Fed Account Guidance Yields More Confusion

In seeking answers from the Federal Reserve Board and one of the regional banks, a crypto fintech’s lawsuit may have forced the regulator to issue guidance on how other companies can gain access to the nation’s vaunted payment rails. 

At issue are which companies are eligible to request master accounts at the 12 Federal Reserve Banks, and in turn, how the Reserve Banks should consider those requests. Central to this debate — and the timing of this guidance — is the Custodia lawsuit.

The day after the Board released the guidance, it asked a judge to dismiss a lawsuit from Custodia, a company that holds a special purpose depository institutions charter from the Wyoming Department of Banking. Custodia, which focuses on digital asset banking, custody and payment solutions, applied for a master account from the Federal Reserve Bank of Kansas City in October 2020, and sued both the Kansas City Fed and the Board this year to force a decision; the Board cited the final guidelines in its justifications for a dismissal. 

“Honestly, it makes the guidelines seem like they were written, in part, to get courts to give [the Board] more deference when it winds up in litigation,” says Julie Hill, a law professor at the University of Alabama who has written about Fed account access. 

Outside of the lawsuit, the guidance speaks to the interest that fintechs and companies with novel bank charters have shown in opening Fed accounts. A Fed account comes with access to the payment rails; the entire banking as a service (BaaS) business line is premised on banks serving as intermediaries and account holders for fintechs to send and store customer money. 

If the path to applying for a master account becomes clearer, institutions with novel banking charters could bypass bank partnerships, and request and operate these accounts directly. But experts tell Bank Director that the Aug. 15 guidance codifies existing practices while offering little insight into how nonbanks can get these accounts — leaving most fintechs and bank partners where they started. 

Companies that want Fed accounts request access from one of the 12 Reserve Banks, depending on which district the company is located in. The final guidance that the Federal Reserve Board issued is directed to those Reserve Banks; its involvement in these regional banks’ decision-making indicates that the Board is trying make these decisions consistent across regions and may be involved in individual requests as well, experts say.

The Fed’s guidance includes six principles that the regional Reserve Banks should use when evaluating these requests, along with a three-tiered review framework for the amount of due diligence and scrutiny that the Reserve Banks should apply to requests submitted by different types of institutions. 

But observers still see shortcomings in the guidance. Several experts pointed out that the guidance doesn’t address which companies are eligible to apply, which is the first hurdle nonbanks must address before requesting an account. It was one of the most frequently asked questions that companies submitted to the regulator, says Matthew Bisanz, a partner in Mayer Brown’s financial services regulatory and enforcement practice. 

The guidance retains the “substantial discretion” that Reserve Banks have in deciding approvals, meaning that institutions still do not have a clear path to account access, according to a Mayer Brown client note. The process is so unclear that these accounts are granted via requests rather than applications that regulators would normally employ, Hill points out.

Observers are waiting to see how the guidance figures into the Custodia case. Hill says that Custodia is an interesting test case; the company is in a strong position to request an account and addresses many of the regulator’s stated risk concerns. It has an ABA routing number and applied to become a member of the Kansas City Fed, which could advance it from tier three to tier two in the review framework. The company also accepts U.S. dollar deposits but does not have FDIC deposit insurance, which is one factor in the tier one considerations.

What’s Next
Hill says the next step for the Reserve Banks is potentially getting together to develop a sort of operating procedure, which could make the request and decision-making process more consistent across regions. And fintechs that might be interested in a novel bank charter may want to reach out to sympathetic lawmakers in Congress and explain their cause. Custodia and other crypto companies have found a champion in Sen. Cynthia Lummis, R-Wyo., and an ally in Sen. Pat Toomey, R-Pa., both of whom have raised concerns with the Fed and could author legislation that is more accommodative to novel banking charters that the Fed would need to follow. 

In the meantime, companies that want a Fed account and aren’t interested in becoming bank holding companies or partnering with a BaaS bank may find themselves in limbo for a while. Bisanz points out that in litigation, the Fed cited a case that said delays of three to five years are not unreasonable; Custodia brought its lawsuit to expedite a decision. For novel banks, waiting years for a decision may as well mean the death of a business model. 

“There is no guarantee of an application under these guidelines, and there is no guarantee of a decision,” Bisanz says. “Nothing in these guidelines says that the Reserve Banks will act expeditiously. People should read the guidelines, consider applying — but also be ready to sit tight.”

