What Banks Missed

It’s a classic case of a couple of upstarts upending the business of banking.

Increasingly familiar names such as Affirm Holdings, Afterpay Ltd. and Klarna Bank, as well as few household names such as PayPal Holdings, are busy taking credit card business away from banks by offering interest-free, installment loans at the point of sale.

Almost overnight, this type of lending has grown into a national phenomenon, starting with online merchants and then spreading throughout the industry, as Bank Director Managing Editor Kiah Haslett wrote about earlier this year.

C + R Research reports that of 2,005 online consumers, nearly half are making payments on some kind of buy now, pay later loan. More than half say they prefer that type of lending to credit cards, citing ease of payments, flexibility and lower interest rates as their top reasons why they prefer to buy, now pay later.

The amount of money flowing into the space is substantial. In August, Square announced that it would purchase Afterpay for $29 billion. Mastercard is trying to get into the game as well, announcing a deal in September to partner with multiple banks such as Barclays US, Fifth Third Bancorp and Huntington Bancshares to bring buy now, pay later to merchants.

Whatever your skepticism of the phenomenon may be, or your lack of interest in consumer lending, it’s clear that financial technology companies are chipping away at bank business models. This phenomenon begs the question: Why are fintech companies having such success when banks could have taken the opportunity but did not?

Banks have the data. They “know their customer” — both in the regulatory and relationship sense. Yet, they didn’t anticipate consumers’ interest or demand because they already had a product, and that product is called a credit or debit card.

Few companies cannibalize their business models by offering products that directly compete with existing products. But increasingly, I believe they should. Banks that don’t acknowledge the realities of today’s pressures are vulnerable to tomorrow’s innovation.

When we think about the business of banking today, I think about a glass half empty. It doesn’t mean we can’t put a little bit more water into it. But it does require an honest assessment of gaps in your current strategy and an assessment of the team you’d need — not necessarily the team you employ.

As I head into Bank Director’s Audit & Risk Committees Conference in Chicago this Monday through Wednesday, these are some of the themes on my mind. In some ways, having a glass half empty is sometimes the best thing for you.

It gives you the chance to do something positive to change it.

The Unbankey Bank: Coastal Financial’s Evolution

Coastal Financial Corp., a $2 billion community banking company in Everett, Washington, was a typical community bank seven years ago. It wasn’t looking to launch a banking-as-a-service (BaaS) division, where the bank would lend out its charter, payment rails and other bank exclusive products and services to third parties.

But that is exactly what the bank did.

When asked if he knew anything about BaaS prior to 2015 — the launch year of Coastal’s BaaS program — CEO Eric Sprink confessed, “Nope — we stumbled into it.”

In 2015, Sprink met Arkadi Kuhlmann, former CEO of ING Direct USA and ING Direct Canada, who was looking for a bank partner to offer banking services on the back end for his financial technology company, Zenbanx. The fintech offered deposit accounts, international currencies and money transfers.

This was the first time Sprink had heard anything about BaaS. He was interested, the board was interested, the executive team of Coastal was interested; so, the bank started an almost 15-month process of engaging investment bankers and consultants, speaking with regulators and preparing to enter into this new line of business.

But then, Coastal lost the bid to do business with Zenbanx to the personal finance giant SoFi Technologies, which later bought the fintech. Six months later, SoFi announced it was shutting down all Zenbanx accounts.

Instead of opting for resignation, Sprink — with the blessing of his board — continued to chase down new technology leads and partners. In the words of one of Sprink’s board members: “‘We’ve got to find out more about this … start running.’”

And Sprink hasn’t stopped running since. Along the way, Coastal recruited multiple new board members — one about every 18 months, and four in total — who have helped build Coastal’s BaaS strategy from the ground up. Sprink explains the process as being, “evolutionary, not revolutionary … We’ve intentionally looked really hard for expertise that we’re lacking in the evolution of our BaaS group.

That expertise, in part, is coming from its newest members: Stephan Klee; venture capitalist veteran and current CFO of Portage Ventures; Sadhana Akella-Mishra, chief risk officer at alternative core provider Finxact; Rilla Delorier, a former innovation executive at Umpqua Bank and PNC Bank; and Pamela Unger, a former tax manager at PwC, who brings understanding of direct venture capital accounting and oversight.

