How to Get More Value Out of Your Tech Spend

If banks want digital transformation to be more than a buzz phrase, they need a strategy based on a keen understanding of what their customers want — along with trusted partners that can help them deliver.

That’s exactly how Little Rock, Arkansas-based Encore Bank became one of the fastest-growing privately held commercial banks in the United States.

Under the guidance of Allan Rayson, the $2.8 billion bank achieved unprecedented results in 2021: 95% asset growth, 119% loan growth, 107% deposit growth, and 1,276 new loans worth approximately $740 million. I recently spoke with Rayson to find out how he vets tech vendors for optimal results.

“Early on, Encore Bank identified three big rocks that we wanted to move: driving commercial loan volume, driving core deposits and driving non-interest revenue,” he says. “Gaining clarity on our business outcomes helped us set a clear technology and innovation strategy.”

According to Rayson, Encore’s success comes down to getting specific about desired goals and outcomes. With upfront clarity on the desired outcome, the digital transformation conversation shifts from “we need tech” to something more substantial — not to mention measurable. For example: “We need the right technology to reduce our labor and marketing cost by X, increase our profit margins and new account openings by Y and boost our operational efficiency by Z.”

Best Practices for Vetting Tech Vendors

1. Legacy is not always better.
The Banking Impact Report found that legacy banking infrastructure is the top reason why bank executives have not fully embraced digital banking. In fact, legacy infrastructure can be a competitive liability that may be keeping your bank at a critical disadvantage in a crowded marketplace.

2. Steer clear of RFPs.
Many FIs rely on requests for proposal to vet technology partners. While this process can be helpful in identifying tech requirements and business objectives, RFPs often require a lengthy process and a drawn-out checklist that may fail to capture some of an institution’s most important considerations. Instead, make sure the fintech’s long-term strategic vision aligns with the bank’s strategic vision, and that the partnership will serve future banking needs.

3. One code base is better than custom code.
Custom code is risky. It can be time intensive and difficult for an institution to update. It doesn’t scale or innovate at the speed that banks might require, and it leaves little room to adapt for whatever the future may hold. Modern platforms that leverage a software as a service approach are built on a single code base. That means they can apply learnings from all of their customers directly onto the platform, so every customer benefits from economies of scale. This can be a major competitive differentiator that will help any bank keep up with the speed of innovation.

Many financial institutions view technology as a cost versus an investment — and a high-risk cost at that. But the advantages of strategic tech partnerships are far-reaching, and the right partner can deliver an enormous return on investment.

“I have zero developers on staff at Encore,” Rayson says. “Even so, we’ve grown to $2.5 billion and will be $3 billion by the end of the year without one. That shouldn’t be possible, but it is with the right tech partners. We probably rely on our fintech partners more than most banks — and I see that as a strength.”

How to Level the Playing Field Through Buy Now, Pay Later

Buy now, pay later (BNPL) has exploded over the last few years and its momentum shows no signs of slowing. In fact, BNPL payments orders grew 85% and revenue increased 88% during Thanksgiving, Black Friday and Cyber Monday compared to the week before, according to Adobe Analytics. Not only is BNPL taking a growing share of lending from many community banks, BNPL platforms are now beginning to move into credit and debit card products too, potentially further eroding banks’ opportunities, and worse, the relationships with their current customers. Fortunately, several white-label solutions are now entering the market, enabling banks to meet the demands for BNPL and to better compete and retain market share of the customer’s wallet.

However, the increased usage and adoption of these solutions has also begun to highlight some of the problems this payment option can pose for both consumers and lenders alike. While it can present an easy way to buy items on credit, every purchase becomes multiple payments to manage and, unsurprisingly, 42% of BNPL users have missed a payment, with 33% of users overdrafting their checking accounts in just one month. As more of today’s borrowers take on an increasing number of BNPL payments, the chance for delinquencies will rise, especially for those customers living paycheck-to-paycheck. Keeping track of BNPL payments in addition to other expenses can get complicated quickly, and for many, one missed loan, credit card or bill payment could mean a long-term hit to their credit scores (and potentially a default for the lending bank).

