How the Edges of Financial Technology Could Change Regulation

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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.

Using Profitability to Drive Banker Behavior

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There used to be a perception that bankers found it tough to innovate because they are largely left-brained, meaning they tend to be more analytical and orderly than creative right brainers. While this may have been true for the founding fathers of this industry, there’s no question that bankers have been forced into creativity to remain competitive.

It could have been happenstance, natural evolution, or the global financial crisis of 2008 — it doesn’t matter. Today’s bankers are both analytical and creative because they have had to find new, more convenient pathways to profitability and use those insights for continuous coaching.

The current economic landscape may require U.S. banks to provision for up to $318 billion in net loan losses from 2020 to 2022, the Deloitte Center for Financial Services estimates. These losses are expected to be booked in several lending categories, mainly driven by the pandemic’s domino effect on small businesses, income inequality and the astounding impact of women leaving the workforce pushing millions into extreme poverty. Additionally, net interest margins are at an all-time low. Deloitte forecasts that U.S. commercial banks won’t see revenues or net income reach pre-pandemic levels until 2022.

In the interim, bankers are still under pressure to perform and increase profitability. Strong performance is possible — economic “doom and gloom” isn’t the whole story. In fact, the second-largest bank in America is projecting loan growth in 2021, of all years, after six years of decline. These industry challenges won’t last forever. so preparation is key. One of the first steps in understanding profitability is establishing if your bank’s business model is transactional, relational or a mix of the two, then answering these questions:

  • How much does a loan pay for the use of funds? How much does a deposit receive for the use of funds?
  • How much does a loan pay for the current period and identified level of credit risk?
  • How much capital does the bank need to assign to the loan or deposit?
  • What are the appropriate fees for accounts and services used by our clients?
  • What expenses are allocated to a product to determine its profitability?

There should never be a question about why loans need to pay for funds. The cash a bank provides for a loan comes from one of three sources: capital investments, debt and borrowing or client deposits.

From there, bankers have shown incredible creativity and innovation in adopting simpler, faster ways to better understand their bank’s profitability, especially through sophisticated technologies that can break down silos by including all clients, products and transactions in a single database. By comparison, legacy databases can leave digital assets languishing in inaccessible and expensive silos. Bankers must view an entire client relationship to most accurately price the relationship.

This requires a mindset shift. Instead of thinking about credit structure — the common approach in the industry – to determine relationship pricing, think instead about the client relationship holistically and leave room to augment as necessary. Pricing models should reflect your bank’s profitability calculations, not adjusted industry average models. And clients will need a primary and secondary owner to break down silos and ensure they receive the best experience.

How does any of this drive optimal banker behavior? A cohesive, structurally sound system that allows bankers to better understand profitability via one source of the truth allows them to review deal performance every six months to improve performance. Further, a centralized database allows C-suite executives to literally see everything, forging connections between their initiatives to banker’s day-to-day actions. It creates an environment where bankers can realize opportunities through execution, accountability and coaching, when necessary.

Designing an Experience that Empowers Businesses to Succeed

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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.

Banks, Fintechs Uniting for Bottom-Line Wins

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Banks have been losing consumer market share to fintechs for more than a decade. But in the middle of a pandemic, their focus has shifted to expediting consumer loan opportunities for balance sheet and bottom line wins. Why?

For one thing, deposit growth is well outpacing loan growth this year, according to the Federal Deposit Insurance Corp.’s Quarterly Banking Profile. At the same time, tech companies like Apple and Amazon.com are dipping their big toes into the consumer finance industry. With less of a need to focus on growing bank deposits and an ever-growing list of competitors entering the lending market, banks should take — and are taking — more-calculated risks to maintain their relevance with digitally savvy customers at their points of financial need. To connect with prospective customers where they want to be reached, banks will need to rely on partners that can help them scale their offerings in a fast, frictionless and secure manner.

The easiest way for banks to lower customer acquisition costs and reach more prospective customers with loan opportunities is to use relevant plug-and-play technologies from fintechs. It’s hardly a new concept at this point; most leading banks have already adopted this methodology as the way to unlock more revenue. Per the Global Fintech Report, 94% of financial services companies said they were confident that fintechs would help grow their company’s revenue over the next two years; 95% of technology companies said the same.

