Reimagining A2A Transfers in a World of Real-Time Payments

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In today’s world of payments, speed matters.

Consumers increasingly expect faster everything, demands that are driven by the proliferation of peer-to-peer (P2P) payments enabling individuals to quickly send money to a friend or pay for products and services. The access, speed and convenience of faster or real-time payments are becoming the norm — that means greater opportunity for financial institutions to differentiate the money movement experiences they deliver to their customers. One area slower to initiate real-time speed is in traditional account-to-account, or A2A, transfers.

A2A transfers happen when a customer transfers funds between their own accounts (brokerage, crypto, savings and checking) held at two different financial institutions: for example, transferring funds from a savings or brokerage account to a separate checking account. Too often, consumers must rely on outdated processes such as traditional Automated Clearing House methods that can take days to complete, ultimately impacting time-sensitive investment opportunities and on-time bill payments.

“Today, consumers are accustomed to being able to quickly send money to friends and family using various P2P payment platforms. But moving money between your own accounts is still a lengthy and inefficient process,” says Yanilsa Gonzalez-Ore, senior vice president, North America head of Visa Direct.

Surveyed U.S. consumers own, on average, 8 financial accounts and conduct 15 transactions between them a year, accounting for $3 trillion in annual money movement via A2A transfers, according to a survey by Visa and Aite Group. This diffusion of their financial picture can result in the subsequent need to optimize finances and investments across those accounts — compounded by the desire and expectation that they can do it with ease anytime, anywhere.

We also found that 90% of surveyed U.S. consumers want the flexibility of real-time transfers between their financial accounts. And 70% of surveyed U.S. consumers said they prefer card-based real-time payments for transfers.

“Two factors that are driving customer demand today are user interface simplicity and real-time money movement,” says Gonzalez-Ore. “Disrupting the A2A space and delivering real-time payments can be a win-win for any financial institution. You may receive deposits faster, and in turn, you’ll potentially see higher retention from those clients by meeting their demand. There are potential benefits for everyone in the ecosystem.”

Younger demographics tend to be a step ahead when it comes to technology adoption and digital experiences. Quick gratification is the expectation for millennial and Generation Z customers. This matters now because there will likely be an overall demographic shift in the U.S., propelled by a transfer of wealth across generations. Banks should think about how they can expand their own money movement offerings in the ever-changing payments landscape.

“We will likely see more and more demand for faster, more seamless transfers and transactions,” says Gonzalez-Ore.

What 2022’s M&A Market Practice Can Teach Banks

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Nelson Mullins reviewed 43 publicly available merger agreements for bank mergers announced in 2022 to identify common market practices. The transactions ranged in deal value from $10.1 million to $13.7 billion, with a median deal value of roughly $136 million. They reflected average pricing of 1.6x tangible book and 16x earnings.

Understanding these market practices can help potential targets understand what might be available in the market, and help potential purchasers understand where they may be able to stand out from the market. Below are some of the highlights and observations of the review.

Adjustments to Merger Consideration Based on Closing Capital
Ten of the 43 transactions included an adjustment to the merger consideration based on the target’s closing capital, with nine including a dollar for dollar decrease in merger consideration based on the target missing a stated closing capital level. Only one merger agreement offered a dollar for dollar increase or decrease based on a stated closing capital level. Transactions varied with respect to whether changes in the value of available-for-sale securities were backed out of closing capital as well as whether transaction expenses were to be included or excluded in such calculations; there was no market consensus. At least one merger agreement also required the held-to-maturity securities portfolio to be marked-to-market for purposes of calculating closing capital. Only eight transactions provided a minimum capital amount as an explicit closing condition.

Closing conditions predicated on minimum capital amounts are more common in years in which financial stress overhangs the industry, such as during the 2008 financial crisis. Given the significant interest rate moves in 2022, these observations are expected. As we look to 2023, we would expect these conditions to become less common if interest rate trends moderate or even stabilize and drop, noting that any asset stress resulting from a possible economic downturn would change our opinion.

Other Adjustments to Merger Consideration
Although there has been discussion of similar provisions, only the TD Bank Group/First Horizon Corp. agreement included additional merger consideration if the transaction was delayed based on delayed regulatory approvals. No other public merger agreements included such a provision. However, there was one agreement that interestingly provided that the parties could mutually agree to reduce the merger consideration by up to $3.5 million if an event caused a material adverse decline in the value of the transaction. One has to wonder: Would a target ever subsequently agree to a discretionary reduction in merger consideration?

