Digital Transformation From a Branch Perspective

If you ask five bankers to define what constitutes a successful digital transformation, you will receive five different answers. However, organizations can employ a few measures to help them succeed, including establishing priorities, assessing capabilities and creating a digital road map.

Meeting current challenges
Many financial institutions were in no rush to transform prior to March 2020. However, the Covid-19 pandemic accelerated the implementation of digital-first models. It also put pressure on organizations to battle-test alternative business models supporting remote operations and service delivery. Most notably, banks had to activate remote working models while simultaneously figuring out how to service and support face-to-face customers.

Now in 2021, the initial challenges posed by the pandemic have mostly been addressed. At the same time, bankers acknowledge that branch traffic levels might never recover to pre-pandemic levels.

Establishing priorities
First, organizations should establish priorities. The average mid-size, full-service retail office has annual operating expenses exceeding $350,000 a year — real money that could be repurposed to build a competitive digital service. Unleashing this capital and using it more effectively is key to initiating an effective digital transformation.

One initial objective should be to rank branch locations in terms of profitability and other performance metrics to identify the bottom 20%. In most cases, that percentage represents the locations that have been habitual low performers, or that might be in declining markets or suboptimal locations. It’s important to determine if these locations are leased, and if so, if there is a clear path to exit the lease. These details affect the timeline required to exit and any write-offs or write-downs related to each location.

Digital channels do not work in a vacuum. Experience tells us that community bankers do not like to lay off staff who live and work in these markets, and organizations should consider redeployment of these employees. Reassigned branch personnel can support new customers and existing users as they navigate organization websites and online product applications.

Once organizations understand the exit strategy and cost impact for low-performing locations, they can create plans that outline the timing and potential resources that could be freed up from physical branches and funneled into the digital channel.

Assessing capabilities
After determining the digital transformation budget, organizations should make an honest assessment of their existing capabilities and identify gaps or weaknesses. One goal should be to fix what is broken or not optimal, then prioritize the spend and deployment timeline for true enhancements.

Selecting digital enhancements involves many options, dependencies and complexities, which can slow down decision-making about digital transformation initiatives. Fixing obvious problems first and then investigating enhancements will take time, so organizations don’t need to close low-performing branches immediately.

Executives need to fully understand the features of potential enhancements, what is lacking from current capabilities, what is additive to current capabilities, enhancement release timelines and costs associated with each improvement. They also should consider the roll-out of these features and the impact on existing and future customers.

Creating a digital road map
Creating a digital road map can enable banks to set expectations about when changes to digital services will occur. Doing so requires honest introspection about where the organization is positioned on the digital transformation continuum.

For example, banks might think they have effective online account opening processes, but they should ask: Is it truly an automated, end-to-end process that works at all times under all conditions? Or do deposit operations personnel need to manually move data or paper along to make sure accounts can get set up? Organizations should fully understand where and how their existing customers might be affected, and where and how new customers will be serviced as they open accounts online.

While creating their digital road maps, banks also should take a look at the digital features they’ve already deployed. Are they useful and easy to adopt? Do they drive the user toward desired actions? Do the customers really use the available digital features? Are there benefits to users? If the answers to any of these questions is “no,” organizations should consider removing problematic features or improving processes.

Teeing up for success
Keeping tabs on customer usage trends and optimizing the customer experience should be top priorities in a digital transformation. Banks that make necessary changes can help improve the entire digital experience. To learn more about digital transformation from a branch perspective, view this video.

 

How Community Banks Can Drive Revenue Growth During the Pandemic

Community banks are the beating heart of the American banking system — and they’ve received a major jolt to their system.

While community banks represent only 17% of the US banking system, they are responsible for around 53% of small business loans. Lending to small businesses calls for relationship skills: Unlike lending to large firms, there is seldom detailed credit information available. Lending decisions are often based on intangible qualities of borrowers.

