Rise of the Quantum Machines

A new technological revolution on the horizon is poised to disrupt the financial services industry: Quantum Computing.

While broad commercial applications of quantum technologies are likely several years away, experts predict that practical applications of quantum computing in the banking industry may only be three to five years away. Various industry leaders at Goldman Sachs Group and JPMorgan Chase & Co. have already begun experimenting with quantum computing and are preparing for the inevitable “quantum supremacy.”

What is Quantum Computing?
IBM defines quantum computing as a “rapidly emerging technology that harnesses the laws of quantum mechanics to solve problems too complex for classical computers.” Classical computers operate on a binary system, processing “bits” of information as either zeros or ones. In contrast, quantum systems process quantum bits or “qubits” of information as either zeros, ones, a combination of zeros and ones, or any value in between. As a result, the processing power of quantum systems will be well beyond what a binary system could ever process.

However, because quantum computing relies on the laws of quantum mechanics, the answers produced by quantum calculations will be probabilistic instead of determinative. Binary systems operate by processing a limited data set via specific processing instructions to deliver a singular answer. In contrast, quantum systems operate by processing multiple units of data, resulting in a narrowed range of possible answers instead of a singular answer. Practically speaking, this means that teams must run calculations through quantum systems multiple times to narrow the universe of possible answer to a functional range.

While results from quantum systems may sound less reliable, it ultimately depends on their use. In many cases, binary systems will be better and never need to be replaced by quantum systems. However, quantum computing will be revolutionary when it comes to eliminating certain possibility ranges associated with incredibly complex problems.

What is Quantum Supremacy?
“Quantum supremacy” sounds ominous, but it simply refers to the point in time where quantum systems can perform calculations beyond the scope of classical computers in a reasonable amount of time. Although developments in quantum computing are promising, quantum supremacy is not likely to occur until the end of this decade. One of the challenges is assembling a single quantum system with the requisite qubits that outperforms a classical, binary computer. Some companies have almost achieved this, but developers have yet to develop a reasonably sized quantum system for commercial applications. So while quantum supremacy is currently only theoretical, it is not so far off in the future.

Benefits and Risks of Quantum Computing
Quantum computing gives early adopters a competitive advantage. Insights gleaned from quantum computing can help banks make better decisions, reduce risk, increase profits and provide better customer service. An IBM report identified a few use cases that are likely to improve financial services:

  • Targeting and Prediction: According to an IBM report, 25% of small to medium sized banks lose customers because their offerings don’t target the right customer. Quantum computing can help financial institutions break down their complex data structures to develop better predictive models that offer products and tailored services more effectively to customers.
  • Trading Optimization: Equity, derivative, and foreign exchange markets are complex environments, and trading activities are growing exponentially. The complex and fast-paced nature of these markets require exceptionally fast models to help investment managers optimize customer portfolios. Quantum computing can help give investment managers the tools necessary to deliver better services to customers, such as improving portfolio diversification or rebalancing portfolio investments to meet a customer’s investment goals.

Although the benefits of quantum computing are numerous, they do not come without risks. In particular, quantum computing poses a serious threat to cybersecurity controls. Encryption techniques used to secure accounts and networks are immediately at risk upon quantum supremacy. Currently, banks use complex encryption algorithms to secure user accounts, transactions and communications. Breaking through current encryption algorithms is virtually impossible and highly impractical. However, threat actors leveraging quantum technologies have the potential power to break through these classical encryption methods. Although this threat is currently only theoretical, leaders in quantum computing are already working on quantum cryptography to get ahead of this potential cybersecurity threat.

How to Prepare for Quantum Supremacy?
While broad adoption of quantum systems and products is unlikely until later this decade, banks can anticipate quantum products and solutions emerging in the next few years. In anticipation of this quantum revolution, financial institutions should:

  • Start Talking About Quantum Computing: Financial institutions should begin preparing to implement and leverage these technologies immediately given that product breakthroughs are likely within the next five years. Financial institutions should also consider potential partnerships with leaders in quantum computing such as IBM, Microsoft, and others. The sooner financial institution boards and executives can put a quantum strategy in place, the better.
  • Start Talking About Quantum Encryption: Financial institutions with significant data repositories should begin thinking about the cybersecurity risks associated with quantum computing. Chief information security officers should begin thinking about how their institution will safely transition their data repositories from classical encryption to quantum encryption in the near future.

