard.

Collection and Understanding
Big data — the collection of very large data sets that can be analyzed computationally to reveal patterns, trends and associations — goes hand-in-hand with AI. When it comes to consumer banking, an AI solution for banks should store all customer interaction information, from words used to communicate with the bot to actions taken by the user, so it can be analyzed and applied in future interactions. To do this, banks need to adopt AI technology that integrates a learning loop that’s always running in the background.

As data accumulates, AI-powered bots should get smarter over time. Behavioral, transaction and preference information enables banks to create personalized experiences that elevates customer experience to the next level. J.D. Power’s 2022 U.S. Retail Banking Satisfaction Study found that 78% of respondents would continue using their bank if they received personalized support, but just 44% of banks are actually delivering it.

Without the right data, there’s no intelligence to inform interactions.

Customer Experience
If someone asked, “What’s your name?” and it took you 8 seconds to respond, the conversation would seem unnatural and disjointed. Similarly, AI technology requires real-time responsiveness to live up to its human-like image. Additionally, bank customers expect to be able to seamlessly transition between interaction channels without having to rehash their issue each time they get transferred, change interaction channels or follow up. Banks can only achieve this omnichannel customer experience that incorporates customer interaction information across channels with customer experience technology that integrates AI.

Consumers now rank omnichannel consistency as the most important dimension of customer experience, according to a 2021 Harris poll, up from No. 2 in 2019. In a Redpoint Global research study, 88% of respondents said that a bank should have seamless, relevant and timely communications across all channels; less than half (45%) reported that their bank effectively achieved this objective. An omnichannel customer experience is foundational for AI.

Security
As powerful as artificial intelligence can be as a competitive advantage in banking, lack of strong security measures is a nonstarter. In the latest The Economist Intelligence Unit Survey, bankers identified privacy and security concerns as the most prominent barrier to adopting and incorporating AI technologies in their organization. Thankfully, ironclad AI is within reach.

While AI capability is great, its usability is limited if its security is not up to par. An AI bot can go far beyond answering your customers’ basic questions if bank transactions are authenticated and secure; it can perform tasks such as retrieving account balances, listing and searching transactions, making payments, transferring funds and more. Imagine the impact that a friendly and reliable virtual teller, available 24/7, could have on your institution.

Four in five senior banking executives agree that unlocking value from artificial intelligence will distinguish outperformers from underperformers. To access its value, a bank’s customer-facing system must be supported by four pillars: AI understanding, quality data, omnichannel customer experience technology and security.

When technology budgets are tight, bank leaders must invest wisely; not all AI solutions are created equal. Chasing the new shiny thing can waste dollars if bank decision makers don’t have a handle on the scope of what their institution needs. Knowing which pieces of the puzzle will complete the picture is a competitive differentiator. Now, your bank can unlock the value of AI and win.

2023 Bank M&A Survey Results: Can Buyers and Sellers Come to Terms?

Year after year, Bank Director’s annual M&A surveys find a wide disparity between the executives and board members who want to acquire a bank and those willing to sell one. That divide appears to have widened in 2022, with the number of announced deals dropping to 130 as of Oct. 12, according to S&P Global Market Intelligence. That contrasts sharply with 206 transactions announced in 2021 and an average of roughly 258 annually in the five years before the onset of the pandemic in 2020.

Prospective buyers, it seems, are having a tough time making the M&A math work these days. And prospective sellers express a preference for continued independence if they can’t garner the price they feel their owners deserve in a deal.

Bank Director’s 2023 Bank M&A Survey, sponsored by Crowe LLP, finds that acquisitions are still part of the long-term strategy for most institutions, with responding directors and senior executives continuing to point to scale and geographic expansion as the primary drivers for M&A. Of these prospective buyers, 39% believe their bank is likely to acquire another financial institution by the end of 2023, down from 48% in last year’s survey who believed they could make a deal by the end of 2022.

“Our stock valuation makes us a very competitive buyer; however, you can only buy what is for sale,” writes the independent chair of a publicly-traded, Northeastern bank. “With the current regulatory environment and risks related to rising interest rates and recession, we believe more banks without scale will decide to sell but the old adage still applies: ‘banks are sold, not bought.’”

