Building a Robust Digital Ecosystem, Regardless of Size

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Let’s get right to the punch: Size should not limit how progressive your bank can be with its digital innovation strategy. Don’t let asset size fool — or limit — you.

As a 2022 ICBA ThinkTECH Accelerator graduate, we’ve had the opportunity to speak to over 150 banks of every shape and size, and here is what we’ve heard. Not all banks are created equal. However, large or small, asset size shouldn’t box you in and prevent you from giving your customers and teams the digital experiences they expect.

That’s because asset size doesn’t correlate to a more-advanced digital ecosystem. We’ve seen $105 million banks act like $5 billion banks, and $8 billion banks act like $250 million banks. Every bank is at a different stage of its digital transformation journey. So, what’s the difference?

Smaller banks may not have as large of a budget for tech, but they are often able to move faster and experiment more easily because there are fewer stakeholders who need to buy-in. These banks are increasingly having to decide if they are going to grow and stay independent or become a more attractive acquisition target. Either way, digital systems are critical to their future.

Larger banks, on the other hand, usually have larger budgets, but more stakeholders involved in the decision-making process and more entrenched operations. Turning the Titanic can take time if the organization does not have a history of supporting experimenting with innovative technology solutions.

No matter the size, banks should assess whether their current technology stack is driving efficiency or dragging the team down due to platform fatigue or lack of clean integrations. In fact, banks have the ability to use digital innovation to decrease the efficiency ratio and increase returns on investment. In our experience, there are a few key things any institution needs to consider when evaluating digital platforms:

  • Does it create a delightful experience?
    Any platform you’re exploring should provide a clean, easy and delightful experience for both your borrowers and employees. Any sense of friction for either group and your institution could lose leads or operational efficiency.
  • Can the platform support a fully integrated environment?
    Platforms should not only be configured to align with your institution’s operational process, but also able to directly connect to essential technology providers: the core, customer relationship management software, know your customer or business solutions, credit providers and spreading platforms, among others. A well-integrated solution should eliminate duplicate work for your team and provide a 360-degree view of the customer, allowing staff to more effectively maximize each customer relationship.
  • Does it do more with the same size team?
    Digital solutions shouldn’t be used to justify letting employees go. They should elevate team members out of busy work to their best and highest use: establishing and growing customer relationships. Having a robust technology stack can help attract and retain top talent in today’s environment.
  • Can the platform scale with the bank?
    Digital platforms should help drive the efficiency ratio down and scale as your bank grows. Below are how two banks on different ends of the asset spectrum have embraced this concept.

Andrew Black, CEO of $105 million Princeville State Bank, based in Illinois, says, “We don’t let our asset size define how we want to serve our customers and team members. At the end of the day, we want to make sure we’re providing a customer-centered, easy experience that helps us continue to grow and expand our customer base. Digital banking capabilities are table stakes for any bank these days, regardless of how large they are.”

Allan Rayson, American Banker’s digital banker of the year and chief innovation officer at Arkansas-based Encore Bank has seen some of the fastest organic growth of any bank in the country. The $2.8 billion bank has a goal of hitting $5 billion in assets with a team of fewer than 400 people — and they’re on track to do it.

“We’re not trying to be the biggest bank in every market, but a bank that delivers an exceptional customer experience. The key is focusing on partnering with best-of-breed technology partners to make that happen. What we have seen with this approach is incredible growth, a transformation of our operations that supports our bank team members and an increase in our overall efficiency,” says Rayson.

Cornerstone Advisors’ annual report states that 86% of banks say their spend on tech is going to be somewhat or significantly higher this year. It’s not a question of “If,” but when and how your team tackles creating a digital ecosystem. Don’t let your asset size dictate what you think your institution can and can’t do. Make sure you’re partnering with a platform that meets you where you are and can scale with you as your bank grows.

What’s New in Payments?

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Following a number of rollouts and innovations, 2022 could finally be the year where the speed of digital payments equals their convenience.

A number of developments, combined with the coronavirus pandemic and changing consumer habits, could hasten changes to the payments landscape — as well as banks’ ability to participate. Altogether, they could address some of the payment pain points for community bank customers.

“The pandemic may have helped to spur growth of innovative payment methods, such as in-person contactless card, digital wallet and [person-to-person] payments,” the Federal Reserve Board wrote in a December 2021 payments study, adding that payment behavior “changed sharply” in 2020.

Digital payments are becoming the primary way that customers interact with their bank, and the number of such payments is accelerating, says Jason Henrichs, CEO of Alloy Labs Alliance. But for all its convenience and security compared to cash and checks, digital payments suffer from two major problems: they are slow and fragmented. Two innovations are making headway on addressing those problems, allowing for greater convenience for customers in timing and directing payments.

“There’s a huge opportunity and overlapping need from bank customers who aren’t in the digital payment world yet, and from those who are but are frustrated because it’s a series of closed networks,” he says. “What if, from your bank app, you could push money to anyone? And they don’t have to subscribe to anything, they don’t have to download an app, they don’t have to create an account?”

A community bank consortium brought together by Alloy Labs is attempting to solve that with CHUCK, an open peer-to-peer payments network. At the end of January, Reading Cooperative Bank, a $661.7 million bank based in Reading, Massachusetts, went live on the network.