With BNPL’s popularity and accessibility, it is unlikely to be going away anytime soon, so the question becomes how can banks make BNPL products better and safer for their customers while mitigating their risk? Luckily, banks have several advantages over pure-play fintechs they can leverage to deliver a superior BNPL experience.

  1. If limiting BNPL offerings to current customers, banks can use customer history to make ability-to-pay judgments prior to extending BNPL credit. Not only will this control potential losses, but it will also enable banks to make stronger offerings, whether providing more credit or as a tie-in with other products (e.g., bumped-up deposit account rates, reduced annual credit card fees, free overdraft protection).
  2. While banks can only encourage ACH autopay for BNPL payments, alternatively, they can require repayment through payroll-linked payments. This allows customers to simply “set it and forget it,” avoiding the need to manage multiple payment schedules for various purchases. It could also serve as an incentive to set up direct deposit for customers who are not already doing so (or to move their direct deposit).
  3. Banks can provide tracking tools for their BNPL customers. One key issue with BNPL is that the loans are not typically reported to credit bureaus (although some providers have started). This makes it impossible for lenders to know how many outstanding BNPL loans a customer has (referred to as “stacking” by the CFPB). It is also difficult for customers to track their payments, so banks can add real value by providing visibility, both for themselves as well as for their customers. Additionally, tracking provides greater insights to enhance future ability-to-pay decisions, allowing banks to continue improving their offerings.
  4. Banks should be fully transparent and go the extra mile for their disclosures. Per the Consumer Financial Protection Bureau, loans with four-or-less payments are not required to provide cost-of-credit disclosures, but doing so can be very useful for the customer. Clearly explaining that while BNPL is interest-free for them, the retailer is paying a fee in exchange for a sale, helps ensure customers better understand the process. Banks can even provide broad guidance on BNPL products for their customers, further enabling them to make good decisions about which payment method is best.
  5. Banks can create a big cross-selling opportunity by tying a debit card and, potentially, rewards points to a BNPL offering. This could be particularly effective with millennials and Gen Z customers who tend to be higher users of BNPL (and often lack or do not trust credit cards). While debit cards are not big money-makers for banks, they can act as effective relationship-builders that open the door for traditional deposit accounts and other products over time.

Consumer appetite for BNPL products is growing, as are the number of platforms available to meet that demand. In fact, many national banks are either in the process or have already rolled out their own BNPL offerings. While competition is increasing, the good news is that options like white-label solutions offer community banks the tools to become leaders in this popular market and can help level the playing field.

What’s more, as the CFPB introduces new regulations covering BNPL, banks’ competitive advantage versus pure-play BNPL players will likely increase, as most will be much better positioned to adapt and comply with future regulations. Today’s community banks should consider their options now and develop their BNPL strategies to both retain their existing customer relationships and compete for new ones in the future.

How Tech Hinders the Ability to Hire

In my role as a CEO of an up-and-coming fintech startup, I spend a lot of time talking to bank executives. In recent months, those conversations have often focused on a common pain point they are all feeling: hiring.

Many executives are struggling with hiring resources and adequate staffing. While the focus is often on salaries, I think the underlying problem is that a culture lacking an innovative spirit, evidenced by outdated technology, deters the new generation of applicants. Banks are not delivering a culture that fosters innovation, nor are they using or employing technology that applicants want in their daily job. Ultimately this leads to insufficient numbers of applicants; filling open positions is an ongoing struggle.

In contrast, open positions at our company typically get hundreds, if not thousands, of applicants for any opening. The question then is: Why is there more interest in a position at a “risky” startup than in an established financial institution?

Unlocking Satisfaction
Ultimately it comes down to one thing: employee satisfaction. Higher satisfaction is often correlated with successful and long-lasting teams; the lack thereof spells doom and high turnover. As millennial employees become the majority of the workforce, their preferences and desires are becoming a more prominent factor in evolving impressions of employee satisfaction. Ultimately it comes down to a few elements:

  • Having a clear mission and ability to affect decisions that influence progress toward fulfilling the mission.
  • Delivering a collaborative and innovative culture.
  • Providing flexible work schedules and remote work possibilities.
  • Encouraging and supporting personal development.

