In July 2021, First Horizon Corp. bought IBERIABANK Corp. and launched an experiment that few banks of its size have attempted: a conversion to an alternative core provider.
But the $88 billion banking company based in Memphis didn’t want to replace its core, the basic nervous system of the bank. It wanted to replace the core of a virtual bank acquired from IBERIABANK. Doing so would allow First Horizon to test the waters with Finxact, a cloud-native core that offers banks a fully open architecture to pick and choose what software and services to offer customers, providing the chance to quickly update and offer new products as customers’ needs change.
Finxact had all the bells and whistles of a modern system. “The way someone designed a mainframe 30 years ago isn’t dictating what we’re doing today,’’ says Tyler Craft, senior vice president and head of First Horizon’s VirtualBank.
Although a few brave souls such as Seattle Bank have accomplished a complete core conversion to a modern, alternative core such as Finxact, some others are testing the waters with partial conversions. While a complete core conversion to an alternative core may feel time consuming and risky, there are a variety of options, including First Horizon’s approach. An increasing number of banks are trying their options.
In fact, it was First Horizon CEO Bryan Jordan who first put that image in my head of an operating table and a skilled surgeon going to work on the very cord that makes the bank function. “This is probably not a great analogy, but changing your core system is, in my mind, about as complicated as a spinal transplant,’’ he says.
This report delves into why and how some banks have leaped off that cliff, the strategies for success, how to get buy-in at your bank and what to ask potential core providers.
Many banks are still trying to determine which consumer preferences and behavior changes are permanent, given the shifts that have occurred over the past 24 months.
During this time period, I’ve spoken with hundreds of bankers and the prevalent theme emerged: The need to respond to customers in a timely fashion, and assurance that there is go-forward alignment with the right business model.
At this point, institutions should consider further exploring ways to refresh customer experience or tackle questions about feasibility, with a focus on defining the strategy for a more competitive customer experience and acquisition structure in today’s digital economy. A strategy that successfully addresses customer needs depends on the ability to project empathy. Executing this in an omni-delivery ecosystem requires financial institutions to effectively listen to their customers’ needs and respond with information or options that are relevant and timely.
There are solutions that financial institutions can leverage today to demonstrate empathy through a listen-respond model. This involves embedding “listening posts” within six functional areas including:
Website sensory: Detecting and interpreting customer needs based on digital behavior. Based on this insight, banks can quantify a customer’s intent and propensity-to-purchase and apply decisioning to trigger the “best” engagement, which could include digital advertising, lead capture or engagement campaign deployment through digital or human channels.
Customer engagement responses: Applying analytics and decisioning to quantify and respond appropriately to customer interaction with campaigns. Desired responses include launching a survey, clicking a link to complete a fulfillment or accepting an invitation for other services that offered by the institution.
Personal financial planner: Obtaining self-disclosed information related to customer needs through unique personal financial planning tools. With goal-centric solutions, the customer selects primary and secondary goals that could include meeting monthly expenses, housing, transportation, education or retirement. The user enters financial information such as income, expenses, assets and debt. By listening to customer goals and financial position, the solution can identify segmentation, quantify customer value index and calculate goal achievability.
Omni-channel fulfillment: Tracking fulfillment attempts and automatically deploying abandonment retargeting campaigns to increase conversions. During the fulfillment process, listening posts can detect customer progress through the application. Through fulfillment completion, a bank can use a decision engine to select an appropriate onboarding engagement plan based on the product selected and any additional anticipated needs.
Staff interaction: Quantifying and monitoring customer satisfaction and attrition risk scores related to personal engagement. Branch and contact center staff listen physically, but they also contribute to digital listening. For example, missed service-level agreements and customer complaints contribute negatively to customer experience and impact predictive attrition risk, triggering customer action. Banker-assisted fulfillment, followed by positive customer survey feedback, can increase satisfaction scores.
Attrition risk: Identifying and quantifying attrition risk factors and proactively and reactively mitigating them. Digital environments can lead to increased customer attrition due to decreased face-to-face engagement.
Solutions can quantify behavior and sentiment indicators based on information that is detected through embedded listening posts. Automated decisioning can respond when thresholds are met and deploy appropriate engagement. Leveraging management insight through key performance indicators and reporting allow banks to monitor, track, execute A/B testing, perform trend analysis and optimize the listening-response model so they can better understand and meet customer needs.