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.

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.

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.

The Future of Banking in the Metaverse

From Nike’s acquisition of RTFKT to Meta Platform’s Chairman and CEO Mark Zuckerberg playing virtual pingpong, the metaverse has evolved from a buzzword into a way of doing business.

The metaverse could become a “river of entertainment in which the content and commerce flow freely,” according to Microsoft Corp. Chairman and Chief Executive Satya Nadella in “The Coming Battle Over Banking in the Metaverse.” Created by integrating virtual and augmented reality, artificial intelligence, cryptocurrency, and other technologies, the metaverse is a 3D virtual space with different worlds for its users to enhance their personal and professional experiences, from gaming and socializing to business and financial growth.

That means banking may ultimately come to play a significant role in the metaverse. Whether exchanging currencies between different worlds, converting virtual or real-world assets or creating compliant “meta-lending” options, financial institutions will have no shortage of new and traditional ways to expand their operations within this young virtual space. Companies like JPMorgan Chase & Co. and South Korea’s KB Kookmin Bank already have a foot in the metaverse. JPMorgan has the Onyx Lounge; Kookmin offers one-on-one consultations. However, banks will find they cannot operate in their traditional ways in this virtual space.

One aspect that might experience a drastic change is the branches themselves. The industry should expect an adjustment period to best facilitate the needs of their metaverse banking customers. These virtual bank branches will need to be flexible in accepting cryptocurrencies, non-fungible tokens, blockchains and alternative forms of virtual currency if they are to survive in the metaverse.

However, not everyone agrees that bank branches will be that relevant in the metaverse. The idea is that online banking already accomplishes the tasks that a branch located in the metaverse might fulfill. Another issue is that there is little current need for bank branches because the migration to the metaverse is nascent. Only time will tell how banking companies adapt to this new virtual world and the problems that come with it.

Early signs point to a combination of traditional and new banking styles. One of the first products from the metaverse is already shining a light on potential challenges: The purchase and sale of virtual space has significantly changed over the past year. In Ron Shevlin’s article, “JPMorgan Opens A Bank Branch In The Metaverse (But It’s Not What You Think It’s For),” he writes, “the average investment in land was about $5,300, but prices have grown considerably from an average of $100 per land in January to $15,000 in December of 2021, with rapid growth in the fourth quarter when the Sandbox Alpha was released.”

The increasing number of virtual real estate transactions also means the introduction of lending and other financial assistance options. This can already be seen with TerraZero Technologies providing what could be described as the first mortgage. This is just the beginning as we see opportunities for the development of banking services more clearly as the metaverse, its different worlds and its functions and services mature.

Even though the metaverse is still young and there are many challenges ahead, it is clear to see the potential it could have on not only banking, but the way we live as we know it.

Recapturing the Data That Creates Valuable Customer Interactions

Before the end of 2021, regulators announced that JPMorgan Chase & Co. had agreed to pay $200 million in fines for “widespread” recordkeeping failures. For years, firm employees used their personal devices and accounts to communicate about business with their customers; the bank did not have records of these exchanges. While $200 million is a large fine by any account, does the settlement capture the true cost of being unsure about where firm data resides?

In 2006, Clive Humby coined the phrased “data is the new oil.” Since then, big tech and fintech companies have invested heavily in making it convenient for consumers to share their needs and wants through any channel, anytime — all while generating and accumulating tremendous data sets makes deep customer segmentation and target-of-one advertising possible.

Historically, banks fostered personal relationships with customers through physical conversations in branches. While these interactions were often triggered by a practical need, the accumulated knowledge bankers’ had about their customers, and their subsequent ability to capitalize on the power of small talk, allowed them to identify unmet customer needs with products and services and drive deeper relationships. Fast forward to the present day: Customer visits to branches have dropped to unprecedented levels as they embrace digital banking as their primary way of managing their finances.

But managing personal finances is different from banking. While most bank interactions revolve around checking balances, depositing checks and paying people and bills, the valuable interactions involve open-ended conversations about the desire to be able to buy a first home, planning for retirement or education, and funding large purchases like cars. These needs have not gone away — but the way consumers want to engage with their institution has completely transformed.