Eyes Wide Open: Building Fintech Partnerships That Work

With rising cost of funds and increased operating costs exerting new pressures on banks’ mortgage, consumer and commercial lending businesses, management teams are sharpening their focus on low-cost funding and noninterest revenue streams. These include debit card interchange fees, treasury management services, banking as a service (BaaS) revenue sharing and fees for commercial depository services, such as wire transfers and automated clearinghouse (ACH) transactions. Often, however, the revenue streams of some businesses barely offset the associated costs. Most depository service fees, for example, typically are offered as a modest convenience fee rather than a source of profitability. Moreover, noninterest income can be subject to disruption.

Responding to both competitive pressures and signals of increased regulatory scrutiny, many banks are eliminating or further reducing overdraft and nonsufficient fund (NSF) fees, which in some cases make up a substantial portion of their fee income. While some banks offset the loss of NSF fees with higher monthly service charges or other account maintenance fees, others opt for more customer-friendly alternatives, such as optional overdraft protection using automatic transfers from a linked account.

In rethinking overdraft strategies, a more innovative response might be to replace punitive NSF fees with a more positive buy now, pay later (BNPL) program that allows qualified customers to make purchases that exceed their account balances, using a short-term extended payment option for a nominal fee.

Partnering with a fintech can provide a bank quick access to the technology it needs to implement such a strategy. It also can open up other potential revenue streams. Unfortunately, a deeper dive into the terms of a fintech relationship sometimes reveals that the bank’s reward is not always commensurate with the associated risks.

Risky Business
As the banking industry adapts to new economic and competitive pressures, a growing number of organizations are turning to bank-fintech partnerships and various BaaS offerings to help improve financial performance, access new markets, and offset diminishing returns from traditional deposit and lending activities. In many instances, however, these new relationships are not producing the financial results banks had hoped to achieve.

And as bank leaders develop a better understanding of the opportunities, risks, and nuances of fintech relationships, some discover they are not as well-prepared for the relationship as they thought. This is particularly true for BaaS platforms and targeted online service offerings, in which banks either install fintech-developed software and customer interfaces or allow fintech partners to interact directly with the bank’s customers.

Often, the fintech partner commands a large share of the income stream — or the bank might receive no share in the income at all — despite, as a chartered institution, bearing an inordinate share of the risks in terms of regulatory compliance, security, privacy, and transaction costs. Traditionally, banks have sought to offset this imbalance through earnings on the fintech-related account balances, overlooking the fact that deposits obtained through fintechs are not yet fully equivalent to a bank’s core deposits.

Moreover, when funds from fintech depository accounts appear on the balance sheet, the bank’s growing assets can put stress on its capital ratio. Unless the bank receives adequate income from the relationship, it could find it must raise additional capital, which is often an expensive undertaking.

Such risks do not mean fintech partnerships should be avoided. On the contrary, they can offer many benefits. But as existing fintech contracts come up for renewal and as banks consider future opportunities, they should enter such relationships cautiously, with an eye toward unexpected consequences.

Among other precautions, banks should be wary of exclusivity clauses. Most fintechs understandably want the option to work with multiple banks on various products. Banks should expect comparable rights and should not lock themselves into a one-way arrangement that limits their ability to work with other fintechs or market new services of their own. It also is wise to opt for shorter contract terms that allow the bank to re-evaluate and renegotiate terms early in the relationship. The contract also should clarify the rights each party has to customer relationships and accounts upon contractual termination.

Above all, management should confirm that the bank’s share of future revenue streams will be commensurate with the associated risks and costs to adequately offset the potential capital pressures the relationship might trigger.

The rewards of a fintech collaboration can be substantial, provided everyone enters the relationship with eyes wide open.

FinXTech’s Need to Know: Accounts Payable

When I think of bookkeeping, the first thing that comes to mind is a scene out of “Peaky Blinders:” a sharply dressed man pacing the floor with a heavy leather book, frantically crunching the numbers to figure out which accounts have an overdue balance and of how much.

Today, accounting software digitizes the majority of this reconciliation process. The problem with this? There are hundreds of software solutions a business can choose from — but more poignantly, software offered by a business’ bank seldom falls at the top of that list.