Meeting customer needs requires engagement over time. When banks can understand their customers’ needs through listening and respond with relevant engagement, the customer feels heard, and the institution benefits from increased acquisition, relationship expansion and improved customer experience.
Americans need personalized financial and wealth management advice more than ever, but don’t know where to look.
The coronavirus pandemic negatively impacted personal finances for more than 60% of Americans, according to recent data from GOBankingRates. Many of these Americans have relationships with regional and community banks that could be a trusted partner when it comes to investing and planning for the future, but these institutions often lack adequate financial advisory resources and options. This drives customers to social media and other providers, such as fintechs or large national institutions, for wealth management needs — when they actually would prefer a personal, professional relationship with their bank.
The current need for stronger wealth management offerigns, coupled with advances in easy-to-deploy technology, means that community banks can now offer more holistic, lifecycle financial advice. These offerings have the potential to create new revenue streams, engage people earlier in their wealth-building and financial planning journey, deepen and fortify existing customer relationships and make financial advice more accessible.
But while many banks have a strong depositor base and a customer base that trusts them, the majority don’t have the expertise, resources or digital engagement tools to offer these services. Modern technology can help fill this gap, empowering institutions to offer more robust financial advisory services.
Banks should meet customers where they spend the majority of their time — within digital channels. Intuitive, self-service digital options presents a valuable way to engage customers in a way that’s not complex or requires additional staff in branches. First steps can include a digital calculator within the bank’s mobile app so individuals can compute their financial wellness score, or presenting simple options to customers to invest a nominal sum of money, then adding a way to monitor its progress or dips. It can also include a digital planning discovery tool to help customers organize their accounts online.
More meaningful success lies in leveraging customer behavior data to understand changes and designing processes so that individual can seamlessly move to the next phase of the financial advice lifecycle. This might include flagging when a customer opens additional accounts, when someone has a high cash balance and frequent deposits, or when a younger individual accrues more wealth that simply sits. If banks fail to proactively monitor this activity and reach out with relevant hooks, offers and insights, that individual is almost guaranteed to look elsewhere — taking their money and loyalty with them.
Banks should provide options for customers to reach out for guidance or questions around next steps — including knowledgeable financial advisors at the ready. While people are increasingly comfortable with (and establishing a preference toward) managing money and investments digitally, there is still a critical need for direct and quick access to a live human. Banks can integrating matching capabilities and staffing regional centers or branches with designated experts, but there should also be options for customers to contact advisors remotely through video or chat. This allows individuals to receive relevant advice and support from anywhere, anytime.
But building the infrastructure that can properly serve and support clients throughout every stage and situation can be prohibitive and cumbersome for most community and regional institutions. Fortunately, there are strategic technology partners that can offer a modern, end-to-end platform that spans the entire advisory lifecycle and offers integrated digital enablement right out of the box.
A platform, in lieu of a collection of bespoke software features from multiple vendors, can act as a single point of truth and provides a centralized ecosystem for customers to receive a holistic snapshot of their financial situations and plan. Look for platforms with open APIs to facilitate seamless integration to complement and maintain the front, middle and back office while offering a full range of functionality for bank customers. Plus, having one platform that can accommodate every stage of the financial advisory lifecycle makes interactions easier and more efficient for the institution, and more familiar and friendly for the customer.
Community and regional institutions have always served as a beacon of trust and support for their communities and customers. They don’t have to experience customer attrition over wealth management options and functions. Those that do so will be able to form even stickier, more profitable relationships, while helping customers broaden their opportunities and improve their overall financial wellness.
Just 29% of chief executives, and 17% of chief information and chief technology officers, say they rely on members of their board for information about technology’s impact on their institution, according to Bank Director’s 2021 Technology Survey. But what if a bank could leverage their board as a resource on this issue, helping to connect the dots between technology and its overall strategy?
