AI/ML
Many banks may already be using some form of AI without fully recognizing it. There are three general categories of AI: Machine Learning, Robotic Process Automation (RPA), and the one that’s grabbing all the headlines today – Generative AI/Natural Language Processing. Banks today may use Machine Learning in their consumer loan decision-making processes, examining a variety of data beyond credit scores to determine an applicant’s ability to repay a loan. Or it may appear in anti-money laundering and fraud detection applications. RPA performs, rather than learns, tasks and is used in applications such as automating loan processing workflows and streamlining fraud investigations. Generative AI software such as ChatGPT is beginning to be used in behind-the-scene areas such as creating internal knowledge centers where their teams can get policy, procedure, or basic referral information. The use of Generative AI in particular is likely to grow exponentially in the near future.
Partnerships
Goldman Sachs continues to struggle with its consumer banking ventures. First with Marcus, which lost $3 billion since December 2020. And now its alliance with Apple is potentially up for sale to American Express. While the Apple partnership saw a successful launch in 2019 with the Apple Card, recent issues, including regulatory investigations and unfavorable deal terms have cast doubt over its sustainability. There are also concerns about customer service and the handling of consumer complaints. Despite this, Goldman Sachs might retain some of the deposits obtained from Apple Savings. Looking ahead, the bank may need to pivot its strategy, potentially focusing more on wealth management or expanding in areas such as commercial real estate lending or securities-based lending.
Embedded finance
Embedded finance refers to the integration of financial services directly within other companies’ business processes or products. This trend has been gaining considerable traction and is expected to generate $1.9 trillion in revenue by 2029. This service caters to modern consumers’ expectations for convenience, round-the-clock availability, and personalization. However, with this integrated approach comes an array of cybersecurity risks. These include potential conflicts of interest when financial services are integrated with non-financial platforms, potential misuse or exploitation of data (especially when collaborating with non-financial partners who may not have a robust understanding of financial service requirements), and a constantly evolving regulatory landscape. To address these concerns, financial firms must identify and prioritize high-risk processes, deploy automation to reduce errors, learn from the broader industry’s experiences, enhance staff training in cyber awareness, stay updated on regulations, and communicate effectively with all stakeholders in terms that they understand.
Payments
Under the open banking model, consumers can seamlessly authorize payments, initiate fund transfers, and access transaction details, all through a single platform. This eliminates the need for multiple payment applications or accounts, thus streamlining the payment process. The use of open banking in payments can create a frictionless and individualized experience for each consumer, enhancing overall payment convenience and security. For it to become mainstream in the payment ecosystem, it needs to be successfully commercialized and positioned as a top payment option. Open banking advantages include robust authentication controls that can significantly reduce unnecessary payment declines while offering strong protection against fraud.
Data analytics
Financial institutions are being encouraged to use their wealth of data to stay competitive and reduce risk. The main challenge lies in identifying the required information, efficiently deriving insights from the data, and assessing the performance against institutional strategies. To overcome these hurdles, institutions should clarify short and long-term strategies, identify critical questions that data can answer, and generate insights that inform decisions. Technological capabilities play a crucial role in this process. Institutions must ensure their technology can efficiently and accurately report and monitor data insights. Ideal tech solutions should be user-friendly, house the majority of the institution’s data, provide real-time insights, offer a granular understanding of data, and be equipped with dynamic dashboards, alert systems, and peer comparison capabilities.
AI/ML
Generative AI has a significant potential to transform the specialty finance industry by enhancing efficiencies and customer experiences according to an Accenture report. Use cases include the generation of hyper-personalized marketing content and targeted marketing campaigns, functioning as an underwriter’s assistant to generate credit assessment reports, managing workflows by reducing manual tasks and freeing staff for high-value work, and maximizing returns by assisting with end-of-term collateral disposition decisions based on a variety of factors. Early adopters of generative AI have the potential to leverage this technology’s vast capabilities for their competitive advantage.