While banks incorporate some of the elements above, they often overlook the impact of technology and business models. Banks often use an outdated technology stack that, while painful for experienced employees, is perceived as utterly terrifying for younger generations who grew up using customer-centric apps and highly customizable digital experiences. In addition, the procedures for handling customers at these institutions are often highly scripted and regimented, allowing little room for variation and a personal touch. These factors can contribute to lower employee satisfaction and an annual turnover among frontline staff that has surged to 23.4% — its highest level since 2019, according to a 2022 compensation and benefits survey from Crowe LLP.

Nonetheless, bank executives rarely consider the impact the technology they make employees use has on that employee’s satisfaction at the company. This is something that definitely deserves more attention from the board and management, and should be one of the major factors when evaluating new technology.

Creating Employee Engagement
There are several elements that make new technologies more desirable to younger employees and that may increase their satisfaction. Improving these could lower your institution’s annual churn and benefit the bottom line.

  • The user interface and user experience of your technology should be similar to that of popular consumer-facing apps. Familiarity requires less time training on how to use the technology and will increase affinity from the get-go.
  • Basic capability features should also be similar to what consumer-facing apps offer. For example, communication and messaging apps should have features like the ability for customers and employees to seamlessly transfer and move between text to video.
  • The technology should allow employees to access feedback and training in the same platform. This increases the platform’s transparency and timeliness of any feedback.
  • The technology should allow for gradual deployment and a test/iterate approach. This collects feedback from a wider number of employees and can generate a greater sense of contribution.

Incorporating the employee’s experience to an already complicated technology acquisition process might sound daunting, but it’s important to remember that this change does not need to be comprehensive and instantaneous. Instead, it can be deployed in stages, allowing your employees and the whole organization time to deploy, observe and adopt. Gradual but consistent change will yield better long-term results for both your customer and employee satisfaction.

Institutions that embrace technology their employees want to use and allow for a culture of innovation and bottom-up input will lay the groundwork for higher employee satisfaction in the future, leading to less turnover and a better bottom line. Those banks that don’t will continue to struggle to attract and retain staff, while relying on pay hikes to close the gaps.

Winning Customer Loyalty During Trying Economic Times

Bank leaders are preparing for an economic downshift; if done well, this can be a time to support customers’ financial health and improve long-term relationships. Proactive counsel, guidance and timely services can turn economic hardships into stronger financial foundations that benefit a bank’s bottom line.

That’s because consumers are facing the perfect storm of cash flow difficulty: Covid-related interventions have petered out, only to be replaced by a rise in the costs of goods, fuel and interest rates. Consumers cannot keep up with the pace of inflation; as of September 2022, 63% of Americans reported living paycheck to paycheck in order to make ends meet, and 43% expected to add to their debt in the next six months.

Economic hard times can give bank customers a sense of shame, discouragement and alienation. They may choose to ignore their financial troubles and debt and disengage with their financial institutions. Bankers can interrupt this pattern with more transparent and proactive best practices. They can provide support and education, in real time, that consumers need to be financially healthy.

Upwards of 80% of consumers prefer to receive money-related insights from more traditional sources such as banks, but only 14% believe their financial institution delivers such guidance. This needs to change. Banks have the unique advantage of owning the data and relationships necessary to proactively develop deep and meaningful experiences that support customers in hard times. They can use this data to maintain and protect customer relationships, rather than risk losing them to a competitor or fintech.

The first step for banks is to focus on customers’ needs, then educate them on helpful tools, best practices and how they can avoid missteps, such as products with predatory interest rates. While banks can’t control inflation, they can be a valuable partner for their customers.

Customers feel at ease when the guesswork is taken out of banking. Bankers need to eliminate the black box of uncertainty. For instance, a bank can analyze internal and external data streams, such as customer information from their loan database and the credit bureaus, to generate personalized pre-approved offers unique to its specific risk tolerance and portfolio. Such offers can include everything from home equity to auto loans, turning lending on its head from an application to a shopping cart scenario.

