Digital Banking: Being Best in Class and Driving Profit

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Forward-thinking financial institutions have been focused on digital transformation to compete with megabanks and fintechs. They’re funding development to actively shaping user expectations for what a digital banking experience can offer. By 2028, the global digital banking market size is estimated to surpass $10.3 trillion.

Yet, many banks without deep pockets or partners and limited technology resources are relying on their core technology provider for a turnkey platform — a “bank-in-a-box” that includes bundled services like payments, loan origination and digital banking. The biggest threat remains for those institutions that decide to maintain the status quo with a less-than-impressive digital banking platform or ineffective home-brewed solution.

Consumers expect a seamless digital experience to help them manage their finances and achieve their financial goals. A recent study found that consumers’ trust in digital banking is shifting away from their preferred financial institution. If account holders aren’t convinced that their preferred bank provides the best digital security and privacy, reliability, feature breadth, and ease of use, they’re willing to leave. It’s clear that digital banking can make or break a bank’s future.

What is the ideal digital banking experience that account holders want? Banks should keep these best-in-class components in mind as they search for the right partners and technology for their digital banking transformation.

  1. Data-driven insights. Bank executives must find ways to execute on internal transaction data to deepen user relationships and build profitability and institutional loyalty.
  2. Seamless user experience. Now more than ever, it’s important that banks understand what attractive features will improve digital banking experiences for their users.
  3. Continuous software delivery. Best practices for continuous software delivery is to find a partner offering a single code source, rather than multiple.
  4. Investments in API and SDKs. Vendors that can seamlessly integrate application programming interfaces, or APIs, into digital banking help banks leverage the latest industry leading technology and maintain a competitive advantage.
  5. Cloud-forward thinking. Banks can leverage the cloud to enhance features, security and user experiences while improving uptime, performance and quality.
  6. Modern security strategies. When financial institutions and digital banking providers band together and treat cybersecurity as a shared responsibility, security issues can pose less of a threat.

Financial institutions may need to consider replacing legacy technologies and embracing artificial intelligence tools. This means taking advantage of transaction data flowing through the core to uncover important insights about account holders’ needs based on their behaviors and spending patterns, and using it to optimize the digital experience. This kind of thinking results in transforming digital banking — moving from a cost center into a revenue center, all rooted in data.

In the past, marketing campaigns focused on products that just needed to be sold. They were delivered from the top down, funneling to all users regardless of their personal needs. That strategy changed when big data, artificial intelligence and machine learning gave marketers the ability to target tailored messages to the ideal recipient. Aligning data insights and marketing automation means banks can deliver experiences that are compelling, timely and relevant to account holders.

Pairing insights and marketing automation with a digital banking platform allows banks to target their account holders with personalized engagements and cross-sell marketing offers that appear within the banking platform and other digital channels. Banks can generate a 70% return on initiatives targeting existing customers, versus 10% when targeting new customers, according to PwC. “In a time where every bank is focused on revenue growth in a constrained and competitive environment, making smart choices with limited resources can provide a fast track to higher-margin growth,” PwC states.

Banks can use data to drive revenue through the digital banking channel through a number of real-world, practical applications, including:

  • Onboarding programs.
  • Self-service account opening.
  • Product cross-sell and upsell.
  • Competitive takeaway.
  • Communications and servicing opportunities.
  • Product utilization.
  • Transitioning retail accounts into business accounts.

Digital banking is mission critical to banks. Catalyzing this platform with data insights and marketing automation creates an engaging channel for deeper customer relations, ultimately transforming the digital banking investment into a profit center.

Nailing the Customer Experience in a Digital Upgrade

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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 a Winning Scenario With Collaborative Banking

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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

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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.

What Does a Tech-Forward Bank Look Like?

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You wouldn’t think Jill Castilla would have trouble getting a bank loan. After all, she’s the CEO of Citizens Bank of Edmond, a $354 million institution in Edmond, Oklahoma. But as a veteran of the U.S. Army married to retired lieutenant colonel Marcus Castilla, she figured they would qualify to get a VA home loan from a bank other than Citizens, which doesn’t offer VA loans.

After 60 days stretched to more than 90 days, the big bank still hadn’t said yes or no, and the seller was getting increasingly anxious. To get the house they wanted, the couple switched gears and got a loan from Citizens instead.

After abandoning the attempt to get a VA loan, Castilla vowed to help other veterans. Her bank has partnered with several technology companies, including Jack Henry Banking, Teslar Software and ICE Mortgage Technology to start a lending platform on a national basis called Roger.

Bank of Edmond hit on a problem the market hadn’t solved: How to make the process of getting a VA loan quicker and easier, especially in a hot real estate market where veterans are more likely to lose bids if they can’t be competitive with other buyers. As Managing Director Sam Kilmer of Cornerstone Advisors put it at Bank Director’s FinXTech Experience conference recently, borrowing from Netflix co-founder Marc Randolph, “the no. 1 trait of an innovator is recognizing what causes other people pain.” Many banks like Castilla’s are trying to solve customer problems and remake themselves with the help of technology, particularly from more nimble financial technology, or “fintech” partners.

