Payments
B2B payments are trending towards electronic transactions but still face efficiency issues. The Clearing House’s real-time payments (RTP) network was launched in 2017 and is available to financial institutions covering approximately 90% of U.S. demand deposit accounts and currently reaches 65% of these. Despite the RTP network’s growth, 3.3 billion checks were processed in 2022 and 55% of Americans wrote a check in the past year. Cross-border B2B payments face additional hurdles due to a lack of standardization and common international payment standards. The established SWIFT system for cross-border transactions, now 50 years old, can take 1 to 5 working days to complete and involves frictional liquidity during the process. Addressing these issues requires collaboration between global government bodies, banks, private institutions, and technology companies, with the creation of a global standard for cross-border transactions being unlikely in the near future.
Customer engagement
“We don’t make that much money on them” is the current attitude of many traditional financial institutions (FIs) towards the Gen Z market. Despite possessing an estimated $360 billion in disposable income, only 33% of Gen Z uses a financial provider, suggesting a significant untapped market – particularly when institutions take a longer-term view of the potential of this cohort. One key issue for banks is ineffective marketing, since few are active on platforms such as TikTok that are favored by Gen Z. And many banks see Gen Z as a future problem and delay building trust with this demographic, allowing other brands like Apple to move in first. Gen Z struggles with growing debt, lacks financial literacy, and follows unqualified influencers for financial advice. FIs can leverage their position of trust to offer credible information and tools for financial planning. Delaying their response to Gen Z’s needs may result in traditional FIs missing their opportunity as this demographic becomes more accustomed to banking with neobanks and fintechs.
Human resources
Improving legacy enterprise technology in retail banks is hindered by a lack of skilled talent capable of creating and managing high-quality digital experiences. This talent deficit is a result of competition across various sectors, including financial services, consulting, and aerospace. Offering high salaries is not an adequate solution due to a limited number of suitable candidates. Instead, banks that identify as software or technology companies providing financial services, known as “pacesetters”, have a better chance of overcoming this challenge. These banks focus on hiring for advanced technical skills and prioritize employee experience and development over rigid organizational rules. Pacesetters emphasize retention, reskilling, and redesign. This helps them outperform their traditional counterparts with improved returns on equity and lower employee churn. Some examples include ING, which focuses on technology-enabled banking solutions, DBS, which emphasizes automation, and Rabobank, which supports a flexible hybrid work-life balance. Though no pacesetter has perfected this model, they all share a willingness to experiment and adapt, recognizing the interconnectedness of their people practices.
Payments
Financial institutions are under pressure to meet evolving consumer demands or risk being outperformed by more agile fintech companies, especially in the payments sector. A recent survey found that 94% of banks are planning to invest in payment technology in the near future. Yet, 40% of them consider the technical challenge of integrating new technology with legacy systems as a major obstacle. To remain competitive and meet consumer demands for services like real-time payments, banks must prioritize implementing technology that offers the highest return on investment. This includes open APIs and cloud-based architecture. Open APIs allow banks to integrate with other companies’ services efficiently and cost-effectively, enhancing capabilities like cross-border payments, compliance, and fraud detection. Cloud-based platforms have also gained acceptance, with new payments-as-a-service offerings enabling financial institutions to quickly adapt to new consumer demands. By embracing open APIs and cloud platforms, banks can future-proof their operations and lay the groundwork for success in the digital age.
BaaS
Banking as a Service (BaaS) and embedded banking are evolving rapidly in response to stricter federal guidelines on third-party relationships and rising interest rates, according to Rodrigo Suarez, Chief Banking and Innovation Officer at Piermont Bank. Unlike other banks, Piermont Bank focused on BaaS from its inception, serving business clients rather than consumers through its BaaS partnerships. New federal guidelines for managing third-party relationships were released on June 6th and will increase scrutiny on banks’ preparedness to work with partners, possibly dissuading institutions without a solid BaaS or embedded banking foundation. Suarez believes that fintechs and startups will need to be more established and operationally robust to meet these elevated expectations. Examples of Piermont Bank’s successful BaaS partnerships include Buildertrend, a software provider for construction companies that integrates banking features into its platform, and Found, a banking, invoicing, tax, and bookkeeping service provider for independent contractors. Suarez does not see major banks as competition in BaaS due to their large existing retail networks. Instead, he points to Goldman Sachs’ collaboration with Apple as more similar to Piermont Bank’s BaaS approach.