Must the Purchaser Act in the Ordinary Course of Business?
In roughly a third of the transactions, the purchaser undertook an affirmative covenant to only act in the ordinary course of business. This would presumably require the purchaser to obtain the target’s consent before engaging in another acquisition. Conversely, in two-thirds of the transactions, the purchaser made no such covenant.

In all transactions, the purchaser did covenant not to undertake any action that would be expected to cause a delay in the immediate transaction. In the two transactions where the target was closest in size to the purchaser — hence more likely a strategic merger or “merger-of-equals” — the purchaser and target agreed to mutual affirmative and negative covenants.

Target’s Ability to Accept Superior Proposals
Virtually all of the transactions permitted the target’s board of directors to respond to unsolicited alternative proposals. This arrangement, commonly referred to as a “fiduciary out,” is common and effectively required under most frameworks of director’s fiduciary duties.

In roughly 75% of the transactions, the target board of directors had the right to terminate the merger agreement if confronted with a superior proposal and conditioned upon paying a termination fee. However, in 25% of the transactions, while the target board of directors could change its recommendation to shareholders in light of a perceived superior proposal, only the purchaser could elect to then terminate the merger agreement and require the target to pay the termination fee. Otherwise, the target remained obligated to seek shareholder approval and likely most of the directors would remain obligated, if subject to voting support agreements, to continue to vote for the transaction. In four transactions, even the target shareholders’ rejection of the merger agreement didn’t immediately give the target the right to terminate the merger agreement; the parties remained obligated to make good faith reasonable best efforts to first negotiate a restructuring that would result in shareholder approval.

Increasingly Common New Provisions
We increasingly saw provisions addressing cooperation on data processing conversions and coordination of dividend timing, with a desire to ensure that each parties’ shareholders received one dividend payment each quarter.

Issues in Selling to a Non-Traditional Buyer

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We have seen a surge in the number of sales of smaller banks to non-traditional buyers, primarily financial technology companies and investor groups without an existing bank.

This has been driven by outside increased interest in obtaining a bank charter, the lack of natural bank buyers for smaller charters and, of course, money. Non-traditional buyers are typically willing to pay a substantially higher premium than banks and including them in an auction process may also generate pricing competition, resulting in a higher price for the seller even if it decides to sell to another bank. Additionally, buyers and sellers can structure these transactions as a purchase of equity, as opposed to the clunky and complicated purchase and assumption structure used by credit unions.

But there are also many challenges to completing a deal with a non-traditional buyer, including a longer regulatory approval process and less deal certainty. Before going down the road of entertaining a sale to a buyer like this, there are a few proactive steps you can take to increase your chances for success.

The Regulatory Approval Process
It is important to work with your legal counsel at the outset to understand the regulatory approval process and timing. They will have insights on which regulators are the toughest and how long the approval process may take.

If the potential buyer is a fintech company, it will need to file an application with the Federal Reserve to become a bank holding company. In our recent experience, applications filed with the Federal Reserve have taken longer, in part because of the increased oversight of the Board in Washington, but also because the Federal Reserve conducts a pre-transaction on-site examination of the fintech company to determine whether it has the policies and procedures in place to be a bank holding company. Spoiler alert: most of them don’t.

If the potential buyer is an individual, the individual will need to file a change in control application with the primary federal regulator for the bank. The statutory factors that regulators need to consider for this type of application are generally less rigorous than those for a bank holding company application. We have seen the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. show more openness to next-generation business plans, as they understand the need for banks to innovate.

Conduct “Reverse” Due Diligence
Find out more about the buyer. You would be surprised at what a simple internet search will uncover and you can bet that the regulators will do this when they receive an application. We have encouraged sellers take a step further and conduct background checks on individual buyers.

Ask the buyer what steps have been taken to prepare for the transaction. Has the investor had any preliminary meetings with the regulators? What advisors has the buyer hired, and do they have a strong track record in bank M&A? Does the buyer have adequate financial resources?