Banks should also consider out-of-the-box financial services and alternative offerings that can meet the evolving needs consumers face in 2023. For instance, if a consumer has a home equity surplus, the bank could suggest that they access this untapped equity in their homes for any pressing needs. The bank may offer to help a consumer with loan consolidation, or a better interest rate based on an improved credit score. Offering specific, personalized rates and services takes the mystery and chance of failure out of financial services. Banks can empower borrowers with knowledge of their unique opportunities — helping them make smart financial decisions while increasing their wallet share and gaining trust that lasts for a lifetime.

More than three in four Americans feel anxious about their financial situation. Banks must take this time to rethink the value they provide to customers. Those that prioritize personal, healthy financial guidance in 2023 will become trusted advisors and solidify relationships that last. 

Evaluating Digital Banking In 2023

Platforms that offer future flexibility, as opposed to products with a fixed shelf life, should be part of any bank’s digital transformation strategy for 2023, says Stephen Bohanon, co-founder and chief strategy and product officer at Alkami Technology. Chatbots and artificial intelligence can deflect many simple, time-consuming customer queries — saving time and costs — but digital channels can go further to drive revenue for the organization. To do that, bankers need to invest in data-based marketing and account opening capabilities.

Topics include:

  • Platforms Vs. Products
  • Sales Via Digital Channels
  • Advantages of Live Service

How Banks Can Win the Small Business Customer Experience

In the first stages of the pandemic, it became apparent that many banks were unable to effectively meet the needs of their small business customers in terms of convenience, response time, fast access to capital and overall customer experience. Innovative financial technology companies, on the other hand, recognized this market opportunity and capitalized on it.

Bankers recognize the importance of providing their business banking customers with the same fast and frictionless digital experience that their consumer retail banking customers enjoy. So, how can banks ensure that they are competitive and continue to be relevant partners for their small business customers?

The reality of applying for most business loans below $250,000 is a difficult experience for the applicant and a marginally profitable credit for the bank. Yet, the demand for such lending exists: the majority of Small Business Administration pandemic relief loans were less than $50,000.

The key to making a smooth, fast and convenient application for the borrower and a profitable credit for the lender lies in addressing the issues that hinder the process: a lack of automation in data gathering and validation, a lack of automated implementation of underwriting rules and lack of standardized workflows tailored to the size and risk of the loan. Improving this means small business applicants experience a faster and smoother process — even if their application is declined. But a quick answer is preferable to days or weeks of document gathering and waiting, especially if the ultimate response is that the applicant doesn’t qualify.

But many banks have hesitated to originate business loans below $100,000, despite the market need for such products. Small business loans, as a category, are often viewed as high risk, due to business owners’ credit scores, low revenues or lack of collateral, which keeps potential borrowers from meeting banks’ qualifications for funding.

Innovative fintechs gained the inside track on small business lending by finding ways to cost-effectively evaluate applicants on the front-end by leveraging automated access to real-time credit and firmographic and alternative data to understand the business’ financial health and its ability to support the repayment requirements of the loan. Here, much of the value comes from the operational savings derived from screening out unqualified applicants, rerouting resources to process those loan applications and reducing underwriting costs by automating tasks that can be performed by systems rather than people.

To make the economics of scale for small dollar business lending work, fintechs have automated data and document gathering tasks, as well as the application of underwriting rules, so their loan officers only need to do a limited number of validation checks. Adopting a similar approach allows banks to better position themselves to more cost effectively and profitably serve the borrowing needs of small business customers.

Although some fintechs have the technology in place to provide a faster, more seamless borrowing experience, many lack the meaningful, personal relationship with business owners that banks possess. They typically must start from scratch when onboarding a new loan customer, as opposed to banks that already own the valuable customer relationship and the existing customer data. This gives banks an edge in customizing offers based on their existing knowledge of the business client.

While consumer spending remains strong, persisting inflationary pressures and the specter of a recession continue to impact small businesses’ bottom lines. Small business owners need financial partners that understand their business and are nimble enough to help them react to changing market dynamics in real time; many would prefer to manage these challenges with the assistance of their personal banker.

The challenge for bankers is crafting and executing their small business lending strategy: whether to develop better business banking technology and capabilities in-house, buy and interface with a third-party platform or partner with an existing fintech.

