What Does a Tech-Forward Bank Look Like?

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.”

The Future-Proof Response to Rising Interest Rates

After years of low interest rates, they are on the rise — potentially increasing at a faster rate than the industry has seen in a decade. What can banks do about it?

This environment is in sharp contrast to the situation financial institutions faced as recently as 2019, when banks faced difficulties in raising core deposits. The pandemic changed all that. Almost overnight, loan applications declined precipitously, and businesses drew down their credit lines. At the same time, state and federal stimulus programs boosted deposit and savings rates, causing a severe whipsaw in loan-to-deposit ratios. The personal savings rate — that is, the household share of unspent personal income — peaked at 34% in April 2020, according to research conducted by the Federal Reserve Bank of Dallas. To put that in context, the peak savings rate in the 50 years preceding the pandemic was 17.7%.

These trends became even more pronounced with each new round of stimulus payments. The Dallas Fed reports that the share of stimulus recipients saving their payments doubled from 12.5% in the first round to 25% in the third round. The rise in consumers using funds to pay down debt was even more drastic, increasing from 14.6% in round one to 52.3% in round three. Meanwhile, as stock prices remained volatile, the relative safety of bank deposits became more attractive for many consumers — boosting community bank deposit rates.

Now, of course, it’s changing all over again.

“Consumer spending is on the rise, and we’ve seen a decrease in federal stimulus. There’s less cash coming into banks than before,” observes MANTL CRO Mike Bosserman. “We also expect to see an increase in lending activities, which means that banks will need more deposits to fund those loans. And with interest rates going up, other asset classes will become more interesting. Rising interest rates also tend to have an inverse impact on the value of stocks, which increases the expected return on those investments. In the next few months, I would expect to see a shift from cash to higher-earning asset classes — and that will significantly impact growth.

These trends are unfolding in a truly unprecedented competitive landscape. Community banks are have a serious technology disadvantage in comparison to money-center banks, challenger banks and fintechs, says Bosserman. The result is that the number of checking accounts opened by community institutions has been declining for years.

Over the past 25 years, money-center banks have increased their market share at the expense of community financial institutions. The top 15 banks control 56.2% of the overall marketshare, up from 40% roughly 25 years ago. And the rise of new players such as fintechs and neobanks has driven competition to never-before-seen levels.

For many community banks, this is an existential threat. Community banks are critical to maintaining competition and equity in the U.S. financial system. But their role is often overlooked in an industry that is constantly evolving and focused on bigger, faster and shinier features. The average American adult prefers to open their accounts digitally. Institutions that lack the tools to power that experience will have a difficult future — regardless of where interest rates are. For institutions that have fallen behind the digital transformation curve, the opportunity cost of not modernizing is now a matter of survival.

The key to survival will be changing how these institutions think about technology investments.

“Technology isn’t a cost center,” insists Christian Ruppe, vice president of digital banking at the $1.2 billion Horicon Bank. “It’s a profit center. As soon as you start thinking of your digital investments like that — as soon as you change that conversation — then investing a little more in better technology makes a ton of sense.”

The right technology in place allows banks to regain their competitive advantage, says Bosserman. Banks can pivot as a response to events in the macro environment, turning on the tap during a liquidity crunch, then turn it down when deposits become a lower priority. The bottom line for community institutions is that in a rapidly changing landscape, technology is key to fostering the resilience that allows them to embrace the future with confidence.

“That kind of agility will be critical to future-proofing your institution,” he says.

Fintech Transactions

Global fintech investment hit $98 billion in the first half of 2021, promising a return to pre-pandemic levels, according to KPMG. So what can we expect for fintech M&A in 2022? Ritika Butani leads corporate development at the technology platform Toast, which provides payments and other services to the restaurant sector. She leverages her background to provide her expectations for fintech M&A, including cross-border transactions. Butani also shares her perspective on the traits of a great technology acquisition.

Use Cases, Best Practices For Working With Fintechs

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 to Give Cardholders Digital Self-Service, Fraud-Fighting Capabilities

Despite the dramatic changes in consumer spending habits over the last 18 months, an unnerving constant remains: Fraudsters are ever-present, and financial institutions and consumers must stay on guard.

