Highlights From the First Half of 2024
By: Tyler Brown
JULY 2, 2024
In the first half of the year, we published over fifty articles covering top trends in banking and fintech. Modernization was our biggest focus — including next-generation bank tech, how to break through roadblocks to an innovation strategy, and what can go wrong in the process. We also discussed digital maturity, the ongoing troubles in the Banking-as-a-Service (BaaS) industry, the state of open banking, and regulatory threats.
Here are some highlights of our most popular articles:
Modernization and innovation
There are many traps to fall into with an innovation strategy, but perhaps the most dangerous comes at the very beginning: Jumping on a bandwagon without a sober assessment of the opportunities, liabilities, and commitment required to be successful. Entering a new line of business, particularly one that involves unfamiliar products and new partners, depends on careful planning and thorough evaluation of the associated challenges.
Digital maturity
Customer demand gives FIs a strong incentive to invest in the customer experience. A modern approach focuses on omnichannel journeys — offering the features and functions customers demand delivered consistently and cohesively across touchpoints. A huge hurdle FIs face is the patchwork of vendors, platforms, and point solutions that form the FI’s technical foundation. Serving customers well depends on the real-time integration of services across an FI’s products, including customer data held in different siloes.
Troubles with BaaS
The risk-management and compliance burden of a BaaS program can be fatal to a BaaS strategy — regulators have made clear that banks are responsible for ensuring their partners’ compliance, no matter how relationships are managed. Regulators have cited sponsor banks for issues tied to their BaaS programs, most notably deficient board governance, third-party risk management, and BSA/AML. The message to sponsor banks has been: Be diligent with your choice of platform partners, conscious of the risk that an intermediary adds to relationships with fintechs, and how that will affect risk management.
The state of open banking
FIs’ discomfort with open banking puts them in a tough spot. The Consumer Financial Protection Bureau’s (CFPB’s) pending rule on open banking, implementing Section 1033 of the Dodd-Frank Act, will require FIs to enable third parties’ access to consumers’ Regulation E and Regulation Z account data. The banking industry has pushed back on aspects of the proposed rule and expressed concern about the practical implications. With the final rule expected this fall, open banking needs to be a part of board-level discussions and strategic planning.
The regulatory threat
Amid a flurry of policy items on the table, the small business lending data collection rule from the CFPB appears to be causing the most anxiety. The financial services community seems concerned about the rule’s implications for the costs and complexity of small-business lending for FIs — particularly smaller ones. The rule has received a lot of pushback, and not just from the banking industry. Congress voted to repeal it (the repeal was vetoed) while legislators emphasized potential compliance costs for smaller institutions. The rule is tied up in court but may not be for long.
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Innovation Should Come in Measured Doses
By: Tyler Brown
JULY 9, 2024
Amid the worsening crisis of confidence in Banking-as-a-Service (BaaS), it’s become clear how high the barrier to entry is for a compliant and competitive BaaS line of business. The basic narrative about BaaS, in which a bank enables nonbanks to provide banking products and services, glosses over the challenges of building and scaling a BaaS program. The basic framing doesn’t do justice to the technical, organizational, or legal complexities: The idea that banks can just turn high-cost infrastructure and a license into a low-cost, scalable source of revenue is too good to be true.
When bankers veer from tried-and-true banking products and services in the name of innovation, old frameworks may no longer apply. The cost base of a BaaS program, for example, isn’t the same as running a traditional bank because the two businesses are fundamentally different. A typical bank’s technology, people, and processes don’t graft evenly onto a line of business that depends on third parties to handle relationships with end customers. Even with the right technology, the incremental cost is high as banks require more staff and resources to meet obligations to partners, end customers, and regulators, particularly related to risk and compliance.
A fatal flaw in the evaluation and planning for an innovative new line of business like BaaS is thinking that it will be easy. That mistake holds for innovation strategies overall: It’s an illusion that anything new in banking will be cheap, quick, and comprehensive. In banking, missing that fact can lead to devastating failures. As the problems in BaaS have shown, cutting corners isn’t a viable solution to unexpectedly high costs, and taking a strategy halfway isn’t likely to be productive, either.
Innovating without tripping takes focus, deliberate thinking, and long-term planning. A key principle is to be rational about the business opportunity: Is it more substance than hype? Another is to be practical about how an opportunity might fit into the organization’s capabilities: Are current staff, culture, and technology enough? The thought process for any innovative product or service should start with a deep understanding of the issue, followed by a hardnosed assessment of the revenue opportunity, and finally, a sober look at the potential costs and unknowns.
The upshot for bankers is that they should innovate in measured steps, based on proper groundwork, and with accurate and complete identification and mitigation of risks. A bank that never modernizes or innovates — mistaking doing nothing for avoiding risk — will get stuck in the past. But by leaping ahead without preparation it may get burned.
How To Frame a Strategy For Customer Touchpoints
JULY 11, 2024
By: Tyler Brown
Consumer Channel Use
By wide margins, consumers most frequently conduct given financial activities via their smartphone, according to research from Galileo: 58% used their smartphone to log into their financial accounts at least weekly and 19% used mobile to log into their financial accounts more than five times per week. In contrast, consumers are likely to use an ATM or visit a branch no more than a few times a month, if not further apart.
Bankers may be tempted to think about this data in the context of a general decline in the use of nondigital channels and the increasing dominance of mobile. But it’s worth some nuance as they reevaluate their channel strategies. There are channels in permanent decline or that never took off, and here are those that consumers clearly need and use, but in which the nature of customer interactions is changing. The channels clearly out of favor are interactive teller machines (ITMs) and automated voice services (IVRs) — whose utility for banking tasks is marginal compared to channels that fulfill similar basic functions.
The biggest warning sign for a channel should be when a critical mass of consumers say they never use it. The ATM and its variants, for example, are probably most useful for cash deposits, withdrawals, and balance checks; using an ITM to speak with a teller adds little value if any. Completing tasks with automated banking over the telephone is more easily done in digital banking and with less wait time. Regular but less frequent use is a different challenge and opportunity.
Channel use “monthly” or “a few times a year” means that banks should encourage customer interactions optimized for the channel and not doable at a lower cost for the bank or at greater value to the customer. For example, there’s little value in the branch as a place to deposit or withdraw money per se. But it’s a storefront for the bank’s brand, a backstop for customer problems and questions, and an opportunity for the bank to sell complex products and advisory services to customers. For some communities, it may also serve as a social center.
The key lessons for bankers may be that a) some channel “innovations” are trying too hard to do something new and b) channels for their own sake aren’t the best way to think about touchpoints. A different model would be to score an interaction with a customer by cost to both the customer and the bank and that interaction’s impact on the relationship. A high-cost branch interaction, for example, should materially strengthen the customer bond or fit into the sales cycle of a high-margin, sticky product. A mobile interaction will more likely be perfunctory but also virtually cost-free — like a balance check, a transaction review, or an electronic payment.
Bankers should think about touchpoints with that equation in mind. A huge barrier to channel reevaluation and innovation is inertia — because a channel exists, it will continue to exist as it always has, with incremental and perhaps even nonsensical changes. Like with leading-edge innovations, senior leaderships need to start with their business strategy and then focus on what channel choices will best fulfill that strategy given their customer base.