Notching Customer, Employee Wins Through Process Automation

Financial institutions are committed to improving digital banking services and enabled more digital capabilities over the past year out of necessity — but there is more transformation to be done.

In their haste to meet customers’ and employees’ needs, many banks overlooked opportunities in back-office processes that are critical to providing excellent customer service, such as operating an efficient Regulation E (Reg E) dispute tracking process along with other processes that can ease employee challenges with regulatory compliance issues.

To enable bank staff to better serve customers, financial institutions must automate their back-office dispute tracking processes. One way to do is through implementing process automation solutions that offer workflows to direct the disputes appropriately, a single storage location for all supporting documentation and automating mundane tasks, such as generating letters and updating general ledger accounts. Implementing this kind of automation enables banks to simplify and streamline their input of disputes, ensuring that all critical information is captured accurately and dispute intake is handled consistently. This allows banks to provide consistent engagement and faster response to their customers.

Back-office automation strengthens a bank’s regulatory compliance and customer engagement. Awaiting outcomes from back-office processes can be extremely frustrating to customers — these moments are often tied to high-stress situations, such as having their cards used fraudulently. Banks should consider how manual, error-prone dispute tracking processes negatively affect the customer experience. Institutions also gain the crucial visibility that supports their decision-making and improves compliance with regulations, mitigating the risk and cost of non-compliance.

Process automation can also eliminate the stress that impacts account holders during this process. Having back-office automation with enhanced workflows and centralized documentation allows banks to return provisional credit more quickly and minimizes errors and delays. Instead of missing deadlines and making mistakes that erode customer confidence and cause audit exceptions, back-office employees meet deadlines and process disputes consistently and accurately, avoiding fines and additional work to remedy errors.

Automation can also improve back-office productivity by enhancing visibility. Clear visibility is created when a back-office employee can immediately track documentation and data when it is needed, at any stage in the process. During an audit, an employee may need to retrieve the date that a customer filed a Reg E dispute or to prove proper credit was applied. Without the appropriate tools, such as a single dashboard for dispute tracking and one platform for all supporting documentation, employees waste time searching paper files, spreadsheets and emails to piece together the required information. A workflow automation platform means a full audit trail with supporting documentation is readily available, optimizing everyone’s time.

For example, automation at Watkinsville, Georgia-based Oconee State Bank enables employees to efficiently complete tasks and focus their attention on serving their customers without being slowed down by complicated processes. The bank reduced the amount of time it took to file consumer disputes by more than 80% through process automation.

With 12 branches across Illinois and Indiana, First Bank, based in Carmi, Illinois, reduced claim processing time by more than 50% and experienced positive impacts from its digital dispute process. Dispute processes that can be easily tracked enable bank executives to clear audits and gain greater visibility into risk and compliance across their institution.

The visibility banks gain through automation improves their decision-making. Hard-to-access information and lack of visibility can be especially defeating when managing risk and compliance. Not only does incorrect or unavailable information open the door for human error, but it can also lead to financial loss. In areas like Reg E dispute tracking, this financial loss can be a result of not identifying a fraudulent dispute or trends of fraudulent charges. Process automation helps by supporting a methodical approach to reducing fraud and increasing visibility of high-risk merchants and customers.

This kind of attentive review during the Reg E process can help banks reduce the amount of undetected fraud and lower their write-off threshold, which is the pre-established amount set by an individual financial institution, under which any dispute is automatically written off as a financial loss. These thresholds are traditionally set with the back office staff’s bandwidth in mind; with more free time, banks can lower this threshold and avoid automatic losses. For instance, after implementing an automated, Reg E dispute tracking solution, Happy State Bank, the bank unit of Canyon, Texas-based Happy Bancshares, was able to lower its write-off threshold from $100 to $50 per dispute.