Many banks have historically been slow to service their small business customers. Account opening, applying for a loan or even getting business cards has traditionally forced business owners to head to a branch. The crucial need for bookkeeping software has turned businesses onto disruptors in the space: Intuit’s Quickbooks, Block’s Square software system, PayPal Holdings, etc. These incumbents, and others, are ready to pounce on a market that’s estimated to grow as big as $45.3 billion.

But banks have the chance to claim some of that market.

The Paycheck Protection Program showed small businesses that there were gaps fintechs couldn’t fill — ones that financial institutions could. Bank leaders looking to strengthen the relationship between their institution and their small business customers may want to start with accounts payable (AP) technology.

 If your bank doesn’t already offer small business customers an integrated AP software as a benefit of having a business account, it’s time to seriously consider it.

Some larger banks — U.S. Bancorp, Fifth Third Bancorp — have built in-house AP offerings for their commercial customers. Others, like my $4 billion bank in southeast Iowa, do not — and probably can’t even afford to consider building. Detroit-based Autobooks provides those in-between banks with a platform to help service the AP and invoicing needs of small businesses.

Autobooks lets banks offer its white-labeled software to their small-business customers to manage accounting, bill pay and invoicing from within the institution’s existing online banking system. This eliminates the need for businesses to go anywhere else to handle their AP, and keeps invoicing and payment data within the bank’s ecosystem. More data can lead to better insights, campaigns and products that generate revenue for the bank.

Autobooks receives payments via credit card, Automated Clearing House (ACH) transfers and lockbox transactions. Because small businesses are already working within the bank’s online system, received funds are automatically deposited directly into the business’ bank account.

Paymode-X from Bottomline Technologies is another solution that banks could use. Paymode-X is an electronic, business-to-business payments network that integrates with the existing cash management systems of a bank’s business customers. It eliminates manual initiation and tracking of electronic and ACH payments; its bi-directional connection to accounting systems helps automate reconciliation. Constant electronic monitoring of payments also better traces and tracks payments for banks.

Bottomline Technologies handles vendor outreach and enrollment into the system, and also helps banks identify opportunities to earn additional revenue through the rebates and discounts a vendor may offer to encourage paying electronically, paying early or buying in high volumes.

In addition to offering it to commercial customers, banks can also use Paymode-X for their internal AP needs.

Bill.com has also marked itself as a notable fintech partner. Bill.com Connect is an end-to-end payments management platform that commercial clients access through a bank’s online portal or mobile app. Platform features include a payments inbox to receive, manage and process invoices digitally, automatic forwarding of invoices to the appropriate party, digital signatures and customizable workflows to enable automated approvals.

Bill.com also touts a network of over three million businesses, which could be an attractive benefit for commercial clients looking to expand, partner and more simply get paid.

There is still time and space for banks to plant their flag in the small business space; fintech partners could be an attractive way to break that ground.

Autobooks, Bottomline Technologies and Bill.com are all vetted companies for 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 finxtech@bankdirector.com.

What to Look for in New Cash and Check Automation Technology

Today’s financial institutions are tasked with providing quality customer experiences across a myriad of banking channels. With the increased focus on digital and mobile banking, bankers are looking for ways to automate branch processes for greater cost and time savings.

This need should lead financial institution leaders exploring and implementing cash and check automation solutions. These solutions can improve accuracy, reduce handling time and labor, lower cost, deliver better forecasting and offer better visibility, establish enhanced control with custom reporting and provide greater security and compliance across all locations, making transactions seamless and streamlining the branch experience. However, as bank leaders begin to implement a cash and check automation solution, they must remember how a well-done integration should operate and support the bank in its reporting and measurement functions.

Ask Yourself: Is This the Right Solution?
When a bank installs a new cash or check automation solution, the question that should immediately come to mind for a savvy operations manager is: “How well is this integrated with my current teller software?” Regardless of what the solution is designed to do, the one thing that will make or break its effectiveness is whether it was programmed to leverage all the available functionality and to work seamlessly with the banks’ existing systems.

For some financial institutions, the question might be as simple as: “Is this device and its functionality supported by my software provider?” If not, the bank might be left to choose from a predetermined selection of similar products, which may or may not have the same capabilities and feature sets that they had in mind.