CHUCK’s open nature simplifies sending and receiving digital payments. In most payment networks, both a payer and payee often need to use the same platform to send and receive funds. For example, customers can only send money over Zelle to other participating banks, and a Cash App user can’t send money to someone’s PayPal account. With CHUCK, a customer can log into their bank mobile app and send money to one of their contacts using the person’s phone number or email; the recipient, who does not have to belong to a CHUCK bank, is notified they have received money and selects where to deposit it.

CHUCK is in beta testing at several other banks in the consortium and is available nationwide to banks that are not members of Alloy Labs. Henrichs says its per-transaction pricing is designed to be cheaper for small banks than Zelle; smaller banks tend to have fewer P2P digital payments and pay more per transaction done over Zelle compared to biggest banks.

Another area of payment innovation is the continued adoption of instant payments, and subsequent customizations. The first instant payments system in the U.S., Real Time Payments or RTP, was introduced by The Clearing House in November 2017. There are now more than 190 financial institutions that offer RTP and all federally insured U.S. depository institutions are eligible to use it. The network processed 123 million real time payments in 2021, almost double what it processed in 2020. This growth comes as the Fed continues to work on FedNow, its own instant payment capabilities, ahead of its slated 2023 launch.

Already, RTP has powered a number of payment innovations, says Steve Ledford, senior vice president of products and strategy at The Clearing House. He lists faster insurance payments and mortgage closings, disbursements from digital wallets from nonbanks, employers that pay employees outside a traditional pay cycle and industries like transportation and trucking that have long invoicing periods. All incorporate RTP functionality in their payment processing. RTP can be used in digital invoicing called “Request for Pay,” which could make it easier for consumers to pay bills when they have funds available and reduce overdraft fees associated with misaligned timing and deposits.

“Folks are expecting payments to move now in real time; now that you can, you’re going to seeing more of it,” he says.

These innovations and continued adoption could solve some payments problems for customers. Payments remains an area of experimentation and innovation for banks and nonbanks alike, and groups like The Clearing House and Alloy Labs are continuing to chip away at these issues.

“I don’t know if CHUCK solves the problem of payments, but it gets us on a path that has a shot,” Henrichs says.

Best Practices to Achieve True Financial Inclusivity

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According to the Federal Reserve’s report on the economic well-being of U.S. households in 2019, 6% of American adults were “unbanked” and 16% of U.S. adults make up the “underbanked” segment.

Source: Federal Reserve

With evolving technological advancements and broader access to digital innovations, financial institutions are better equipped to close the gap on financial inclusivity and reach the underserved consumers. But to do so successfully, banks first need to address a few dimensions.

Information asymmetry
Lack of credit bureau information on the so-called “credit invisible” or “thin file” portions of unbanked/underbanked credit application has been a key challenge to accurately assessing credit risk. Banks can successfully address this information asymmetry with Fair Credit Reporting Act compliant augmented data sources, such as telecom, utility or alternative financing data. Moreover, leveraging the deposits and spend behavior can help institutions understand the needs of the underbanked and unbanked better.

Pairing augmented data with artificial intelligence and machine learning algorithms can further enhance a bank’s ability to identify low risk, underserved consumers. Algorithms powered by machine learning can identify non-linear patterns, otherwise invisible to decision makers, and enhance their ability to screen applications for creditworthiness. Banks could increase loan approvals easily by 15% to 40% without taking on more risk, enhancing lives and reinforcing their commitment towards the financial inclusion.

Financial Inclusion Scope and Regulation
Like the Community Reinvestment Act, acts of law encourage banks to “help meet the credit needs of the communities in which they operate, including low- and moderate-income (LMI) neighborhoods, consistent with safe and sound banking operations.” While legislations like the CRA provide adequate guidance and framework on providing access to credit to the underserved communities, there is still much to be covered in mandating practices around deposit products.

Banks themselves have a role to play in redefining and broadening the lens through which the customer relationship is viewed. A comprehensive approach to financial inclusion cannot rest alone on the credit or lending relationships. Banks must both assess the overall banking, checking and savings needs of the underbanked and unbanked and provide for simple products catering to those needs.

Simplified Products/Processes
“Keep it simple” has generally been a mantra for success in promoting financial inclusion. A simple checking or savings account with effective check cashing facilities and a clear overdraft fee structure would attract “unbanked” who may have avoided formal banking systems due to their complexities and product configurations. Similarly, customized lending solutions with simplified term/loan requirements for customers promotes the formal credit environment.

Technology advancements in processing speed and availability of digital platforms have paved the way for banks to offer these products at a cost structure and speed that benefits everybody.

The benefits of offering more financially inclusive products cannot be overstated. Surveys indicate that consumers who have banking accounts are more likely to save money and are more financially disciplined.

From a bank’s perspective, a commitment to supporting financial inclusivity supports the entire banking ecosystem. It supports future growth through account acquisition — both from the addition of new customers into the banking system and also among millennial and Gen Z consumers with a demonstrated preference for providers that share their commitment to social responsibility initiatives.

When it comes to successfully executing financial inclusion outreach, community banks are ideally positioned to meet the need — much more so than their larger competitors. While large institutions may take a broader strategy to address financial inclusion, community banks can personalize their offerings to be more relevant to underserved consumers within their own local markets.

The concept of financial inclusion has evolved in recent years. With the technological advancements in the use of alternative data and machine learning algorithms, banks are now positioned to market to and acquire new customers in a way that supports long-term profitability without adding undue risk.