Tackling process automation can help banks compete and win while improving the level of service provided to customers. This technology empowers staff to be more responsive and alert to trends, enabling better decision-making and saving both cost and time. Implementing process automation allows banks to differentiate themselves from their competitors by providing consistent engagement and faster responses to customers. Process automation is the key to optimizing efficiency within any financial institution.

The API Band-Aid

Years before the Covid-19 crisis pushed the banking industry headfirst into a digital-forward ecosystem, many financial institutions felt stuck in place. While a few front-runners were making technological headway with modernized, adaptive core technologies — such as Deland, Florida-based Surety Bank, with $183 million in assets — many banks were tied to on-premises, decades-old systems. 

Still today, replacing the core — the backend system that processes all transactions — hasn’t become mainstream as a way to upgrade a bank’s technology. Instead, much of the industry seems to be moving toward a variety of outside solutions. 

And one of the most popular solutions has become application programming interfaces (APIs). In Bank Director’s 2021 Technology Survey, 63% of banks report using APIs.

APIs function as passageways between software systems that facilitate data exchanges; in simpler terms, they allow systems to talk to each other. Layering APIs on top of legacy core systems allow them to interact with disparate third-party technology companies almost instantly, among other capabilities.

Finzly, a London-based alternative core provider, advocates that banks not break their core contracts. The company’s Director of Marketing Suja Ramakrishnan says, “The core has been designed for certain functions. Let’s allow it to do what it is made to do and build a new innovation layer on top of it to let [the bank] do what it wants to do.”

Finzly integrates with a bank’s existing core via API calls. It’s hosted on Amazon Web Services, so no on-site installation is required. Once integration is complete, a bank can access Finzly’s products, as well as ancillary technologies that handle payments, account opening, foreign exchange and commercial business needs. “Alternative cores are breeding grounds for innovation,” Ramakrishnan adds.

U.S. legacy cores aren’t standing on the sidelines, watching foreign fintechs provide the technology their bank clients are asking for.

To retain their customers and poach new ones, some of the leading providers — Jack Henry & Associates, FIS and Fiserv — have all invested in API and similar functional technologies to be included in their technology stacks. Jack Henry’s jXchange, FIS’s Code Connect and Fiserv’s Communicator Advantage are the providers’ way of offering real-time communication capabilities with selected third parties not included in their core contract. 

But these API marketplaces come with a catch.

Tom Grottke, managing director at Crowe LLP, notes that banks can’t self-select the third parties they want to work with and go to market the next day. The providers are the ones to vet, certify and onboard the services they want to offer to their bank clients. “They [legacy core providers] are more open than they have been, they’ve added more functionality … but it’s not an open architectured marketplace,” he explains.

While banks are still wondering how they can add more digital features and services, Grottke says banks have realized that they won’t have to change the core to find those answers. 

There may be many advantages to replacing legacy cores, but it appears that many banks are content in using APIs as a Band-Aid to temporarily fix a longstanding problem. And with core conversion costly, replacing the core could be daunting for many banks. APIs buy a bank more time in figuring out their long-term core strategy.

How Banks Can Leverage Niche With M&A

After a year of formidable industry change, bank merger and acquisition activity is beginning to bounce back.

July’s 19 announced transactions brings this year’s total to 116 deal announcements so far, compared with 111 overall in 2020, according to data from S&P Global Market Intelligence. Financial institutions are looking to make strategic investments; post-pandemic, that means building seamless digital experiences at a lower cost remains a top priority.

This is a prime opportunity for banks to revisit the outdated traditional playbook of converting newly acquired customers. The conventional model of post-M&A communication is packed with marketing jargon like “commitment” and “service,” followed by a barrage of letters that make it difficult for customers to know what to expect from their new financial partner.

The goal of this approach has always been to reduce churn. But it has led to stagnant or low growth in wallet share and overlooked chances to build stronger relationships. One in four customers surveyed by BankingExchange took some form of action due to an acquisition: 5% closed their account, and an additional 22% eventually opened an account with another financial entity. Customers are increasingly willing to bank elsewhere if their financial needs are not being met.

