Rethinking Digital Onboarding for Customer Acquisition and Retention

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Onboarding is among the most important interactions a bank will ever have with its customers. When done right, it has the power to drive significant returns on investment, boost customer acquisition and reduce churn. It becomes a catalyst for positive change, benefiting both customers and the bank.

In today’s fast-paced digital world, consumers expect a seamless and convenient experience. However, many traditional banks fail to provide such an experience. Onboarding processes are often cumbersome, paper-intensive and time-consuming. This is where fintech providers can step in, armed with innovative technologies that are reshaping the landscape of digital onboarding and account funding.

The Art of First Impressions
The onboarding process plays a vital role in establishing the first impression of a bank and its customers, establishing loyal and enduring relationships. It is essential that the first interaction leaves a positive, lasting impression.

Studies show that potential new customers abandon the process due to complexity (30%), lack of access to identity documents (38%), lengthy application time (21%) and extensive information required (21%). In its newest report, The Digital Onboarding Report 2023, ebankIT highlights that 90% of financial institutions report digital abandonment, resulting in potentially millions of dollars in lost business. Customer abandonment is a significant challenge banks face during the onboarding process.

In an era of rising competition and technological disruption, it is necessary that banks provide their customers with a seamless and convenient digital banking experience, from account opening and funding to adding new products or services.

The Road to Better Digital Onboarding
Digital onboarding offers convenience to customers and reduces operational costs for banks. However, optimizing this process can be a challenge for banks without the partnership of fintech providers that offer solutions to overcome this challenge.

1. Speed
Speed is paramount in reducing onboarding churn; customers expect to be able to complete the onboarding process in a matter of minutes, not days. It is crucial to streamline processes that provide customers with all the necessary tools to complete their journey effortlessly.

2. Streamline identity-checking processes
New customers expect prompt verification when they upload their identification and may find delays caused by manual checks to be unacceptable. Financial institutions that prioritize robust and automated KYC processes and invest in quick and accurate identification verification technology can reduce customer abandonment risks and establish a positive relationship from the start.

3. A secure and seamless process
Offering effortless biometric authentication methods like fingerprint or facial recognition makes customers more likely to complete the process, reducing churn. Additionally, the inclusion of e-signatures expedites the overall process, allowing customers to conveniently sign documents anytime, anywhere.

4. Automate, reduce manual work
According to The Digital Onboarding Report 2023, institutions that automate processes can reduce their costs by 50%. Banks should look for ways to minimize manual data entry and embrace automation wherever possible. Thanks to automation, financial institutions can eliminate the need for manual work and allow their employees to focus on more challenging tasks.

5. Human touch
Digital customers still require access to human assistance when needed. The human touch involves more than just employing staff at the right times during onboarding. Humanized digital technology, including chatbots, can help banks meet clients’ needs and improve onboarding. Combining humanized tech with easy access to human support through chat or voice calls is a reliable way to reduce abandonment.

As banks venture into the realm of onboarding, they must prioritize five fundamental characteristics to truly excel in this ever-evolving landscape. First and foremost, speed is crucial in our fast-paced digital world. Customers expect a quick onboarding process, sparing them from days or weeks of waiting. However, speed alone will not suffice. A customer-centric approach is equally important. The onboarding solution should revolve around meeting customers’ evolving needs, ensuring satisfaction and fostering loyalty. Moreover, it is essential for the onboarding process to seamlessly integrate across different channels, minimizing any obstacles while automation improves efficiency and fosters customer satisfaction. Lastly and perhaps most importantly, by incorporating a human touch, banks can create tailor-made experiences that build stronger, lasting connections.

Two Distinct Duties: Holding Company vs. Bank Boards

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It wasn’t too long ago that banks were restricted from conducting business outside their home state.  But some institutions found a workaround: Bank holding companies offered a way to operate in multiple states, leading Congress to pass the Bank Holding Company Act of 1956. Regulators also wanted to limit banks’ ability to own nonbank firms like a manufacturing company or retailer, which could have allowed them to influence borrowers to patronize those subsidiaries or use deposits to make loans to those businesses, according to Joe Mahon of the Federal Reserve Bank of Minneapolis. 

Interstate banking has been the norm since the 1980s, and the Bank Holding Company Act has been modified several times since its 1956 passage. But generally, the law clarifies the purpose of a bank holding company and gives the Federal Reserve broad powers to supervise these companies. 