To address fraud issues and enhance safety, credit and debit card payments are being reimagined and increasingly conducted via digital channels. By deploying digital self-service card capabilities, banks can better protect their consumers and allow them to keep transacting securely.

Recent research by Raddon, a Fiserv company, shows the ongoing primacy of credit and debit card payments. In a typical month, 77% of U.S. households use a debit card for purchases and 80% of household use a credit card for purchases, according to the research.

 

Card usage among varying demographic consumer segments remains robust, with millennials, Generation X and baby boomers all reporting significant reliance on card-based payments.

However, the definition of a “card payment” is changing. Consumers are increasingly using their cards digitally, with 40% saying at least half of their monthly transactions are done digitally on their mobile phones or computers, according to Raddon.

Mobile card applications are the answer to these changing trends. Today’s digitally minded consumer needs card apps that help them manage their accounts when and how it suits them. Banks can keep customers satisfied and safe by implementing a comprehensive mobile card management solution.

Digital wallet participation enables banks to give cardholders the ability to add a card to their smartphone or wearable. If cards can be digitally issued at the time of account opening, all the better. This process enables immediate card access via the digital wallet and provide an easy, secure and contact-free way to pay. Card apps can also provide control features designed to keep cardholders safe and their financial institution top-of-mind. Consumers can use these apps to protect their accounts, manage their money and take charge of card usage. Their increased peace of mind will drive transaction volume and cardholder engagement, empowering users to fight fraud through alerts for card transactions and personalizing usage controls.

Consumers are concerned about their spending patterns. Providing cardholders with detailed spend insights and enriched transaction information makes it easier for them to understand their spending and make informed spending decisions. An enriched transaction can make the difference between a panicked consumer who is worried about fraud and someone secure in knowing that each purchase is one they’ve made. The transactions should include real merchant names, retail locations for physical purchases, transaction amount and purchase date. It should also include contact information for the merchant, so consumers can make any inquiries about the purchase directly with the merchant.

Every interaction with consumers is a chance to make a great impression, especially on mobile. Consumers appreciate fresh app designs and features that focus on simplicity, including one-touch access to functions. For example, consumers should be able to quickly and easily lock a misplaced card to prevent fraud and unlock it when located. These digital-first, self-service capabilities create an efficient and safe cardholder experience. Banks can leverage existing marketing resources and creative assets to keep their consumers informed about and remind them of secure self-service aspects of the payments program.

Consumer expectations continue to rapidly evolve and drive change. Banks must respond by staying focused on consumer needs and regularly delivering new app features and interconnected payment experiences. The institutions that do will succeed by continuing to provide consumers with convenient and safe digital management capabilities for their credit and debit cards, whenever and wherever consumers transact.

Filling the Gap of Wealth Management Offerings to Grow Wallet Share

Americans need personalized financial and wealth management advice more than ever, but don’t know where to look.

The coronavirus pandemic negatively impacted personal finances for more than 60% of Americans, according to recent data from GOBankingRates. Many of these Americans have relationships with regional and community banks that could be a trusted partner when it comes to investing and planning for the future, but these institutions often lack adequate financial advisory resources and options. This drives customers to social media and other providers, such as fintechs or large national institutions, for wealth management needs — when they actually would prefer a personal, professional relationship with their bank.

The current need for stronger wealth management offerigns, coupled with advances in easy-to-deploy technology, means that community banks can now offer more holistic, lifecycle financial advice. These offerings have the potential to create new revenue streams, engage people earlier in their wealth-building and financial planning journey, deepen and fortify existing customer relationships and make financial advice more accessible.

But while many banks have a strong depositor base and a customer base that trusts them, the majority don’t have the expertise, resources or digital engagement tools to offer these services. Modern technology can help fill this gap, empowering institutions to offer more robust financial advisory services.

Banks should meet customers where they spend the majority of their time — within digital channels. Intuitive, self-service digital options presents a valuable way to engage customers in a way that’s not complex or requires additional staff in branches. First steps can include a digital calculator within the bank’s mobile app so individuals can compute their financial wellness score, or presenting simple options to customers to invest a nominal sum of money, then adding a way to monitor its progress or dips. It can also include a digital planning discovery tool to help customers organize their accounts online.