Financial institutions need a new conversion playbook to keep old customers happy and new customers engaged. Banks should look beyond generic tactics and think like brands to make the M&A process smoother. This approach means the institution isn’t thinking about messaging as a box to check, focusing instead on the customer experience and brainstorming fresh and creative ways to communicate. Brand identity and emotion play a critical role in customer retention. According to a Deloitte study, over 35% of respondents who switched banks cited emotional reasons — they felt their bank was too large to care about their financial needs anymore.

Embracing a new acquisition model requires a proactive approach to post-merger communications and strategy. Framing a compelling story, integrating complex technology and bringing together multiple teams is achievable — but takes time and attention to detail.

A Fresh Approach to the M&A Playbook
Post-deal communications require a fresh approach to connecting emotionally and digitally with new customers. Forming deeper connections and reaching new opportunities for growth requires starting with an innovative model that leverages niche-focused products and services to create a greater affinity with the growing customer base.

Although a niche strategy isn’t an entirely new concept, it’s one of the most undervalued assets used by banks today. “Superior customer value occurs when a company can offer either a unique bundle of value, a comparable value at a lower cost than the competition or a combination of differentiated value and low cost,” research shows. Delivering tailored financial products to niche customer segments allows banks to build a brand that appeals to a new category of customers, creating a lasting connection and brand affinity.

Engaging a niche audience doesn’t mean your bank changes its foundation; it means focusing more deeply on an underserved segment of your newly acquired customer base to deliver a more robust and connected experience. Start by identifying these underserved markets with data to determine what opportunities exist. Maybe there’s a high concentration of gig workers who could benefit from new or newly combined digital bank offerings. As the acquiring bank, you could build an experience that meets these needs and the needs of other gig workers in your current customer base and communities.

This is a prime opportunity to jumpstart research, initiate conversations and craft meaningful marketing strategies that will delight your new audience. The standard welcome letter will not generate the same excitement as a bespoke campaign inviting gig workers to take part in building innovative products that will empower them to manage and grow their finances. This proactive approach demonstrates your dedication to providing top-notch customer services and solidifies your commitment to investing in each individual member.

Banks that take advantage of the new growth opportunities in today’s M&A landscape can move to a truly innovative approach that leverages data analytics to identify, differentiate and deliver value, leading to greater affinity and sustainable growth. Banks are poised to foster deeper trust in their new customers by building brands that deliver focused financial services for specific needs, ultimately creating lifetime value.

Taking Model Risk Management to the Next Level

A financial institution’s data is one of its most valuable resources. Banks constantly collect data on their loans, deposits and customer behaviors. This data should play a key role in how financial intuitions manage their risks.

Yet, developing a data strategy can be seen as too complex based on the sheer amount of data an institution may have, or as an unnecessary burden if the objective is solely to use the information to satisfy regulatory requirements. But a holistic data strategy can enhance value across all model risk management (MRM) platforms, both for regulatory and strategic purposes. On the flip side, being inconsistent or not updating data and inputs in a timely manner can lead to inaccurate or inconsistent results. Executives need to continually update and review information for consistency; if not, the information’s relevancy in assessing risk across various platforms will decrease.

Currently, the most common data strategy approach for banks is using individual tools to measure risk for regulatory purposes. For instance, financial institutions are required to calculate and monitor interest rate risk related to their balance sheet and potential movements in future interest rates. Typically, one team within the institution extracts data and transfers it to another team, which loads the data into an internal or external model to calculate the various interest rate profiles for management to analyze and make decisions. The institution repeats this process for its other models (credit, capital adequacy, liquidity, budgeting, etc.), adjusting the inputs and tools as needed. Often, banks view these models as individual silos — the teams responsible for them, and the inputs and processes, are separate from one another. However, the various models used to measure risk share many commonalities and, in many aspects, are interdependent.