In fact, investors already view banks differently based on their approaches to technology, said William “Wally” Wallace IV, a managing director and equity analyst at Raymond James Financial, who spoke at the conference. Wallace categorized banks in three groups: the legacy banks, the growth banks and the tech-enabled banks.

The legacy banks aren’t growing and trade close to book value or 1.5 times book, Wallace said. The growth banks emphasize relationships and are technologically competent. They trade at 1.5 to 2.5 times book. But the tech-enabled banks use technology offensively, rather than defensively. Tech-enabled banks look to create opportunities through technology. Their stocks command a median tangible to book value of 2.5 times. They have more volatile stock prices but they have outperformed other indexes since 2020, with an average return of 104%, he said. Wallace predicts such banks will out-earn other banks, even growth banks, in the years ahead. He estimates their earnings per share will enjoy average compound annual growth rates of about 24% over a five-year period starting next year, compared to 7% for small-cap banks on average.

Take the example of banking as a service, where a bank provides financial services on the back end for a fintech or another company that serves the customer directly. Wallace said those banks have a fixed cost in building up their risk management capabilities. But once they do that, growth is strong and expenses don’t rise at the same rate as deposits or revenue, generating positive operating leverage.

But, as banks try to remake themselves in more entrepreneurial and tech-forward ways, they’re still not tech companies. Not really. Technology companies can afford to chase rabbits to find a solution that may or may not take off. Banks can’t, said Wallace. “You have to be thoughtful about how you approach it,” he added. But, he suggested that tech-enabled banks that invest in risk management will have large payoffs later. “If you guys prove you can manage the risks, and not blow up the bank, investors will start to pay for that growth,” he said.

Customers Bancorp is positioning itself as one of those tech-forward banks but it’s already seeing results. The West Reading, Pennsylvania-based bank reported a core return on common equity of 24% and a return on average assets of 1.63% in the first quarter of 2022.

Jennifer Frost, executive vice president and chief administrative officer at $19.2 billion Customers Bank, spoke at the conference. “We had some pretty sophisticated platforms, but we didn’t have a way to unlock the power with the people who knew how to use them,” she said. Since the Paycheck Protection Program proved the bank could pivot to providing digital loans quickly, the bank began ramping up its capabilities in small business and commercial lending. Instead of limiting itself to buying off-the-shelf platforms from technology providers, its strategy is to carefully pick configurable programs and then hire one or two developers who can make those programs a success.

“Take what you’ve learned here and start a strategy,” she warned the crowd of some 300 bankers and fintech company representatives at the conference. “If you’re not starting now, it’s going to be a dangerous season.”

Use Cases, Best Practices For Working With Fintechs

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Bank leadership teams often come under pressure to quickly establish new fintech relationships in response to current market and competitive trends.

The rewards of these increasingly popular collaborations can be substantial, but so can the associated risks. To balance these risks and rewards, bank boards and senior executives should understand the typical use-case scenarios that make such collaborations appealing, as well as the critical success factors that make them work.

Like any partnership, a successful bank-fintech collaboration begins with recognizing that each partner has something the other needs. For fintechs, that “something” is generally access to payment rails and the broader financial system — and in some cases, direct funding and access to a bank’s customer base. For banks, such partnerships can make it possible to implement advanced technological capabilities that would be impractical or cost-prohibitive to develop internally.

At a high level, bank-fintech partnerships generally fall into two broad categories:

1. Customer-facing collaborations. Among the more common use cases in this category are new digital interfaces, such as banking-as-a-service platforms and targeted online offerings such as deposit services, lending or credit products, and personal and commercial financial management tools.

In some collaborations, banks install software developed by fintech to automate or otherwise enhance their interactions with customers. In others, banks allow fintech partners to interact directly with bank customers using their own brand to provide specialized services such as payment processing or peer-to-peer transactions. In all such relationships, banks must be alert to the heightened third-party risks — including reputational risk — that result when a fintech partner is perceived as an extension of the bank. The bank also maintains ultimate accountability for consumer protection, financial crimes compliance and other similar issues that could expose it to significant harm.

2. Infrastructure and operational collaborations. In these partnerships, banks work with fintechs to streamline internal processes, enhance regulatory monitoring or compliance systems, or develop other technical infrastructure to upgrade core platforms or support systems such as customer onboarding tools. In addition to improving operational efficiency and accuracy, such partnerships also can enable banks to expand their product offerings and improve the customer experience.

Although each situation is unique, successful bank-fintech partnerships generally share some important attributes, including:

  • Strategic and cultural alignment. Each organization enters the collaboration for its own reasons, but the partnership’s business plan must support both parties’ strategic objectives. It’s necessary that both parties have a compatible cultural fit and complementary views of how the collaboration will create value and produce positive customer outcomes. They must clearly define the roles and contributions and be willing to engage in significant transparency and data sharing on compatible technology platforms.
  • Operational capacity, resilience and compatibility. Both parties’ back-office systems must have sufficient capacity to handle the increased data capture and data processing demands they will face. Bank systems typically incorporate strict controls; fintech processes often are more flexible. This disparity can present additional risks to the bank, particularly in high-volume transactions. Common shortcomings include inadequate capacity to handle customer inquiries, disputes, error resolution and complaints. As a leading bank’s chief operating officer noted at a recent Bank Director FinXTech event, improper handling of Regulation E errors in a banking-as-a-service relationship is one of the quickest ways to put a bank’s charter at risk.
  • Integrated risk management and compliance. Although the chartered bank in a bank-fintech partnership inevitably carries the larger share of the regulatory compliance risk, both organizations should be deliberate in embedding risk management and compliance considerations into their new workflows and processes. A centralized governance, risk, and compliance platform can be of immense value in this effort. Banks should be particularly vigilant regarding information security, data privacy, consumer protection, financial crimes compliance and dispute or complaints management.