While community banking is relationship lending at its very best, the pandemic is forcing change. Community bankers have been caught in the eye of the Covid-19 storm, providing lifesaving financial services to small businesses. They helped fuel the success of the Paycheck Protection Program, administering around 60% of total first wave loans, according to Forbes. This was no small feat: Community banks administered more loans in four weeks than the grup had in the previous 12 months.

However, as with many businesses, they have been forced to close their doors for extended periods and move many employees to remote arrangements. Customers have been forced to move to online channels, forming new banking habits. Community banks have risen to all these challenges.

But the pandemic has also shown how technology can augment relationship banking, increase customer engagement and drive revenue growth. Many community banks are doing things differently, acknowledging the need to do things in new ways to drive new revenues.

Even before Covid-19, disruptive forces were reshaping the global banking landscape. Customers have high expectations, and have become accustomed to engaging online and through mobile services. Technology innovators have redefined what’s possible; customers now expect recommendations based on their personal data and previous behavior. Many believe that engaging with their bank should be as easy as buying a book or travel ticket.

Turn Data into Insights, Rewards
While a nimble, human approach and personal service may offset a technical shortcoming in the short run, it cannot offset a growing technology debt and lack of innovation. Data is becoming  the universal driver of banking success. Community banks need to use data and analytics to find new opportunities.

Customer data, like spending habits, can be turned into business insights that empower banks to deliver services where and when they are most needed. Banks can also harness the power of data to anticipate customer life moments, such as a student loan, wedding or a home purchase.

Data can also drive a relevant reward program that improves the customer experience and increases the bank’s brand. Rewards reinforce desired customer behavior, boost loyalty and ultimately improve margins. For example, encouraging and rewarding additional debit transaction activity can drive fee income, while increasing core deposits improves lending margins.

The pandemic also highlights the primacy of digital transformation. With branches closed, banks need to find new ways to interact with customers. Digital services and digitalization allow customers to self-serve but also create opportunities to engage further, adding value with financial wellness products through upselling and cross-selling. In recent months, some community banks launched “video tellers” to offset closed branches. Although these features required investment, they are essential to drive new business and customers will expect these services to endure.

With the right digital infrastructure, possibilities are limited only by the imagination. But it’s useful to remember that today’s competitive advantage quickly becomes tomorrow’s banking baseline. Pre-pandemic, there was limited interest in online account opening; now it’s a crucial building block of an engaging digital experience. Banking has become a technology business — but technology works best with people. Community banks must invest in technologies to augment, deepen and expand profitable relationships.

Leverage Transformative Partnership
Technology driven transformation is never easy — but it’s a lot easier with an expert partner. With their loyal customers, trusted brands and their reputation for responsiveness, community banks start from a strong position, but they need to invest in a digital future. The right partner can help community banks transform to stay relevant, agile and profitable. Modern technologies can make banking more competitive and democratic to ensure community banks continue to compete with greater customer insights, relevant rewards programs and strong digital offerings.

When combined, these build on the customer service foundation at the core of community banking.

Top Four Digital Trends for the Next Five Years

The sheer amount of disruptions the banking industry endured in 2020 has cast a new light on banking industry trends. But will these disruptions translate into major shifts or further acceleration — especially with regard to digital growth — over the next five years?

Last year, banks saw an unprecedented influx of deposits — $2.4 trillion, according to the Federal Deposit Insurance Corp., with gains going primarily to the biggest banks. Looking ahead, we predict further ascendance of the moneycenter banks, but still see opportunities for smaller, nimbler banks to remain competitive when it comes to digital banking innovation. 

Disruptions and Opportunities
The Covid-19 pandemic demonstrated compelling reasons for community banks to step up their digital banking efforts. In-person interactions are limited, and even in places where banks are open, many customers may not feel safe. The preference for remote banking is likely to continue into the future: Qualtrics XM Institute found that 80% of people who start banking online are at least somewhat likely to continue.