Understand the key aspects of the buyer’s proposed business plan. Is it approvable? Are the new products and services to be offered permissible banking services? A business plan that adds banking as a service is more likely to be approved than one that adds international payments or digital assets. Does the buyer have a strong management team with community bank experience? What impact will the business plan have on the community? Regulators will not approve an application if they think the charter is being stripped and a community is at risk of being abandoned. We have seen buyers offer donations to local charities and engage in community outreach to show the regulators their good intentions.

Negotiate Deal Protections in the Agreement
Additional provisions can be included in the definitive agreement to protect the selling bank. For example, request a deposit of earnest money upon signing that is forfeitable if the buyer does not obtain regulatory approval. Choose an appropriate drop-dead date for the transaction. Although this date should be realistic, it should also incentivize the buyer to move quickly. We have seen sellers offer buyers options to pay for extensions. The contract should also require the buyer to file the regulatory application promptly following signing and to keep the selling bank well informed about the regulatory approval process.

While a transaction with a non-traditional buyer may be more challenging, under the right circumstances it can present an appealing alternative for a bank looking to maximize its sale price in a cash transaction.

Detect and Prevent Check Fraud in Real Time

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Financial institutions are engaged in a never-ending battle to stay a step ahead of fraudsters that are clever and nimble enough to continuously exploit their organization or system weaknesses.

Many banks focus on combating digital fraud given the rapid digital developments in the financial services industry. However, fraudsters continue to leverage digital and physical channels to commit check fraud. In fact, checks serve as the payment method most impacted by fraud activity; 66% of payments professionals reported check fraud activity in 2020, according to the 2021 Association for Financial Professionals Payments Fraud and Control Survey.

Banks encounter check fraud in many ways, including counterfeits, forgeries, alterations, serial numbers, stop payments and check kiting. Technological advances have made it easier for fraudsters to create realistic counterfeit and fictitious checks, as well as false identification that can be used to defraud financial institutions nationwide.

Digital banking provides customers with many conveniences but also leaves banks vulnerable to risk. Perpetrators are no longer required to show their faces at physical branches or ATMs to deposit fake checks. However, 49% of fraud occurs in over-the-counter transactions, according to a recent ABA Deposit Account Fraud Survey Report.

Fortunately for financial institutions, there are three key tools they can use to combat check fraud.

The first is leveraging transaction analysis, which is the process of examining bank transactions to look for unusual and suspicious activity or other issues. This key component scrutinizes debits and credits contained in deposits and withdrawals to identify suspicious items, such as duplicate check numbers and out-of-range check numbers and amounts. It also applies tests at the account and entity level, measuring things such as account velocity, account volume and deposits or withdrawals of unusual amounts.

The second tool is check stock validation, which analyzes presented check images against historical reference check images to authenticate the check stock. This can help institutions identify counterfeit in-clearing and over-the-counter checks quicker and more effectively. accurately and reliably than visual inspections. Check stock verification leverages technology to spot aberrations that the human eye cannot detect. It also reduces the number of manual verifications and decreases false positives through digital check image analysis. This improves the check fraud detection process and alleviates the burden on in-house anti-fraud teams.

A third tool is signature verification, which uses machine learning algorithms and sophisticated decision trees to provide a detailed analysis of check signatures. This results in efficient evaluation of suspect in-clearing and over-the-counter checks and increased confidence levels for acceptance and return decisions.

Banks can improve on their ability to detect fraud by combining software innovations such as decision tree/multiple variable analysis, image analysis and machine learning predictive analytics. Data topology, which is a way to classify and manage real-world data scenarios, will increase over time, which allows banks to include contextual information and negative historical analytics. In turn, these outcomes detect transactional fraud and suspicious activity, reducing false negatives and enabling a financial institution to make better and faster fraud-related decisions.

Automation software performs fraud risk scoring on deposits and withdrawals, using specific detection algorithms for each type of check such as on-us, transit, treasury checks and local government checks. The software applies transaction and image analysis on each item in the deposit, along with a configurable scorecard that calculates the risk for the parties involved in the transaction. Today, software can analyze more than 60 parameters covering the conductor, beneficiary, issuing account, and items to produce a single fraud score. This calculated fraud score provides the bank with an appropriate interdiction message — including a hold recommendation that gives the bank the option to accept the deposit, covering the fraud and other collectability risks by holding the fund.