Recently, with the failure of Silicon Valley Bank, questions have been raised about a holding company’s role as a source of financial strength. The Santa Clara, California-based bank’s holding company, SVB Financial Group, remained in operation as of Sept. 7, 2023. 

But even in normal circumstances, a holding company presents distinct governance considerations for boards. 

Why Have a Bank Holding Company?
A bank holding company’s primary purpose is to hold stock, or ownership, in a bank. 

Banks don’t have to be held by a holding company — notable examples of banks without holding companies include Little Rock, Arkansas-based Bank OZK, with $31 billion in assets, and $87 billion Zions Bancorp., in Salt Lake City, which merged its holding company into its bank in 2018. Zions said at the time that the consolidation would improve efficiency and cut down on duplicative regulatory examinations. 

A holding company structure eases an organization’s ability to borrow or raise money, and “inject it down into the bank,” says Andrew Gibbs, a senior vice president at Mercer Capital who leads the advisory firm’s deposit institutions group. Equity plans, including employee stock ownership programs, could be easier to manage via a holding company. For smaller banks below $15 billion in assets, it also changes what counts as regulatory capital.

“One of the benefits of bank holding company status is the ability to count securities like trust preferred securities as regulatory capital,” says Gibbs. Zions and Bank OZK didn’t receive those capital advantages due to their size.

A holding company structure also allows a bank to engage in a broader array of activities. “A bank holding company can invest in any kind of company, so long as it holds less than 5% of voting stock of that company,” says Samantha Kirby, partner and co-chair of the banking and consumer financial services practice at Goodwin Procter. Those investments can include fintechs. In Bank Director’s 2023 Bank M&A Survey, conducted last fall, 9% of bank executives and board members reported that their organization had directly invested in fintech companies in 2021-22. 

If a bank holding company wants to offer a broader selection of financial services, such as investment banking or insurance, the board can elect to become a financial holding company, a separate designation created in 1999 via the Gramm–Leach–Bliley Act. 

A bank holding company can also serve as a financial source of strength for the bank, referencing a doctrine that was reinforced in Section 616 of the Dodd-Frank Act, which amended the Bank Holding Company Act. Put simply, the holding company should provide financial support to its insured bank subsidiary “in the event of the financial distress” of that institution. 

James Stevens, a Georgia-based partner at Troutman Pepper, witnessed a number of bank failures in that state during the 2008 financial crisis. Bank holding companies were expected to ensure their subsidiary bank had enough capital to survive. “If a subsidiary bank needs capital, and the bank holding company has additional capital that could be injected into the bank, it is supposed to push that capital into the bank under the source of strength doctrine,” he says. “If a bank holding company doesn’t do that, its board could be subject to criticism from regulators.”

Investors often prefer that capital be held at the holding company rather than at the bank. Gibbs explains that pulling capital out of the bank generally requires regulatory approval, so large capital activities — like dividends — are best handled at the holding company level. “It’s generally easier to keep [capital] at the holding company, and then you don’t need to deal with [the] regulatory process to extract it from the bank, if the bank has too much capital.”

Know Your Role
Both holding company and bank boards have the same fiduciary duties to shareholders, says Kirby, meaning the directors of both boards have a legal and ethical responsibility to act in the best interests of the company’s owners. That said, bank and holding company boards have distinct responsibilities, and directors should have a “clear understanding of whether they are serving on the bank board or on the holding company board, or both,” she says. It sounds basic, but sometimes that line isn’t clear.

Often, the boards mirror one another, but it’s not uncommon for a member or two to serve on just one of the boards. For example, it’s fairly routine for a private equity investor to only serve on the holding company board where they can focus on the overall direction of the company. And sometimes, the holding company and bank boards could be two entirely different groups. 

According to Bank Director’s 2023 Compensation Survey, holding companies and banks tend to have the same number of members, at a median of 10. Bank boards meet a little more frequently, at a median 12 times a year versus 10 meetings for the holding company board.

The bank board should focus on the bank’s activities — put simply, strategies, policies and risks related to the bank’s business of making loans and taking deposits. “Bank regulators will not find it acceptable if the bank holding company is the one that’s managing the risk,” says Stevens. “Same thing with audit and compliance management, and the scope of internal audit. … They want the bank board to be focused on those things.”  