The Difference Between True Automation and Not
A well-supported and properly integrated cash automation solution communicates directly with the teller system. For example, consider a typical $100 request from a teller transaction to a cash recycler, a device responsible for accepting and dispensing cash. Perhaps the default is for the recycler to fulfill that request by dispensing five $20 notes. However, this particular transaction needs $50 bills instead. If your cash automation solution does not directly integrate with the teller system, the teller might have to re-enter the whole transaction manually, including all the different denominations. With a direct integration, the teller system and the recycler can communicate with each other and adjust the rest of the transaction dynamically. If the automation software is performing correctly, there is no separate keying process alongside the teller system into a module; the process is part of the normal routine workflow within the teller environment. This is a subtle improvement emblematic of the countless other things that can be done better when communication is a two-way street.

Automation Fueling Better Reporting and Monitoring
A proper and robust solution must be comprehensive: not just controlling equipment but having the ability to deliver on-demand auditing, from any level of the organization. Whether it is a branch manager checking on a particular teller workstation, or an operations manager looking for macro insights at the regional or enterprise level, that functionality needs to be easily accessible in real time.

The auditing and general visibility requirements denote why a true automation solution adds value. Without seamless native support for different types of recyclers, it’s not uncommon to have to close and relaunch the program any time you need to access a different set of machines. A less polished interface tends to lead to more manual interactions to bridge the gaps, which in turn causes delays or even mistakes.

Cash and check automation are key to streamlining operations in the branch environment. As more resources are expanding to digital and mobile channels, keeping the branch operating more efficiently so that resources can focus on the customer experience, upselling premium services, or so that resources can be moved elsewhere is vital. Thankfully, with the proper cash and check automation solutions, bank leaders can execute on this ideal and continue to improve both the customer experience and employee satisfaction.

The Easiest Way to Launch a Digital Bank

New fintechs are forcing traditional financial institutions to acclimatize to a modern banking environment. Some banks are gearing up to allow these fintechs to hitchhike on their existing bank charters by providing application programming interfaces (APIs) for payments, deposits, compliance and more. Others are launching their own digital brands using their existing licenses.

Either way, the determining factor of the ultimate digital experience for users and consumers is the underlying technology infrastructure. While banks can spawn digital editions from their legacy cores through limited APIs and cobbled-up middleware, the key questions for their future relevance and resilience remain unanswered:

  1. Can traditional banks offer the programmability needed to launch bespoke products and services?
  2. Can they compose products on the fly and offer the speed to market?
  3. Can they remove friction and offer a sleek end-to-end experience?
  4. Can they meet the modern API requirements that developers and fintechs demand from banks?

If the core providers and middleware can’t help, what can banks use to launch a digital bank? The perfect springboard for launching a digital bank may lie in the operating system.

Removing friction at every touchpoint is the overarching theme around most innovation. So when it comes to innovation, why do banks start with the core, which is often the point in their system with the least amount of flexibility and the most friction?

When it comes to launching a digital bank, the perfect place for an institution to start is an operating system that is exclusively designed for composability — that they can build configurable components to create products and services — and the rapid launch of banking products. Built-in engines, or engines that can take care of workflows based on business rules, in the operating system can expedite the launch of financial services products, while APIs and software development kits open up the possibility for custom development and embedded banking.

That means banks can create products designed for the next generation of consumers or for niche communities through the “composability” or “programmability” offered by these operating systems. This can include teen accounts, instant payments for small and medium-sized business customers that can improve their cash flow, foreign exchange for corporate customers with international presence, domestic and international payments to business customers, tailored digital banking experiences; whatever the product, banks can easily compose and create on the fly. What’s more, they also have granular control to customize and control the underlying processes using powerful workflow engines. The operating system also provides access to centralized services like compliance, audit, notifications and reporting that different departments across the bank can access, improving operational efficiency.

Menu-based innovation through operating systems
The rich assortment of microservices apps offered in operating systems can help banks to launch different applications and features like FedNow, RTP and banking as a service(BaaS) on the fly. The process is simple.

The bank fills up a form with basic information and exercises its choice from a menu of microapps compiled for bankers and customers. The menu includes the payment rails and networks the bank needs — ACH, Fedwire, RTP, Swift — along with additional options like foreign exchange, compliance, onboarding and customer experiences like bulk and international payments, to name a few.