Payments
The Federal Reserve’s FedNow payments system will soon go live with 57 initial financial institutions, including about 42 banks. This system will join the existing Real-Time Payments (RTP) network by The Clearing House, which currently has about 351 participating banks. FedNow and RTP are designed to facilitate instant money transfers between financial institutions 24/7, with immediate payment confirmation. The integration of these systems could provide a broader network reach and redundancy for providers, with benefits such as increased control over payment schedules, decreased costs, and improved efficiency. Another significant feature is the Request for Payment (RFP), which allows billers to request payment and attach documents or data to the payment message, simplifying payment processes for various entities including businesses and governments. It is predicted that these faster payment methods will decrease check usage and potentially cannibalize cards, ACH, and wire volumes, making banks with these capabilities more competitive. With Europe already showing a preference for faster payments, it is anticipated that U.S. customers will follow suit, with increasing numbers selecting their banks based on their faster payment capabilities.
Customer experience
As customer expectations for personalized experiences increase, financial institutions are making efforts to transform their service centers into customer experience centers. Financial institutions are seeking to ensure their call centers, branches, and digital channels communicate the right information and offer an omnichannel experience to meet customer expectations for personalized services. Banks are increasingly working with fintechs better to use new sources of contextual and transient data to predict customer needs. The goal of ‘customer experience centers’ is to educate customers about digital options, as many transactions could be more efficiently handled digitally. Financial institutions are also addressing customer authentication issues, using methods such as phone number recognition and voice identification to ensure a smooth experience for customers.
BaaS
Banking as a Service (BaaS) has become increasingly popular, providing financial institutions an opportunity to expand their services and generate revenue. However, as the BaaS market expands, it faces several challenges, including increased regulatory scrutiny, a potential recession, and questions about growth. Regulators are particularly concerned about compliance with the Bank Secrecy Act’s provisions on anti-money laundering and also credit underwriting standards. While the rise in regulatory attention may be daunting, it is not deterring Community Financial Institutions (CFIs) from pursuing BaaS. Rather, it’s improving awareness around risk management and enhancing the sophistication of financial institutions and fintechs as they form these partnerships.
Mergers/acquisitions
The US banking industry may witness a wave of mergers and acquisitions (M&A) in the coming years, amid increasing pressure from rising interest rates and regulatory oversight. With interest rates on the rise, banks are experiencing losses on their securities and seeing savers withdraw funds. These factors, coupled with growing losses on commercial real estate and other loans, are impacting the bottom line of many banks. Additionally, regulators are expected to increase their scrutiny of medium-sized institutions following the collapse of Silicon Valley Bank. Experts predict that these pressures may trigger significant consolidation in the banking sector, forcing weaker banks to merge with stronger institutions. JPMorgan’s recent acquisition of First Republic, a lender with $229 billion in assets, signals the beginning of this predicted wave of M&A. Analysts suggest that the industry consolidation is likely to continue over the next decade, with around half of the country’s banks expected to be acquired by competitors.
PFM
Personal financial management (PFM) tools integrated into mobile banking and credit card apps are becoming increasingly crucial for financial institutions to retain customers. According to J.D. Power, 29% of bank customers have moved money to a secondary deposit account in the previous 90 days, seeking better rates, cashback, and digital tools. Simultaneously, independent PFM apps like Mint and YNAB are aggregating consumer accounts from multiple providers. The data suggest that traditional banks must improve their PFM offerings to meet customer expectations and compete with these alternative platforms.
Digital banking
Jenius Bank, a new digital-only banking division of California-based Manufacturers Bank, has launched its inaugural consumer lending product. The bank is targeting customers in the 25 to 44 age range with complex financial needs and digital engagement expectations. To offer a completely digital banking experience, Jenius will provide personal loans initially, with savings and checking accounts to be launched within the next 12 to 18 months. The bank’s strategy also involves creating a digital and viral marketing presence, hiring a largely remote workforce, and collaborating with fintech firms to enhance their offerings. However, veteran banking executive and president of Jenius, John Rosenfeld, highlighted the challenge of overcoming consumer inertia and convincing them to switch banks. The bank plans to focus on accumulating assets by acquiring a high-quality customer base, gradually expanding its marketing, and increasing its product lineup.
Digital banking
Consumers are increasingly opting for a mix of traditional and digital banking services, according to a survey by Marqeta. The study revealed that consumers are selecting financial services based on the features and services they want. While traditional banks are not being abandoned entirely, neobanks and fintechs are progressively chipping away at their advantages. In the U.S., 42% of consumers use both traditional and digital banking providers. Notably, traditional banks are also losing the status of being their customers’ primary financial institution to fintechs.