Stevens describes the structure as one that’s “bottom up,” as the bank board makes important decisions about the business, and the holding company makes higher level decisions about strategy — capital allocation and deployment, or prospective M&A activity. “What’s the risk management framework? What’s our internal audit going to look like? Who has lending authority?” says Stevens. “That stuff has got to be at the bank.” 

The holding company typically can add or remove directors from the bank board. “The process and authority depend on the articles and bylaws of the bank,” says Stevens, “but generally the bank holding company, as the sole shareholder of the bank, has the power to change the composition of the bank board.”

Separate Agendas, Minutes
No matter the makeup of the holding company and bank boards, both Kirby and Stevens say it’s important that deliberations — which board is taking action on what — are clearly documented. 

Ideally, the bank board and the holding company board would have two distinct agendas, and two sets of minutes. 

Stevens sometimes sees mirrored boards make joint resolutions. But he says it can get complicated when the two boards aren’t composed of the same directors. “You have to be thoughtful, if you have separate groups, that you’ve got the right people in the room to make the decisions that impact those fundamental banking decisions.”

That isn’t to say that members of the holding company board won’t sit in on the bank board meeting, or vice versa, says Kirby. But, when it comes time for formal action, that should be taken by the appropriate board.

Revisit Your Structure
Choosing to adopt a bank or financial holding company structure — or not — should be a decision informed by the bank’s strategy. Kirby recommends that this be part of the board’s annual strategic discussions. Consider whether the bank has the right structure to pursue its strategic goals and facilitate its growth. 

While the difference between the two boards, holding company and bank, may appear trivial, getting governance right makes a difference on regulatory examinations. The board’s effectiveness factors into a bank’s CAMELS rating, short for capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk. The board falls under the management pillar. 

“You want to have this buttoned up, and [you] don’t want to get criticized for it,” says Stevens. “If you’re being examined, and you’re on the cusp of being a three or a four, you don’t want the corporate governance issue to move you from a three to a four CAMELS rating. … It’s not a place for boards to be creative and make mistakes.”  

Additional Resources
Bank Director’s 2023 Compensation Survey, sponsored by Chartwell Partners, surveyed 289 independent directors, CEOs, human resources officers and other executives of U.S. banks below $100 billion in assets to understand how they’re addressing talent challenges, succession planning and CEO performance. Compensation data for directors, non-executive chairs and CEOs for fiscal year 2022 was also collected from the proxy statements of 102 public banks. Members of the Bank Services Program have exclusive access to the complete results of the survey, which was conducted in March and April 2023.

Bank Director’s 2023 Bank M&A Survey, sponsored by Crowe LLP, surveyed 250 independent directors, CEOs, chief financial officers and other senior executives of U.S. banks below $100 billion in assets to examine current growth strategies, particularly M&A. Members of the Bank Services Program can access the complete results of the survey, which was conducted in September 2022.

Fintech Transactions

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

FinXTech’s Need to Know: Charitable Giving Platforms

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In the wake of disaster, people give back.

Less than twenty-four hours after Russian President Vladimir Putin announced a “special military operation” in neighboring Ukraine, Ukrainian-based charity Come Back Alive received over $673,000 in donations — $400,000 of which was in bitcoin. At the time of this newsletter, over $50 million has been donated to Ukraine in cryptocurrency.

Whether it’s a global catastrophe or an organization closer to home, U.S. consumers want easy ways to give to the causes that are important to them. Banks are in a perfect position not only to highlight local charities for their customers, but also to facilitate donations to them in a safe, efficient and trackable manner.

And financial technology companies can provide the software to make it possible.

Fintechs that specialize in charitable giving help embed donation capabilities directly into a bank’s digital banking platform via application programming interfaces (APIs), avoiding lengthy core integration timelines. Once live, bank customers can choose which charities to give to, how often they donate and, of course, how much.

Charleston-based in/PACT offers a white-labeled giving solution for banks called GoodCoin. GoodCoin allows customers to give in multiple ways: one-off donations, recurring gifts (monthly, bi-weekly, etc.) or “round up,” which rounds up a user’s card payments to the nearest dollar and donates the change.

These fintechs also keep track of each customer’s donations for the year. Users can access exportable receipts during tax season, or whenever a donation is made. And using a giving-based fintech allows users to access how much they’ve given starting at the start of the year or since they started giving so they can track their impact.