Less than half of respondents to the survey, which was conducted in September, say their board and management team would be open to selling the bank over the next five years. Many point to being closely held, or think that their shareholders and communities would be better served if the bank continues as an independent entity. “We obviously would exercise our fiduciary responsibilities to our shareholders, but we feel strongly about remaining a locally owned and managed community bank,” writes the CEO of a small private bank below $500 million in assets.

And there’s a significant mismatch on price that prohibits deals from getting done. Forty-three percent of prospective buyers indicate they’d pay 1.5 times tangible book value for a target meeting their acquisition strategy; 22% would pay more. Of respondents indicating they’d be open to selling their institution, 70% would seek a price above that number.

Losses in bank security portfolios during the second and third quarters have affected that divide, as sellers don’t want to take a lower price for a temporary loss. But the fact remains that buyers paid a median 1.55 times tangible book in 2022, based on S&P data through Oct. 12, and a median 1.53 times book in 2021.

Key Findings

Focus On Deposits
Reflecting the rising rate environment, 58% of prospective acquirers point to an attractive deposit base as a top target attribute, up significantly from 36% last year. Acquirers also value a complementary culture (57%), locations in growing markets (51%), efficiency gains (51%), talented lenders and lending teams (46%), and demonstrated loan growth (44%). Suitable targets appear tough to find for prospective acquirers: Just one-third indicate that there are a sufficient number of targets to drive their growth strategy.

Why Sell?
Of respondents open to selling their institution, 42% point to an inability to provide a competitive return to shareholders as a factor that could drive a sale in the next five years. Thirty-eight percent cite CEO and senior management succession.

Retaining Talent
When asked about integrating an acquisition, respondents point to concerns about people. Eighty-one percent worry about effectively integrating two cultures, and 68% express concerns about retaining key staff. Technology integration is also a key concern for prospective buyers. Worries about talent become even more apparent when respondents are asked about acquiring staff as a result of in-market consolidation: 47% say their bank actively recruits talent from merged organizations, and another 39% are open to acquiring dissatisfied employees in the wake of a deal.

Economic Anxiety
Two-thirds believe the U.S. is in a recession, but just 30% believe their local markets are experiencing a downturn. Looking ahead to 2023, bankers overall have a pessimistic outlook for the country’s prospects, with 59% expecting a recessionary environment.

Technology Deals
Interest in investing in or acquiring fintechs remains low compared to past surveys. Just 15% say their bank indirectly invested in these companies through one or more venture capital funds in 2021-22. Fewer (1%) acquired a technology company during that time, while 16% believe they could acquire a technology firm by the end of 2023. Eighty-one percent of those banks investing in tech say they want to gain a better understanding of the space; less than half point to financial returns, specific technology improvements or the addition of new revenue streams. Just one-third of these investors believe their investment has achieved its overall goals; 47% are unsure.

Capital To Fuel Growth
Most prospective buyers (85%) feel confident that their bank has adequate access to capital to drive its growth. However, one-third of potential public acquirers believe the valuation of their stock would not be attractive enough to acquire another institution.

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 and other relevant attributes. If you want to find out how your bank can gain access to this exclusive report, contact bankservices@bankdirector.com.

Leveraging Innovations to Double Down Where Fintechs Can’t Compete

For years, financial technology companies, or fintechs, have largely threatened the domain of big banks. But for community banks — perhaps for the first time — it’s getting personal. As some fintechs enter the lending domain, traditional financial institutions of all sizes can expect to feel the competitive impact of fintechs in new ways they cannot afford to ignore.

The good news is that fintechs can’t replicate the things that make local community banks special and enduring: the relational and personal interactions and variables that build confidence, trust and loyalty among customers. What’s even better is that local financial institutions can replicate some of the fintechs playbook — and that’s where the magic happens.