More meaningful success lies in leveraging customer behavior data to understand changes and designing processes so that individual can seamlessly move to the next phase of the financial advice lifecycle. This might include flagging when a customer opens additional accounts, when someone has a high cash balance and frequent deposits, or when a younger individual accrues more wealth that simply sits. If banks fail to proactively monitor this activity and reach out with relevant hooks, offers and insights, that individual is almost guaranteed to look elsewhere — taking their money and loyalty with them.

Banks should provide options for customers to reach out for guidance or questions around next steps — including knowledgeable financial advisors at the ready. While people are increasingly comfortable with (and establishing a preference toward) managing money and investments digitally, there is still a critical need for direct and quick access to a live human. Banks can integrating matching capabilities and staffing regional centers or branches with designated experts, but there should also be options for customers to contact advisors remotely through video or chat. This allows individuals to receive relevant advice and support from anywhere, anytime.

But building the infrastructure that can properly serve and support clients throughout every stage and situation can be prohibitive and cumbersome for most community and regional institutions. Fortunately, there are strategic technology partners that can offer a modern, end-to-end platform that spans the entire advisory lifecycle and offers integrated digital enablement right out of the box.

A platform, in lieu of a collection of bespoke software features from multiple vendors, can act as a single point of truth and provides a centralized ecosystem for customers to receive a holistic snapshot of their financial situations and plan. Look for platforms with open APIs to facilitate seamless integration to complement and maintain the front, middle and back office while offering a full range of functionality for bank customers. Plus, having one platform that can accommodate every stage of the financial advisory lifecycle makes interactions easier and more efficient for the institution, and more familiar and friendly for the customer.

Community and regional institutions have always served as a beacon of trust and support for their communities and customers. They don’t have to experience customer attrition over wealth management options and functions. Those that do so will be able to form even stickier, more profitable relationships, while helping customers broaden their opportunities and improve their overall financial wellness.

Three Steps to Building a Post-Pandemic Payments Strategy

The Covid-19 pandemic spotlighted contactless payments. To stay competitive with the future of payments, community banks must offer multifaceted options, like virtual cards, P2P payments and digital wallets.

But building a digital and contactless payments strategy goes beyond just offering digital wallets — though that can be a key tool. To become their customers’ primary transactional relationship, community banks need a strategy to make credit and debit payments easy in any digital channel.

Digital banking and contactless payment adoption accelerated during the coronavirus pandemic. A Mastercard survey conducted last year found that contactless transactions grew twice as fast as traditional checkout methods at grocery and drug stores between February and March. Additionally, Juniper Research found that spend in digital wallets is projected to increase 83% by 2025 due to adoption of digital payments during the pandemic. Three key steps for community banks looking to construct a card strategy are to audit your payments capabilities and gaps, use digital to become the passive provider of choice and diversify your card and payment portfolio.

Audit Payments Capabilities, Gaps
Before bank leaders can roll out new card programs, they must evaluate where their bank’s existing programs are and if any service gaps exist. Common questions every manager should evaluate are:

  • How much revenue is the current card program driving, and is it increasing or decreasing?
  • What is the wallet share of the bank’s current cards and is it increasing or decreasing?
  • Who are customers using to make payments outside your network?
  • What payment options can you support? Options should encompass virtual cards, P2P payments, purpose-driven cards that are targeted to specific audiences and needs and digital wallets.

From here, bank leaders can figure out where their greatest opportunities lie. It might be in building a set of niche card programs to meet a specific need, such as teen card accounts, gig worker cards or a virtual card offering. It could also be expanding card options to include prepaid programs, bringing debit cards in-house or adding card controls to enhance the customer experience.

Become the “Passive Payment” Provider of Choice
Once bank leaders understand their opportunities, they need to build strategies that help their cards become the “passive payment” provider of choice. Taking security as a given, customers care most about convenience. They will use the payment option that is the easiest for their chosen channel of commerce.

Digital wallets and contactless are becoming table stakes for banks; they are no longer “nice-to-have” products that will differentiate your institution from your competitors. The rise in e-commerce means that banks must make it easy for their customers to fulfill those purchases with their preferred payment option virtually.

Additionally, customers are increasingly demanding instant access to new accounts. Instant digital card issuance enables customers to issue or reissue a credit or debit card digitally and on demand for immediate use.

Banks should also work to ensure that their cards are able to integrate with existing digital wallets, allowing customers to “push-provision” their cards into their preferred wallet or app, rather than manually entering their card information.