The banks struggling to justify the need to partner are missing the big picture: growth opportunities and low-hanging fruit. Take business clients as an example. Far too many banks wait for a business to become frustrated at competitors before competing to win their business. A fintech partnership can help banks go on the offensive and create a strategy that positions businesses as the face of financing by offering point-of-need lending to consumers, driving revenue for the business and improving the bottom line at the bank.

“Coming together is a beginning, staying together is progress, and working together is success.” – American industrial and business magnate Henry Ford

Being open-minded about fintech partnerships allows banks to offer valuable and attractive services to business clients and consumers, especially at a time when both are faced with a life-altering pandemic and natural disasters. Consumers need quick access to credit at reasonable rates; in the face of excess liquidity from deposits and a continued low-rate environment, banks should be look to provide better loans for their customers than their online finance competitors.

Banks that choose not to use fintechs partners may find themselves lacking the ability to get embedded into consumer loan deals and unable to offer consumers a frictionless experience during the process. They can’t leverage alternative data, machine learning and artificial intelligence to get a more-accurate portrayal of a consumer’s creditworthiness outside of their FICO credit scores. Accessing value-add technology and creative solutions allows banks to innovate rapidly to improve efficiencies and meet the future needs of businesses and consumers.

Fintechs have demonstrated their ability to meet banks’ third-party standards. Banks sitting on the partnership sidelines are cautioned to set aside their “sword and shield” mentality in favor of an approach that’s more inviting and open to collaborative innovation. Today’s current economic environment can act as a catalyst for this change.

Banks have proven they are capable of being highly responsive to meet business and consumer needs during recent challenges. This is an opportunity for them to think differently and invest in partnerships to quickly offer new experiences as demand for financial products and services increases.

Build Versus Buy Considerations for Data Analytics Projects

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It is the age-old question: buy versus build? How do you know which is the best approach for your institution?

For years, bankers have known their data is a significant untapped asset, but lacked the resources or guidance to solve their data challenges. The coronavirus crisis has made it increasingly apparent that outdated methods of distributing reports and information do not work well in a remote work environment.

As a former banker who has made the recent transition to a “software as a service” company, my answer today differs greatly from the one I would have provided five years ago. I’ve grown in my understanding of the benefits, challenges, roadblocks and costs associated with building a data analytics solution.

How will you solve the data conundrum? Some bank leaders are looking to their IT department while other executives are seeking fintech for a solution. If data analytics is on your strategic roadmap, here are some insights that could aid in your decision-making. A good place to start this decision journey is with a business case analysis that considers:

  • What does the bank want to achieve or solve?
  • Who are the users of the information?
  • Who is currently creating reports, charts and graphs in the institution today? Is this a siloed activity?
  • What is the timeline for the project?
  • How much will this initiative cost?
  • How unique are the bank’s needs and issues to solve?

Assessing how much time is spent creating meaningful reports and whether that is the best use of a specific employee’s time is critical to the evaluation. In many cases, highly compensated individuals spend hours creating reports and dashboards, leaving them with little time for analyzing the information and acting on the conclusions from the reports. In institutions where this reporting is done in silos across multiple departments and business units, a single source of truth is often a primary motivator for expanding data capabilities.

Prebuilt tools typically offer banks a faster deployment time, yielding a quicker readiness for use in the bank’s data strategy, along with a lower upfront cost compared to hiring developers. Vendors often employ specialized technical resources, minimizing ongoing system administration and eliminating internal turnover risk that can plague “in house” development. Many of these providers use secure cloud technology that is faster and cheaper, and takes responsibility for integration issues.  

Purchased software is updated regularly with ongoing maintenance, functionality and new features to remain competitive, using feedback and experiences gained from working with institutions of varying size and complexity. Engaging a vendor can also free up the internal team’s resources so they can focus on the data use strategy and analyzing data following implementation. Purchased solutions typically promotes accessibility throughout the institution, allowing for broad usage.

But selecting the criteria is a critical and potentially time-consuming endeavor. Vendors may also offer limited customization options and pose potential for integration issues. Additionally, time-based subscriptions and licenses may experience cost growth over time; pricing based on users could make adoption across the institution more costly, lessening the overall effectiveness.