Pinkaloo, another charitable giving platform, operates accounts for charitable donations that are similar to a health savings account. Customers can fund the account, donate to a selected charity and immediately receive a tax receipt for the transactions — all under the bank’s brand. Customers can even convert their credit card rewards points into charitable dollars.

On a larger scale, CyberGrants, which was acquired by Apax Partners in June 2021, helps banks to manage, track and report on all of their corporate philanthropic efforts. It also has a front-end interface that allows employees to sign up for payroll donations or track volunteer hours and nonprofits to apply for bank grants.

Here are four customer- and bank-facing benefits of implementing a giving-based fintech:

  • It provides audit-ready, real-time and exportable tax receipts. All of a customer’s giving lives in one place. Banks can even use certain platforms to track enterprise-level giving. 
  • It promotes giving, locally and globally. There are over 1.5 million 503(c)3 nonprofit organizations registered with the IRS. in/PACT has over 1.2 million of them on its platform for users to search and donate to. Banks can also use the platforms to match customer donations to specific charities.
  • It can realign or reinforce corporate philanthropy. Collecting donation data can show banks what charities or causes are important to their community. They can later choose to incorporate or emphasize those organizations into their corporate giving strategy.
  • It drives digital engagement and brand loyalty. Consumers like aligning themselves with brands that provide opportunities to give back (and give back themselves). Having a donation platform as an integral part of a mobile banking experience can keep customers engaged and coming back.

Banks that implement a giving platform can help customers increase their charitable donations on their time and dime.

Pinkaloo, in/PACT and CyberGrants are included in FinXTech Connect, a curated directory of technology companies who strategically partner with financial institutions of all sizes. For more information about how to gain access to the directory, please email [email protected].

5 Key Factors for Fintech Partnerships

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As banks explore ways to expand their products and services, many are choosing to partner with fintech companies to enhance their offerings. These partnerships are valuable opportunities for a bank that otherwise would not have the resources to develop the technology or expertise in-house to meet customer demand.

However, banks need to be cautious when partnering with fintech companies — they are subcontracting critical services and functions to a third-party provider. They should “dig in” when assessing their fintech partners to reduce the regulatory, operational and reputational risk exposure to the bank. There are a few things banks should consider to ensure they are partnering with third party that is safe and reputable to provide downstream services to their customers.

1. Look for fintech companies that have strong expertise and experience in complying with applicable banking regulations.

  • Consider the banking regulations that apply to support the product the fintech offers, and ask the provider how they meet these compliance standards.
  • Ask about the fintech’s policies, procedures, training and internal control that satisfy any legal and regulatory requirements.
  • Ensure contract terms clearly define legal and compliance duties, particularly for reporting, data privacy, customer complaints and recordkeeping requirements.

2. Data and cybersecurity should be a top priority.

  • Assess your provider’s information security controls to ensure they meet the bank’s standards.
  • Review the fintech’s policies and procedures to evaluate their incident management and response practices, compliance with applicable privacy laws and regulations and training requirements for staff.

3. Engage with fintechs that have customer focus in mind — even when the bank maintains the direct interaction with its customers.

  • Look for systems and providers that make recommendations for required agreements and disclosures for application use.
  • Select firms that can provide white-labeled services, allowing bank customer to use the product directly.
  • Work with fintechs that are open to tailoring and enhancing the end-user customer experience to further the continuity of the bank/customer relationship.

4. Look for a fintech that employs strong technology professionals who can provide a smooth integration process that allows information to easily flow into the bank’s systems and processes.

  • Using a company that employs talented technology staff can save time and money when solving technology issues or developing operational efficiencies.

5. Make sure your fintech has reliable operations with minimal risk of disruption.

  • Review your provider’s business continuity and disaster recovery plans to make sure there are appropriate incident response measures.
  • Make sure the provider’s service level agreements meet the needs of your banking operations; if you are providing a 24-hour service, make sure your fintech also supports those same hours.
  • Require insurance coverage from your provider, so the bank is covered if a serious incident occurs.

Establishing a relationship with a fintech can provide a bank with a faster go-to-market strategy for new product offerings while delivering a customer experience that would be challenging for a bank to recreate. However, the responsibility of choosing a reputable tech firm should not be taken lightly. By taking some of these factors into consideration, banks can continue to follow sound banking practices while providing a great customer experience and demonstrating a commitment to innovation.