Integrating model risk management processes require understanding a bank’s current data sources and aggregation processes across all of its current models. The first step for executives is to understand what data is currently used across these platforms, and how your organization can utilize it other beyond just checking the regulatory box. In order to enhance data quality, can one data extract be used for multiple platforms? For example, can the same loan-level data file be used for different models that use similar inputs such as asset liability management (ALM) and certain CECL models? While models may utilize some different or additional fields and inputs, there are many fields — such as contractual data or loan prepayment assumptions — that are consistent across models. Extracting the data once and using it for multiple platforms allows institutions to minimize the risk of inaccurate or faulty data.

From here, bank executives can develop a centralized assumption set that can be modeled across all platforms to ensure consistency and align results between models. For instance, are the credit assumptions that are developed for CECL purposes consistent with those used to calculate your ALM and liquidity profile under various scenarios? Are prepayment assumptions generated within the ALM model also incorporated into your CECL estimate? Synchronizing assumptions can provide more accurate and realistic results across all platforms. The MRM dashboard is a tool that can be configured to alert bank executives of emerging risks and ensure that data shared by different models is consistent.

One common method of gaining insights using MRM is through scenario and stress testing. Today’s environment is uncertain; executives should not make future decisions without in-depth analysis. They can develop scenarios for potential growth opportunities, modeling through the integrated platforms to calculate impacts to profitability and credit and interest rate risk. Similarly, they can expand deposit data and assumptions to assess high-risk scenarios or future liquidity issues apart from normal day-to-day operations. Whatever the strategy may be, assessing risk on an integrated basis allows management to gain a better understanding of all impacts of future strategies and make stronger business decisions.

Once institutions begin centralizing their data and model inputs and streamlining their monitoring processes using MRM dashboards, management can shift their focus to value-added opportunities that go beyond compliance and support the strategic vision of the institution.

Leveraging Rationalization to Tackle Digital Transformation

The coronavirus pandemic has had a notable impact on financial institutions, creating a more-urgent need to embrace digital-first banking. However, shifting to digital doesn’t just mean adopting new digital banking tools — a common misconception. Rather, it requires that banks rethink their holistic digital strategy to evolve alongside customer expectations, digitize all aspects of the financial journey and connect their customers’ digital and physical experiences.

Such a transformation boils down to determining which processes are digital-ready and which will need to be overhauled completely. Enter rationalization.

Relying on rationalization
Three billion people will access banking through digital devices this year, according to one estimate from Deloitte. Most banks have 3, 5 or even 10-year plans, but struggle to determine where to start. Think of rationalization as triage for banks: It allows them to identify which processes are ready to be digitized right now, and which need to be reimagined entirely before embarking on digitization.

Consider the process to open a checking account. It’s a simple process, requiring proof of identity and address, and a form to complete. Customers are generally good to go. This is a prime example of a digital-ready banking service that should be moved online immediately — and that can be accomplished rather easily.

Compare that to applying for a loan: a process that involves careful evaluation of the applicant and a mountain of paperwork filled with lengthy, confusing terms and requirements. If the process is intimidating to consumers with the help of a professional, imagine how it feels left to their own devices.

For processes that contain inherent points of friction, like the loan application example above, digitizing may simply make the cumbersome process quicker. Outdated, clunky processes must be revamped before they can be digitally transformed.

Putting customers at the center
Customers are the most important part of rationalization. As customer expectations have rapidly evolved, it’s time for institutions to modernize the digital experience to strengthen relationships and solidify loyalty. Some areas that banks should consider when evaluating the customer experience include:

  • Automating previously manual processes can reduce costs, improve efficiency and deliver an “always on” experience.
  • Ease-of-use. Along with being more accessible to people who might resist digitization, intuitive use and educational resources are integral to customer adoption and success.
  • Constant support. According to Accenture, 49% of customers say real-time support from real people is key to fostering loyalty.
  • Enhanced security. Strong security efforts are fundamental to giving customers peace of mind, which is critical when it comes to their money.
  • Make simple possible. Remove friction from the process to enhance the customer experience.