Coastal is dedicated to partnering with fintechs that are not only unwavering in their mission, but that are compatible with Coastal’s core values: stay flexible, embrace great thinking and be “unbankey,” as Sprink says. In what he describes as their “emotional gating criteria,” the bank sits down — or Zooms in, post-March 2020 — with these fintechs. They want to better understand the business, review their performance and investors, and, most importantly, find out what they want to accomplish. The key is to find partners that will reach and embolden specific communities through financial products and services tailored to their needs.

“We try real hard upfront to make sure we’re picking the ones that best fit us and that have the most likelihood of success,’’ he says. “With limited resources, you really have to stick to your gating criteria and believe in what you’re trying to accomplish.”

The whole process, from initial discussion to commercial launching, takes upwards of one year to 18 months. As of July, Coastal was working with 24 fintechs, half of them actively offering banking products and services through Coastal.

It takes a lot of effort to get to that stage. Out of the more than 1,100 fintechs vetted, only about 2% became fintech partners.

And in regard to the 12 active fintech partners, Coastal just recently crested the $1 million in revenue mark. Coastal’s BaaS revenue for the quarter ending June of 2021 was $1.4 million, a 50.2% increase from the prior quarter. Included in Coastal’s overall BaaS revenue, the bank reported $110,000 in interchange income for the quarter ending in June, up from $35,000 in the prior quarter. The bank isn’t tracking profitability of the division yet, but plans to break it out next year for analysts and investors.

In a 2020 survey, venture capitalist firm Andreessen Horowitz found that out of those surveyed, half of the BaaS banks were seeing above-industry average rates on their return on assets and equity, calculated from 2017 to 2019. The firm says that these returns are two to three times the average industry rate.

When Bank Director magazine launched a study to determine the top 10 fastest growing U.S. banks in 2020, it found that two of the banks listed are BaaS providers: NBKC Bank, with $1.2 billion in assets, placed at the top of the list, while $4.7 billion Celtic Bank ranked fifth.

A BaaS division could lead a bank to new revenue and deposit sources, growth and access to new customer segments, but it does not have the sole capability to turn a bank profitable. It takes good timing, patience and a healthy bank with curious leaders — a combination that Coastal seems to flourish on.

The bank’s second quarter 2021 investor presentation also reports that 73% of Coastal’s fintech partners are headed by a diverse CEO, those who identify as a minority or female. Eighty-eight percent have a diverse co-founder. Partners include Greenwood, Cheese, Fair, Aspiration and Ellevest, some of which reach underserved communities or offer mission-based banking practices.

“At the end of the day, we’re still a community bank, and we’re trying to give that [community banking] experience to others [who] haven’t had it yet,” Sprink says. “And we’re using partners to deliver it.”

Power in Pineapples: Why Less Isn’t More in Financial Education

One of the first things we’re taught about money is that it is imperative to save it. But that is often where the lesson ends.

What type of loans should students take out? When is the best time to start investing? Should we invest and where? Where should we go in a financial emergency?

For a society that prides itself on its economy, most of its citizens are lacking the basic knowledge of how its primary building block — money —  works. The 2021 TIAA Institute GFLEC Personal Finance Index, which measures working financial knowledge in adults 18 years and older, found that, on average, respondents were only able to answer half of its questions accurately. The disparities were great between race and ethnic groups. While 55% of non-Hispanic white respondents answered its index questions correctly, Hispanic and Black Americans scored 41%, and 37%, respectfully.

On top of that, debt is soaring. Experian found that overall consumer debt hit an all-time high of $14.88 trillion in 2020. Student loan debt accounted for over $1.5 trillion, auto loan debt reached $1.35 trillion and mortgage debt climbed to an astounding $10.3 trillion. Federal student loan payments, which were suspended during the pandemic, resume October 1, putting more pressure on student borrowers in the months ahead.

Banks have long offered personal finance education in local schools and through partnerships with various nonprofits. Transitioning into the digital age, many of them also offer budgeting and money management apps. Even so, consumers may not be thrilled with what banks have to offer. A February 2021 study from the Ipsos-Forbes Advisor U.S. Consumer Confidence Tracker found that only 5% of respondents ranked their bank’s budgeting and tracking tools as one of its top three most valuable mobile features. Mobile check deposit, viewing statements and account balances and transferring funds between accounts took the top three spots.