But the coronavirus is just another tick in the column in favor of greater investments in digital banking. Many community banks have already rolled out online service options in the past few years. Their efforts and investments to make digital banking more user-friendly and efficient is paying dividends.

For instance, Cross River Bank, a community bank with $11.5 billion in assets in Fort Lee, New Jersey, emerged as one of the top Paycheck Protection Program lenders while simultaneously gathering $250 million in deposits in just 15 days. As innovative banking technology becomes more readily available, community banks will have convenient alternatives to legacy vendors that don’t require a massive budget.

What’s Next in Digital Banking?
Banking will continue to evolve rapidly over the next five years. In particular, community institutions should take heed of four trends.

1. Hyper-localized products will help community banks compete with larger institutions.
Community institutions should focus on overall product offerings, not just rates. Digital solutions can offer better tools to connect with the local community, as well as expand a bank’s customer base nationwide.

A major trend for banks to consider is verticalized banking. The big banks aren’t capable of delivering hyper-localized or targeted offerings to the same extent. While these services already exist for certain demographics, such as military personnel and students, we’re seeing this expand to female entrepreneurs, minority-owned businesses and tech developers.

2. Banks are leveraging technology to deepen community relationships.
Covid-19 relief efforts created an opening for tech-savvy community banks to win market share and goodwill among small businesses and communities at-large. These relief efforts will likely continue to be a major area for investment and innovation over the next few years.

A prime example of this is Quontic Bank’s #BetheDrawbridge campaign. The Astoria, New York-based bank’s Drawbridge Savings account matches a portion of interest paid to account holders into a fund providing financial relief to New York City families and businesses. Not only is the bank leveraging digital account opening to broaden its footprint, but also building goodwill within its home-base. 

3. Real-time transaction monitoring becomes table stakes to compete online.
While the U.S. has been slow to adopt real-time payments (RTP), the time is near. The Federal Reserve is working to release its RTP network, FedNow, by 2024; The Clearing House’s RTP Network is quickly expanding.

Community banks should prepare for real-time banking — not only through the implementation of real-time digital servicing, but also through real-time transaction monitoring. Money moves today; if banks don’t receive a report until the next morning, it’s too late. As real-time payments become more accessible, real-time transaction monitoring will be table stakes in order to prevent fraud, mitigate costs and stay competitive.

4. The business banking experience will see major growth and user-friendly improvements.
Commercial banking has so far lagged behind consumer services, remaining manual and paper-based. Fortunately, the innovations that have emerged in personal banking are migrating to the commercial space. This will likely become a major area of focus for technology firms and financial institutions alike.

Looking Ahead
In the next five years, smaller banks will need to double down on digital banking trends and investments, taking advantage of their nimble capabilities. The right tools can make all the difference — the best way for banks to fast-track digital offerings in the next stage of their evolution is to find the right partners and products for their needs.

Why Nailing the Customer Experience Comes Down to Empathy

While this pandemic has brought many challenges to the financial industry, it’s also brought the opportunity of accelerating customer adoption of your digital banking services.

But it’s also presented an opening for your bank to build genuine customer loyalty and turbocharge your net promoter score.

Difficult times bring out the best and the worst in both people and companies. It’s easy to offer amazing service when things are going well, but it’s how you treat your customers during tough times that builds, or breaks, loyalty. American poet and civil rights activist Maya Angelou said, “People will forget what you said, people will forget what you did, but people will never forget how you made them feel.”

Right now is your opportunity to make your customer feel valued, supported and secure. To do that, you need to be empathetic to your customers and your staff.

Consider your customers. They’re stressed.

This is a stressful time for them. Many are financially strained and need advice on the new programs and policies put in place to help them. They’re socially isolated and trying to avoid public places in an effort to stay safe. So, naturally, they’re increasingly banking through your digital channels — but that’s stressful too. How do I use mobile banking? Is it secure? How do I make sure I don’t send money to the wrong person?

To navigate these tricky waters, your customers need access to knowledgeable people who can guide them through your technology, and help them understand how to use your products and services.

