As we reach the halfway point of 2022, it is a reflection point, looking back and forward.
Financial institutions built their plan with many expectations, such as increased retail spending, further growth in buy-now-pay-later options, simpler processes through digital channels, and eliminating key fee revenue while anticipating an overall ‘return’ to the new normal. Entering Q3 is a time where marketing budgets are revised, account growth trajectories evaluated, and key projects are assessed to ensure deployment is achieved in the fiscal year.
Digital Payments: The ‘Coopetition’
Definition - the collaboration between business competitors in the hope of a mutually beneficial result
Constant evolution is needed to keep up. Just as several large banks developed Zelle to offer electronic payments, PayPal's Venmo democratized payments by allowing users to split payments for incidentals, such as dinners and movies. Now, two of the largest banks have integrated Stripe APIs into their payment solutions, which are embedded into Shopify's e-commerce platform. The rationale for this ‘coopetition’ is that technology companies are more agile and better suited to innovate than banks in most instances.
Further evolution to the point of being agnostic, networks will have to enable payments to be received from outside their eco-environment, where users of different platforms can better interact with each other in a seamless process.
Going, Almost Gone: Overdraft Fees
Many financial institutions have announced reductions in overdraft fees, with some forgoing the revenue from that activity altogether. Influencing factors driving this change include negative publicity, the potential for regulatory or legislative action, and competition.
As consolidation among financial services providers continues, customers are suspicious of moving to a bank or credit union charging fees at a higher rate than their current institution. Meanwhile, Fintechs have been a driving force in fee reduction spurred by the ability to reduce costs through innovative, less expensive technology. Many online banks, such as Chime, don't charge overdraft fees. But they also don't have the infrastructure cost of traditional brick-and-mortar institutions. Chime has grown to 13.1 million accounts, making income mainly through interchange revenue from their customer base. But Chime is not alone. Companies such as Brex and GoodLeap compete directly with banks to provide services to retail and commercial consumers. Each, as with others, puts revenue pressure on banks and credit unions because they can partner with other providers to expand service offerings.
The Emergence of the Hybrid Schedule
Technology has become just as crucial for banks and credit unions as any other industry vertical. The pandemic quickly forced companies to embrace a new model; some did so easier than others, and employees made adjustments that are here to stay. The debate over remote versus in-person continues, ranging from studies in collaboration to results in productivity and employees calling the shots. Banks, many of which operated under the traditional in-office model, are now creating hybrid approaches by allowing employees to balance remote and working from a company office. As with all changes, after the initial challenges are addressed, the positives emerge. With a more virtual model, companies can now attract talent from a different radius, reduce corporate overhead, support more climate change initiatives, and generally empower employees to determine the best working arrangement for themselves, all while many experience an increase in productivity and worker satisfaction. Before the pandemic, only 8% of workers were considered "remote." Today, it's over 44% and expected to grow.
The Law of Large Numbers
At its’ height, the financial industry contained over 30,000 banks in the US. This week, fewer than 5,000 banks filed Call Reports for the last reporting period, a decline of roughly 85%. The U.S. credit union market has experienced nearly identical dynamics, with approximately 5,000 remaining from over 12,500. In the past two and a half years, over 450 banks have merged or acquired. Today the top 10 banks have 50% of all banking assets, and the top 25 nearly 70%.
Loan growth over the past eight quarters has been approximately 6%, while deposits have surged by 35%. The Federal Reserve increasing rates will benefit banks as loan rates are adjusted. Still, high inflation continues to limit new borrowing coupled with rising interest rates which have put a damper on mortgage activity.
Reduced margins and returns will pressure banks to continue looking for synergies to drive revenue and reduce costs.
2022 - Second Half
Banks have started a transformational path to increase their strategic resilience and leanness. However, when examining contemporary transformation initiatives, we mostly see platform consolidation executed using agile transformations and digitalization initiatives striving to replicate in-person banking. However, a more deliberate transformation program is needed:
- Banks must leverage platform-based models to optimize growth:
Banks may get exclusive consumer insights to raise the competitiveness of their digital marketing capabilities with improved data governance methods. This will open new opportunities for finding, keeping, and engaging consumers with real-time experiences. However, banks also need to reconsider their broader business models and restructure to concentrate on delivering the same individualized, lifestyle-enabled ecosystem journeys clients have grown accustomed to from their digital interactions. Traditional banks risk losing value from their customers to nimble FinTech competitors. The mismatch and glaring inconsistency are not addressed between their customers' digital and physical banking experiences.
- Reinventing products:
Buy-now-pay-later loans are replacing traditional installment loans, simple mobile investment ideas are capturing the attention of new investors, and open banking is beginning to show up in product propositions such as lending and accounts. Banks must update their fundamental skills and offer straightforward solutions to the complex issues they face to remain relevant.
- Delivering on the AI promise:
Most AI investments, to date, have been focused on cost-effectiveness and have been restricted to small-scale pilots and specialized use cases. Compared to previous technologies, organizations have more difficulty embracing AI. For banks, deploying AI at scale should be a top priority in the near future. For many banks, this can only be accomplished in the cloud. The cloud strategy will facilitate quick invention and deployment, as well as efficient monitoring and maintenance, making it even more crucial.
Banks need to be able to manage constantly changing trends to compete and prosper in this climate. This necessitates a coordinated effort among all areas of the bank. Technology is only the beginning of this change, which also involves having a clear vision, a well-thought-out plan with objectives and measurements, empowered teams, iterative work, and partners who can help with the challenging task of business model redesign.