Ready to go to work on this issue is Bolun Li, one of the founders and CEO of Durham, North Carolina-based Zogo Finance, an emerging trailblazer in the financial literacy fintech sector. Zogo aims to keep financial education sourced at a consumer’s primary financial institution. Banks can white-label Zogo’s gamified app, can use it to teach customers about general financial topics as well as bank-specific product offerings, and track usage and engagement.

While Zogo was created with the Gen-Z and Millennials in mind, it claims users of all ages, backgrounds and demographics. If a bank has the app, any of its customers can access it.

“Too few students — particularly those from low-income backgrounds — receive any personal finance education during their K-12 years,’’ says Li. “Even existing financial education initiatives, where they exist, often overlook the learning preferences and needs of younger generations. In many instances, these offerings are boring, complex, and intimidating.”

A Council for Economic Education report last year found only 21 states require high school students to take a class in personal finance.

Li says: “Upon reaching adulthood, however, people are confronted with an array of major financial decisions regarding student debt, credit cards, housing, car ownership, retirement planning and taxes.”

Black Americans in particular have a disadvantage when it comes to financial wellness. But Kevin Cohee, chairman, CEO and owner of Boston-based, black-owned and fully digital OneUnited Bank, with $653 million in assets as of March, views digital solutions as a way to start empowering consumers. “This online banking product [digital banking platforms] allows for a broader base of communication that can be used for things like teaching financial literacy,” he told Forbes earlier this year.

OneUnited Bank pioneered OneTransaction Conference, a free and virtual financial conference, on Juneteenth (June 19) of this year, capitalizing on the community’s need for better and equalized access to financial education resources. The event had over 25,000 participants sign up.

What seems clear is that this type of financial education must increasingly be delivered through online or mobile channels for today’s consumers. With digital solutions like Zogo, users can access hundreds of lessons at any time, anywhere. Users accumulate pineapples — selected as the app’s gamified coin due to the fruit’s popularity — as they learn. The fintech further sweetens the pot by rewarding users for completing learning milestones, with options such as gift cards and bank-specific products and discounts.

Zogo understands what consumers want: access to everything online, incentives and bite-sized bits of knowledge.

In a June article detailing where banks have traditionally fallen short in providing financial health resources to its consumers, former bank executive Evan Siegel writes, “Navigating the journey [of personal finance management] requires a series of personalized, bite-sized action plans. The advice must be delivered in discrete chunks, so as not to overwhelm, and served up as an ongoing diet because financial improvement requires many actions.” If not, the knowledge won’t stick, and consumers can quickly get overwhelmed.

Zogo, coming off of signing its 100th financial institution, was asked what types of lessons and categories its users were flocking to. It doesn’t concern federal aid, mortgages or even cryptocurrency.

It’s investing.

“We’re seeing young people really gravitate towards our ‘Start Investing’ and ‘Save Money’ categories,” Li says. “Their behavior in the app has suggested people are really hungry for investing education — so much so that we released another category in the app called ‘Advanced Investing.’ Older people, on the other hand, tend to gravitate towards our ‘Save for Retirement’ category.”

Li wants Zogo to put banks and credit unions in a better position to tackle America’s financial illiteracy problem, one pineapple at a time.

Tactical Pillars for Quick Wins in the Challenging Operating Environment

The challenges of 2020 included a landslide of changes in financial services, and the sheer effort by banking professionals to keep operations running was nothing short of historic.

Although there will be some reversion to prior habits, consumers in 2021 have new expectations of their banks that will require more heavy lifting. This comes at a time when many banks in the U.S. are engaging in highly complex projects to redesign their branches, operations and organizational charts. Fortunately, there are some quick win tactics that can support these efforts. Consider the following three “pillar” strategies that offer short-term cost savings and guidelines to set a foundation for operational excellence.

Portfolio Rationalization
Portfolio rationalization need not involve product introductions or retirements. But, given the changing consumer landscape, executives should consider taking a fresh look at their bank’s product portfolios. Due to the many changes in accountholder behavior, certain cost/benefit dynamics have changed since the pandemic began. This fact alone makes re-evaluating and recalibrating existing portfolio strategies a matter of proper due diligence. Rationalizing the portfolio should include revising priorities, adding new features and reassessing risk profiles and existing project scopes.