Your frontline is your bank. It’s through your frontline that your customers experience your bank. And these are difficult times for frontline staff, too. Many are working from home, and have had to switch roles to handle the increased volume of remote support requests.

At the same time, they don’t have the in-person support of their colleagues, and they don’t have the same toolsets at their disposal. And new programs and policies are being rolled out faster than ever. All this at a time when many of them are experiencing personal difficulties.

You need to provide them with the knowledge, skills, and tools to deliver an exceptional customer experience. For the knowledge and skills part, they need practical training, which has been made more difficult by the pandemic. Instructor-led trainings are off the table, your learning management system could be better. You need an engaging and effective way to train remote staff so they can offer the right solution at the right time for your customers.

One of the biggest holes you need to plug is the lack of employee knowledge and familiarity with your digital products — the very ones you customers need to rely on right now. Many of your staff don’t bank with you, so they’ve never experienced your digital tools. If they’re not familiar with your tech, how can they be expected to promote and support it? To empower them, you need to train them on your tech and give them tools to help customers navigate transactions.

It all works together. The goal during this pandemic is to deliver an exceptional customer experience, to make customers feel secure and valued during a difficult time. Banks that can pull this off will build coveted long lasting customer loyalty. My contention is that empathy is the key to success.

Your customer experience is curated by your frontline employees. If you can remove stress from their jobs with training and support tools, they’ll be in a better position to help your customers. Investing in your frontline and showing them that you care about them will make them feel valued and help you build staff loyalty.

A well-trained, supported and secure frontline will do a much better job of helping your customers get through these tough times. Armed with the knowledge, skills and tools they need, frontline staff will be able make prescient recommendations that promote your products while making the customer feel confident and secure with their banking situation.

In the long run your customers won’t remember the details of each transaction and how it was handled. They’ll remember whether their bank added to their stress, or gave them one less thing to worry about during a trying time.

Scaling Quality Customer Service in the Pandemic Era

Since February 2020, the pandemic has reshaped everyone’s daily reality, creating a perfect storm of financial challenges.

In early March 2020, the economy was thriving. Six weeks later, over 30 million U.S. workers had filed for unemployment. The pandemic has exacerbated alreadycrushing consumer debt loads. At the end of the first quarter, nearly 11% of the $1.54 trillion student loan debt was over 90 days past due. Emergency lending programs like the Small Business Administration’s Paycheck Protection Program have not been renewed.  

Guiding consumers, especially millennials and Gen Z, to financial wellness is critical to the future of financial institutions. These demographics bring long-term value to banks, given their combined spending power of over $3 trillion.

But the banking support system is straining under incredible demand from millions of consumers, and it feels broken for many. Consumers are scrambling for help from their banks; their banks are failing them. With hold times ranging from 20 minutes to three hours, compared with an average of 41 seconds in normal times, customers are having an increasingly aggravating experience. And website content isn’t helping either. Often too generic or laced with confusing jargon like “forbearance,” customers can’t get advice that is relevant to their unique situation and  make good financial choices.

All this comes at a time of restricted branch access. Gone are the days when customers could easily walk into their local branch for product advice. Afraid of coronavirus exposure, most consumers have gone digital. Moreover, many branches are closed, reduced hours or use appointments due to the pandemic. No wonder digital has become an urgent imperative.

How can community banks scale high-quality service and advice cost-effectively in the pandemic era and beyond? The answer lies in a new breed of technology, pioneered by digital engagement automation, powered by artificial intelligence and knowledge. Here is what you can do with it.

Deliver smarter digital services. AI-automated digital self-service enables banks to deliver service to more customers, while lowering costs. For example, next-gen chatbots are often just as effective as human assistance for solving a broad range of basic banking queries, such as bill payments, money transfers and disputed charges. The average cost per agent call could be as high as $35; an AI-powered chatbot session costs only a few pennies, according to industry analysts.