Coastal Financial Corp., based in Everett, Washington, has brought on board members over the past three years with experience working in and supporting the digital sector: Sadhana Akella-Mishra, chief risk officer at the core provider Finxact; Stephan Klee, chief financial officer at the venture capital firm Portage Ventures and former CFO of Zenbanx, a fintech acquired by SoFi in 2017; Rilla Delorier, a retired bank executive who until last year led digital transformation at Umpqua Bank; and Pamela Unger, a certified public accountant who created software to support her work with venture capital firms. That deep bench of technology expertise helps the bank evolve, according to CEO Eric Sprink, by better understanding opportunities and risks. The board can even help $2 billion Coastal identify and bring on staff.
“The board has always been entrepreneurial at its basis, and some of the core values that we developed as a board were, be flexible, be unbankey and live in the gray — and those are [our] board values,” Sprink says. “We’ve really worked hard to continually ask people to join our board that continue that evolution and entrepreneurial spirit with some specialty that they bring.”
Bank Director’s recent Technology Survey finds that roughly half of bank boards discuss technology at every board meeting; another 30% make sure it’s a quarterly agenda item. That’s been the picture for several years in our survey, given technology’s importance in an increasingly digital economy.
But for many community bank boards, the expertise reflected in the boardroom hasn’t caught up to today’s reality — just 49% of board members and executives representing a bank smaller than $10 billion in assets report that their board has a director with a background or expertise in technology. And these skills are even rarer for discrete areas affecting bank strategies and operations, from cybersecurity (25% say they have such an expert on their board) to digital transformation (20%) and data analytics (16%).
Bank boards would benefit greatly from this expertise — and many of them know it, says J. Scott Petty, a partner at the executive search firm Chartwell Partners. “When I interview boards and we go through an assessment process, it’s always the No. 1 thing they talk about,” he says. “There’s no one there [who] can really understand what their head of technology is talking about. So, whatever they say, they go, ‘OK, well, you’re the tech expert.’”
In Bank Director’s 2021 Governance Best Practices Survey conducted earlier this year, board members identify their two most vital functions: holding management accountable for achieving strategic goals in a safe and sound manner, and meeting the board’s fiduciary responsibilities to shareholders.
If board members can’t pose a credible challenge to management when it comes to discussions on technology — asking pointed questions about a rising budget item for the majority of banks, as our recent research finds — then they can’t effectively fulfill their two most important duties. And boards also will find themselves unable to contribute to the bank’s strategy in the way they could or should.
Directors with technology expertise can help boards provide effective oversight and link technology and strategy, says Petty. “That’s the No. 1 [thing] — that fiduciary responsibility to really understand how the bank [aligns] its business strategy with its technology strategy.”
Petty shares a comprehensive list that identifies how technology expertise in the boardroom can contribute to the board’s oversight and strategic functions. These include:
Linking technology to the overall business strategy
Asking incisive questions of the bank’s CIO and/or CTO, and holding them accountable for goals, deadlines and budgets
Providing effective oversight of information security as well as Bank Secrecy Act/anti-money laundering (BSA/AML) compliance
Offering input and guidance on the bank’s technology initiatives
Giving feedback on innovation, customer experience and acquisition, product development, digital integration, cross-selling opportunities and similar areas
Asking pointed questions and deliberating about these technology matters isn’t just a fiduciary responsibility — it makes banks better, points out Jeff Marsico, president of The Kafafian Group, a consulting firm. Technology use by the industry isn’t new, he notes, but community bank boardrooms are typically composed of older members who will be inherently less tapped into what’s going on in the digital banking space. As a result, “they don’t have enough base knowledge to be challenging to management and therefore management knows, ‘I’m not going to be particularly challenged here,’” Marsico says. “[Boards] need somebody with enough knowledge to be able to challenge management — because then management gets better.”
Marsico sees flaws in most boards’ often-informal nomination processes. Performance evaluations, he notes, aren’t adequately used by the industry to identify gaps in board composition, and board members are often reticent to leave. Bank Director’s governance research backs this up, finding that roughly half of boards representing banks between $1 billion and $10 billion in assets conduct an annual performance assessment; that drops to 23% of boards below $1 billion in assets. Fewer than 20% overall use that assessment to modify the board’s composition.
Finding technology skill sets may challenge community bank boards, but Petty recommends a few ways that nominating committees can expand their search. Banks aren’t alone in the digital evolution, which affects practically every sector of the economy. With that in mind, he suggests looking at other industries for prospective board members. “Take an industry-agnostic look to find technology experts from organizations that are larger than the current institution,” Petty says.