BaaS
Companies like Apple that lack a banking charter often offer their customers financial services by partnering with banks through banking-as-a-service (BaaS) programs. The benefits for banks include new revenue streams and access to deposits and loans beyond their geographic markets. A study by Cornerstone Advisors revealed that many banks and credit unions have expressed interest in BaaS. To successfully implement BaaS, banks need to follow several steps which start with developing a strategic plan defining their objectives. Roles and responsibilities then need to be assigned within the bank. Banks also need to engage with regulators about their BaaS strategy and implement a plan for managing third-party relationships. BaaS-specific policies should be created, focusing on governance, approval processes, risk appetite, and contingency plans. Banks should only onboard BaaS partners that align with their strategic goals and can manage the associated risks. Finally, maintaining ongoing risk and compliance oversight is vital, with banks needing to monitor partners to ensure risk management and regulatory compliance in order to create a resilient program. The different approaches a company might take to BaaS can vary depending on the bank’s capacity, risk tolerance, and strategic philosophy.
Customer engagement
Consumers are becoming more open to using nonbank financial services and digital banks, with 56% of US consumers expressing this sentiment, a rise of 10% since 2022, according to research by Marqeta. Although consumers are not expected to abandon traditional providers entirely, they are increasingly willing to diversify their financial services. In a survey of 4,000 people, nearly half indicated they would consider using nontraditional providers, a number that rose to 60% for those aged 26 to 34. Despite these shifts, trust and data privacy remain concerns for consumers when considering alternative providers. The research also revealed the popularity of digital features such as early wage access and automated savings among younger consumers, indicating a need for traditional banks to innovate to meet changing consumer demands.
Agile development
The adoption of Agile project management by financial institutions has proven beneficial in their digital transformation efforts, with success extending beyond just software development. A significant increase in the use of Agile outside technology-related sectors was reported between 2020 and 2021, according to a recent report. The Agile methodology allows teams to adapt swiftly to changes, which is critical in an industry that’s constantly evolving. Several banks, including JPMorgan Chase, Provident Bancorp, and Barclays, have implemented Agile across their operations, fostering a culture of innovation and efficiency. Even marketing teams are using Agile principles to monitor campaign results and adjust strategies quickly. Implementing an Agile approach can be challenging, however, depending on the culture of the company. It typically requires a shift from traditional top-down structures to a more collaborative, iterative way of working.
AI/ML
Ally Financial is exploring the use of ChatGPT for enhancing its marketing and customer service operations. Despite the excitement surrounding the potential of this technology, Ally is adopting a cautious and thoughtful approach toward adoption. Initial experiments suggest that ChatGPT can effectively generate content that is indistinguishable from that created by humans. While Ally’s content team is enthusiastic about the capabilities of ChatGPT, the technology is currently at the “version 1.0” stage and is considered an enabler for existing staff rather than a replacement for human marketers. Before ChatGPT can be utilized on a wider scale, the bank is implementing a governance process that requires every asset produced by ChatGPT to be reviewed by legal, compliance, and brand teams. Ally does not foresee the technology replacing creative teams but believes it will impact future recruitment trends, with expertise in AI giving applicants an edge. The development and adoption of ChatGPT will also influence the relationships between financial institutions and their marketing agencies. As technology advances, banks may depend less on external agencies, resulting in more in-house marketing operations.
Banking strategies
There were similarities and interesting differences between banks and credit unions in their responses to a Jack Henry strategic priorities survey. Both institution types are prioritizing deposit growth, operational efficiency, and payment processing solutions. They’re aiming to manage economic uncertainties, with an emphasis on leveraging AI and machine learning to improve customer experiences and automate processes. And they are concerned with competitive threats from fintech firms and traditional financial institutions. But there are some notable differences, with banks being more concerned with talent acquisition, retention, and net interest margin compression. Banks are focusing investments in digital banking, fraud and security, and core system upgrades. Credit unions are primarily worried about the economic slowdown and competitive threats from ‘big banks’. Their investment priorities are more focused on data analytics and AI to improve member experiences and financial health through digital marketing and chatbots.