Provide instant access to help. The next generation of chatbots go beyond “meet and greet” and can solve customer issues through AI and knowledge-guided conversations. This capability takes more load off the contact center. Chatbots can walk customers through a dialog to best understand their situation and deliver the most relevant guidance and financial health tips. Where needed, they transition the conversation to human agents with all the context, captured from the self-service conversation for a seamless experience.

Satisfy digital natives. Enhancing digital services is also critical to attracting and keeping younger, digital-native customers. Millennials and Gen Z prefer to use digital touchpoints for service. But in the pandemic era, older consumers have also jumped on the bandwagon due to contact risk.

Many of blue-chip companies have scaled customer service and engagement effectively with digital engagement automation. A leading financial services company implemented our virtual assistant chatbot, which answers customer questions while looking for opportunities to sell premium advice, offered by human advisors. These advisors use our chat and co-browse solution to answer customer questions and help them fill forms collaboratively. The chatbot successfully resolved over 50% of incoming service queries.

The client then deployed the capability for their IT helpdesk, where it resolved 81% of the inquiries. Since then the client has rolled out additional domain-specific virtual assistants for other functional groups. Together, these virtual assistants processed over 2 million interactions in the last 12 months.

The economic road ahead will be rocky, and financial institutions cannot afford to lose customers. Digital engagement automation with AI and knowledge can help scale up customer service without sacrificing quality. So why not get going?

Four Digital Lessons from the Pandemic

2020, so far, is the year of digital interactions.

Without the ability to interact in the physical world, digital channels became the focal point of contact for everyone. Industries like retail and restaurants experienced a surge in the use of digital services like Instacart, DoorDash and others.

This trend is the same for banks and their customers. In a survey conducted by Aite Group, 63% of U.S. consumers log into financial accounts on a desktop or laptop computer to check accounts at least once a week, while 61% use a smartphone.

The coronavirus pandemic has certainly accelerated the move to the digital channel, as well. In a Fidelity National Information Services (FIS) survey, 45% of respondents report changing the way they interacted with their financial institution because of the pandemic. The increased adoption of the digital channel is here to stay: 30% of respondents from the same survey noting they plan to continue using online and mobile banking channels moving forward.

The same is true for payments. FIS finds that consumers are flocking to mobile wallets and contactless payment to minimize virus risks, with 45% reporting using a mobile wallet and 31% planning to continue using the payment method post-pandemic.

This pandemic-induced shift in consumer preferences provides a few important lessons:

1. Experience Matters
Customers’ experiences in other industries will inform what they come to expect from their bank. Marketing guru Warren Tomlin once said, “a person’s last experience is their new expectation.” No matter where it came from, a great digital experience sets the standard for all others.

Banks should look to other industries to see what solutions can offer a great customer experience in your online and mobile banking channels. Customers’ service experiences with companies like Amazon.com’s set the bar for how they expect to interact with you. Their experience making payments with tools from PayPal Holdings, like Venmo, may inform their impression of how to make payments through the bank.

2. Personalization is Key
Providing a personalized experience for customers is key to the success of your bank, both now and in the future. Your bank’s online and mobile tools must generate a personalized experience for each customer. This makes them feel valued and well served — regardless of whether they are inside a branch or transacting through a mobile app.

Technologies like artificial intelligence can learn each customer’s unique habits and anticipate specific needs they might have. In payments, this might look like learning bill pay habits and helping customers manage those funds wisely. AI can even make recommendations on how users can ensure they have enough funds to cover the month’s bills or save anything they have left over.

AI is also able to look at customer data and anticipate any services they might need next, like mortgages, car loans or saving accounts. It brings the personal banker experience to customers in the digital world.

3. Weave the Branch Into the Digital
The ability to interweave the personalized, in-branch experience into the digital world is crucial. There are positives and negatives in both the branch and digital channels. The challenge for banks is to take the best of both worlds and provide customers with an experience that shines.