The bank submits the form and receives notification that its digital bank has been set up on a modern, scalable and robust cloud infrastructure. The institution also benefits from an array of in-built features like audit, workflows, customer relationship management, administration, dashboards, fees and much more.

Setting up the payment infrastructure for a digital bank can be as easy as ordering a pizza:

  1. Pick from the menu of apps.
  2. Get your new digital brand setup in 10 minutes.
  3. Train employees to use the apps.
  4. Launch banking products to customers.
  5. Onboard fintech partners through For-Benefit-Of Accounts (FBO)/virtual accounts.
  6. Offer APIs to provide banking as a service without the need for middleware.

The pandemic has given new shape and form to financial services; banks need the programmability to play with modular elements offered on powerful operating systems that serve as the bedrock of innovation.

Creating a Winning Scenario With Collaborative Banking

The banking industry is at a critical crossroads.

As banks face compounding competition, skyrocketing customer expectations and the pressure to keep up with new technologies, they must determine the best path forward. While some have turned to banking as a service and others to open banking as ways to innovate, both options can cause friction. Banking as a service requires banks to put their charters on the line for their financial technology partners, and open banking pits banks and fintechs against each other in competition for customers’ loans and deposits.

Instead, many are starting to consider a new route, one that benefits all parties involved: banks, fintechs and customers. Collaborative banking allows institutions to connect with customer-facing fintechs in a secure, compliant marketplace. This model allows banks and fintechs to finally join forces, sharing revenue and business opportunities — all for the good of the customer.

Collaborative banking removes the regulatory risk traditionally associated with bank-fintech partnerships. The digital rails connecting banks to the marketplace anonymize and tokenize customer data, so that no personally identifiable information data is shared with fintechs. Banks can offer their customers access to technology they want, without having to go through vendor evaluations, one-to-one fintech integrations and rigorous vendor due diligence.

Consider the time and money it can take for banks to turn on just one fintech today: an average of 6 months to a year and up to $1 million. A collaborative banking framework allows quick, more affordable introduction of unlimited fintech partnerships without the liability and risk, enabling banks to strategically balance their portfolios and grow.

Banks enabling safe, private fintech partnerships will be especially important as consumers increasingly demand more control over their data. There is a need for greater control in financial services, granting consumers stronger authority over which firms can access their data and under which conditions. Plus, delivering access to a wider range of features and functionality empowers consumers and businesses to strengthen their financial wellness. Collaborative banking proactively enhances consumer choice, which ultimately strengthens relationships and creates loyalty.

The model also allows for banks to offer one-to-one personalization at scale. Currently, most institutions do not have an effective way to accurately personalize experiences for each customer they serve. People are simply too nuanced for one app to fit all. With collaborative banking, customers can go into the marketplace and download the niche apps they want. Whether this means apps for the gig economy or for teenagers to safely build credit, each consumer or business can easily download and leverage the new technology that works for them. Banks have an opportunity to sit at the center of customer financial empowerment, providing the trust, support, local presence and technology that meets customers’ specific needs, but without opening up their customers to third-party data monetization.

While many banks continue attempting to figure out how to make inherently flawed models, such as banking as a service and open banking, work, there is another way to future-proof institutions while creating opportunities for both banks and fintechs. Collaborative banking requires a notable shift in thinking, but it offers a win-win-win scenario for banks, fintechs and customers alike. It paves the way for industry growth, stronger partnerships and more control and choice for consumers and businesses.

3 Considerations for Your Next Strategic Planning Session

Modernizing a bank’s technology has the potential to improve efficiency, reduce errors and free up resources for further investment. Still, with all those benefits, many banks are still woefully behind where they need to be to compete in today’s digital environment.

According to Cornerstone Advisors’ What’s Going On In Banking 2022 research, just 11% of banks will have launched a digital transformation strategy by the end of 2022. So what’s the holdup? For one thing, transformation is hamstrung by the industry structure that has evolved with banking vendors. Stories of missed deadlines, releases with dingbat issues, integrations that stop working and too few knowledgeable professionals to assist in system implementation and support are commonplace.