Building a data analytics tool offers the ability to customize and prioritize development efforts based on a bank’s specific needs; controllable data security, depending on what tools the bank uses for the build and warehousing; and a more readily modifiable budget.

But software development is not your bank’s core business. Building a solution could incur significant upfront and ongoing cost to develop; purchased tools appear to have a large price tag, but building a tool incurs often-overlooked costs like the cost of internal subject matter experts to guide development efforts, ongoing maintenance costs and the unknowns associated with software development. These project may require business intelligence and software development expertise, which can carry turnover risk if institutional knowledge leaves the bank.

Projects of this magnitude require continuous engagement from management subject matter experts. Bankers needed to provide the vision and banking content for the product — diverting management’s focus from other responsibilities. This can have a negative impact on company productivity.

Additionally, “in-house” created tools tend to continue to operate in data silos whereby the tool is accessible only to data team. Ongoing development and releases may be difficult for an internal team to manage, given their limited time and resources along with changing business priorities and staff turnover.

The question remains: Do you have the bandwidth and talent at your bank to take on a build project? These projects typically take longer than expected, experience budget overruns and often do not result in the desired business result. Your bank will need to make the choice that is best for your institution.

Creating the Next Opportunity for Your Bank

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Health, social, political and economic stressors around the world are bumping up business uncertainty for banks everywhere.

Some bankers may find a hunker-down posture fits the times. Others are taking a fresh look at opportunities to achieve their business objectives, albeit in a different-than-planned environment. What is your bank trying to accomplish right now? What are you uniquely positioned to achieve now that creates value for your institution, your shareholders and your customers?

The best opportunities on your bank’s list may be straightforward initiatives that may have been difficult to prioritize in a non-crisis environment. This can be a good time for banks to review their suppliers and vendors, their risk management, cybersecurity and compliance plans and protocols.

We’ve seen bank clients of ours with rock-solid foundations find themselves with the ability to leverage these times to pursue growth, to increase their technology offerings and explore niche markets, such as an all-digital delivery of banking services. These institutions are creating their own opportunities.

From straightforward to downright bold opportunities, BankOnIT and our client banks across the United States have observed that skillful execution requires one constant: a solid technology and systems foundation.

Here are a few examples of various objectives that we see our clients pursuing:

Embrace and Excel at Digital Banking
Digital banking, not to be confused with online banking, is more than a trend. Banks with user-friendly digital experiences are meeting the needs of millennials and Generation Z by offering activities that were once only accessible from the banking center. It removes geographical barriers and limitations of the traditional bank, such as operating hours and long lines.

Technological hurdles are grievances of both digital and traditional banks. The simple solution is unrestricted technology capabilities that improve reliability and increase security, especially when introducing features like artificial intelligence and digital banking.

A Growth Plan with The Ability To Compete
Customers’ expectations are shifting; banks need to be technologically nimble in response. With a high-growth plan in place, one BankOnIT client viewed outsourcing the network infrastructure to a partner with industry knowledge as the key to success. The result: opening four bank offices in seven months.

“We have all of the benefits of a large bank infrastructure, and all of the freedom that comes with that, without being a large bank,” said Kim Palmer, chief information officer at St. Louis Bank.

Partnering with Fintechs To Reach Niche Markets
The trick to accessing new markets will vary from bank to bank, but your strategy should start with the network infrastructure technology. This will be the foundation upon which all other technology in the institution is built upon. Cloud computing, for example, provides digital and traditional banks with resources needed to improve scalability, improve efficiency and achieve better results from all the other applications that rely upon the network foundation.   

Banks should look for partners that help them tailor their banking operations to benefit consumers who are conducting business in the virtual world. Technology at the forefront can keep business running smoothly during the global pandemic. Bloomfield Hills, Michigan-based Mi Bank, for example, is able to accommodate customers during the pandemic, just like before.

“We can leverage technology to allow our customers to function as normal as possible,” said Tom Dorr, chief operating officer and CFO. “BankOnIT gives us the flexibility to function remotely without any disruption to our services. Our structure allows us to compete with the bigger institutions without sacrificing our personal service.”

Is your technology reliable, scalable, and capable of sustaining your goals post-pandemic?