Consumers want to engage their banker through channels that are convenient to them, and this includes mobile messaging, SMS, Facebook messenger and WhatsApp. JPMorgan’s bankers may not have been trying to circumvent securities regulations in engaging with customers on their terms. Failing to meet your customers where they are frustrates both customers and bankers. Failing to embrace these digital channels leads to less valuable data the bank can use.

Banking platforms — like digital, payment and core banking — can capture data that provides insight into consumers’ saving and spending behavior, but fails to capture latent needs. Institutions that make it more convenient for customers to ask their personal banker something than Googling it opens up an entirely new data source. Allowing customers to ask open-ended questions augments transactional insight with unprecedented data on forward-looking needs.

In a recent case study, First National Bank of Omaha identified that 65% of customers expressed interest in exploring new products and services: 15% for credit cards, 12% for home loans, 9% for investments, and 7% for auto loans.

If “data is the new oil,” the real value lies is in the finished product, not the raw state. While data is exciting, the true value is in deriving insights. Analyzing conversational data can provide great insight. And banks can unlock even greater value when they analyze unprocessed conversational data in the context of other customer behavior, like spending patterns, propensity to use other engagement channels and socio-demographic changes.

At present, most of this data is owned and guarded by financial processors and is not readily available for banks to access and analyze. As banks extend their digital engagement model, it is imperative they own and can access their data and insights. And as banks increasingly see the benefits of allowing customers to engage with their banker in the same way they talk to their friends, key considerations should include:

  • Conversation aggregation. Is a customer’s conversation with multiple bankers aggregated to a single thread, avoiding data lost through channel switching?
  • Are conversations across channels retained within a dedicated and secure environment?
  • Can conversations transition from one relationship banker to another, avoiding the downfall of employee attrition?
  • Are suitable tools powered by artificial intelligence and other capabilities in place to ensure a real-time view of trending topics and requests?
  • Data access. Is raw conversational data readily available to the bank?

Engaging customers through digital channels presents an exciting opportunity for banks. No longer will data live within the mind of the banker: rather, insight that are derived from both individual and aggregate analysis can become a key driver for both strategic and tactical decisioning.

An Inside Look At One Bank’s Digital Growth Planning

By now, most bank leadership teams understand the importance of offering well-designed digital experiences. What we’ve found is often more elusive is knowing where to start when making a significant investment in digital.

One bank that recently grappled with this was Boston-based Berkshire Hills Bancorp, the $11.6 billion parent company of Berkshire Bank.

Executives wanted to digitally transform the bank and that success would only be achievable if they unified around a core set of goals and built a robust strategic plan for reaching them. This vision allowed teams to work toward individual milestones along the way.

We recently spoke with Lucia Bellomia, EVP and head of retail banking and CIO Jason White. They gave us an inside look at what went into developing the Berkshire BEST plan for transformation, and the factors they believe will lead to their successful digital growth.

The Berkshire leadership team started by recognizing that if the plan was going to truly transform the entire bank, they needed to gather input and feedback from every department. “Executives spoke to stakeholders in every department to what milestones the bank would need to hit and what it would take to achieve those goals”, says Bellomia. They also formed groups specifically to achieve some of the components of that milestone.

Involving this many additional stakeholders extended the strategic planning phase — In Berkshire’s case, it took three months of meetings. But White felt the time spent laying a foundation of transparency and open communication will help the bank execute and fulfill the objective of the transformation.

Without some clearly defined pillars outlining your main goals, the whole process of starting the institution’s digital plan can feel chaotic and messy. White suggests that banks first investigate what it means for their institution to digitally transform, and then define the core strategic pillars from there.

Berkshire’s three core pillars were: optimize, digitize and enhance. These pillars support efforts to improve the customer experience, deliver profitable growth, enhance stakeholder value, and strengthen their community impact. Taking the time to first define core pillars that support a larger strategic plan helped Berkshire Bank recognize even greater opportunities. Rather than simply adding new digital services to their banking stack, they realized they could facilitate the evolution of their entire bank.

With the plan announced and in place, Berkshire launched into the execution phase of its transformation. Here, they were met with new challenges that required thoughtful commitments from leadership and investments in project infrastructure. One impactful early investment was developing a transformation office that was responsible for measuring, monitoring and communicating the success of the plan. Executives and sponsors worked with the office to define both date and monetary milestones.