What’s New in Payments?

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

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

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

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

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

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

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

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

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

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

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

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

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

Bankers’ Perspectives: Better Banking for Small Businesses

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Digital trends predating the Covid-19 pandemic vastly accelerated as a result of the crisis, with clients moving further away from in-person experiences. Small businesses increasingly expect more from their financial institution as fintech providers outside the traditional banking space chip away at market share. Bank leaders have to act quickly to provide better services, products and experiences. In this video, Bank Director Vice President of Research Emily McCormick interviews three bankers about how they’re approaching these circumstances: Shon Cass of $986 million Texas Security Bank, based in Dallas; Stacie Elghmey of $1.7 billion Hawthorn Bank in Jefferson City, Missouri; and Cindy Blackstone of Tyler, Texas-based Southside Bank, with $7.1 billion in assets.

Derik Sutton of Autobooks also provides his point of view, based on the technology company’s background in working with banks and small businesses across the U.S.

Investing in technology isn’t just dollars and cents, says Cass, and banks need to rethink return on investment in the digital age. “How does [technology] build a better bank for the future?”

Topics discussed include:

  • Meeting the Needs of Small Business Clients
  • The Changing Competitive Landscape
  • Working With Technology Vendors to Meet Strategic Goals
  • Looking Ahead to 2022

For more on serving small business customers today, access the Small Business Insights report developed by Bank Director and sponsored by Autobooks.

The Do’s and Don’ts of Digital Lending Transformation

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For many mid-size community banks, the shift to technology has been slower than expected. There can be a resistant mindset when it comes to implementing financial technology practices, hindering any results that the technology can provide. Bankers try to make the tech fit to their existing processes, rather than the other way around.

If you’re already considering a digital transformation, you might be tempted to run out and overhaul your entire system right away. However, this can be an overwhelming approach, destining the project for failure. One recent study finds that most financial institutions that have partnered with fintech firms have seen moderate gains, but there is still a need to distribute more dedicated resources to a true digital lending transformation. However, there are a few quick do’s and don’ts that every institution can benefit from:

Don’t try to overhaul the entire thing at once. Take an assessment of not only your bank’s current technology state, but also of your current practices and approaches. Too often, financial institutions want to focus on “the way it’s always been done,” rather than looking to see how digital solutions can make processes easier and more efficient. Keep what works in today (and tomorrow’s) environment and find ways to adapt the rest.

Do start with the most profitable areas. One of the best ways to see the most return on an investment in digital is to begin with the areas that drive revenue and profit to the institution. Your back office and credit department will benefit the most from technology that allows them to operate more efficiently and make decisions faster, making them logical starting points.

Don’t try to mix and match solutions. When it comes to implementing technology into the branches, many choose to try and piecemeal different products and systems together. While you might think this approach saves money by only buying certain products from certain vendors, your bank is most likely losing key integrations that can come from having a single solution.

Do trust your technology partners to guide you. Finding a partner that understands what it means to work in a bank, with these current processes, ensures that you’re getting support from folks that understand what you’re trying to do. The key here is trust. Too often, banks are resistant to the idea that their technology partners might be able to teach them a more efficient way.

Don’t try to change the technology. Rather than looking at how the bank can adopt the tech to its processes, consider leveraging technology partners to explore how your bank can simplify processes through technology. When you purchase a solution from a financial technology provider, you’re also paying for their expertise. Don’t throw your money away.

Do adjust your mindset when it comes to tech. Tech in the banking industry has made giant leaps in the last five years, let alone in the decades prior to that. If your bank’s mindset when it comes to implementing or adding technology into your processes is that certain things can’t be changed because it’s always been done this way, you’re setting yourself up to achieve fewer desirable results.

When the coronavirus pandemic sent everyone to their homes for months in 2020, many banks were forced to recognize that an online portal or a mobile app wasn’t going to cut it anymore. Adapting to a fully automated process has become necessary, not optional. Now is the time to learn from this and to take control of your technology. Don’t wait until the next unexpected issue forces you to adapt, when you can get ahead of the game.