As banking catapults into a digitally dominant era, institutions should establish a presence across all digital touchpoints — desktop and web browser, mobile apps, even social media — to enable customers to access financial services and information at their convenience. A mobile-first mentality will help ensure that products and services work seamlessly across all devices and platforms. Consistency here is key.

Customers are ultimately looking to their institutions to solve their individual financial problems. Banks have a wealth of data available to them; those that seek to create the strongest relationships with customers can leverage these insights to tailor the experience and deliver relevant, timely products and support to meet their unique needs.

All sectors faced the same challenge over the course of the pandemic: How does a business survive physical separation from their customers? Industries like retail were better prepared for expedited digital transformation because they’ve been establishing a digital presence for years; they were largely able to rationalize quicker. Hospitality sectors, on the other hand, more closely mirrored banking in that many processes were far behind the digital times. Some restaurants lacked an online presence before the pandemic, and now must undergo their own version of rationalization to remain in business.

While rationalization looks different to each vertical, the central mission remains the same: determining the best, most sensible order of digital transformation to provide the best customer experience possible. Those companies that leverage the principles of rationalization to manage the massive migration to digital will be better positioned to solidify and capitalize on customer loyalty, and keep their institutions thriving.

Embracing Fraud Protection as a Differentiator

Community banks are under pressure from the latest apps or start-ups that attempt to lure customers away with features that they may lack: cutting edge technology, international capabilities and a digital-first approach.

However, much less attention is focused on where established banks thrive: compliance. It might not be as flashy as the latest app, but being able to offer customers a sense of protection is more valuable than many would believe. Main Street banks have long been integral parts of their communities, serving both local businesses and families through their people-first approach. These institutions are well known for reinvesting back into their communities, making them intertwined with their neighborhood. This approach is unique and solidified the reputation of these institutions as personable — a sentiment that remains today, even as tech giants grow within the financial sector. Established institutions have an edge as their long histories and reputations are deemed by consumers as more trustworthy than fintechs.

Public trust is a valuable asset, especially after high-profile data breaches in recent years and coronavirus scams. Payment scams suffered by banks and companies are typically front-page news and can cause significant damage to the business with costly fines and reputation harm. More than 75% of customers say security is a top consideration when choosing a financial institution. Interestingly, even if the organization is not directly at fault, consumers still consider them culpable. In fact, 63% say a company is always responsible for their data — even if the scam resulted from their direct actions, including falling for an email scheme.

$1 Billion Threat
The realization that banking customers hold their banks accountable for all types of fraud and scams may be surprising to some financial leaders. It underscores the importance of banks taking an active role in educating users, as well as protecting their own security behind the scenes.

One of the most common schemes is business email compromise: a cyber crime where a payee sends fraudulent banking information to a business or individual, who unknowingly sends funds to the wrong account. The fraud grew during the coronavirus pandemic as many businesses worked remotely for the first time and relied on email in place of phone calls or in-person interactions. The FBI reported $26 billion in losses in just a three-year period.

Such numbers should concern financial institutions, especially since these funds can be difficult to recover. These incidents are likely underreported, meaning the real figures are likely much larger.

Three Immediate Actions
Today’s challenging environment for financial institutions means that little focus is placed on non-revenue generating activities, especially with the emergence of new fintechs and start-ups. However, helping to ensure that customer funds are protected and providing them with preventative advice could become a huge value-add for banks.

  1. Though some banks do make information available on their websites or in-branches, this is often an afterthought. Showcasing your institution as an authority on these matters will emphasize your desire to put customers first — and they will take notice.
  2. Many customers ignore the threat of fraud because they do not see themselves or their business as a potential victim. Taking the time to explain how a scam targets each customer segment will demonstrate your institution’s ability to identify and mitigate risks to each person.
  3. Monitoring fraud is particularly difficult for many institutions because threats are constantly evolving. Working with larger partners can be an asset, as bigger organizations are more likely to invest both funds and personnel in monitoring and combatting scams.