Colleges, universities or vocational schools may also provide a resource to tap into technology expertise. “They typically are also at the forefront of talking about digitization across industries,” Petty adds.
While boardrooms should benefit from recruiting members with expertise for the digital age, that doesn’t excuse directors from enhancing their own understanding of the topic.
The 2021 Technology Survey finds board members highly reliant on bank executives and staff (87%) for information about the technologies that could affect their institution — right behind articles and publications (96%) as directors’ top resources.
While input from the bank’s executive team is critical, it’s important that directors leverage their own backgrounds, in addition to taking advantage of ongoing training and informational resources, to ask the right questions of these executives.
Marsico recommends that boards focus on strategy in every board meeting, with regular quarterly updates on the bank’s progress on executing the strategy. Other sessions should provide opportunities to educate board members on what’s going on in the banking environment — and should include external points of view. These could include technology vendors or representatives from the various associations serving the banking community. Petty suggests bringing in a former technology executive of another, larger bank who could brief members on what they’re seeing in the marketplace.
“[Boards] can get an outsider’s perspective that breathes fresh air into what is the possible — because I don’t think they know what is the possible,” says Marsico.
Petty also points to increasing interest in forming board-level technology committees. Bank Director’s 2021 Compensation Survey, conducted earlier this year, found that 23% of banks use such a committee.
“Even the smaller banks will have a technology committee, because it’s such a major focus for any institution to drive the digitization of how they go to market, how they leverage the digital experience for the customer, how they leverage the digital product offerings, [and] how they use digital to acquire new customers and onboard new customers,” says Petty.
Bank Director’s 2021 Technology Survey, sponsored by CDW, surveyed more than 100 independent directors, CEOs, COOs and senior technology executives of U.S. banks below $100 billion in assets to understand how these institutions leverage technology in response to the competitive landscape. The survey was conducted in June and July 2021.
Bank Director’s 2021 Compensation Survey, sponsored by Newcleus Compensation Advisors, surveyed 282 independent directors, chief executive officers, human resources officers and other senior executives of U.S. banks below $50 billion in assets to understand talent trends, cultural shifts, CEO performance and pay, and director compensation. The survey was conducted in March and April 2021.
Bank Director’s 2021 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner LLP, surveyed 217 independent directors, chairs and chief executives of U.S. banks below $50 billion in assets. The survey was conducted in February and March 2021, and explores the fundamentals of board performance, including strategic planning, working with the management team and enhancing the board’s composition.
Imagine a game where your team can’t score points and there’s no such thing as winning. All you can do is meticulously follow the rules; if you follow them well enough, then your team doesn’t lose. Most banks approach compliance with this survival mindset and it shows.
According to the Federal Reserve Bank of St. Louis, compliance expenses account for 7% of banks’ non-interest expenses. The majority of that spend is typically directed at headcount distributed across siloed operational functions — using equally siloed technology — to get the job done during the last leg of a transaction. The best that can be said for this approach is that it achieves baseline compliance. The worst? It prevents institutions from investing in transaction data management strategies that deliver compliance while simultaneously driving efficiencies and business growth that show up on the bottom line. This scenario becomes more untenable with each passing year: Increasing compliance complexity drives up costs, and that diversion of investment erodes a bank’s ability to compete.
Banks can choose to play the game differently, by viewing compliance as an integrated part of the data management process. Solutions that leverage application programming interfaces, or APIs, provide a mechanism for technology components to communicate with each other and exchange data payloads. Outside of this approach, transaction data resides in bifurcated systems and requires extra handling, either by software or human intervention, to complete a transaction and book the right data to the core. Having the same data in multiple systems and rekeying data dramatically increase an institution’s risk profile. Why make it harder to “not lose” the game when banks can leverage API-first solutions to ensure that data is only collected once and passes through to the touchpoints where it’s needed? The key to unlocking this efficiency is a compliance architecture that separates the tech stack from the compliance stack. Otherwise, banks are obliged to wait for code changes every time compliance updates are pushed.
Mobile enablement is now as critical for a bank’s success as any product it offers. The customers that banks are trying to reach have no practical limit to their financial services options and are increasingly comfortable with contact-free experiences. According to studies from J.D. Power & Associates released this year, 67% of U.S. bank retail customers have used their bank’s mobile app and 41% of bank customers are digital-only customers. Given historical trends, those numbers are expected to only increase.