Fraudsters become more innovative every year, targeting vulnerable victims to execute their plans and schemes. Even though check use is increasingly uncommon, fraudsters still utilize checks as a convenient medium to exploit banks and their customers. But banks can mitigate risk and reduce fraud loss efficiently. Used together, tools like transaction analysis, check stock validation and signature verification enable banks to prevent check fraud. Providing a safer banking experience protects the financial institution from fraudulent risks, strengthens the customer experience and earns trust.

A Seller’s Perspective on the Return of Bank M&A

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Any thoughts of a lingering impact on mergers and acquisitions as a result of the 2020 economic downturn caused by Covid-19 should be long gone: 2021 bank transaction value exceeded $50 billion for the first time since 2007.

Continued low interest rates on loans and related compression of net interest margin, coupled with limited avenues to park excess liquidity have made many banks consider whether they can provide sustainable returns in the future. Sustainability will become increasingly difficult in the face of continued waves of change: declining branch transactions, increasing cryptocurrency activity and competition from fintechs. Additionally, the fintech role in M&A activity in 2021 cannot be ignored, as its impact is only expected to increase.

Reviewing 2021 M&A transactions, one could argue that the market for bank-to-bank transactions parallels the current residential home market: a finite amount of supply for a large amount of demand. While more houses are being built as quickly as possible, the ability for banks to organically grow loans and deposits is a much slower process; sluggish economic growth has only compounded the problem. Everyone is chasing the same dollars.

As a result, much like the housing market, there are multiple buyers vying for the same institutions and paying multiples that, just a few years ago, would have seemed outlandish. For sellers, while the multiples are high, there is a limit to the amount a buyer is willing to pay. They must consider known short-term gains in exchange for potential long-term returns.

For banks that are not considering an outright sale, this year has also seen a significant uptick in divestures of certain lines of business that were long considered part of the community bank approach to be a “one-stop shop” for customer needs. Banks are piecemeal selling wealth management, trust and insurance services in an attempt to right-size themselves and focus on the growth of core products. However, this approach does not come without its own trade-offs: fee income from these lines of business has been one of the largest components of valuable non-interest income supporting bank profitability recently.

Faced with limited ability to grow their core business, banks must decide if they are willing to stay the course to overcome the waves of change, or accept the favorable multiples they’re offered. Staying the course does not mean putting down an anchor and hoping for calmer waters. Rather, banks must focus on what plans to implement and confront the waves as they come. These plans may include cost cutting measures with a direct financial impact, such as branch closures and workforce reductions, but should entail investments in technology, cybersecurity and other areas where returns may not be quantifiable.

So with the looming changes and significant multiples being offered, one might wonder why haven’t every bank that has been approached by a buyer decides to sell? For one, as much as technology continues to increasingly affect our everyday lives, there is a significant portion of the population that still finds value in areas where technology cannot supplant personal contact. They may no longer go to a branch, but appreciate knowing they have a single point of contact who will pick up the phone when they call with questions. Additionally, many banks have spent years as the backbone of economic development and sustainability in their communities, and feel a sense of pride and responsibility to provide ongoing support.

In the current record-setting pace of M&A activity, you will be hard pressed to not find willing buyers and sellers. The landscape for banks will continue to change. Some banks will attack the change head-on and succeed; some will decide their definition of success is capitalizing on the current returns offered for the brand they have built and exit the market. Both are success stories.

How to Give Cardholders Digital Self-Service, Fraud-Fighting Capabilities

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Despite the dramatic changes in consumer spending habits over the last 18 months, an unnerving constant remains: Fraudsters are ever-present, and financial institutions and consumers must stay on guard.

To address fraud issues and enhance safety, credit and debit card payments are being reimagined and increasingly conducted via digital channels. By deploying digital self-service card capabilities, banks can better protect their consumers and allow them to keep transacting securely.

Recent research by Raddon, a Fiserv company, shows the ongoing primacy of credit and debit card payments. In a typical month, 77% of U.S. households use a debit card for purchases and 80% of household use a credit card for purchases, according to the research.

 

Card usage among varying demographic consumer segments remains robust, with millennials, Generation X and baby boomers all reporting significant reliance on card-based payments.

However, the definition of a “card payment” is changing. Consumers are increasingly using their cards digitally, with 40% saying at least half of their monthly transactions are done digitally on their mobile phones or computers, according to Raddon.