Many misconceptions regarding fraud still exist, and customers may not realize they are at risk before it’s too late. Transforming your institution into their financial protector could be a low-cost — yet valuable — way to stand out.

Four Ways Banks Can Cater to Generational Trends

As earning power among millennials and Generation Z is expected to grow, banks need to develop strategies for drawing customers from these younger cohorts while also continuing to serve their existing customer base.

But serving these younger groups isn’t just about frictionless, technology-enabled offerings. On a deeper level, banks need to understand the shifting perspective these age groups have around money, debt and investing, as well as the importance of institutional transparency and alignment with the customer’s social values. Millennials, for instance, may feel a sense of disillusionment when it comes to traditional financial institutions, given that many members of this generation — born between 1981 and 1996, according to Pew Research Center — entered the workforce during the Great Recession. Banks need to understand how such experiences influence customer expectations.

This will be especially important for banks; Gen Z — members of which were born between 1997 and 2012 — is on track to surpass millennials in spending power by 2031, according to a report from Bank of America Global Research. Here are four ways banks can cater to newer generational trends and maintain a diverse customer base spanning a variety of age groups.

1. Understand the customer base. In order to provide a range of services that effectively target various demographics, financial institutions first need to understand the different segments of their customer base. Banks should use data to map out a complete picture of the demographics they serve, and then think about how to build products that address the varying needs of those groups.

Some millennials, for instance, prioritize spending on experiences over possessions compared to other generations. Another demographic difference is that 42% of millennials own homes at age 30, versus 48% of Generation X and 51% of baby boomers at the same age, according to Bloomberg. Banks need to factor these distinctions into their offerings so they can continue serving customers who want to go into a branch and engage with a teller, while developing tech-driven solutions that make digital interactions seamless and intuitive. But banks can’t determine which solutions to prioritize until they have a firm grasp on how their customer base breaks down.

2. Understand the shifting approach to money. Younger generations are keeping less cash on hand, opting to keep their funds in platforms such as Venmo and PayPal for peer-to-peer transfers, investing in Bitcoin and other cryptocurrencies and other savings and investment apps. All of these digital options are changing the way people think about the concepts of money and investing.

Legacy institutions are paying attention. Bank of New York Mellon Corp. announced in February a new digital assets unit “that will accelerate the development of solutions and capabilities to help clients address growing and evolving needs related to the growth of digital assets, including cryptocurrencies.”

Financial institutions more broadly will need to evaluate what these changing attitudes toward money will mean for their services, offerings and the way they communicate with customers.

3. Be strategic about customer-facing technology. The way many fintech companies use technology to help customers automatically save money, assess whether they are on track to hit their financial goals or know when their balance is lower than usual has underscored the fact that many traditional banks are behind the curve when it comes to using technology to its full potential. Institutions should be particularly aggressive about exploring ways technology can customize offerings for each customer.

Companies should think strategically about which tech functions will be a competitive asset in the marketplace. Many banks have an artificial intelligence-powered chatbot, for instance, to respond to customer questions without involving a live customer service agent. But that doesn’t mean all those chatbots provide a good customer experience; plenty of banks likely implemented them simply because they saw their competitors doing the same. Leadership teams should think holistically about the best ways to engage with customers when rolling out new technologies.

4. Assess when it makes sense to partner. Banks need to determine whether the current state of their financial stack allows them to partner with fintechs, and should assess scenarios where it might make sense — financially and strategically — to enter into such partnerships. The specialization of fintech companies means they can often put greater resources into streamlining and perfecting a specific function, which can greatly enhance the customer experience if a bank can adopt that function.

The relationship between a bank and fintech can also be symbiotic: fintech companies can benefit from having a trusted bank partner use its expertise to navigate a highly regulated environment.