A large part of a bank’s future depends on how it hires and develops technical talent, manages fintech partnerships and scrutinizes and optimizes its technology contracts. Here are three key truths for bank officers and directors to consider in advance of their next strategic planning session:

1. There is no university diploma that can be obtained for many areas of the bank.
Our research finds that 63% of financial institution executives cited the ability to attract qualified talent as a top concern this year — up dramatically from just 19% in 2021. But even in the face of an industry shift to digital-first delivery and a need to better automate processes and leverage strong data intelligence, most banks have neither invested enough, nor sufficiently developed, their IT team for the next decade.

Every financial institution has a unique combination of line of business processes, regulatory challenges, and vendors and systems; the  expertise to manage these areas can only be developed internally. Identifying existing skill sets across the organization will be critical, as will providing education and training to employees to help the organization grow.

A good place for directors and executives to start is by developing a clear and comprehensive list of the jobs, skills and knowledge the bank needs to develop across four key areas of the bank: payments, commercial credit, digital marketing and data analytics.

2. Financial institutions and fintechs are on different sides of table.
Over the past decade, there have been profound changes in the relationship between financial technology and financial institutions. “Banking as usual” no longer exists; as much as banks and fintechs want to work at the same table together, they have very different needs, different areas of dissatisfaction with the relationship and are sitting on different sides of that table.

A fintech can create viable software or a platform for the bank to build upon, but the bank needs to have the internal talent to leverage it (see No. 1). A culture of disciplined execution and accountability that ensures the fintech solution will be deployed in a high performance, referenceable way will go a long away in strengthening the partnership.

3. Training and system utilization reviews need to find their way into vendor contracts.
When it comes to software solutions, banks are looking at multimillion-dollar contracts and allocating tens of thousands of dollars in training on top of that. This is not the time to be penny-wise and pound-foolish.

Every organization needs to build a tightly integrated “change team” that can extend, integrate, lightly customize and monitor a growing stack of new, primarily cloud-based, platform solutions. For CFOs and the finance department, this means a punctuated investment in the raw talent to make the bank more self-sufficient from a tech perspective (see No. 1 and 2 above).

One way to launch this effort is with an inventory for executive management that details how many users have gone through which modules of training. This tool can be vitally important, involves only minor add-on costs and can and should be embedded in every vendor contract.

Many financial institutions subject themselves to unfavorable technology contract terms by entering negotiations with too little knowledge of market pricing, letting contracts auto-renew and failing to prioritize contracts that need the most attention. If managed properly, vendor contracts represent a huge opportunity for savings.

7 Indicators of a Successful Digital Account Opening Strategy

How good is your bank’s online account opening process?

Many banks don’t know where to begin looking for the answer to that question and struggle to make impactful investments to improve their digital growth. Assessing the robustness of the bank’s online account opening strategy and reporting capabilities is a crucial first step toward improving and strengthening the experience. To get a pulse on the institution’s ability to effectively open accounts digitally, we suggest starting with a simple checklist of questions.

These key indicators can provide better transparency into the health of the online account opening process, clarity around where the bank is excelling, and insight into the areas that need development.

Signs of healthy digital account opening:

1. Visitor-to-Applicant Conversion
The ratio of visits to applications started measures the bank’s ability to make a good first impression with customers. If your bank experiences a high volume of traffic but a low rate of applications, something is making your institution unappealing.

Your focus should shift to conversion. Look at the account opening site through the eyes of a potential new customer to identify areas that are confusing or distract from starting an application. Counting the number of clicks it takes to start an online application is a quick way to evaluate your marketing site’s ability to convert visitors.

2. Application Start-to-Completion
On average, 51% of all online applications for deposit accounts are abandoned before completion. It’s key to have a frictionless digital account opening process and ensure that the mobile option is as equally accessible and intuitive as its web counterpart.

If your institution is seeing high abandonment rates, something is happening to turn enthusiasm into discouragement. Identifying pain points will reveal necessary user flow improvements that can make the overall experience faster and more satisfying, which should translate into a greater percentage of completed applications.

3. Resume Rate on Abandoned Applications
The probability that a customer will restart an online application they’ve abandoned drastically decreases as more time passes. You can assess potential customers’ excitement about opening accounts by measuring how many resume where they left off, and the amount of time they take between sessions.

Providing a quick and intuitive experience that eliminates the friction that causes applicants to leave an application means less effort trying to get them to come back. Consider implementing automated reminders similar to the approach e-commerce brands take with abandoned shopping carts in cases where applications are left unfinished.