Proceed Cautiously
Banks should guard against rushing into bank-fintech relationships merely to pursue the newest trend or product offering. Rather, boards and senior executives should require that any relationship begins with a clear definition of the specific issues the partnership will address or the strategic objective it will achieve. In addition, as regulators outlined in recent guidance regarding bank and fintech partnerships, the proposed collaboration should be subject to the full range of due diligence controls that would apply to any third-party relationship.

Successful fintech collaborations can help banks expand their product offerings in support of long-term growth objectives and meet customers’ growing expectations for innovative and responsive new services.

How Experience FinXTech Parallels The NFL Draft

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By the time the NFL announced plans to host the draft from various remote locations, nearly every other sports league had postponed or canceled their events.

The decision raised eyebrows.

The NFL draft has become a must-attend in-person event, as evidenced by the record-breaking 600,000 turnout in Nashville, Tennessee, last year. As a fan, I wondered if the league was putting their own interests too far ahead of others by going forward with a new, unproven format just to keep to this activity on the calendar.

It turns out, the digital nature of the three-day event resonated in many positive ways. The draft was viewed by 55 million viewers over the three-day event, according to the league. Naturally, some of the viewership reflected an appetite for new, non-pandemic related content. But from a business perspective, it showed how migrating an in-person event entirely online could, in a pinch, work.

As we all try our best to live normal lives from our homes, the NFL’s success with the draft gives me confidence in our decision to go remote with our annual Experience FinXTech.

Much as the NFL drew a great audience to Music City last year, so too were we excited to welcome a stellar audience to Bank Director’s hometown in early May. Just as the NFL figured out how to provide viewers with new glimpses into their team’s futures, so too will our Experience FinXTech as we move online. Ours will just be in terms of how and where financial technology companies and financial institutions might develop relationships that beget future successes.

Experience FinXTech parallels the NFL draft based on the concept of team-building. Just as every NFL franchise faces its own challenges, so too does every financial institution. Indeed, the ever-expanding digital chasm between the biggest banks and community institutions remains a major strategic challenge in terms of talent, tools and dollars spent.

While there is no one-size-fits-all approach to building a team, there are lessons that executives and leadership teams might entertain from their peers during a program like this one. Indeed, we have heard and seen incredible examples of community banks pulling together to serve their constituents as best they can, however they can, during this time. This program allows us to share examples.

Bank Director’s desire to help community banks succeed in all circumstances provides an impetus for moving to video and webinars instead of waiting until the late fall to meet in person. Helping banks and fintechs get smarter about immediate opportunities to develop meaningful relationships is incredibly relevant. The time is now to assess a business strategy and make decisions that could reshape your institution’s future. Access to timely, verified and reliable information is something we didn’t want to delay in providing.

Indeed, Experience FinXTech will touch on areas where technology can assist banks to provide counseling, assistance and a personal touch to their existing and potential customers. In addition, we talk about authentication. The need to embrace the cloud. Filling in the missing pieces in the digital commercial banking product set.

Beginning on May 5, we take a pragmatic approach to new business relationships, collaborations and strategic investments. We offer virtual demonstrations to help viewers see proven technologies available to banks with regards to security, data and analytics, internal systems, lending, digital banking, payments, compliance and the customer experience.

With so many elements of our economy being challenged, we know our “next normal” will look very different from what we’ve become accustomed to. Connecting interests, and ideas, to help banks and fintechs navigate their futures is why we ultimately decided to offer this year’s experience online, for free, to anyone interested in joining us.

I look forward to welcoming people to this year’s Experience FinXTech and promise that references to certain NFL teams will be kept to a minimum.

Thanks to the support of these companies, we are able to extend complimentary registration for Experience FinXTech. To sign up, please click here.

How Collaboration Is Taking Shape

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Banks and fintech firms are increasingly working together to create new and innovative solutions-developing a new products and services, or generating efficiencies for the traditional banking industry. How will these relationships continue to take shape in the near future? In these short videos, three members of the FinXTech Advisory Group share their thoughts.

Sima Gandhi, Plaid

—Sima Gandhi of Plaid shares why the best way for community banks to proactively invest in technology for the new digital age starts with partnerships.

Jim Hale, FTV Capital

Jim Hale of FTV Capital discusses where the significant investments and advancements for innovation lie for the banking industry.

Tom Brown, Paul Hastings LLP

Tom Brown, partner at the Paul Hastings law firm, shares why many early stage fintech companies fail, and how they can set themselves up for success.