A dedicated internal resource focused on project management helped Berkshire communicate the progress made toward each milestone through regular meetings, tracked and updated key performance indicators, and other updates.

Equally important to the success of Berkshire’s transformation plan was its commitment to scrutinizing each investment and vendor to ensure the right fit and an acceptable return on investment for the bank. The bank is a “low-code” development team with limited resources and used achievable digital goals to identify and select vendors to digitize, according to the bank’s plan.

As part of its transformation plan, the bank extended its existing fintech relationship to include digital banking platforms for consumer and small business customers. This allows the bank to innovate and digitize at an accelerated pace, without having to grow internal developer resources.

Ultimately, institutions like Berkshire Bank are realizing that developing a successful plan for digital transformation that works for both internal stakeholders and customers requires a rethinking of the way executive teams gather feedback, address challenges across departments, and monitor the success of a project.

The Future-Proof Response to Rising Interest Rates

After years of low interest rates, they are on the rise — potentially increasing at a faster rate than the industry has seen in a decade. What can banks do about it?

This environment is in sharp contrast to the situation financial institutions faced as recently as 2019, when banks faced difficulties in raising core deposits. The pandemic changed all that. Almost overnight, loan applications declined precipitously, and businesses drew down their credit lines. At the same time, state and federal stimulus programs boosted deposit and savings rates, causing a severe whipsaw in loan-to-deposit ratios. The personal savings rate — that is, the household share of unspent personal income — peaked at 34% in April 2020, according to research conducted by the Federal Reserve Bank of Dallas. To put that in context, the peak savings rate in the 50 years preceding the pandemic was 17.7%.

These trends became even more pronounced with each new round of stimulus payments. The Dallas Fed reports that the share of stimulus recipients saving their payments doubled from 12.5% in the first round to 25% in the third round. The rise in consumers using funds to pay down debt was even more drastic, increasing from 14.6% in round one to 52.3% in round three. Meanwhile, as stock prices remained volatile, the relative safety of bank deposits became more attractive for many consumers — boosting community bank deposit rates.

Now, of course, it’s changing all over again.

“Consumer spending is on the rise, and we’ve seen a decrease in federal stimulus. There’s less cash coming into banks than before,” observes MANTL CRO Mike Bosserman. “We also expect to see an increase in lending activities, which means that banks will need more deposits to fund those loans. And with interest rates going up, other asset classes will become more interesting. Rising interest rates also tend to have an inverse impact on the value of stocks, which increases the expected return on those investments. In the next few months, I would expect to see a shift from cash to higher-earning asset classes — and that will significantly impact growth.

These trends are unfolding in a truly unprecedented competitive landscape. Community banks are have a serious technology disadvantage in comparison to money-center banks, challenger banks and fintechs, says Bosserman. The result is that the number of checking accounts opened by community institutions has been declining for years.

Over the past 25 years, money-center banks have increased their market share at the expense of community financial institutions. The top 15 banks control 56.2% of the overall marketshare, up from 40% roughly 25 years ago. And the rise of new players such as fintechs and neobanks has driven competition to never-before-seen levels.

For many community banks, this is an existential threat. Community banks are critical to maintaining competition and equity in the U.S. financial system. But their role is often overlooked in an industry that is constantly evolving and focused on bigger, faster and shinier features. The average American adult prefers to open their accounts digitally. Institutions that lack the tools to power that experience will have a difficult future — regardless of where interest rates are. For institutions that have fallen behind the digital transformation curve, the opportunity cost of not modernizing is now a matter of survival.

The key to survival will be changing how these institutions think about technology investments.

“Technology isn’t a cost center,” insists Christian Ruppe, vice president of digital banking at the $1.2 billion Horicon Bank. “It’s a profit center. As soon as you start thinking of your digital investments like that — as soon as you change that conversation — then investing a little more in better technology makes a ton of sense.”

The right technology in place allows banks to regain their competitive advantage, says Bosserman. Banks can pivot as a response to events in the macro environment, turning on the tap during a liquidity crunch, then turn it down when deposits become a lower priority. The bottom line for community institutions is that in a rapidly changing landscape, technology is key to fostering the resilience that allows them to embrace the future with confidence.

“That kind of agility will be critical to future-proofing your institution,” he says.