Better serving business customers by integrating a digital, seamless experience to compliment the personal touch of traditional banking positions financial institutions to compete with anyone in the small business lending marketplace. With the right strategy in place, banks can begin to win the small business customer experience battle and more profitably grow their small business lending portfolios.

Nailing the Customer Experience in a Digital Upgrade

To get your bank’s people ready for a technology upgrade, you need to do two things: educate front line staff so they become ambassadors for the new tech and help customers learn how to use it. Sounds easy, but in many cases, financial institutions don’t have the right tools to nail their digital customer experience through a technology upgrade.

Start with developing your training and development assets for staff training into the bank’s technology project plan and each rollout. Your staff needs to time to become familiar with the new technology; launching training two weeks prior to go-live won’t set them up to successfully help customers access the new services. Project managers and executive sponsors should develop and test a digital banking curriculum in advance of rollout and begin training front line staff on how to use the tech before launching it to the public.

The seemingly logical approach is to ask the bank’s learning and development group to create some new tech training in the learning management system (LMS). But that often doesn’t work. Traditional LMSes often aren’t tooled for digital experiences; static learning content struggles to drive digital fluency among employees. And tedious training approaches or topics can foster an aversion to LMS training among staff. Banks investing in their digital products and services may want to consider a modern solution that’s tooled for teaching tech.

Game-based learning that uses built-in incentives and an employee’s inherent motivation, as well as interactive role-plays and visually appealing learning modules, are often the most effective way to help today’s employees retain essential information. These innovative elements can make the difference in a bank’s training system and subsequent customer interactions.

And as your staff tries out the tech, either in-house or after launch, be sure to explicitly ask and encourage for their feedback on the digital experience. What can be improved? Which features are hard to understand or non-intuitive? What additional features and functions are desired? Where do they stumble when using the tech?

Endicott, New York-based Visions Federal Credit Union created a digital advisory board made up of a dozen rank-and-file employees who meet monthly to discuss consumer behavior trends, review prospective vendor partnerships and provide feedback on the institution’s use of consumer technology.

“They’re not necessarily managers, VPs or SVPs,” says Tom Novak, vice president and chief digital officer at Visions Federal Credit Union. “They’re day-to-day employees that are in the know about what’s happening in technology, social media and typical consumer lifestyles. They understand why people are on TikTok more than Facebook, or why they use Venmo instead of traditional PayPal mechanisms.”

Your team will also need the right tools to support your customers after their training. Consider providing them with access to technology walk-throughs and simulators, so they can easily find quick tips and features to help customers calling in or visiting a branch. Ensure your learning solution provides staff with support in the flow of work, so they can help customers on demand.

Finally, allow your customers to “test drive” the tech before they commit. Change is hard on your customers too. Your institution needs to be prepared to coach them along the journey — whether that’s a new digitally based product or service or an upgrade from a prior solution that they have grown comfortable with over time. Give them a chance to try it out, and provide them with a safety net through easy-to-use, shareable technology walkthroughs and simulators to make learning easy.

While financial institutions of all sizes are making significant investments to transform their technology to meet the ever-changing needs of their customers, the biggest hurdle often comes in right at the end. To achieve success in your technology upgrade, your bank will need to leverage the power of your people through a well-considered deployment strategy that places intuitive learning and technology support squarely at its center. New, innovative learning and development tools make these processes — and ultimately, the digital transformation — less intimidating, engaging, fun and flexible.

Maximizing Profitability Potential Via Push Notifications

Implementing digital fintech solutions is critical for banks seeking to grow their customer base and maximize profitability in today’s increasingly competitive industry.

To engage account holders, banks must explore digital-first communication strategies and mobile-friendly fintech products. Push notifications are an often overlooked, yet powerful, tool that enables financial institutions to proactively deliver important messages to account holders that earn higher engagement rates than traditional communication methods.