A Solid Foundation
Take the opportunity to review your institution’s goals. How do they line up with the opportunities to act in the midst of this unplanned business environment? This may be your opportunity to build a solid technology, systems and compliance foundation. Or, this may be your time to seize the opportunities that are created from turning technology into a source of strength for your institution.

COVID-19: A Make-or-Break Moment for Customer Loyalty

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It seems like the world is spinning faster these days. COVID-19 has caused dramatic shifts in the way people live their lives and manage their finances. Add record job loss to the mix, and you get a groundswell of people relying on their banks more than ever. It’s a make-or-break moment, as customers form new habits in response to their new reality.

Ryan Caldwell has a bird’s-eye view of how customers are relying on their financial institutions’ data and digital tools in this moment of crisis. As the CEO of MX, a Utah-based fintech, Caldwell helps financial institutions collect, analyze, present and act on data. Right now, the data is telling him this moment offers an opportunity for banks to cultivate loyalty. At the same time, it presents big risks for banks that don’t rise to the occasion.

In a recent interview, Caldwell told a story that serves as an interesting corollary for two approaches banks might take to navigate the crisis.

Driving down the streets of Lehi last week, Caldwell noticed construction in the parking lot of a Chick-fil-A. He was curious so, at the stoplight, he opened their app and placed an order. When he pulled up to the window, the Chick-fil-A manager confirmed his order and handed it over with sterile gloves. The receipt was in the app. It was an optimal, socially distanced experience.

Caldwell asked the manager about the construction. In a time when most restaurants are struggling to stay afloat, Chick-fil-A, Caldwell was told, is converting half its parking spots into mobile ordering stations. They’re experiencing exponential growth in mobile usage and, without customers spending 45 minutes in the store, they’re able to operate at redline capacity. They’re busier than ever.

Shortly after his Chick-fil-A experience, Caldwell had an experience that better aligns with refrains we’re hearing in the news about how restaurants are getting slaughtered without dine-in customers.

Caldwell’s family frequents a local pancake place, but the restaurant has no mobile app and a terrible website. Still, when your four-year old daughter has been cooped up in the house for weeks, you run out of options. So Caldwell placed a phone order and ventured out.

When he pulled up, the restaurant looked deserted. He parked and went inside to pay for the order — touching door handles and PIN pads along the way. The pancake place’s manager had a completely different problem from Chick-fil-A’s: without dine-in customers, they had virtually no business. Caldwell says everyone in town loves this place’s pancakes — a lot more than they like Chick-fil-A — but it didn’t matter how much people love it if they don’t have a safe, easy way to get to it.

The restaurant analogy easily applies to banks. The ones that provide a modern mobile experience are not only processing basic transactions for their clients, they’re using data to provide helpful insights and peace of mind in this crucial time. They’re able to increase engagement and help their customers figure out just how much is safe to spend on toilet paper stockpiles. They play a key role helping customers tackle daily struggles.

Banks that aren’t leaning into technology risk losing out on these opportunities. Worse, they may not see that loss until we’re on the other side of this crisis.

Banks without data aggregation have no way of knowing how their customers’ behavior is changing in response to this crisis. They can’t see it when social distancing and closed branches cause customers to download new apps, apply for a loan from a fintech or find a new way to move money.

“Banks are completely blind to changing consumer habits regarding digital banking if they don’t have aggregation,” Caldwell says. “So I think a lot of banks may think they’re going to come out of this at the end even stronger, but they are not realizing they’ve already lost a battle. It’s just a question of time before that lingering account dwindles down to the low balance, and then it either sits as a zombie account or it goes to zero.”

In times of rapid change, banks can’t afford to fly blind by using lagging indicators based on last month’s reports. Caldwell says leading indicators — the tiny tremors in behavioral changes that only artificial intelligence can detect — will be crucial in helping customers and de-risking the bank.

And banks need to get their data and digital experiences in place fast. The healthcare industry’s response to COVID isn’t to take 18 months building a new hospital from the ground up, Caldwell says. Healthcare administrators triage; they set up tents in parking lots and do whatever they have to do to provide help where it’s needed most.