Mobile card applications are the answer to these changing trends. Today’s digitally minded consumer needs card apps that help them manage their accounts when and how it suits them. Banks can keep customers satisfied and safe by implementing a comprehensive mobile card management solution.

Digital wallet participation enables banks to give cardholders the ability to add a card to their smartphone or wearable. If cards can be digitally issued at the time of account opening, all the better. This process enables immediate card access via the digital wallet and provide an easy, secure and contact-free way to pay. Card apps can also provide control features designed to keep cardholders safe and their financial institution top-of-mind. Consumers can use these apps to protect their accounts, manage their money and take charge of card usage. Their increased peace of mind will drive transaction volume and cardholder engagement, empowering users to fight fraud through alerts for card transactions and personalizing usage controls.

Consumers are concerned about their spending patterns. Providing cardholders with detailed spend insights and enriched transaction information makes it easier for them to understand their spending and make informed spending decisions. An enriched transaction can make the difference between a panicked consumer who is worried about fraud and someone secure in knowing that each purchase is one they’ve made. The transactions should include real merchant names, retail locations for physical purchases, transaction amount and purchase date. It should also include contact information for the merchant, so consumers can make any inquiries about the purchase directly with the merchant.

Every interaction with consumers is a chance to make a great impression, especially on mobile. Consumers appreciate fresh app designs and features that focus on simplicity, including one-touch access to functions. For example, consumers should be able to quickly and easily lock a misplaced card to prevent fraud and unlock it when located. These digital-first, self-service capabilities create an efficient and safe cardholder experience. Banks can leverage existing marketing resources and creative assets to keep their consumers informed about and remind them of secure self-service aspects of the payments program.

Consumer expectations continue to rapidly evolve and drive change. Banks must respond by staying focused on consumer needs and regularly delivering new app features and interconnected payment experiences. The institutions that do will succeed by continuing to provide consumers with convenient and safe digital management capabilities for their credit and debit cards, whenever and wherever consumers transact.

The Widening M&A Gap

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The number of bank M&A transactions completed in 2020 represent a stark decline compared to those that have closed in recent years. Dory Wiley of Commerce Street Capital believes that deal activity will rebound in 2021 — but notes that buyers and sellers may find it even more difficult to come to terms on price. In this video, he provides guidance on how banks can meet their goals.

  • Predictions for 2021
  • Considerations for Acquirers
  • Advice for Prospective Sellers

The Myth that Binds Banks to Their Payment Processors

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payment-7-22-19.pngBanks are losing a heavyweight fight, one in which they did not know they were participating. Their opponent? The ever-growing giants of debit card processing in an ever-shrinking ring of industry consolidation.

Over the past few years, interchange income has surpassed all traditional types of deposit-based fee income, making it the number one source of deposit-based non-interest income. But in order to maximize that income, interchange network arrangements must be effectively managed and optimized. Executives must sift through misinformation to consider several critical issues when it comes to protecting interchange income.

Many bankers aren’t aware they can choose which vendors process their customers’ debit card transactions from the point-of-sale and believe they are forced into selecting the PIN-based debit card transaction network provided by their core or EFT processor. This couldn’t be further from the truth.

Debit card transaction networks have varying negotiable switch fees, increasingly complex expense structures and several types of incentive offerings for transaction routing loyalty or priority. Most importantly, these vendors offer differing interchange income pay rates; some even support PIN-less routing, which negatively affects the interchange income bank card issuers can earn for certain transaction types. This means bankers must thoroughly evaluate their options to find a partner that can generate above-average interchange profit.

Oftentimes a bank’s core or electronic funds transfer (EFT) processor offers the least-competitive option when compared to other PIN networks. Since the Durbin Amendment awarded merchants the power of the card transaction network choice, EFT processors are negotiating with merchants to get as many transactions on their network as possible. The processors do this by offering lower PIN and PIN-less rates than their competitors.

Of course, if a merchant can divert less of the purchase amount in interchange with the bank, then they absolutely will. The merchant simply chooses the transaction-routing options that are less expensive to them, and pays less to the bank. In this type of situation—where it appears that banks have little control—what can a banker do?