Compliance represents an opportunity to remove friction from the mobile banking experience, whether offered through an app or a website. Traditional PDF documents are designed for in-branch delivery and are a clumsy fit for the mobile world. Responsive design applies to compliance content no less than it applies to mobile apps; content needs to adjust smoothly to fit the size of the viewing screen. The concept of “document package” is evolving to the point where a “compliance package” should be constructed on responsive design principles and require minimal user clicks to view and acknowledge the content.
An embedded compliance solution should treat optimized mobile channels as table stakes. To survive and thrive in this environment, institutions need to be where their customers are, when they are there. Traditional banker’s hours have officially gone the way of the dodo.
Embedded compliance can also enhance bank data security in the event of a breach. It is difficult to overstate the reputational damage that results from a data breach. Embedded compliance offers critical safeguards for sensitive customer information, bolstering an institution’s overall security profile. Legacy compliance or document-prep solutions often require duplicate data entry and expose customer personal identifiable information to the inherent data breach risks that come with multiple databases scattered across technology platforms. Look for solutions that do not store PII data, and instead offer bi-directional integrations with your platform.
Increasing demand for digital engagement provides banks with opportunities to rethink their technology stacks. Management should evaluate each component for its potential to address a myriad of business needs. Compliance solutions can sharpen or dull a bank’s competitive edge and should be considered part of a strategic plan to grow business. Who knows, maybe someday compliance will actually become “cool”? A dreamer can dream.
Financial institutions are committed to improving digital banking services and enabled more digital capabilities over the past year out of necessity — but there is more transformation to be done.
In their haste to meet customers’ and employees’ needs, many banks overlooked opportunities in back-office processes that are critical to providing excellent customer service, such as operating an efficient Regulation E (Reg E) dispute tracking process along with other processes that can ease employee challenges with regulatory compliance issues.
To enable bank staff to better serve customers, financial institutions must automate their back-office dispute tracking processes. One way to do is through implementing process automation solutions that offer workflows to direct the disputes appropriately, a single storage location for all supporting documentation and automating mundane tasks, such as generating letters and updating general ledger accounts. Implementing this kind of automation enables banks to simplify and streamline their input of disputes, ensuring that all critical information is captured accurately and dispute intake is handled consistently. This allows banks to provide consistent engagement and faster response to their customers.
Back-office automation strengthens a bank’s regulatory compliance and customer engagement. Awaiting outcomes from back-office processes can be extremely frustrating to customers — these moments are often tied to high-stress situations, such as having their cards used fraudulently. Banks should consider how manual, error-prone dispute tracking processes negatively affect the customer experience. Institutions also gain the crucial visibility that supports their decision-making and improves compliance with regulations, mitigating the risk and cost of non-compliance.
Process automation can also eliminate the stress that impacts account holders during this process. Having back-office automation with enhanced workflows and centralized documentation allows banks to return provisional credit more quickly and minimizes errors and delays. Instead of missing deadlines and making mistakes that erode customer confidence and cause audit exceptions, back-office employees meet deadlines and process disputes consistently and accurately, avoiding fines and additional work to remedy errors.
Automation can also improve back-office productivity by enhancing visibility. Clear visibility is created when a back-office employee can immediately track documentation and data when it is needed, at any stage in the process. During an audit, an employee may need to retrieve the date that a customer filed a Reg E dispute or to prove proper credit was applied. Without the appropriate tools, such as a single dashboard for dispute tracking and one platform for all supporting documentation, employees waste time searching paper files, spreadsheets and emails to piece together the required information. A workflow automation platform means a full audit trail with supporting documentation is readily available, optimizing everyone’s time.
For example, automation at Watkinsville, Georgia-based Oconee State Bank enables employees to efficiently complete tasks and focus their attention on serving their customers without being slowed down by complicated processes. The bank reduced the amount of time it took to file consumer disputes by more than 80% through process automation.
With 12 branches across Illinois and Indiana, First Bank, based in Carmi, Illinois, reduced claim processing time by more than 50% and experienced positive impacts from its digital dispute process. Dispute processes that can be easily tracked enable bank executives to clear audits and gain greater visibility into risk and compliance across their institution.