Diversify the Card, Payment Portfolio
A diverse payments strategy is more than just offering a general-purpose debit or credit card. People increasingly want purpose-driven cards that meet their specific needs and situations. Families love accounts that provide the parents control over funds while giving their teens the ability to learn how to manage their money and spend with some autonomy. A dedicated business card can make paying vendors and other bills easy to manage without staff in the office to run a traditional accounts payable team. In addition, many businesses want “team” or “disbursement” cards they can issue to employees and monitor the transactions in real-time while retaining some control over how the funds are spent. The combinations are endless — elderly care accounts, affiliations with membership organizations and gig worker cards are other popular options.

To determine which products a community bank should focus on, leaders need to analyze customers’ spending behaviors by channel, using transaction data to look for trends. Then, they can build campaigns to target the most profitable or most engaged customers.

The additional revenue sources will be vital to community banks’ survival, given continually low interest rates. By building a comprehensive digital, contactless and physical card payments strategy, institutions can positioned themselves to remain the bank of choice for their communities.

The Corporate Banking Conundrum and the Massive Digitization Opportunity

Corporate banking makes up nearly a third of the average bank’s total lending operations. So, it is surprising that institutions don’t consider it among their core banking activities, especially given the need to digitize their front and back-end processes.

Corporate banking encompasses a large portfolio of services, including cash management, trade finance, risk management, transaction services and corporate finance services. At some banks, nearly 20% of their underlying book value is dedicated entirely to corporate banking activities. There are many moving pieces, which can make it difficult to optimize and digitize, especially for banks with a large number of corporate clients.

Corporate onboarding is an important and highly complicated process, with unique complexities for each bank. From the corporate customer perspective, the time needed to onboard, resolution turnaround time and customer experience are the most valuable areas — and require the most improvement. According to a recent Fenergo survey, 81% of bank C-suite executives believe poor data management lengthens onboarding and negatively affects customer experience. Improving how banks onboard corporate clients has a variety of benefits.

  • Reduce Time-to-revenue: Banks are keen to onboard new customers quickly to maximize income and profit. A faster setup means greater potential for revenue generation through various lending products.
  • Improve Customer Experience and Loyalty: An efficient customer onboarding process is crucial to secure loyal, lifelong relationships with corporate clients.
  • Streamline and Standardize Compliance: Anti-money laundering, Know Your Customer and other regulatory compliance obligations can be effectively automated internally and cross-country.

From a bank’s perspective, getting the right information, accounting for risk, and managing customer lifecycles is not only important – it is a differentiator. But we still find, right from the start of the customer journey, that tasks are excessively manual and turnaround time is alarmingly long: lacking even the most basic digital optimization, it can take between 90 and 120 days for corporate customer onboarding.

In corporate banking, a key area of concern is time. The traditional model of account onboarding and relationship management is far too labor intensive: collecting documents and navigating through tedious elements of their bank’s internal process flows, among other tasks. This time could be used for  meaningful and insightful interactions with the clients and enabling transaction for the customer.

Digitizing onboarding processes allows RMs more time to interact with clients. Digital channels can provide additional ways to connect with and closely serve clients. Applying artificial intelligence (AI) and machine learning (ML) to administrative and analytical tasks not only improve RM productivity, but provide a new perspective on customer service.

Digitized information leads to digitalization of the entire corporate onboarding process. Relationship portfolio management is the glue that holds it all together.

How to Attack the Corporate Banking Behemoth

Step 1: Adopt a digital technology framework to deliver end-to-end digitalization across customer lifecycle. This allows the bank to capture information from unstructured and structured sources using optical character recognition software (OCR), among other software solutions. As a result, making this information available digitally across stakeholders.

Step 2: Remove the friction between bank data sources, then automate the process flow with lean principles. This helps ease data enrichment by addressing any adverse or inadequate information upfront.

Step 3: Be proactive and manage risk.

Risk management has changed substantially over the past decade. Regulations that emerged from the global financial crisis and levied fines triggered a wave of change in risk functions. These included more detailed and demanding capital, leverage, liquidity, and funding requirements, as well as higher standards for risk reporting.