Process Re-Engineering
Banking executives have been under tremendous pressure recently to quickly implement non-standard procedures, all in the name of uninterrupted service during socially distanced times.

Though many working models will see permanent change, it is critical to optimize these processes early for long-term efficiency, security and customer experience. As the digital curve steepens, banks will need to map out the customer journey across all digital channels to remain competitive. Some process re-engineering methods include eliminating workarounds, streamlining processes and updating legacy policies that are no longer relevant.

Intelligent Automation
Banks are increasingly leveraging technologies classified under the umbrella of intelligent automation. These include machine learning, robotic process automation and artificial intelligence — all of which have become especially relevant to deal with multiple types of high-volume, low-value transactions. Automated workflows remove the clerical aspects of the process from the experts’ plates, allowing them to focus time and energy on more high-value activities. When executed well, intelligent automation works alongside humans, supplementing their expertise rather than replacing it. For example, areas like fraud and underwriting are becoming increasingly automated in repetitive and known scenarios, while more complicated cases are escalated to personnel for further analysis.

Supplier Contracts
Auditing invoices for errors and evaluating vendor contracts might be the last place a banker would look to establish a quick win. However, our benchmarks suggest they can be a critical stepping-stone to bottom-line opportunities. Existing vendor contracts often include inconsistent clauses and undetected errors (such as applications of new pricing tiers missed, etc.). Eventually, minor errors can creep into the run rate that adds up over the years to significant dollar discrepancies. With extensive due diligence or someone in the know, it’s possible to find a six to seven figure lift, simply by collecting intelligence on the prevailing market rates, the available range of functionality and reasonable expectations for performance levels.

While the financial services industry has been keeping operations running uninterrupted, there is no time like the present to optimize operating processes. Accomplishing a few results early  on can free up resources and support long-term gains. Executives should take the time now to optimize operating model structures in order to brace for what comes next. Looking into the increasingly digital future, consumers will continue to expect banks to reinvent and build up their operating models to greater heights.

Best Practices to Achieve True Financial Inclusivity

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.

Banks Risk Missing This Competitive Advantage

Artificial intelligence is undergoing an evolution in the financial services space: from completely innovative “hype” to standard operating technology. Banks not currently exploring its many applications risk being left behind.

For now, artificial intelligence remains a competitive advantage at many institutions. But AI’s increasing adoption and deployment means institutions that are not currently investing and exploring its capabilities will eventually find themselves at a disadvantage when it comes to customer satisfaction, cost saves and productivity. For banks, AI is not an “if” — it’s a “when.”

AI has proven use cases within the bank and credit union space, offering a number of productivity and efficiency gains financial institutions  are searching for in this low-return, low-growth environment. The leading drivers behind AI adoption today are improvements in customer experience and employee productivity, according to a 2020 report from International Data Corporation. At Microsoft, we’ve found several bank-specific applications where AI technology can make a meaningful impact.

One is a front-office applications that create personalized insights for customers by analyzing their transaction data to generate insights that improve their experience, like a charge from an airline triggering a prompt to create a travel notification or analyzing monthly spend to create an automated savings plan. Personalized prompts on a bank’s mobile or online platform can increase engagement by 40% and customer satisfaction by 37%; this can translate to a 15% increase in deposits. Additionally, digital assistants and chatbots can divert call center and web traffic while creating a better experience for customers. In some cases, digital assistants can also serve as an extension of a company’s brand, like a chatbot with the personality of “Flo” that auto insurer Progressive created to interact with customers on platforms like Facebook, chat and mobile.

Middle-office fraud and compliance monitoring are other areas that can benefit from AI applications. These applications and capabilities come at a crucial time, given the increased fraud activity around account takeovers and openings, along with synthetic identity forgery. AI applications can identify fraudsters by their initial interaction while reducing enrollment friction by 95% and false positives by 30%. In fact, IDC found that just four use cases — automated customer service agents, sales process recommendation and automation, automated threat intelligence and prevention and IT automation — made up almost a third of all AI spending in 2020.

There are several steps executives should focus on after deciding to implement AI technology. The first is on data quality: eliminating data silos helps to ensure a unified single view of the customer and drives highly relevant decisions and insights. Next, its critical to assemble a diverse, cross-functional team from multiple areas of the bank like technology, legal, lending and security, to explore AI’s potential to create a plan or framework for the bank. Teams need to be empowered to plan and communicate how to best leverage data and new technologies to drive the bank’s operations and products.