Customers want to know that someone is looking out for them, whether they can see that person or not. A digital assistant keeps customers engaged with the bank and provides the peace of mind that, whether they are in the branch or 100 miles away, there is always someone looking out for their financial well-being.

4. Embrace the “Now” Normal
To state that the Covid-19 pandemic changed the world would be a big understatement. It has disrupted what we thought was “business as usual,” and irrevocably changed the future.

The “new normal” changes day by day, so much that we choose to more accurately refer to it as the “now normal.” The increased dependency on digital has made it critical to have the right infrastructure in place . You truly never know what is coming down the line.

Customers enjoy the ease of digital and, more than likely, will not go “back to normal” when it comes to banking and payments. Now, more than ever, is the time to examine the digital experiences that your bank offers to further ensure its prepared for this endless paradigm shift that is the “now normal.”

The Best Way To Increase Digital Deposits

Consumers have come to expect the ability to do banking — and a wide range of other activities — online. These expectations are only likely to grow with the Covid-19 pandemic.

While some banks have offered online services for some time, many others may be rethinking their strategy as they consider options that might help them grow market share beyond their traditional or geographically limited service areas. After all, digital banking has the potential to draw deposits and service loans from a broader pool of potential customers. As banks of all sizes contend with margin compression and increased competition, one of the easiest and most expeditious ways to cut costs is through the use of technology.

As banks work to increase deposits in an increasingly digital world, they have the opportunity to take different, sometimes divergent, approaches to connecting with audiences and compelling them to become customers. Two key strategies are:

  • Establishing a digital branch — a digital version of an existing branch
  • Launching an entirely new digital bank, with an entirely different look and feel from the existing brand

There is no right approach as long as banks are meeting customers’ digital needs. Each bank should pursue an approach that incorporates their brand, their core strategies and their target audiences. But small community banks don’t have to be hampered by the lack of big budgets or deep pockets when providing excellent experiences to their customers and fuel consistent growth, though. By leveraging truly optimized digital capabilities, community banks can grow faster and at a low cost.

Extending the Brand Name
There’s great value in brand loyalty. Many community banks have long-standing positive relationships; strong brand awareness and loyalty are firmly established within the communities they serve. When doubling down on offering online services, leveraging its existing brand name can help the bank establish immediate awareness and preference for its services.

Leveraging the existing brand name can be a less-costly undertaking, since new logos, branding platforms, key messages and marketing collateral don’t need to be established.

The potential downside? When reaching into new markets, an existing brand name may not have enough awareness to compete against the large, national, online brands. Fortunately, the online landscape offers even very small community banks the opportunity to build a very large footprint. To do that, some are launching new brands designed to reach an entirely new target audience.

Launching a New Online Brand
Reaching a new audience is one of the biggest benefits for banks that launch a new online brand. It also creates an opportunity to shift the bank’s image if the existing brand has not been strong or does not convey the modern, nimble image that tends to appeal to younger audiences.

The drawbacks, though, include the costs of creating a new brand, both in terms of time and money with no certainty or guarantee that the new brand will gain traction in the market. In addition, launching a new brand relinquishes any opportunity to leverage any existing brand equity. Operational planning and related costs may also be higher, given the likelihood that some positions and services will be duplicated between physical and online branches.

Still, community banks should carefully consider both options in light of their unique positioning, strategies and goals. While both approaches represent some level of risk, they also provide specific benefits that can be capitalized on to grow market share and revenue. We’ve worked with banks in both camps that have seen incredible growth and gained operational efficiencies well beyond their goals.

No matter the approach, when it comes to digital banking, it’s imperative to have clear objectives, buy-in from all stakeholders, focused resources to make it happen, and partners that can provide guidance and best-practices along the way.

A New Opportunity for Revenue and Efficiency

Intelligence-Report.pngIn 2017, Bank Director magazine featured a story titled “The API Effect.” The story explained how banks could earn revenue by using application programming interfaces, or APIs, and concluded with a prediction: APIs would be so prevalent in five years that banks who were not leveraging them would be similar to banks that didn’t offer a mobile banking application in 2017.