4. Total Time to Completion
The more time a person has to take to open an account, the more likely they’ll give up. This is something many banks still struggle with: 80% of banks say it takes longer than five minutes to open an account online, and nearly 30% take longer than 10 minutes. At these lengths, the potential for abandonment is very high.

A simple way to see how customers experience your digital application process is to measure the amount of time it takes, including multi-session openings, to open an account, and then working to reduce that time by streamlining the process.

5. Percent of Funded Accounts
A key predictive factor for how active a new customer will be when opening their new account is whether they choose to initially fund their account or not. It’s imperative that financial institutions offer initial funding options that are stress-free and take minimal steps.

For example, requiring that customers verify accounts through trial deposits to link external accounts is a time-consuming process involving multiple steps that are likely to deter people from funding their accounts. Offering fast and secure methods of funding, like instant account authentication, improves the funding experience and the likelihood that new users will stay active.

6. Percent of Auto-Opened Accounts
Manual intervention from a customer service rep to verify and open accounts is time-consuming and expensive. Even with some automation, an overzealous flagging process can create bottlenecks that forces applicants wait longer and bogs down back-office teams with manual review.

Financial institutions should look at the amount of manual review their accounts need, how much time is spent on flagged applications, and the number of bad actor accounts actually being filtered out. Ideally, new online accounts should be automatically opened on the core without any manual intervention—something that banks can accomplish using powerful non-document based verification methods.

7. Fraud Rate Over Time
A high percentage of opened accounts displaying alarming behavior means there may be a weakness in your account opening process that fraudsters are exploiting. To assess your bank’s ability to catch fraud, measure how many approved accounts turn out to be fraudulent and how long it takes for those accounts to start behaving badly.

The most important thing for financial institutions to do is to make sure they can detect fraudulent activity early. Using multiple verification processes is a great way to filter out fraudulent account applications at the outset and avoid headaches and losses later.

Unlocking Banking as a Service for Business Customers

Banking as a service, or BaaS, has become one of the most important strategic imperatives for chief executives across all industries, including banking, technology, manufacturing and retail.

Retail and business customers want integrated experiences in their daily lives, including seamlessly embedded financial experiences into everyday experiences. Paying for a rideshare from an app, financing home improvements when accepting a contractor quote, funding supplier invoices via an accounting package and offering cash management services to fintechs — these are just some examples of how BaaS enables any business to develop new and exciting propositions to customers, with the relevant financial services embedded into the process. The market for embedded finance is expected to reach $7 trillion by 2030, according to the Next-Gen Commercial Banking Tracker, a PYMNTS and FISPAN collaboration. Banks that act fast and secure priority customer context will experience the greatest upside.

Both banks and potential BaaS distributors, such as technology companies, should be looking for ways to capitalize on BaaS opportunities for small and medium-sized enterprises and businesses (SMEs). According to research from Accenture, 25% of all SME banking revenue is projected to shift to embedded channels by 2025. SME customers are looking for integrated financial experiences within relevant points of context.

SMEs need a more convenient, transparent method to apply for a loan, given that business owners are often discouraged from exploring financing opportunities. In 2021, 35% of SMEs in the United States needed financing but did not apply for a loan according to the 2022 Report on Employer Firms Based on the Small Business Credit Survey. According to the Fed, SMEs shied away from traditional lending due to the difficult application process, long waits for credit decisions, high interest rates and unfavorable repayment terms, and instead used personal funds, cut staff, reduced hours, and downsized operations.

And while there is unmet demand from SMEs, there is also excess supply. Over the last few years, the loan-to-deposit ratio at U.S. banks fell from 80% to 63%, the Federal Reserve wrote in August 2021. Banks need loan growth to drive profits. Embedding financial services for SME lending is not only important for retaining and growing customer relationships, but also critical to growing and diversifying loan portfolios. The time for banks to act is now, given the current inflection point: BaaS for SMEs is projected to see four-times growth compared to retail and corporate BaaS, according to Finastra’s Banking as a Service: Global Outlook 2022 report.