It’s likely you, the board and bank management understand the threat of fintech. Your bank lives it every day; it’s probably a key topic of conversation among the executive team. But what might be less clear is what to do about it. As your institution navigates the changing landscape of the banking industry, there are a few topics to consider in creating your bank’s game plan:

  • Threat or opportunity? Fintechs give consumers a number of desirable and attractive options and features in easy-to-navigate ways. Your bank can view this as a threat — or you can level up and find a way to do it better. Your bank should start by identifying its key differentiators and then elevating and leveraging them to increase interest, engagement and drive growth.
  • It’s time for a culture shift. Relationships are not built through transactions. Banks must move from transactional to consultative by investing time, talent and resources into the relational aspects of banking that are best done in-person. They also need to find ways to meet the transactional needs of consumers in low friction, efficient ways.
  • It’s not about you … yet. Step outside of the services your bank directly provides. Think of your institution instead as a connector, a resource and trusted advisor for current and prospective consumers. If your bank doesn’t provide a certain service, have a go-to referral list. That prospect will continue to come back to you for guidance and counsel and one day soon, it will be for the service you provide.
  • What’s in your toolbox? What is the highest and best use of your team’s time? What are your team members currently spending time on that could be accomplished more efficiently through an investment in new, different or even fintech-driven tools? By leveraging technology to streamline operations, your bank can benefit from efficiencies that create space and time for staff to focus on relationship-building beyond the transaction.
  • Stop guessing. You could guess, but wouldn’t you rather know? Banks have access to an incredible amount of data. Right now, many financial institutions are sitting on a treasure trove of data that, when activated appropriately, can help target and maximize growth efforts. Unlocking the power of this data is key to your financial institution’s growth and evolution; data drives action, offering valuable insight into consumer behaviors, preferences and needs.

Your bank can adopt a view that fintechs are the enemy. Or it can recognize that fintechs’ growth stems from an unmet consumer need — and consider what it means for your bank and its products and services. The key is doubling down on the who, what and why that is unique to your brand identity, and capitalizing on the opportunity to highlight and celebrate what makes your bank stand out, while simultaneously evolving how your institution determines and delivers against your consumers’ needs.

Giving Customers Choice, Access With Investments

It’s time for community financial institutions to significantly upgrade their investment resources to service their clients. Retail investors want to be more educated about investing opportunities and have greater access to investment tools; in response, investment-as-a-service companies are building platforms so banks can give their clients more of what they want.

One problem with financial and investment innovation today is that there is either too much focus on gimmicks or not enough focus on innovation. Crypto-only investment companies indiscriminately pitch every token as the latest and greatest get-rich-quick scheme. Gamified investment apps promote risky options trades to retail investors, turning investing into a lottery or casino and distracting users from what investing should be: a powerful tool to maintain, protect and build wealth. Further, legacy investment institutions often make the bulk of their revenue from customers who are already wealthy via older products, with little incentive to experiment with creative new offerings.

In this unhappy mix, it is investors with the most to gain from a long-term investing strategy — younger less affluent or not yet rich investors — who lose the most. Unable to access wealth management and investing services from their trusted financial institution, they seek out third-party investment apps that don’t prioritize their long-term success and happy retirement. For community financial institutions, this interrupts the chain of familial wealth transfer and risks their next generation of customers.

Investors desire a unified platform that offers access to a growing list of investments, ranging from physical metals to AI-driven investment models to crypto-assets to collectibles. A self-directed platform is key: Investors should be given a choice to pursue the investment strategy they feel fits best for their unique investment interests and risk profile. The platform should include all the tools they need to effortlessly pursue the “Get rich slowly” strategy: passive investing and dollar-cost averaging into a low-cost, highly diversified portfolio.

Cloud computing innovations and numerous rounds of fintech venture capital have made it possible for companies to build curated investment platforms that traditional banks can easily add and implement. Investment tools driven by application program interfaces, or APIs, allow financial services to embrace change in collaborative ways that don’t conflict with existing business, yet still appeal to the ever-changing preferences of investors.

Investing is not one-size-fits-all. Wine fans may want to invest in a portfolio of wine assets to hold or eventually redeem. Investors who collected baseball cards as a kid may now have the capital to buy collectibles with significance to them as culturally relevant assets. Individuals also may want to invest in thematic categories, like semiconductors — the foundation for all computing, from electric vehicles to computers to smartphones. These investments are not optimal for everyone, but they don’t have to be for everyone. What matters most is access.

Too many banking platforms do not take full advantage of the full range of investment tools available in the marketplace, even though their clients are looking for these. Lack of access leads to painful experiences for the average investor who wants to be both intelligent with their money and allowed to experiment and explore the ever-changing world of digitally available investment categories. Give customers a choice to pursue wealth-building strategies based on their unique insights and instincts, and made available through their existing bank.