Push notifications are delivered directly through a banking app and sent to account holders’ mobile devices and can provide timely alerts from a financial provider. While push notifications can act as a marketing tool, they can also convey critical security alerts via a trusted communication channel — as opposed to mediums that are vulnerable to hacks or spoofing, such as email or SMS texts. Push notifications can be used for personalized promotional offers or reminders about other financial services, such as bill pay or remote check deposit, transaction and application status updates, financial education and support messaging, local branch and community updates and more.

Banks can also segment push notifications using geo-location technology, as long as customers get permission, to alert account holders at a time, place and setting that is best suited to their needs. Banks can customize these notifications to ensure account holders receive messages notifying them of services that are most relevant to their financial needs.

When leveraged effectively, push notifications are more than simple mobile alerts; they’re crucial tools that can significantly increase account holder engagement by nearly 90%. Push notifications can be more effective in reaching account holders compared to traditional marketing methods like email or phone calls and receive engagement rates that are seven times higher.

Boosting customer engagement can ultimately have a significant impact on a bank’s profitability. Studies show that fully engaged retail banking customers bring in 37% more annual revenue to their bank than disengaged customers. Enhancing ease of use while offering greater on-demand banking services that consumers want, banks can leverage push notifications to encourage the use of their banking apps. Enabling push notifications can result in a 61% app retention rate, as opposed to a rate of 28% when financial providers do not leverage push notifications.

Bank push notifications come at a time when consumer expectations for streamlined access to digital banking services have greatly accelerated. In a study, mobile and online access to bank accounts was cited by more than 95% of respondents as a prioritized banking feature.

This focus forces financial institutions to explore fintech solutions that will elevate their customers’ digital experience. Traditional institutions that fail to innovate risk a loss of market or wallet share as customers migrate to technologically savvy competitors. U.S. account holders at digital-only neobanks is expected to surge, from a current 29.8 million to 53.7 million by 2025.

Banks should consider adding effective mobile fintech tools to drive brand loyalty and reduce the threat of lost business. Push notifications are a unique opportunity for banks to connect with their audience at the right moments through relevant messaging that meets individual account holder needs.

Real-time and place push notifications can also be a way for banks to strengthen their cross-selling strategies with account holders. They can be personalized in a predictive way for account holders so that they only offer applicable products and services that fit within a specific audience’s needs. This customization strategy can drive revenue while fostering account holder trust.

To gain insight on account holders’ financial habits and goals, institutions can track user-level data and use third-party services to tailor push notifications about available banking services for each account holder. Institutions can maximize the engagement potential of each offer they send by distributing contextually relevant messaging on services or products that are pertinent to account holder’s financial needs and interests.

Push notifications are one way banks are moving toward digital-first communication strategies. Not only do push notifications offer a proactive way to connect with account holders, they also provide financial institutions with a compelling strategic differentiator within the banking market. Forward-looking financial institutions can use mobile alerts to strengthen account holder relationships, effectively compete, grow their customer base and, ultimately, maximize profitability.

4 Keys Banks Need to Unlock Value From Artificial Intelligence

Banks of all sizes are tuning up their technology to better compete for customer loyalty by focusing on areas involving consumer interactions. But bank leaders need to understand that artificial intelligence, or AI, alone can’t revolutionize the customer experience.

In order for AI investments to elicit instant, human-like understanding and communication, banks must combine AI technology with:

  • Access to quality data.
  • Customer experience solutions that support responsiveness, natural interaction and context retention.
  • Security for enrollment, authentication and fraud detection — indispensable in the context of retail banking.

Data
Quality and Access
Data is the fuel driving AI-based experiences. That means the quality of the available data about the user for a specific use case and the ability to access this data in a real-time, secure fashion are mission-critical aspects of an AI investment.

Unsurprisingly, increasing the quality of data and providing seamless, secure access to this data has been a challenge that banks have grappled with for years.

But institutions must overcome these data utilization hurdles in order to offer an AI-based experience that is better than mediocre. The best outcome? Users will no longer suffer through disjointed experiences or delayed satisfaction caused by siloed data, multiple data connection hops and antiquated back ends that haven’t been modernized to today’s standard.