How to Succeed in Banking as a Service for SMEs
There are three key steps that any institution must take to succeed in BaaS: Understand what use cases will deliver the most value to their customers, select monetization models that deliver capabilities and enable profits and be clear on what is required to take a BaaS solution to market, including partnerships that accelerate delivery.

BaaS providers and distributors should focus on the right use case in their market. Banks and technology companies can drive customer value by embedding loan and credit offers on business management platforms. Customers will benefit from the increased convenience, better terms and shorter application times because the digitized process automates data entry. Banks can acquire customers outside their traditional footprint and reduce both operational costs and risks by accessing financial data. And technology companies can gain a competitive advantage by adding new features valued by their customers.

To enable the right use case, both distributors and providers must also select the right partners — those with the best capabilities that drive value to their customers. For example, a recent collaboration between Finastra and Microsoft allows businesses that use Microsoft Dynamics to access financing offers on the platform.

Banks will also want to focus on white labeling front‑to-back customer journeys and securing access to a marketplace. In BaaS, a marketplace model increases competition and benefits for all providers. Providers should focus on sector‑specific products and services, enhancing data and analytics to enable better risk decisions and specialized digital solutions.

But one thing is clear: Going forward, embedded finance will be a significant opportunity for banks that embrace it.

Does Your Bank Struggle With Analysis Paralysis?

The challenge facing most community financial institutions is not a lack of data.

Institutions send millions of data points through extensive networks and applications to process, transmit and maintain daily operations. But simply having an abundance of data available does not automatically correlate actionable, valuable insights. Often, this inundation of data is the first obstacle that hinders — rather than helps — bankers make smarter decisions and more optimal choices, leading to analysis paralysis.

What is analysis paralysis? Analysis paralysis is the inability of a firm to effectively monetize data or information in a meaningful way that results in action.

The true value is not in having an abundance of data, but the ability to easily turn this cache into actionable insights that drive an institution’s ability to serve its community, streamline operations and ultimately compete with larger institutions and non-bank competitors.

The first step in combatting analysis paralysis is maintaining a single source of truth under a centralized data strategy. Far too often, different departments within the same bank produce conflicting reports with conflicting results — despite relying on the “same” input and data sources. This is a problem for several reasons; most significantly, it limits a banker’s ability to make critical decisions. Establishing a common data repository and defining the data structure and flow with an agreed-upon lexicon is critical to positioning the bank for future success.

The second step is to increase the trust, reliability, and availability of your data. We are all familiar with the saying “Garbage in, garbage out.” This applies to data. Data that is not normalized and is not agreed-upon from an organizational perspective will create issues. If your institution is not scrubbing collected data to make sure it is complete, accurate and, most importantly, useful, it is wasting valuable company resources.

Generally, bad data is considered data that is inaccurate, incomplete, non-conforming, duplicative or the result of poor data input. But this isn’t the complete picture. For example, data that is aggregated or siloed in a way that makes it inaccessible or unusable is also bad data. Likewise, data that fails to garner any meaning or insight into business practices, or is not available in a timely manner, is bad data.

Increasing the access to and availability of data will help banks unlock its benefits. Hidden data is the same as having no data at all.

The last step is to align the bank’s data strategy with its business strategy. Data strategy corresponds with how bank executives will measure and monitor the success of the institution. Good data strategy, paired with business strategy, translates into strong decision-making. Executives that understand the right data to collect, and anticipate future expectations to access and aggregate data in a meaningful way is paramount to achieving enduring success in this “big data” era. For example, the success of an initiative that takes advantage of artificial intelligence (AI) and predictive capabilities is contingent upon aligning a bank’s data strategy with its business strategy.

When an organization has access to critical consumer information or insights into market tendencies, it is equipped to make decisions that increase revenue, market share and operational efficiencies. Meaningful data that is presented in a timely and easy-to-digest manner and aligns with the company’s strategy and measurables allows executives to react quickly to changes affecting the organization — rather than waiting until the end of the quarter or the next strategic planning meeting before taking action.

At the end of the day, every institution’s data can tell a very unique story. Do you know what story your data tells about the bank? What does the data say about the future? Banks that are paralyzed by data lose the ability to guide their story, becoming much more reactive than proactive. Ultimately, they may miss out on opportunities that propel the bank forward and position it for future success. Eliminating the paralysis from the analysis ensures data is driving the strategy, and enables banks to guide their story in positive direction.