One way for bankers to exert influence is by limiting network choices on their debit cards. Banks should limit the PIN networks available for routing their debit card transactions to a maximum of two. At the same time, banks must select the best two-network combination to force the merchants’ hands, providing the best rates possible. This tactic tips the power scales back toward the card issuers.

Some processors are creating networks to compete with Visa and Mastercard for routing dual-message, or signature transactions. These signature-routing networks, being rolled out by PIN network processors, will likely be structured to appeal to merchants in attempts to win as many transactions as possible. As one might guess, this will further pressure bank income.

Most recently, it’s also been observed that several networks setup for ATM-only routing by their participating issuers were gaining PIN point-of-sale transactions from merchants. They did this by allowing PIN-less routing and simply being present as a network option on the issuers’ debit card network arrangement. Both of these tactics create confusion for banks, and build a case for closely monitoring network performance.

Banks participating in their core or EFT processor’s PIN network should take a close look at how their PIN-based interchange income has performed over the past two to three years. They should compare their current PIN income rates to the rate averages in the FED Interchange Study, fully considering the historical trend being reviewed. This can be a great first step for banks to regain some control of their interchange income.

Takeaways from the BB&T-SunTrust Merger

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merger-2-27-19.pngIn early February, BB&T Corp. and SunTrust Banks, Inc. announced a so-called merger of equals in an all-stock transaction valued at $66 billion. The transaction is the largest U.S. bank merger in over a decade and will create the sixth-largest bank in the U.S. by assets and deposits.

While the transaction clearly is the result of two large regional banks wanting the additional scale necessary to compete more effectively with money center banks, banks of all sizes can draw important lessons from the announcement.

  • Fundamentals Are Fundamental. Investors responded favorably to the announcement because the traditional M&A metrics of the proposed transaction are solid. The transaction is accretive to the earnings of both banks and BB&T’s tangible book value, and generates a 5-percent dividend increase to SunTrust shareholders. 
  • Cost Savings and Scale Remain Critical. If deal fundamentals were the primary reason for the transaction’s positive reception, cost savings ($1.6 billion by 2022) were a close second and remain a driving force in bank M&A. The efficiency ratio for each bank now is in the low 60s. The projected 51 percent efficiency ratio of the combined bank shows how impactful cost savings and scale can be, even after factoring in $100 million to be invested annually in technology.
  • Using Scale to Leverage Investment. Scale is good, but how you leverage it is key. The banks cited greater scale for investment in innovation and technology to create compelling digital offerings as paramount to future success. This reinforces the view that investment in a strong technology platform, even on a much smaller scale than superregional and money center banks, are more critical to position a bank for success.
  • Mergers of Equals Can Be Done. Many have argued that mergers of equals can’t be done because there is really no such thing. There is always a buyer and a seller. Although BB&T is technically the buyer in this transaction, from equal board seats, to management succession, to a new corporate headquarters, to a new name, the parties clearly went the extra mile to ensure that the transaction was a true merger of equals, or at least the closest thing you can get to one. Mergers of equals are indeed difficult to pull off. But if two large regionals can do it, smaller banks can too.
  • Divestitures Will Create Opportunities. The banks have 740 branches within 2 miles of one another and are expected to close most of these. The Washington, D.C., Atlanta, and Miami markets are expected to see the most branch closures, with significant concentrations also occurring elsewhere in Florida, Virginia, and the Carolinas. Deposit divestitures estimated at $1.4 billion could present opportunities for other institutions in a competitive environment for deposits. Deposit premiums could be high.
  • The Time to Invest in People is Now. Deals like this have the potential to create an opportunity for community banks and smaller regional banks particularly in the Southeast to attract talented employees from the affected banks. While some banks may be hesitant to invest in growth given the fragile state of the economy and the securities markets, they need to be prepared to take advantage of these opportunities when they present themselves.
  • Undeterred by SIFI Status. The combined bank will blow past the new $250 billion asset threshold to be designated as a systemically important financial institution (“SIFI”). While each bank was likely to reach the SIFI threshold on its own, they chose to move past it on their terms in a significant way. Increased scale is still the best way to absorb greater regulatory costs – and that is true for all banks.
  • Favorable Regulatory Environment, For Now. Most experts expect regulators to be receptive to large bank mergers. Although we expect plenty of public comment and skepticism from members of Congress, these efforts are unlikely to affect regulatory approvals in the current administration. It is possible, however, that the favorable regulatory environment for large bank mergers could end after the 2020 election, which could motivate other regionals to consider similar deals while the iron is hot.
  • Additional Deals Likely. The transaction may portend additional consolidation in the year ahead. As always, a changing competitive landscape will present both challenges and opportunities for the smaller community and regional banks in the market. Be ready!