For risk functions to thrive during this period of fundamental transformation, banks need to proactively rebuild them. To succeed, banks must start now with a portfolio of initiatives, such as digital underwriting, the incorporation of AI and machine learning techniques and interactive risk reporting, that align short-term business cases with the long-term target vision. These improvements should be complemented by a shift in recruiting toward more technology-savvy profiles or the introduction of data lakes.

Prioritize natively integrated systems and gain deep insight into the portfolio with real-time metrics reflecting transactions, positions and risk exposure data. Slash costs by simplifying legacy systems, taking SaaS beyond the cloud, and adopting robotics and AI. Build technological capabilities that force the bank to be more intelligent around customers’ needs. Look for more advanced analytic tools with best-in-class road mapping and reporting functionality.

Banks are scrambling to catch up to the emerging demands of consumers in this digitally driven and rapidly evolving ecosystem. The commercial banking space has been buzzing around advancements in digitizing and automating processes, with clear benefits to boast. It’s time corporate banking joined them.

By 2025, risk functions in banks will need to be fundamentally different than today. The next decade in risk management may be subject to more transformation than the last one. Unless banks act now and prepare for these longer-term changes, they will continue to find themselves overwhelmed by new requirements and emerging demands.

Three Things Bankers Learned During the Pandemic

It’s been well documented how the pandemic lead to the digitization of banking on a grand scale.

But what bankers discovered about themselves and the capabilities of their staff was the real eye-opener. Firms such as RSM, an audit, tax and consulting company that works with banks nationwide, saw how teams came together in a crisis and did their jobs effectively in difficult circumstances. Banks pivoted toward remote working, lobby shut-downs, video conferencing and new security challenges while funneling billions in Paycheck Protection Program loans to customers. The C-suites and boards of financial institutions saw that the pandemic tested their processes but also created an opportunity to learn more about their customers.

Overall, the pandemic changed all of us. From our discussions with the leaders of financial institutions, here are three major things bankers learned about themselves and their customers during the pandemic.

1. Customers Want to Use Technology
Banks learned that customers, no matter their generation, were able to use technology effectively. Banks were able to successfully fulfill the needs of their customers, as more devices and technologies are available to banks at all price points and varying degrees of complexity. Post-pandemic, this practice will continue to help increase not only internal efficiencies but convenience for customers. As banks compete with many of the new digital providers, this helps even the playing field, says Christina Churchill, a principal and national lead for financial institutions at RSM US LLP.

Did you have a telemedicine appointment during the pandemic? Do you want to go back to driving to a doctor and sitting in a waiting room for a short appointment, given a choice? Probably not. Nor will bank customers want to come to a branch for a simple transaction, says Churchill.

The pandemic made that all too clear. Banks had to figure out a way to serve customers remotely and they did. Digital account opening soared. Banks stood up secure video conferencing appointments with their customers. They were successful on many counts.

2. Employees Can Work Remotely
The myth that bankers were all working effectively while in the office was exposed. Instead, some found employees were more effective while not in the office.

Technology helped bridge the gap in the existing skill set: Bankers learned how to use technology to work remotely and used it well, says Brandon Koeser, senior manager at RSM. Senior leaders are finding that getting employees back to the office on a strict 8 a.m. to 5 p.m. schedule may be difficult. “Some bankers have asked me, ‘do we return to the office? Do we not go back?’” says Koeser. “And I think the answer is not full time, because that is the underlying desire of employees.”

After surveying 27,500 Americans for a March 2021 study, university researchers predicted that Covid-19’s mass social experiment in working from home will stick around. They estimate about 20% of full workdays will be supplied from home going forward, leading to a 6% boost in productivity based on optimized working arrangements such as less time commuting.

Still, many senior bank leaders feel the lack of in-person contact. It’s more difficult and time-consuming to coach staff, brainstorm or get to know new employees and customers. It’s likely that a hybrid of remote and in-person meetings will resume.

3. Banks Can Stand Up Digital Quickly
Banks used to spend months or years building systems from scratch. That’s no longer the case, says Churchill. Many banks discovered they can stand up technological improvements within days or weeks. Ancillary tools from third-party providers are available quickly and cost less than they did in the past. “You don’t have to build from scratch,” Koeser says. “The time required is not exponential.”

