How Bank Executives Can Address Signs of Trouble

As 2021’s “roaring” consumer confidence grinds to a halt, banks everywhere are strategizing about how best to deal with the tumultuous days ahead.

Jack Henry’s annual Strategic Priorities Benchmark Study, released in August 2022, surveyed banks and credit unions in the U.S. and found that many financial institutions share the same four concerns and goals:

1. The Economic Outlook
The economic outlook of some big bank executives is shifting. In June 2022, Bernstein Research hosted its 38th Annual Strategic Decisions Conference where some chief executives leading the largest banks in the U.S., including JPMorgan Chase & Co., Wells Fargo & Co. and Morgan Stanley, talked about the current economic situation. Their assessment was not entirely rosy. As reported by The New York Times, JPMorgan Chase Chairman and CEO Jamie Dimon called the looming economic uncertainty a “hurricane.” How devastating that hurricane will be remains a question.

2. Hiring and Retention
The Jack Henry survey also found 60% of financial institution CEOs are concerned about hiring and retention, but there may be some hope. A 2022 national study, conducted by Alkami Technology and The Center for Generational Kinetics, asked over 1,500 US participants about their futures with financial institutions. Forty percent responded they are likely to consider a career at a regional or community bank or credit union, with significant portion of responses within the Generation Z and millennial segments.

3. Waning Customer Loyalty
The imperative behind investing in additional features and services is a concern about waning customer loyalty. For many millennials and Gen Z bank customers, the concept of having a primary financial institution is not in their DNA. The same study from above found that 64% of that cohort is unsure if their current institution will remain their primary institution in the coming year. The main reason is the ease of digital banking at many competing fintechs.

4. Exploding Services and Payment Trends
Disruptors and new competition are entering the financial services space every day. Whether a service, product or other popular trend, a bank’s account holders and wallet share are being threatened. Here are three trends that bank executives should closely monitor.

  • The subscription economy. Recurring monthly subscriptions are great for businesses and convenient for customers: a win-win. Not so much for banks. The issue for banks is: How are your account holders paying for those subscriptions? If it’s with your debit or credit card, that’s an increased source of revenue. But if they’re paying through an ACH or another credit card, that’s a lost opportunity.
  • Cryptocurrency. Your account holders want education and guidance when it comes to digital assets. Initially, banks didn’t have much to do with crypto. Now, 44% of execs at financial institutions nationwide plan to offer cryptocurrency services by the end of 2022; 60% expect their clients to increase their crypto holdings, according to Arizent Research
  • Buy now, pay later (BNPL). Consumers like BNPL because it allows them to pay over time; oftentimes, they don’t have to go through a qualification process. In this economy, consumers may increasingly use it to finance essential purchases, which could signal future financial trouble and risk for the bank.

The Salve for It All: The Application of Data Insights
Banks need a way to attract and retain younger account holders in order to build a future-proof foundation. The key to dealing with these challenges is having a robust data strategy that works around the clock for your institutions. Banks have more data than ever before at their disposal, but data-driven marketing and strategies remains low in banking overall.

That’s a mistake, especially when it comes to data involving how, when and why account holders are turning to other banks, or where banks leave revenue on the table. Using their own first-party data, banks can understand how their account holders are spending their money to drive strategic business decisions that impact share of wallet, loyalty and growth. It’s also a way to identify trouble before it takes hold.

In these uncertain economic times, the proper understanding and application of data is the most powerful tool banks can use to stay ahead of their competition and meet or exceed account holder expectations.

Can Banks Afford to Be Short-Sighted With Real-Time Payments?

The industry’s payments ecosystem is developing rapidly in response to increasing consumer demand for faster, smarter payments.

The need for real-time payments was accelerated by the global pandemic — but most banks are moving far too cautiously to respond to market demand, whether that is P2P, B2B, B2C or other segments. Currently, The Clearing House’s RTP® network is the only available real-time payments platform, while the Federal Reserve’s instant payments service, FedNow℠, is in a pilot phase with plans to launch in 2023. FedNow will equip financial institutions of all sizes with the ability to facilitate secure and efficient real-time payments round the clock.

For most banks, operating on core legacy technology has created a payments infrastructure that is heavy-handed, disjointed, costly and difficult to maintain, with no support for future innovation. Most banks, fearing the cost and effort of modernization, have settled for managing multiple payment networks that connect across disparate systems and require the support of numerous vendors. With the introduction of real-time payments, can these new payment rails afford to be a mere addendum to the already-byzantine payment architecture of banks?

Answering “yes” begets more questions. How resilient will the new offering be on the old infrastructure? Can banks afford to be myopic and treat real-time payments as a postscript? Are short-sighted payment transformations elastic enough to accommodate other innovations, like the Central Bank Digital Currency (CBDC) that are in the offing?

Preparation starts with an overhauling of payments infrastructure. If banks are to place themselves at a vantage point, with a commanding perspective into the future of payments, they should consider the following as part of the roadmap to payments modernization:

  1. From transactions to experience. Payments are no longer merely functional transactions; they are expected to provide qualitative attributes like experience, speed and intelligence. Retail and business customers increasingly demand frictionless and intuitive real-time payments, requiring banks to refurbish the payment experiences delivered to clients.
  2. The significance of payment data. The ISO20022 data standard for payments is heavier and richer compared to legacy payments data, and is expected to be the global norm for all payments by 2025. Banks are under increasing pressure to comply, with players like SWIFT already migrating to this format and more than 70 countries already using ISO20022. Payment solutions that can create intuitive insights from centralized data stored in ISO20022 format, while also being able to convert, enrich and validate legacy messaging into ISO20022, are essential. Banks can benefit from innovative services like B2B invoices and supply chain finance, as Request for Payment overlay services is a key messaging capability for customers of real-time payments.
  3. Interoperability of payment systems. The interoperability between payment systems will be an imperative, especially with the ecosystem of different payment rails that banks have to support. Interoperable payment rails call for intelligent routing, insulating the payer and payee from the “how” of payment orchestration, and paving the way for more operational efficiency. Operating costs account for more than 68% of bank payment revenues; centralizing the management of multiple payment networks through an interoperable payment hub allows bankers to minimize these costs and improve their bottom lines.
  4. Streamlining payment operations. Work stream silos lead to fragmented, inefficient and redundant payment operations, including duplicated fraud and compliance elements. This is where payment hubs can add value by streamlining payment operations through a single, consolidated operation for all payment types. Payment hubs are a great precursor for subsequent modernization: intelligent payment hubs can handle omnichannel payments, as well as different payment types like ACH, Fedwire, RTP and FedNow in the future. This takes care of the entire payment lifecycle: initiation, authorization, clearing, settlement and returns.
  5. Future-proofing payment systems. Following the path of trendsetters, banks have to equip themselves with future-proof solutions that can adapt to real-time domestic and cross-border payment systems processing multiple currencies. As open-banking trends gain traction, it is important to consider that the winds of change will eventually find payments, too. It is imperative that banks are cloud based and API driven, so they can innovate while being future-ready.

The opportunity cost of not offering real-time payments is becoming more evident for banks, as they wait for their core providers to enable real-time payments. Calls for banks to modernize their payments infrastructure are swelling to a roar; now is the time for banks to define their payments modernization strategy and begin to act.