The visibility banks gain through automation improves their decision-making. Hard-to-access information and lack of visibility can be especially defeating when managing risk and compliance. Not only does incorrect or unavailable information open the door for human error, but it can also lead to financial loss. In areas like Reg E dispute tracking, this financial loss can be a result of not identifying a fraudulent dispute or trends of fraudulent charges. Process automation helps by supporting a methodical approach to reducing fraud and increasing visibility of high-risk merchants and customers.
This kind of attentive review during the Reg E process can help banks reduce the amount of undetected fraud and lower their write-off threshold, which is the pre-established amount set by an individual financial institution, under which any dispute is automatically written off as a financial loss. These thresholds are traditionally set with the back office staff’s bandwidth in mind; with more free time, banks can lower this threshold and avoid automatic losses. For instance, after implementing an automated, Reg E dispute tracking solution, Happy State Bank, the bank unit of Canyon, Texas-based Happy Bancshares, was able to lower its write-off threshold from $100 to $50 per dispute.
Tackling process automation can help banks compete and win while improving the level of service provided to customers. This technology empowers staff to be more responsive and alert to trends, enabling better decision-making and saving both cost and time. Implementing process automation allows banks to differentiate themselves from their competitors by providing consistent engagement and faster responses to customers. Process automation is the key to optimizing efficiency within any financial institution.
JPMorgan Chase & Co. Chairman and CEO Jamie Dimon recognizes the enormous competitive pressures facing the banking industry, particularly from big technology companies and emerging startups.
“The landscape is changing dramatically,” Dimon said at a June 2021 conference, where he described the bank’s growth strategy as “three yards and a cloud of dust” — a phrase that described football coach Woody Hayes’ penchant for calling running plays that gain just a few yards at a time. Adding technology, along with bankers and branches, will drive revenues at Chase — and also costs. The megabank spends around $11 billion a year on technology. Products recently launched include a digital investing app in 2019, and a buy now, pay later installment loan called “My Chase Plan” in November 2020. It’s also invested in more than 100 fintech companies.
“We think we have [a] huge competitive advantage,” Dimon said, “and huge competition … way beyond anything the banks have seen in the last 50 [to] 75 years.”
Community banks’ spending on technology won’t get within field-goal distance of JPMorgan Chase’s technology spend, but budgets are rising. More than three-quarters of the executives and board members responding to Bank Director’s 2021 Technology Survey, sponsored by CDW, say their technology budget for fiscal year 2021 increased from 2020, at a median of 10%. The survey, conducted in June and July, explores how banks with less than $100 billion in assets leverage their technology investment to respond to competitive threats, along with the adoption of specific technologies.
Those surveyed budgeted an overall median of almost $1.7 million in FY 2021 for technology, which works out to 1% of assets, according to respondents. A median 40% of that budget goes to core systems.
However, smaller banks with less than $500 million in assets are spending more, at a median of 3% of assets. Further, larger banks with more than $1 billion in assets spend more on expertise, in the form of internal staffing and managed services — indicating a widening expertise gap for community banks.
Key Findings
Competitive Concerns Despite rising competition outside the traditional banking sphere — including digital payment providers such as Square, which launched a small business banking suite shortly after the survey closed in July — respondents say they consider local banks and credit unions (54%), and/or large and superregional banks (45%), to be the greatest competitive threats to their bank.
Digital Evolution Continues Fifty-four percent of respondents believe their customers prefer to interact through digital channels, compared to 41% who believe their clients prefer face-to-face interactions. Banks continued to ramp up their digital capabilities in the third and fourth quarters of last year and into the first half of 2021, with 41% upgrading or implementing digital deposit account opening, and 30% already offering this capability. More than a third upgraded or implemented digital loan applications, and 27% already had this option in place.
Data Dilemma One-third upgraded or implemented data analytics capabilities at their bank over the past four quarters, and another third say these capabilities were already in place. However, when asked about their bank’s internal technology expertise, more than half say they’re concerned the bank isn’t effectively using and/or aggregating its data. Less than 20% have a chief data officer on staff, and just 13% employ data scientists.
Cryptocurrency More than 40% say their bank’s leadership team has discussed cryptocurrency and are weighing the potential opportunities and risks. A quarter don’t expect cryptocurrency to affect their bank; a third haven’t discussed it.