Recently, RSM helped a bank’s loan review process by building a bot to eliminate an hour of work per loan by simply pulling the documentation to a single location. That was low-value work but needed to be done; the bot increased efficiency and work-life quality for the bank team. A robotic process automation bot can cost less than $10,000 as a one-time expense, Churchill says.

Throughout this year, senior bankers discovered more about their staff and their capabilities than they had imagined. “It really helped people look at the way banks can process things,” Churchill says. “It helped gain efficiencies. The pandemic increased the reach of financial institutions, whom to connect with and how.”

The pandemic, it turned out, had lessons for all of us.

How FIs Can Take the Speedboat or Extensibility Approach to Digital, Accelerated Financial Services

In a post-pandemic world, legacy financial institution must accelerate their digital processes quickly, or risk ceasing to be relevant.

With financial technology companies like Chime, Varo Money, Social Finance (or SoFi) and Current on the rise, change is inevitable. Alongside the nimble fintech competition, banks face pressure to rapidly deliver new products, as was the case with the Small Business Administration’s Paycheck Protection Program loans. While most legacy institutions try to respond to these business opportunities with manual processes, companies like Lendio and Customers Bank can simply automate much of the application process over digital channels.

Legacy institutions lack the access to the latest technology that digital challengers and fintechs enjoy due to technology ecosystem constraints. And without the same competitive edge, they are seeing declining profit margins. According to Gartner, 80% of legacy financial services firms that fail to adapt and digitize their systems will become irrelevant, and will either go out of business or be forced to sell by 2030. The question isn’t if financial institutions should evolve — it’s how.

To fuel long-term growth, traditional banks should focus on increasing their geographic footprint by removing friction and automating the customer’s digital experience to meet their needs. Millions of Generation Z adults are entering the workforce. This generation is 100% digitally native, born into a world of vast and innovative technology, and has never known life without Facebook, Snapchat, TikTok or Robinhood. In a couple of years, most consumers will prefer minimal human interaction, and expect fast and frictionless user experience in managing their money, all from their smartphone.

Some solutions that traditional banks s have undertaken to enhance their digital experience include:

  • Extending on top of their existing tech stack. In this scenario, financial institutions acquire digital/fintech startups to jump-start a move into digital banking. However, there are far fewer options to buy than there are banks, and few of the best fintechs are for sale.
  • Totally transforming to modern technology. This option replaces the legacy system with new digital platforms. It can come with significant risks and costs, but also help accelerate new product launches for banks that are willing to pay a higher initial investment. Transformations can last years, and often disrupt the operations of the current business.
  • Using the extensibility approach. Another way forward is to use the extensibility approach as a sub-ledger, extending the legacy system to go to market quickly. This approach is a progressive way to deliver fit-for-purpose business capabilities by leveraging, accelerating and extending your current ecosystem.

Institutions that want to enter a market quickly can also opt for the speedboat approach. This includes developing a separate digital bank that operates independently from the parent organization. Speedboats are fintechs with their own identity, use the latest technology and provide a personalized customer experience. They can be quickly launched and move into new markets and unrestricted geography effortlessly. For example, the Dutch banking giant ABN AMRO wanted to create a  fully digital lending platform for small to medium enterprises; in four months, the bank launched New10, a digital lending spinoff.

A speedboat is an investment in innovation — meant to be unimpeded by traditional organizational processes to address a specific need. Since there is a lot of extensibility, the technology can be any area the bank wants to prioritize: APIs, automation, cloud and mobile-first thinking. Banks can generate value by leveraging new technology to streamline operations, automate processes and reduce costs using this approach.

Benefits include:

  • Being unencumbered by legacy processes because the new bank is cloud native.
  • The ability to design the ideal bank through partners it selects, without vendor lock-in.
  • Easier adaption to market and consumer changes through the bank’s nimble and agile infrastructure.
  • Lower costs through automation, artificial intelligence and big data.
  • Leveraging a plug-and-play, API-first open banking approach to deliver business goals.

By launching their own spin-off, legacy banks can go to market and develop a competitive edge at the same speed as fintechs. Modern cloud technology allows banks to deliver innovative customer experiences and products while devoting fewer resources to system maintenance and operational inefficiencies.

If a financial institution cannot make the leap to replace the core through a lengthy transformational journey and wants to reach new clients and markets with next-generation technology, launching a speedboat born in the cloud or opting for the extensibility approach opens up numerous opportunities.