Six Pivots Banks Should Consider Immediately… Or Get Left Behind

The Future is Calling. Are Banks Listening?

(Sept 8, 2021)

 

The only constant is change, a wise Greek philosopher once said. This adage couldn’t be more true now – especially for financial institutions. 

Considering the myriad problems caused by the pandemic – and the ensuing impact on marketplaces around the world, it should come as no surprise that FIs have been struggling with issues of their own. According to a survey conducted by the International Finance Corporation titled The Early Impact of COVID-19 on Financial Institutions, IFC Financial Institution clients have been operating at 80% of pre-crisis levels in 2020 after the easing of restrictions, and they have also noticed lower loan collection and disbursement levels. 

2021 was largely expected to bring improvements in the financial sector – but so far, market performance has fallen short. Changes prompted by the pandemic have forced businesses to adopt new strategies, and today’s legacy FIs aren’t exactly known for their agility. Is there a future for traditional banks? Of course – but only if they change as much as the world has changed… which is a LOT. Let’s review six possible pivots traditional FIs should consider in the short term to stay relevant, lest they risk going the way of the dodo.

 

1. Seek Fintech Partnerships to Deliver Innovation Faster

Through partnerships with proven fintech firms, forward-thinking FIs are offering their own payment or lending platform. Partnerships like these create new revenue streams by offering more payment types beyond ACH, checks, and wire transfers. Those same partnerships allow banks to deliver innovation at a much faster pace (and a lower risk of failure, since the proof of concept should already be occurring at the fintech) than if they tried to innovate in-house.   

An illustration: Traditional FIs are losing younger customers to digital wallets like Venmo and PayPal. According to Forbes, not only did digital wallet adoption grow from 8% to 14% among baby boomers from October 2020 to July 2021, 5% of GenZers and 6% of millennials consider PayPal to be their main checking account. 

Considering these facts, FIs would do well to consider their response: do they try to build their own hot wallet solution over the course of months or years, or do they seek out a partnership that can have a comparable service (with considerable brand recognition) up and running in a matter of weeks?

 

2. Pursue Automated Wealth Management 

Considering the gradual digitization of nearly every aspect of our lives since the dot com boom, it’s no surprise that banking services are becoming more and more technologically assisted. As an example, banks offering wealth management services typically have experts who can help customers make the right decisions. However, they may at times lag behind the tech curve depending on who their clientele is, and how invested they are into reaching younger customers. 

In a not-so-distant future, artificial intelligence (AI) will manage the decision making… but what if your human advisors could harness advanced analytics and technology to help customers manage their wealth right now

According to a 2016 Broadbridge report titled Targeting the Digital Generation, 69% of surveyed millennials said that they would expect to use personalized services often or very often over the next five years. The report also mentioned that they would prefer a high tech and high touch environment, accessing personalized service while also using sophisticated technology. 

This innovation is what a handful of fintech firms offer, and banks could get left behind if they don’t start navigating toward this trend. Fintech companies like Wealthfront, InteractiveAdvisors and Betterment are just a few examples of companies using AI to advise their customers on financial decisions, and this option could actually work if the situation is simple and common enough, or the AI is advanced enough to advise an intricate situation. Some FIs are getting the picture (like Bank of America with their Merrill edge self-directed service) but smaller FIs still have some catching up to do. 

 

3. Pull Better Data From More Devices

Data is the new gold for FIs seeking to tap into the needs of their customer base. Consumer data gives institutions guidance on what to do next, what to avoid like the plague, and how they could solve – and possibly avoid altogether – future challenges. 

In today’s economy, small- to medium businesses pose a risk to banks in terms of loans – but with better data collection from online platforms and increasingly responsive mobile apps, FIs can better determine to whom they should be lending. According to a 2019 Federal reserve banks report, 70% of small businesses have outstanding debt – and this number is likely to be far higher as a result of the pandemic. 

 

4. Instant and Real-Time Money Movement

With near-instant P2P payments being around for years, many consumers are wondering why their banks aren’t offering the same thing. Consumers want faster payments, and considering the economic precariousness experienced in the K-shaped recovery, many of today’s consumers need access to their money quicker than ever. 

Unemployment levels haven’t returned to pre-pandemic levels, and considering that the pandemic crisis isn’t yet over, we’re looking at a gap between consumer interests and the business practices of an FI. Real-time payments are increasingly available at financial institutions due in large part to the pandemic, but only for the largest of banks. Regional and super-regional FIs can still leverage them for competitive advantage. 

KyckGlobal has been ahead of this curve from the beginning, and this is why we are one the best solutions on the market today. With a dozen payment types, and valuable support services like Advance Pay, Daily Pay, cross-border payment flavors and much more, the choice is clear.

 

5. Go Digital. VERY Digital.

There’s no question that banking will likely be fully immersed in automation someday, but today we’re only at the beginning. That means banks that pursue the digital path sooner will reap the benefits sooner – and make innovation an integral part of their culture. Fully digital banks (known as neobanks) are a prime illustration of digital’s huge competitive advantage: lower overhead costs. 

According to Accenture, the average yearly operating costs of a UK customer in a neobank was found to be between $25 to $63. The traditional bank? $210! Bottom line, digital operations can cut costs dramatically. Digital payments reduce workflow costs even more: a dizzying number of banks still use paper checks to issue payments on their customer’s behalf. This is both costly and wasteful – especially escheated checks, which are roughly $7.00! 

With cost savings so obvious, why not go as digital as possible?

 

6. Go Deep (Instead of Wide)

On average, banks offer 18 distinct products and services, inclusive of such innovations as advances, remittance of funds, credit cards, and ATM access. These services are important, but super-regional and large regional players won’t be able to compete in the mass market for generalized services. 

One upside of this imbalance is that non-global FIs can capitalize on being really good at solving one specific problem, rather than being average at solving many problems. 

Rather than thinking horizontally, regional players might start to think vertically. You may have some general services, but it could be more valuable to think about who you could specifically serve, and the specific services you could offer them. For instance, tighten focus to offer loans to only SMBs, or concentrate on BIPOC-owned businesses.  

 

Summary

Traditional FIs offering pre-pandemic products and services in a mid-pandemic world are already paying a tremendous price in the marketplace. Automation, data and real-time money movement are just a few ways FIs need to pivot immediately, or simply become another casualty in the shifting sands of today’s economy. And whether it’s due to lockdowns, closures, or a loss of interest from their customers, business owners and consumers alike need access to cash faster than ever. 

The sooner financial institutions start making pivots like these, the sooner they will anticipate and deliver customer interests – and ultimately serve them better in the New Normal.