Behind the Times Thirty-six percent of respondents worry that bank leaders have an inadequate understanding of how emerging technologies could impact their institution. Further, 31% express concern about their reliance on outdated technology.
Serving Digital Natives Are banks ready to serve younger generations? Just 43% believe their bank effectively serves millennial customers, who are between 25 and 40 years old. But most (57%) believe their banks are taking the right steps with the next generation — Gen Z, the oldest of whom are 24 years old. It’s important that financial institutions start getting this right: More than half of Americans are millennials or younger.
To view the full results of the survey, click here.
The pace of announced mergers among rated U.S. banks has accelerated and is likely to gain steam.
The limited prospect of material loan growth makes asset growth via mergers and acquisitions increasingly attractive. And as we anticipated, more banks are favoring large transformational deals. We expect the industry will continue to consolidate in the second half of 2021. Greater size and efficiency will remain primary drivers of consolidation in the face of continued low interest rates, as will the imperative to invest in new technologies at scale.
There was a substantial jump in transformational M&A activity during the second quarter. Four sizable deals were announced in the period, and each envisions an enlarged entity that benefits from greater diversification and economies of scale. All four transactions promise eventual benefits for creditors, but each presents significant execution risk that is an immediate credit negative.
The main drivers of consolidation will continue for the next 12 to 18 months. Interest rates are unlikely to rise until 2023, increasing the likelihood of a jump in M&A activity. Technology upgrades will require substantial investment, which prospective cost savings from acquisitions can help fund. And loan growth will remain subdued because of the massive deposit holdings of U.S. companies and households.
Difficulty forecasting business activity and loan growth, as well as rising bank share prices, may have held back some deals. The value of an acquisition target is harder to gauge in an uncertain economic and market environment, which likely helped slow overall sector consolidation in 2020 and first quarter 2021, but nonetheless did not prevent the prominent deals we highlight in this report.
The coronavirus pandemic has had a notable impact on financial institutions, creating a more-urgent need to embrace digital-first banking. However, shifting to digital doesn’t just mean adopting new digital banking tools — a common misconception. Rather, it requires that banks rethink their holistic digital strategy to evolve alongside customer expectations, digitize all aspects of the financial journey and connect their customers’ digital and physical experiences.
Such a transformation boils down to determining which processes are digital-ready and which will need to be overhauled completely. Enter rationalization.
Relying on rationalization Three billion people will access banking through digital devices this year, according to one estimate from Deloitte. Most banks have 3, 5 or even 10-year plans, but struggle to determine where to start. Think of rationalization as triage for banks: It allows them to identify which processes are ready to be digitized right now, and which need to be reimagined entirely before embarking on digitization.
Consider the process to open a checking account. It’s a simple process, requiring proof of identity and address, and a form to complete. Customers are generally good to go. This is a prime example of a digital-ready banking service that should be moved online immediately — and that can be accomplished rather easily.
Compare that to applying for a loan: a process that involves careful evaluation of the applicant and a mountain of paperwork filled with lengthy, confusing terms and requirements. If the process is intimidating to consumers with the help of a professional, imagine how it feels left to their own devices.
For processes that contain inherent points of friction, like the loan application example above, digitizing may simply make the cumbersome process quicker. Outdated, clunky processes must be revamped before they can be digitally transformed.
Putting customers at the center Customers are the most important part of rationalization. As customer expectations have rapidly evolved, it’s time for institutions to modernize the digital experience to strengthen relationships and solidify loyalty. Some areas that banks should consider when evaluating the customer experience include:
Automating previously manual processes can reduce costs, improve efficiency and deliver an “always on” experience.
Ease-of-use. Along with being more accessible to people who might resist digitization, intuitive use and educational resources are integral to customer adoption and success.
Constant support. According to Accenture, 49% of customers say real-time support from real people is key to fostering loyalty.
Enhanced security. Strong security efforts are fundamental to giving customers peace of mind, which is critical when it comes to their money.
Make simple possible. Remove friction from the process to enhance the customer experience.
As banking catapults into a digitally dominant era, institutions should establish a presence across all digital touchpoints — desktop and web browser, mobile apps, even social media — to enable customers to access financial services and information at their convenience. A mobile-first mentality will help ensure that products and services work seamlessly across all devices and platforms. Consistency here is key.