Today, the banking industry is on a fast track to proving that hypothesis.

Banks are hurtling into the digital revolution in response, in no small part, to the outbreak of Covid-19, a novel coronavirus that originated in China before spreading around the globe. The social distancing measures taken to contain the virus have forced banks to operate without the safety nets of branches, paper and physical proximity to customers. They’re feeling pressure to provide up-to-the-minute information, even as the world is changing by the hour. And they’re grappling with ideas about what it means to be a bank and how best to serve customers in these challenging times.

One way to do so is through APIs, passageways between software systems that facilitate the transfer of data.

APIs make it possible to open and fund new accounts instantly — a way to continue to bring in deposits when people can’t visit a branch. They pull data from call centers and chat conversations into systems that use it to send timely and topical messages to customers. And they enable capabilities like real-time BSA checks — an invaluable tool for banks struggling to process the onslaught of Paycheck Protection Program loans backed by the Small Business Administration.

All those capabilities will still be important once the crisis is over. But by then, thanks to the surge in API adoption, they’ll also be table stakes for banks that want to remain competitive.

In short, there’s never been a better time to explore what APIs can do for your bank, which is the purpose of this FinXTech Intelligence Report, APIs: New Opportunities for Revenue and Efficiency.

The report unpacks APIs — exploring their use cases in banking, and the forces driving adoption of the technology among financial institutions of all sizes. It includes:

  • Five market trends driving the adoption of APIs among banks
  • Actionable API use cases for growing revenue and creating efficiencies
  • A map of the API provider landscape, highlighting the leading companies enabling API transformation
  • An in-depth case study of TAB Bank, which reimagined its data infrastructure with APIs
  • Key considerations for banks developing an API strategy

To learn more, download our FinXTech Intelligence Report, APIs: New Opportunities for Revenue and Efficiency.

How to Respond to LendingClub’s Bank Buy

For me, the news that LendingClub Corp. agreed to purchase Radius Bancorp for $185 million was an “Uh oh” moment in the evolution of banking and fintechs.

The announcement was the second time I could recall where a fintech bought the bank, rather than the other way around (the first being Green Dot Corp. buying Bonneville Bank in 2011 for $15.7 million). For the most part, fintechs have been food for banks. Banks like BBVA USA Bancshares, JPMorgan Chase & Co and The Goldman Sachs Group have purchased emerging technology as a way to juice their innovation engines and incorporate them into their strategic roadmaps.

Some fintechs have tried graduating from banking-as-a-service providers like The Bancorp and Cross River Bank by applying for their own bank charters. Robinhood Markets, On Deck Capital, and Square have all struggled to apply for a charter. Varo is one of the rare examples where a fintech successfully acquired a charter, and it took them two attempts.

It shouldn’t be surprising that a publicly traded fintech like LendingClub just decided to buy the bank outright. But why does this acquisition matter to banks?

First off, if this deal receives regulatory approval within the company’s 12 to 15 month target, it could forge a new path for fintechs seeking more control over their banking future. It could also give community banks a new path for an exit.

Second, banks like Radius typically leverage technology that abstract the core away from key digital services. And deeper pockets from LendingClub could allow them to spend even more, which would create a community bank with a dynamic, robust way of delivering innovative features. Existing smaller banks may just fall further behind in their delivery of new digital services.

Third, large fintechs like LendingClub don’t have century-old divisions that don’t, or won’t, communicate with each other. Banks frequently have groups that don’t communicate or integrate at all; retail and wealth come to mind. As a result, companies like LendingClub can develop and deploy complementary banking services, whereas many banks’ offerings are limited by legacy systems and departments that don’t collaborate with each other.

The potential outcome of this deal and other bifurcations in the industry is a new breed of bank that is supercharged with core-abstracted technology and a host of innovative, complementary technology features. Challenger banks loaded with venture capital funds and superior economics via bank ownership could be potentially more aggressive, innovative and dangerous competitors to traditional banks.