Once infrastructure is in place, banks can then focus on incorporating the insights AI generates into strategy and decision-making. Using the data to understand how customers are interacting, which products they’re using most, and which channels can be leveraged to further engage — unlocking an entire new capability to deliver business and productivity results

In all this, bank leadership and governance have an important role to play when adopting and implementing technology like AI. Incorporating AI is a cultural shift; executives should approach it with constant communication around AI’s usage, expectations, guiderails and expected outcomes. They must establish a clear set of governance guiderails for when, and if, AI is appropriate to perform certain functions.

One reason why individual banks may have held off exploring AI’s potential is concern about how it will impact current bank staff — maybe even replace them. Executives should “demystify AI” for staff by offering a clear, basic understanding of AI and practical uses within an employee’s work that will boost their productivity or decrease repetitive aspects of their jobs. Providing training that focuses on the transformational impact of the applications, and proactively creating new career paths for individuals whose roles may be negatively impacted by AI show commitment to employees, customers, and the financial institution.

It is critical that executives and managers are aligned in this mission: AI is not an “if” for banks, it is “when.” Banks that are committed to making their employees’ and customers’ lives better should seriously consider investing in AI capabilities and applications.

 

How the Edges of Financial Technology Could Change Regulation

Financial regulation in the United States follows a longstanding pattern: The presidential administration changes, the other political party takes power and the financial regulation pendulum swings. Those working in compliance inevitably need to recalibrate.

President Joe Biden’s messaging so far has aimed to minimize polarization. This bodes well for moving beyond the typical “financial deregulation” versus “more regulation” dynamic. It gives the industry an opportunity to turn our attention towards pulling the overall framework out of an old, slow, manual and paper-based reality. What the U.S. financial regulatory framework really needs are large, fundamental overhauls and modernizations that will support a healthy, ever-changing financial services marketplace — not just through the next presidential administration, but further beyond, through the next several decades.

The incoming leadership could make regulation smarter and more effective with reforms that:

  • Measure success by outcomes and evidence, as opposed to procedural adherence.
  • Leverage technology to streamline compliance for agencies as well as providers.
  • Catch up and keep up with the ongoing advancements in financial technology.

The time for these sorts of changes just so happens to be ripe.

Digital or cryptocurrencies and charters for financial technologies have an awkward fit within the existing regulatory framework. Cannabis, another fringe area of finance, poses extra layers of legal and regulatory challenge, but its status could change on a dime if the new administration resolves the state and federal disconnect. All three of these peripheral business opportunities have gained significant momentum recently and may force regulators to adapt. To support these new use cases, which would otherwise break existing bank infrastructure, technology providers would have to modernize in ways that would benefit financial service compliance across the board.

As the emerging regulatory lineup takes shape from the legacies of the outgoing agency heads, the swing from the past administration to the present may not be all that dramatic. There are strange bedfellows in fintech. In the last six months of Donald Trump’s administration, there was already a balance between Acting Comptroller of the Currency Brian Brooks and U.S. Treasury Secretary Steven Mnuchin.

Brooks was indeed very active in his short tenure. Under him, the Office of the Comptroller of the Currency issued full-service national bank charters for fintech companies, published interpretive letters supporting digital currencies and published a working paper from its chief economist, Chartering the FinTech Future,” that lent support to the use of stablecoins.

In contrast, Mnuchin spent his last month in office encouraging  Financial Crimes Enforcement Network, or FinCEN, to issue a controversial proposed rulemaking that would affect crypto wallets and transactions. Critics argue this would make compliance impossible for decentralized technologies.

The Biden administration may have a similar dynamic between these two regulatory roles, albeit less dramatic. The confirmation of Treasury Secretary Janet Yellen, with her experience and moderate stance, conveys a great deal of stability. Still, she may not champion stablecoins, given her public statements on cryptocurrency.

At writing, Michael Barr is the anticipated pick for comptroller. His extensive and diverse résumé shows a long history of supporting fintech. We anticipate that he would continue the momentum towards modernization that Brooks started.

