Digital strategy
Cornerstone has identified five “Crisis of the ’20s” that reflect fundamental shifts in banking, encompassing products, technologies, human resources, processes, and the political climate. Areas they singled out include: digital banks and fintechs offering new “checking accounts” in direct competition with traditional banks, legacy banks still being hampered by “zombie cores”, a struggle to attract needed talent, and the need to foster organizational creativity to leverage data and technology optimally. To prevail in the 2020s crisis, banks must strategically plan for the longer term, cultivate internal capabilities, and redefine their focus, moving beyond geographic constraints to serve niche markets. By 2030 banks that manage to survive will either be intelligent in their approaches or just plain lucky.
Customer engagement
As the industry navigates the post-pandemic world marked by economic challenges, inflation, and fraud, there is a need for banks and FinTechs to offer tailored and timely experiences for consumers. The overarching theme is a mobile-first approach, with customers expecting real-time insights into their financial health and timely alerts. A future digital roadmap for banks should focus on creating new customer experiences across all channels while ensuring enhanced security and compliance. Incorporating AI and machine learning to overcome the constraints of legacy systems and offer a seamless omnichannel experience will also be essential.
Cloud computing
Arvest Bank’s cloud migration aims to leverage big data for improved customer personalization, provide seamless connections between customer-facing solutions and backend functions, counteract fraud, and reduce its carbon footprint. Among the anticipated benefits are enhanced operational efficiency, increased digital channels, collaboration with third parties for a modernized banking tech stack, faster revenue growth, and expedited product development. John Kain from Amazon Web Services (AWS) emphasizes that cloud migration is essentially a business transformation, not just a technological shift. Successful migrations are defined by clear business objectives. For instance, AWS facilitated a migration for student lender Sallie Mae that led to a 30% decrease in overall costs and a 25% reduction in time and maintenance by automating software patching.
AI/ML
Banks and credit unions face challenges in deploying AI due to economic uncertainties. However, embracing AI is crucial for these institutions to meet evolving customer expectations, fend off competition from fintechs, large banks, and other challengers, and enhance efficiency. Not prioritizing AI innovation places financial institutions at significant risk of lagging behind. One challenge is attracting scarce AI talent — no institution can deliver AI maturity single-handedly. Tapping into shared innovation through diverse collaborations is essential. Savvy banks are building web-like networks spanning open-source communities, universities, accelerators, and third-party solution providers. This cooperation with outside expertise gives access to greater flows of ideas, technologies, and partnerships.
Digital banking
Neobanks seek to become their customers’ primary financial institution. Although many consumers have traditionally kept their main accounts with traditional banks, recent research indicates this trend is changing as Millennials and Gen Z become dominant account holders. Neobank, Dave, has introduced a strategy to make its accounts more appealing by offering a 4% APY on both its checking and savings accounts. This move is not a limited-time promotion and applies to all accounts. Dave, which primarily serves people living paycheck to paycheck, saw a 5% increase in its membership in the second quarter of 2023. On the lending side, Dave’s approach to credit evaluation using AI for predictive cash-flow analysis instead of traditional FICO scores has garnered positive attention.
AI/ML
Generative artificial intelligence offers considerable promise for the banking industry in areas such as fraud detection, loan approvals, and customer service. However, the risk of “random acts of digital”—sporadic or impulsive implementation without aligning with an organization’s broader goals—can increase costs, and risks, and even result in regulatory noncompliance. It’s crucial for banks to find a balance between adopting GenAI hastily and being overly cautious, potentially missing out on its benefits. For a successful digital transformation involving GenAI, technology is only 30% of the equation, with the remaining 70% being business decisions and organizational change management.
Financial wellness
Banks and credit unions are offering financial education, but most consumers are either unaware of these resources or find the advice too generic. Banks with tailored financial wellness tools have seen greater customer engagement, higher deposits, and improved satisfaction scores. 58% of consumers expressed willingness to switch to a bank that aids in smarter budgeting and saving. However, less than 10% recall receiving valuable financial guidance from their institutions. Prominent examples of successful engagement include Bank of America’s Life Plan digital tool and BBVA’s financial health tools. These services, based on personalized guidance and integration of financial health into business strategy, have led to a significant increase in deposits and customer engagement. Evidence suggests that personalized financial literacy programs can enhance banks’ bottom lines, boosting customer loyalty and product usage.
Regulation
In July, federal banking regulators proposed new rules aimed at bolstering the resilience of the U.S. banking system. This would mandate large banks to hold 16% more capital than current requirements. The urgency for these changes increased after regional bank failures in Spring 2023. Originally intended for the most significant global banks, the rules now cover all banks with assets over $100 billion and would have encompassed regional banks like Silicon Valley Bank and Signature Bank. Key proposed changes include the introduction of a standardized risk-based approach for calculating capital requirements, higher weights on risk-weighted assets, and higher capital standards will for banks with assets over $100 billion.