Customers are ultimately looking to their institutions to solve their individual financial problems. Banks have a wealth of data available to them; those that seek to create the strongest relationships with customers can leverage these insights to tailor the experience and deliver relevant, timely products and support to meet their unique needs.
All sectors faced the same challenge over the course of the pandemic: How does a business survive physical separation from their customers? Industries like retail were better prepared for expedited digital transformation because they’ve been establishing a digital presence for years; they were largely able to rationalize quicker. Hospitality sectors, on the other hand, more closely mirrored banking in that many processes were far behind the digital times. Some restaurants lacked an online presence before the pandemic, and now must undergo their own version of rationalization to remain in business.
While rationalization looks different to each vertical, the central mission remains the same: determining the best, most sensible order of digital transformation to provide the best customer experience possible. Those companies that leverage the principles of rationalization to manage the massive migration to digital will be better positioned to solidify and capitalize on customer loyalty, and keep their institutions thriving.
2020 induced widespread digital transformation in response to the coronavirus pandemic.
In payments, we saw the rise of options for contactless payments, digital wallets, P2P transfers and more. The challenge for banks was that consumers often did not have to go through their bank to use any of these solutions.
The developments in the payment space over the past year make one thing clear: Banks should keep up with the newest available consumer technology to retain and attract customers, and modernize their digital payments strategy for future success as well.
Consumer demand remains strong, and the experience companies provide matters more than ever. After leaning so heavily on digital solutions for the past year and a half, they expect everything to be easy and instant. It is now relatively easy to find payment apps that provide real-time payments, P2P, bill pay and more. Banks that don’t offer similar solutions runs the risk of losing market share to non-banks that do.
Customers are weighing their banking experience against their experience with fintech apps as well as any other experience they have when shopping online, ordering food or taking a rideshare. Any good customer experience — no matter the industry — is one that the bank must now measure up to.
Take artificial intelligence (AI) and machine learning, for example. While not every financial institution is using AI and machine learning today, retailers like Amazon.com use AI and machine learning to predict consumer behavior, knowing what they need and when they will need it. They estimate when consumers will repurchase a product or try something new. A bank that is not doing the same is falling behind in providing the experiences that many consumers are growing accustomed to.
Where to Start? By leveraging technologies like AI and machine learning, banks can use the tremendous wealth of customer data at their disposal to provide a more personalized experience. This is a tremendous advantage over non-bank competitors that do not have access to the same consumer information. It can seem like a challenge to effectively put customer data to use, but there are a few steps banks should take to make the change a successful one.
First, a bank must set clear goals for what it wants to achieve when updating its payment platform or adding a technology like AI and machine learning. For most, the goal will be to provide a better experience, but it is helpful to dig even deeper than that. Ask: Do we want better customer satisfaction? More engagement with the platform? More bill pay users? More account-to-account (A2A) transactions? More P2P transactions? Be as specific as possible with goals, as these form the roadmap for the remainder of the process.
Once goals are set, find the partner that can help achieve those goals. Look for a partner that shares the bank’s vision for payments and has the right skill sets and capabilities to achieve those goals. Finding the right vendor partner will ensure the bank is successful in the end.
Clear goals and a like-minded vendor ensure that the tech a bank uses can help meet its goals. Just as Amazon uses AI and machine learning to predict a consumers’ purchases or recommend a product, banks can predict customers’ payment habits or make proactive payment recommendations to manage their financial health. The use cases of AI and machine learning are versatile, and can serve many different purposes to help banks reach their unique goals.
Finally, do not lose sight of the future. It is easy for banks to get concerned with what will make them successful now, but keep looking ahead. Work with your vendor to think about where both the industry and your bank are going. Be sure to choose solutions that can grow and change with the bank and its customers for years to come, rather than focusing too heavily on the here and now.
Change can be intimidating, but following the right steps to implement a tool like AI will ensure success by creating a better customer experience. Revitalizing your bank’s digital payment strategy is a process, but done right, the stronger digital relationships you build with your customers will be worth it.
In July 2021, First Horizon Corp. bought IBERIABANK Corp. and launched an experiment that few banks of its size have attempted: a conversion to an alternative core provider.