About Baker Hill
Baker Hill empowers financial institutions to work smarter, reduce risk and drive more profitable relationships. The company delivers a single unified platform with modern solutions to streamline loan origination and risk management for commercial, small business and consumer lending. The Baker Hill NextGen® platform also delivers sophisticated analytics and marketing solutions that support sound business decisions to mitigate risk, generate growth and maximize profitability. For more information, visit www.bakerhill.com.

Four Ways Banks Can Cater to Generational Trends

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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.

How Fintechs Can Help Advance Financial Inclusion

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Last year, the coronavirus pandemic swiftly shut down the U.S. economy. Demand for manufactured goods stagnated while restaurant activity fell to zero. The number of unbanked and underbanked persons looked likely to increase, after years of decline. However, federal legislation has created incentives for community banks to help those struggling financially. Fintechs can also play an important role.

The Covid-19 pandemic has affected everyone — but not all equally. Although the number of American households with bank accounts grew to a record 95% in 2019 according to the Federal Deposit Insurance Corp.’s “How America Banks” survey, the crisis is still likely to contribute to an increase in unbanked as unemployment remains high. Why should banks take action now?

Financial inclusion is critical — not just for those individuals involved, but for the wider economy. The Financial Health Network estimates that 167 million America adults are not “financially healthy,” while the FDIC reports that 85 million Americans are either unbanked or “underbanked” and aren’t able to access the traditional services of a financial institution.

It can be expensive to be outside of the financial services space: up to 10% of the income of the unbanked and underbanked is spent on interest and fees. This makes it difficult to set aside money for future spending or an unforeseen contingency. Having an emergency fund is a cornerstone of financial health, and a way for individuals to avoid high fees and interest rates of payday loans.

Promoting financial inclusion allows a bank to cultivate a market that might ultimately need more advanced financial products, enhance its Community Reinvestment Act standing and stimulate the community. Financial inclusion is a worthy goal for all banks, one that the government is also incentivizing.

Recent Government Action Creates Opportunity
Recent federal legislation has created opportunities for banks to help individuals and small businesses in economically challenged areas. The Consolidated Appropriations Act includes $3 billion in funding directed to Community Development Financial Institutions. CDFIs are financial institutions that share a common goal of expanding economic access to financial products and services for resident and businesses.

Approximately $200 million of this funding is available to all financial institutions — institutions do need not to be currently designated as a CDFI to obtain this portion of the funding. These funds offer a way to promoting financial inclusion, with government backing of your institution’s assistance efforts.

Charting a Path Toward Inclusion
The path to building a financially inclusive world involves a concerted effort to address many historic and systemic issues. There’s no simple guidebook, but having the right technology is a good first step.

Banks and fintechs should revisit their product roadmaps and reassess their innovation strategies to ensure they use technologies that can empower all Americans with access to financial services. For example, providing financial advice and education can extend a bank’s role as a trusted advisor, while helping the underbanked improve their banking aptitude and proficiency.

At FIS, we plan to continue supporting standards that advance financial inclusion, provide relevant inclusion research and help educate our partners on inclusion opportunities. FIS actively supports the Bank On effort to ensure Americans have access to safe, affordable bank or credit union accounts. The Bank On program, Cities for Financial Empowerment Fund, certifies public-private partnership accounts that drive financial inclusion. Banks and fintechs should continue joining these efforts and help identify new features and capabilities that can provide affordable access to financial services.

Understanding the Needs of the Underbanked
Recent research we’ve conducted highlights the extent of the financial inclusion challenge. The key findings suggest that the underbanked population require a nuanced approach to address specific concerns:

  • Time: Customers would like to decrease time spent on, or increase efficiency of, engaging with their personal finances.
  • Trust: Consumers trust banks to secure their money, but are less inclined to trust them with their financial health.
  • Literacy: Respondents often use their institution’s digital tools and rarely use third-party finance apps, such as Intuit’s Mint and Acorns.
  • Guidance: The underbanked desire financial guidance to help them reach their goals.

Financial institutions must address both the transactional and emotional needs of the underbanked to accommodate the distinct characteristics of these consumers. Other potential banking product categories that can help to serve the underbanked include: financial services education programs, financial wellness services and apps and digital-only banking offerings.

FIS is committed to promoting financial inclusion. We will continue evaluating the role of technology in promoting financial inclusion and track government initiatives that drive financial inclusion to keep clients informed on any new developments.