Considering Conversational AI? Make Sure Your Solution Has These 3 Things

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AI-10-9-18.pngThe pace at which consumers adopt new technologies has never been faster. Whether it’s buying coffee, booking travel, or getting a ride, or a date, consumers expect immediacy, personalization, and satisfaction. Banking is no different. According to a study by Oracle, when banks fall short of their consumers’ digital expectations, a third of consumers are open to trying a non-bank provider to get what they want – and what they want, increasingly, is a digital experience that’s smart, intuitive, and easy to use.

Conversational AI—a platform that powers a virtual assistant across your mobile app, website, and messaging platforms—is core to providing the experience consumers want. Whether you choose to build or buy a conversational AI solution, it needs three key things.

Pre-packaged Banking Knowledge
A platform with deep domain expertise in banking is what gives you a head start and accelerates time to market. A solution fluent in banking and concepts such as accounts, transactions, payments, transfers, offers, FAQs, and more, is one that saves you time training it about the basics of banking. Deep domain expertise is also necessary for a virtual assistant or “bot” to hold an intelligent conversation.

Your conversational AI solution should already be deeply familiar with concepts and actions common in banking, including:

  • Information about accounts – so customers can check balances and credit card details such as available credit, minimum payment and credit limit.
  • Information about transactions – so customers can request transactions by specific accounts or account types, amount, amount range (or above, or under), check number, date or date range, category, location or vendor.
  • Information about payments – so customers can move money and make payments using their bank accounts or a payment service such as Zelle or Venmo.

Human-like Conversations
Most conversational AI systems answer a question, but then leave it up to the customer as to what they should do next. Few conversational AI systems go beyond answering basic questions and helping customers accomplish one simple goal at a time, and that’s sure to disappoint some customers.

A conversational AI platform should be able to track goals and intents so bots and virtual assistants can do more for consumers. It should go beyond basic Natural Language Understanding and combine deep-domain expertise with the ability to reason and interpret context. This is what gives it the ability to help customers achieve multiple goals in a fluid conversation – creating a “human-like” conversation that not only understands what the customer is texting or saying but tracks what the customer is trying to do, even when the conversation jumps between multiple topics.

Platform Tools
Under the hood of every Conversational AI platform are the deep-learning tools. Effective analysis of data is at the core of every good conversational AI platform—understand how it collects and federates, builds, trains, customizes and integrates data. This will have a huge impact on the accuracy and performance of the virtual assistant or bot.

After you deploy the system, you want to be empowered to take full control of the future of your conversational AI platform and not be trapped in a professional services cycle. Make sure you have a full suite of tools that allow you to customize, maintain and grow the conversational experiences across your channels. You’ll need to measure engagement and continually train the virtual assistant to respond to ever-changing business goals, so you’ll want an easy way to manage content and add new features and services, channels, and markets.

Above all – is it Proven in Production?
There is a huge difference between a proof of concept or internal pilot with a few hundred employees to a full deployment with a virtual assistant or bot engaging with customers at scale in multiple channels. A conversational AI platform is not truly tested until it’s crossed this chasm, and from there can improve and grow with additional use cases, products and services and new markets.

During the evaluation, ask for customer engagement metrics, AI training stats, and business KPIs based on production deployments. Delve into timelines related to integration – are the APIs integrating with your backend systems fully tested in production? Understand how the system is trained to extend and do more. What did it take to roll out new features with a system already deployed?

If the platform has been deployed in production several times with several different financial institutions, you know it has been optimized and tested for performance, scalability, security and compliance. You can have confidence the solution was designed to work with your back-end and front-end ecosystem, channels and infrastructure. Only then has it been truly validated and proven to integrate and adhere to many leading banks’ rigorous and challenging regulatory, IT and architecture standards and technologies.

There’s just no way to underscore the value of production deployments as a way to separate the enterprise-ready from the merely POC-tested solutions.