Gary Gensler, the nominated chair of the Securities and Exchange Commission, has a great deal of expertise and enthusiasm for digital currencies. Since his tenure as chair of the Commodity Futures Trading Commission during Barack Obama’s administration, he has served on faculty at MIT Sloan School of Management, teaching courses on blockchain, digital currencies and other financial technologies. Chris Brummer, the Biden administration’s anticipated choice for the CFTC, currently serves as faculty director at Georgetown University’s Institute of International Economic Law, has written books on the regulation of financial technologies and founded D.C. Fintech Week to help promote discussion of fintech innovation among policymakers.

When we get to the outer edges of finance — to crypto, charters and cannabis — the divide between political camps starts to disappear. But there’s still quite a bit of rigidity in the traditional financial industry and regulatory framework. Combining the slate of steady, open-minded regulators with the building pressures of technology yields reasonable hope for regulatory overhauls that will pull compliance along into the future.

E-signatures Move from Nice to New Normal

The coronavirus pandemic has been a pivotal catalyst within the financial services industry, as banks of all sizes adopt and launch digital tools and services at an unprecedented pace. While not a new initiative, e-signatures suddenly became a top priority for banks, as customer sought ways to complete their financial transactions and certify documents remotely. According to BAI’s August Banking Outlook research on digital banking trends during Covid-19, half of consumers use digital products more since the pandemic, and 87% indicate they plan to continue after the pandemic. Banks now realize they must implement a digital transformation strategy in order to navigate these challenging times and new consumer expectations.

However, some financial institutions still view e-signatures as a luxury — a solution that holds benefit and value but is not at the top of their list of digital priorities. To defend their market share and ensure future success, banks must embrace digital transformation and provide customers with a more personalized, engaging experience. The crucial link is e-signatures.

The coronavirus means banking customers need to be able to conduct banking business, open new accounts, obtain new loans or modify or extend existing loans while avoiding traditional in-person contact and interaction with bank staff. It has never been more important to transmute traditional, paper-based processes to the digital realm. Declines in branch visits and ATM transactions, an increased focus on touchless interactions and payments and the rapid operational migration to remote operations moved e-signatures from a nice-to-have, convenient solution to a critical tool every bank must offer to empower their customers to process daily transactions.

Adoption rates for e-signatures were on the rise prior to the pandemic, but have now taken on an even larger and more significant role, enabling banks to move transactions forward in an era of social distancing. E-signatures allow the continuation of normal banking activities in a secure environment while protecting the safety of both the customer as well as the bank employee. It’s apparent that other unexpected conditions could arise in the future that would force the same technological need. They’ve moved from a convenience offering to a banking infrastructure necessity.

Basic banking services like opening an account, arranging a line of credit and applying for a mortgage all require an exchange of documents. In the age of Covid-19, the ability to do that electronically has become mandatory. The most frequent use for of e-signatures has been with new account opening and new loan origination and closing processes. The Small Business Administration’s Paycheck Protection Program also drove a dramatic rise in e-signature requirements. Banks are leveraging e-signatures to enable daily account service and maintenance transactions such as address changes, name changes, stop payment requests, wire transfer requests and credit card disputes. E-signatures provide service convenience to customers as they move through the stages of the lending process or digital account opening.

Financial institutions are experiencing a boom in digital-first relationships with new and existing customers. Customers are requesting new account openings and loan applications online, and perhaps modifying or extending existing loans. It all must be done electronically. Additionally, the day-to-day demand of account service and maintenance transactions have only increased, and require a new solution to those daily operational activities. E-signatures are one way to place electronically fillable forms on an bank’s website or online banking center so allow customers can complete and sign the appropriate documents and submit directly to the bank. Now more than ever, e-signatures and digital transaction management are critical technologies for financial institutions.

Designing an Experience that Empowers Businesses to Succeed

With more businesses choosing fintechs and neo-banks to address their financial needs, banks must innovate quickly and stay up-to-date with the latest business banking trends to get ahead of the competition.

In fact, 62% of businesses say that their business banking accounts offer no more features or benefits than their personal accounts. Fintechs have seized on this opportunity. Banks are struggling to keep up with the more than 140 firms competing to help business customers like yours manage their finances.

Narmi interviewed businesses to identify what their current business banking experience is like, and what additional features they would like to have. To help banks better understand what makes a great business banking experience, we’ve put together Designing a Banking Experience that Empowers Businesses to Succeed, a free online resource free for bank executives.