Collection and Understanding
Big data — the collection of very large data sets that can be analyzed computationally to reveal patterns, trends and associations — goes hand-in-hand with AI. When it comes to consumer banking, an AI solution for banks should store all customer interaction information, from words used to communicate with the bot to actions taken by the user, so it can be analyzed and applied in future interactions. To do this, banks need to adopt AI technology that integrates a learning loop that’s always running in the background.

As data accumulates, AI-powered bots should get smarter over time. Behavioral, transaction and preference information enables banks to create personalized experiences that elevates customer experience to the next level. J.D. Power’s 2022 U.S. Retail Banking Satisfaction Study found that 78% of respondents would continue using their bank if they received personalized support, but just 44% of banks are actually delivering it.

Without the right data, there’s no intelligence to inform interactions.

Customer Experience
If someone asked, “What’s your name?” and it took you 8 seconds to respond, the conversation would seem unnatural and disjointed. Similarly, AI technology requires real-time responsiveness to live up to its human-like image. Additionally, bank customers expect to be able to seamlessly transition between interaction channels without having to rehash their issue each time they get transferred, change interaction channels or follow up. Banks can only achieve this omnichannel customer experience that incorporates customer interaction information across channels with customer experience technology that integrates AI.

Consumers now rank omnichannel consistency as the most important dimension of customer experience, according to a 2021 Harris poll, up from No. 2 in 2019. In a Redpoint Global research study, 88% of respondents said that a bank should have seamless, relevant and timely communications across all channels; less than half (45%) reported that their bank effectively achieved this objective. An omnichannel customer experience is foundational for AI.

Security
As powerful as artificial intelligence can be as a competitive advantage in banking, lack of strong security measures is a nonstarter. In the latest The Economist Intelligence Unit Survey, bankers identified privacy and security concerns as the most prominent barrier to adopting and incorporating AI technologies in their organization. Thankfully, ironclad AI is within reach.

While AI capability is great, its usability is limited if its security is not up to par. An AI bot can go far beyond answering your customers’ basic questions if bank transactions are authenticated and secure; it can perform tasks such as retrieving account balances, listing and searching transactions, making payments, transferring funds and more. Imagine the impact that a friendly and reliable virtual teller, available 24/7, could have on your institution.

Four in five senior banking executives agree that unlocking value from artificial intelligence will distinguish outperformers from underperformers. To access its value, a bank’s customer-facing system must be supported by four pillars: AI understanding, quality data, omnichannel customer experience technology and security.

When technology budgets are tight, bank leaders must invest wisely; not all AI solutions are created equal. Chasing the new shiny thing can waste dollars if bank decision makers don’t have a handle on the scope of what their institution needs. Knowing which pieces of the puzzle will complete the picture is a competitive differentiator. Now, your bank can unlock the value of AI and win.

Venture Capital Funds Remain Hungry for Fintechs

Fintech investment isn’t drying up, so much as resetting from rabid to rational. That’s the assessment of several bank-backed fintech investment funds, where interest in striking deals remains high.

“Given the reset in valuations, more disciplined cash burn in the companies we are looking at and record deal flow, it’s a great environment for us and I expect us to step up our pace of investments in 2023,” says Adam Aspes, general partner at JAM Special Opportunity Ventures.

Over the past two years, its JAM FINTOP joint venture has raised about $312 million from a network of more than 90 bank investors to put into promising fintech and blockchain technology. It has two funds with a five-year investment period, “so we are still in the very early days of deploying capital,” Aspes says.

Regulators have signaled that they’ll be scrutinizing bank-fintech partnerships more closely and reviewing how well compliance issues are addressed. That might have unsettled some venture capitalists, especially those from outside the industry who are sometimes referred to as fintech “tourists.” But Aspes is unphased.

“We have always had a thesis [that] there would be greater emphasis on fintechs being compliant with a bank’s regulated rails,” he says. “So, I don’t think our investment thesis has changed, but I think the market is definitely moving in our direction,” especially in the areas of blockchain technology and banking as a service, or BaaS.

Activity at the venture capital divisions of the largest U.S. banks has not cooled off significantly either, says Grant Easterbrook, a fintech consultant.

“While the total dollars involved may be down relative to 2021 — as firms retrench in a down market and valuations fall — I am not seeing any signs of a major pullback from fintech,” Easterbook says. “Banks know that technology continues to be both a weakness and an opportunity, and they are looking for deals.”