How should banks respond?

Start by making sure that your bank has a digital channel provider that enables the relatively easy and cost-effective insertion of new third-party features. If your digital channel partner can’t do this, it’s time to draft a request for proposal.

Next, start identifying and speaking to the myriad of enterprise fintechs that effectively recreate the best features of the direct-to-consumer fintechs in a white-label form for banks. Focus on solutions that offer a demonstrable path to revenue retention, growth and clear cost savings — not just “cool” features.

After coming up with a plan, find a partner to help you market the new services either through  the third-party vendors you select or another marketing partner. Banks are notorious for not doing the best job of marketing new products and features to their clients. You can’t just build it and hope that new and existing customers will come.

Finally, leverage the assets you already have: physical branches, a mobile banking app that should be one of the top five on a user’s phone, and pricing advantage over fintechs. Most fintechs won’t be given long runways by their venture capital investors to lose money in order to acquire clients; at some point, they will have to start making money via pricing. Banks still have multiple ways to make money and should use that flexibility to squeeze their fintech competitors.

Change is the only constant in life — and that includes banking. And it has never been more relevant for banks that want to stay relevant in the face of rapidly developing technology and industry-shifting deals.

How Community Banks Can Compete Using Fintechs, Not Against Them


fintech-7-15-19.pngSmaller institutions should think of financial technology firms as friends, not foes, as they compete with the biggest banks.

These companies, often called fintechs, pose real challenges to the biggest banks because they offer smaller firms a way to tailor and grow their offerings. Dozens of the biggest players are set to reach a $1 billion valuation this year—and it’s not hard to see why. They’ve found a niche serving groups that large banks have inadvertently missed. In this way, they’re not unlike community banks and credit unions, whose people-first philosophy is akin to these emerging tech giants.

Ironically, savvy fintechs are now smartly capitalizing on their popularity to become more like big banks. These companies have users that are already highly engaged; they could continue to see a huge chunk of assets move from traditional institutions in the coming year. After all, what user wouldn’t want to consolidate to a platform they actually like using?

The growth and popularity of fintechs is an opportunity for community banks and credit unions. As customers indicate increasing openness to alternative financial solutions, these institutions have an opportunity to grab a piece of the pie if they consider focusing on two major areas: global trading and digital capabilities.

Since their creation, community banks and member-owned organizations have offered many of the same services as their competitors. However, unlike fintechs, these financial institutions have already proved their resilience in weathering the financial crisis. Community banks can smartly position themselves as behind-the-scenes partners for burgeoning fintechs.

It may seem like the typical credit union or community banking customer would have little to do with international transactions. But across the world, foreign payments are incredibly common—and growing. Global trading is an inescapable part of everyday consumer life, with cross-border shopping, travel and investments conducted daily with ease. Small businesses are just as likely to sell to a neighbor as they are to a stranger halfway around the globe. Even staunchly conservative portfolios may incorporate some foreign holdings.

Enabling global trades on a seamless digital scale is one of the best avenues for both community banks and credit unions to expand their value and ensure their continued relevance. But the long list of requirements needed to facilitate international transactions has limited these transactions to the biggest banks. Tackling complex regulatory environments and infrastructure can be not only intimidating, but downright impossible for firms without an endless supply of capital earmarked for these such investments.

That means that while customers prefer community banks and credit unions for their personalization and customer service, they flock to big banks for their digital capabilities. This makes it all the more urgent for smaller operations to expand while they have a small edge.

Even as big banks pour billions of dollars into digital upgrades, an easy path forward for smaller organizations can be to partner with an established service that offers competitive global banking functions. Not only does this approach help them save money, but it also allows them to launch new services faster and recapture customers who may be performing these transactions elsewhere.

As fintechs continue to expand their influence and offerings, innovation is not just a path to success—it’s a survival mechanism.