A banking platform built with business owners in mind will help them focus on what matters most — running a successful company. In turn, banks will be able to grow accounts, drive business deposits and get ahead of fintech competitors encroaching on their market share.

Understanding How Businesses Bank
No business is the same. Each has different financial needs and a way of operating. Narmi chose to talk with a range of business owners via video chat, including an early-stage startup, a dog-walking service, a bakery, a design agency and a CPA firm.

Each business used a variety of banks, including Wells Fargo & Co., JPMorgan Chase & Co., SVB Financial Group, Bank of America Corp. and more.

A few of the questions we asked:

  1. How is your current business banking experience?
  2. Which tools do you most frequently use to help your business run smoothly?
  3. How often do you log in?
  4. What are the permissions like on your business banking platform?
  5. What features do you wish your business banking platform could provide?

We conducted more than 20 hour-long interviews with the goal of better understanding how business owners use their bank: what they liked and disliked about their banking experience, how they would want to assign access to other employees, and explore possible new features.

We learned that businesses tended to choose a financial institution on three factors: familiarity and ease, an understanding of what they do and competitive loan offers. Business owners shared with us how their experience with the Small Business Administration’s Paycheck Protection Program factored into their decision about where they currently bank.

They tended to log into their accounts between once a day and once a week and oscillated between their phone and computers; the more transactions they had, the more frequently they checked their accounts. They appreciated when their institution offered a clean and intuitive user experience.

We also uncovered:

  • How do businesses handle their payments.
  • What do businesses think of their current banking features.
  • How do business owners want to manage permissions.

Want to read more? Download a free copy of Designing a Banking Experience that Empowers Businesses to Succeed.

How Open Finance Fuels the Money Experience and Drives Growth

If one idea encapsulates a significant trend in the current business environment, it’s “openness.”

Society is placing a greater value on transparency and “open” approaches. Even Microsoft Corp., the long-time defender of closed software, under the leadership of CEO Satya Nadella, has proclaimed they are “all in open source.” One industry where being open is of particular importance is banking and finance.

Open banking is the structured sharing of data through an application programming interface, or APIs. These APIs allow data to move freely from financial institutions to third-party consumer finance applications. Customers initiate and consent to data sharing, establishing a secure way to grant access and extract financial information from the financial institution.

Open finance, on the other hand, is a broader term. It extends open banking to include customer data access for a range of services beyond the banking industry — to retail stores, hotels, airlines, car apps and much more.

Open finance is popular in Europe and is now gaining momentum in the United States. The goal, similar to open banking, is to enhance the way consumers in all industries interact with money. There are numerous far-reaching benefits of the open finance movement, both for consumers and organizations.

Consumers receive fast access to apps and services. Opening up data access allows someone to sign on and share their data with popular third-party apps (such as Netflix or Amazon.com) so they don’t have to re-enter their information every time. Taking it a step further, a stream of innovative applications such as fraud monitoring, automated savings, accelerated mortgage reduction and more are possible once access to financial information is opened up.

Greater security and control. With currently available technology, financial institutions, can leverage API connections to allow account access or facilitate money movement for their customers. This control provides a sense of autonomy and security for consumers and bankers alike, creating an improved and secure money experience. Banking APIs also impact business models, and most significantly, allow banks to adapt to changes in the marketplace.

But security is critical when “opening up data” to the world. When we launched our open finance platform, MX Open, we ensured that financial institutions would be able to help protect their user’s financial data. Security needs to be at the heart of any successful open finance strategy, so that  financial institutions, third-party financial apps and other companies can create more personalized money experiences that give customers greater access and control.

Easier connection of services, apps, cores and systems. Establishing a secure, end-to-end mechanism for sharing data not dependent on credential sharing allows banks and fintech companies can connect to many, many more services — resulting in even more services and offerings for users. Data connectivity APIs exist for that purpose: to empower organizations beyond the constraints of legacy systems, connecting financial institutions with new services, apps, cores and systems.

As a company focused on the financial services space, we recognize that data should be open to everyone. This movement of opening up — from open-source, to open banking to open finance — can only help bankers and boards maintain the advocacy-focused approach they desire in serving their customers, while increasing control over their roadmap to innovate faster and deliver the right tools and products to the right customers.