Carey Ransom, managing director of the BankTech Ventures fund, is on the hunt for “real solutions to real problems,” and thinks the fintech shakeout will benefit investors like him. His goal is to find fintechs that can be of value to the more than 100 community banks in his fund by advancing their digital transformation efforts in some way. So the fund isn’t just injecting capital, but helping the fintechs grow.

“We have increasing relevance in a market shift like this,” Ransom says. “We have a very clear value proposition.”

In his view, the market had gotten out of whack with all the free-flowing money over the last year. Now the focus is on more sensible valuation metrics. “Some of it is just returning back to the right valuations and fundamentals,” he says.

David Francione, managing director and head of fintech at Capstone Partners in Boston, has a similar take, pointing out that 2021 skewed perceptions in more ways than one. With the pent-up demand following the Covid-19 pandemic, “2021 was a record year by anybody’s imagination for any metric.”

He notes that investment in fintechs for this year is up compared to the years prior to 2021, so he thinks the dramatic drop-off needs to be put into perspective. “If you strip out 2021, and you look at the prior three or so years before that, this year is still a record year, relatively speaking,” Francione says.

Still, he would not be surprised if there is a lull in activity, given factors like the geopolitical environment and the threat of a recession.

“I think this year is sort of a transition year. Things are probably taking a little bit longer to finance. At least that’s what we’re seeing in some of the transactions that we’re in,” says Francione, whose firm was recently acquired by the $179 billion Huntington Bancshares in Columbus, Ohio. “I would call it more of a pause than anything.”

Like Ransom, Francione thinks the pause could benefit banks that want to partner with fintechs. Francione’s advice to fintechs is to reflect on what they can do to solve a problem that banks — or more importantly, the bank’s customers — have.

“A lot of these fintechs that we’re talking to, they think, ‘Oh, this bank could be interesting.’ But sometimes they don’t really understand why and what they can really do for them. So they really have to peel back the onion and figure out: Who are their customers? Is it a similar target market? What are some of their needs? Does our technology solution address those needs? Can they integrate easily? What is the real value that they’re going to bring to this potential bank partnership, whether the partnership is in the form of an investment or is strictly a partnership to resell some of its products?”

Ransom says he has been in meetings where fintech executives come in saying they are out to disrupt banks. Then they find out that Ransom works with banks and because they need to raise money, “mid-conversation they shift their tone to, ‘Maybe I can help banks,’” he says.

His top recommendation to fintech executives that want to work with BankTech Ventures is to understand the value their technology can provide to community banks. “If we have to explain it, they’ll lack credibility,” Ransom says.

The fintech founders who tend to be a fit for his fund — which is backed by banks ranging in size from $200 million to $20 billion in assets — are less flashy and more pragmatic. The ideal founders also have taken care to capitalize the fintech properly.

“Don’t raise $100 million for a business that’ll sell for $200 million,” Ransom says. “That’s a change we have seen — which I see as healthy.”

Those that take on too much money create a situation where the risk is no longer worth the potential return for investors. But the total amount raised is not the only concern; the types of investments can also be an issue.

He believes some fintechs take on too much “preference capital,” the outside money that gets priority for returns over common shares, which the founding executives tend to own. If the executives think they are unlikely to get paid, it misaligns incentives and creates a risk that they could decide to leave the fintech, Ransom says.

If some fintechs are in a sudden scramble to cut expenses, slow the cash burn and move from growth to profitability faster, fintech analyst Alex Johnson suggests that it is to be expected after the heady cash free-for-all that prevailed last year.

“Between 2019 and 2021, money was just too readily available. A lot of tourists — founders looking to get rich quickly and generalist VC firms sitting on massive piles of cash — wandered into fintech and screwed stuff up,” Johnson writes in a recent edition of his Fintech Takes newsletter.

A growth-over-everything mindset prevailed and a lot of bad behavior got overlooked. “One example: the alarming amount of first-party fraud that has been tolerated by neobanks in recent years,” he writes. “And now we are all suffering through the hangover.”