It is possible for banks to play catch-up quickly. Fintechs have come out in droves to support banks with accelerated launches and discounted services. For MX’s part, they can set up a data-driven mobile app that sits alongside the bank’s existing app in a matter of weeks.

“You don’t have time to retrofit your ancient hospital,” Caldwell says. “If you want to take good care of your customers and not let them down, you need to launch something in the next few weeks. The world you live in right now is a world where that is not only possible, but it’s requisite.”

How to Respond to LendingClub’s Bank Buy

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

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

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

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

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

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

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

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

How should banks respond?

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

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

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

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

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

AI: The Slingshot for Small Banks

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Regional and community banks are struggling with growth and profitability in the face of competitive pressure from large national banks and fintech startups. Executives at these institutions are instructed to invest in technology, and to leverage data and artificial intelligence to compete more effectively.

While that sounds good, smaller banks are often constrained by a dependence on legacy core vendors that limits their IT potential, encounter difficulties in accessing their own data, lack skilled data scientists, and have no clear vision on where to start.

This conundrum came up during Bank Director’s 2020 Acquire or Be Acquired conference in Phoenix. I rubbed shoulders with fellow conference attendees over the course of three days, sharing ideas about the state of the banking sector and how community banks could leverage data and AI to drive business results. The talent gap was a frequent topic. Perhaps unsurprisingly, only a miniscule number of community banks have hired data scientists. The majority of banks have not prioritized data science capabilities; the few who are actively recruiting data scientists are struggling to attract the right talent.

But even if community banks could arm up with data scientists, what volume of data will they be working on to derive insights to fuel their business strategy? A $1 billion asset bank may have 50,000 to 75,000 customers — not a lot of data to start with. Furthermore, a number of bankers point to the difficulties they encounter in accessing their data in their legacy core systems.

As we were having these discussions, conversations were raging about the need for smaller banks to prepare for an existential threat. At the World Economic Forum in Davos, attendees were assessing comments from Bank of America Corp. Chairman and CEO Brian Moynihan that the bank could double its U.S. consumer market share. Back-of-envelope calculations indicate that if Bank of America manages to accomplish that growth, more than 1,000 community banks could be out of business. Can technology enable these banks to retain their core customer base, grow and avoid this fate? I think so.

One promising area of AI application for community banks is loan and deposit pricing. Community banks have little or no analytic tools beyond competitive rate surveys; most rely on anecdotal feedback from customers and front-line bankers. But price setting and execution on both assets and liabilities is one of the most important levers a bank can use to drive both growth and improve its net interest margin. Community banks should take advantage of new tools and data to level the playing field with the big banks, which are already well ahead of them in adopting price optimization technology.   

Small banks can gain the upper hand in this “David versus Goliath” scenario because accessible cloud-based technology works in their favor. True, big banks have worked with price optimization technology and leveraged large amounts of customer behavioral data for years. But community banks tend to have stronger customer relationships and often better pricing power than their larger competitors. Now is the time for community banks to take control of their destiny by adopting new technology and tools so they can better compete on price.

There are three reasons why cloud computing and the power of AI will be the slingshot of these ‘David’ banks:

  1. Scalable computing power, instantly on tap. Cloud-based computing and pre-configured pricing solutions are affordable and can be implemented in days, not months.
  2. Big data — as a service. Community banks can quickly leverage AI-based pricing models that have been trained on hundreds of millions of transactions. There is no need to build their own analytic models from a small customer footprint.
  3. Plug-and-play IT. It’s much easier today to integrate cloud-based platforms with a bank’s core system providers, which makes accessing their own data and implementing smarter pricing feasible.

Five years ago, it would have seemed crazy to think that in 2020, community banks would be applying AI to compete against the nation’s top banks. But the first wave of early adopters are already deploying AI for pricing. I predict we’ll see more institutions embracing AI and machine learning to improve their NIM and increase growth over the coming years.

Developing a Future-Proof Bank

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Banks are growing more fintech-friendly, giving them an avenue to strengthen their capabilities. In this video, Mbanq CEO Vlad Lounegov shares how traditional financial institutions can better compete with tech-savvy upstarts in the financial space.  

  • The Changing Relationship Between Banks & Fintechs
  • Examining Core Systems
  • Four Qualities of a Good Solution