Offering financial products and services that meet the needs of today’s younger generations is an ever-evolving effort, especially as companies in other sectors outside of banking raise the bar for expectations around tailored products and services. A focus on the key areas outlined above can help banks in their efforts to win these customers over.

Unlocking the Value of Customers’ Data

A customer data platform is at the heart of the most cutting edge, customer-centric digital programs at leading financial institutions. This platform should clean, connect and share customer data so the business lines that need it most can create distinctive and relevant experiences. Amperity’s Jill Meuzelaar details the four key features banks should look for in a customer data platform, as well as common issues they may encounter when evaluating a current or prospective system.

  • How to Connect Customer Data
  • Incorporating Flexibility for Maximum Functionality
  • Avoiding Common Pitfalls

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.

Why ESG Will Include Consumer Metrics

Imagine a local manufacturer, beloved as an employer and a pillar of the community. The company uses 100% renewable energy and carefully manages its supply chain to be environmentally conscious. The manufacturer has a diverse group of employees, upper managers and board. It pays well and provides health benefits. It might be considered a star when it comes to environmental, social and governance (ESG) parameters.

Now imagine news breaks: Its product causes some customers to develop cancer, an outcome the company ignored for years. How did a good corporate citizen not care about this? You could say this was a governance failure. Everyone would agree that it was a trust-busting event for customers.

ESG, at its root, is about looking at the overall impact of a company. The most profound impact of banks is the impact of banking products. Most bank products are built for use in a perfect world with perfect compliance, but perfect compliance is hard for some people. Noncompliance disproportionately affects the most vulnerable customers ⎯ people living paycheck-to-paycheck and managing their money with little margin to spare. That isn’t to say that these individuals are all under or near the poverty line: Fully 18% of people who earn more than $100,000 say they live paycheck to paycheck, according to a survey of 8,000 U.S. workers by global advisory firm Willis Towers Watson. There is growing recognition that bank products need to reflect the realities of more and more Americans.

Years ago, Columbus, Ohio-based Huntington Bancshares started working on better overdraft solutions for customers whose financial lives were far from perfect. Currently, the $123 billion regional bank will not charge for overdrafts under $50 if a customer automatically deposits their paycheck. If the customer overdrafts $50 or more, the bank sends them an alert to correct it within 24 hours.

Likewise, Pittsburgh-based PNC Financial Services Group recently announced a new feature that gives PNC Virtual Wallet customers 24 hours to cure an overdraft without having to pay a fee.  If not corrected, an overdraft amounts to a maximum of $36 per day.

“With this new tool, we’re able to shift away from the industry’s widely used overdraft approach, which we believe is unsustainable,” said William Demchak, chairman and CEO of the $474 billion bank, in a statement. The statement alone reframes what sustainability means for banking.

The banks that become ESG leaders will create products that improve the long-term financial health of their retail and small businesses customers. To do so, some financial institutions are asking their customers to measure their current financial realities in order to provide better solutions.

For example, Credit Human, a $3.2 billion credit union in San Antonio, is putting financial health front and center both in their branches and digitally. Their onboarding process directs individuals to a financial health analysis supported by FinHealthCheck, a data tool that helps banks and credit unions measure the financial health of customers and the potential outcomes of the products they offer. The goal of Credit Human is to improve the financial health of their customers and eventually make it a part of the overall measurement of the product’s performance.

Measurement alone will not build better bank products. But it will provide banks and credit union executives with critical information to align their products with customer well being. With the implementation of overdraft avoidance programs such as PNC’s Low Cash Mode, the bank expects to help its customers avoid approximately $125 million to $150 million in overdraft fees annually. PNC benefits its bottom line by driving more customers to its Virtual Wallet, nabbing merchant fee income and creating customer loyalty in the process. PNC’s move makes it clear that they believe promoting the long-term financial health of their customers promotes the long-term financial health of the company.

Banks need to avoid appearing to care about ESG, while failing to care about customers. The banks that include customer financial health in their ESG measurement will survive, thrive and become the true ESG stars.