Many of us have read articles, attended conferences and talked to other industry leaders about the future of our industry. But, how many bank and credit union executives have incorporated what they have learned into their organization’s strategic and operational plans?
Let’s go even further. How many financial institutions are envisioning the future and aggressively pursuing it to make it a reality?
Having spent 20 years as financial institution executive working at several institutions of different asset sizes, along with consulting work, I’m intimately familiar with the challenges banks and credit unions face. These challenges have grown more numerous and critical over the past couple of years to the point where inaction is no longer an option.
Below are ten key change factors financial institutions must understand, plan for, invest in, and — in particular — execute on in order to not only remain relevant in banking’s future, but increase their relevancy.
1. ‘Primary Financial Institution’ Has Changed
Community financial institutions no longer compete only against the large banks within their marketplace, but also with big tech (Apple, Amazon, Google Checking, PayPal), fintechs, and neobank/mobile banks such as Chime, SoFi and Ally.
PFI status is now more applicable to products or services than to institutions.
On average, financial services customers have between five and eight relationships spread across multiple institutions, many of them not traditional banking providers. For example, a consumer may consider the Apple Card as their “primary credit card,” Venmo as their “primary payments platform,” and Chase as where they hold their “primary checking.”
In order to maximize the customer relationship, community banks and credit unions must identify areas of expertise and differentiation and create their plans and best offerings around these niches.
The way engagement is calculated must be revised as well. For example, just because a consumer has two to three core products with a bank or credit union does not necessarily give that institution PFI status.
2. Branch of the Future: More Emotion, Less Cash
Today, branches are still perceived by financial institutions (especially credit unions) and their customers as transactional, emotionless centers, powered by old school technology. The branch of the future will be smaller in square footage, cashless (no cash dispenser), will not have instant card issuing machines, and the experience will be similar to the Genius bar at an Apple Store.
Tech with Feeling:
‘Tablet banking’ within a branch better enables bankers and consumers to connect emotionally.
The branch will become a center of expertise where employees will assist customers with more complex needs. Among them: purchasing a house, investing, improving financial health, managing small business finances, addressing account fraud, planning for retirement, sending kids to college, and planning a wedding or a move.
Employees will be trained to identify customer needs by life stage and will be empowered by tablet banking and personalized appointment scheduling platforms to be able to carry on comfortable interactions and conversations as they and the customer walk around the open space at the branch and connect emotionally.
Customers who want to perform basic transactions such as cash withdrawals, depositing checks and transferring funds can use the ATMs installed at the branches, and if applicable, be taught how to do these transactions via mobile banking.
Digital cards will be issued instantly to consumers’ mobile wallets where they can be used immediately until the physical card arrives at their home.
3. Big Change In the Credit Score
Today’s credit scoring system was designed to be used for lending decisions and portfolio risk-assessments. However, the model used for the credit score of the future will assess the overall financial health of consumers beyond just risk.
The credit score will become a much more powerful concept: A Financial Health Score.
This financial health score will be calculated based on a mix of ten unique life drivers:
- Actual household income
- Social-economic score of primary place of residency
- Median household income
- Median home value
- Educational attainment
- Occupation type
- Credit score (FICO or other)
- Current life stage
- Current life event(s)
- Acxiom PersonicX segmentation cluster.
A weight will be given to each variable and an algorithm will be used to calculate this Financial Health Indicator. The FHI will be used to assess the current state of a consumer’s finances, their potential for financial success in the future, and risk-lending.
Financial institutions of the future will create a roadmap for customers that if executed properly, will improve a person’s financial health score, helping to lead them to financial success.
4. Platformification as the ‘De Facto’ Model
External third-party platforms will be labeled as sales and fulfillment platforms by the financial services industry. Consumers seldom visit financial institutions’ websites for their banking needs when applying for a mortgage, auto loan, credit card, or even a checking account.
Account opening platforms will be integrated into external third-party platforms in order to meet customers’ financial needs where they are purchasing, not where we want them to go to purchase (for example: home buyers go to RedFin, Zillow, and Realtor.com to find a house; car buyers go to Carvana, etc.).
5. Rapid Changes in Payments and Money Movement
Consumers today are realizing and experiencing the digital transformation of payments. The Apple Pay platform along with the Apple Card has become the gold standard of the industry. In fact, Apple doesn’t just compete with traditional banks and credit unions, but also competes with buy now, pay later fintechs such as AfterPay and Affirm.
Venmo is another fintech that has a best-in-class payments platform that has been widely adopted.
A Sure Bet:
Apple and Goldman Sachs will not stop in payments, but will develop other best-in-class financial products on the Apple Pay platform.
The reality is that checking accounts are being replaced by mobile digital cards. Real-time transactions and notifications, excellent mobile user interface and internet of things integration will define which digital payments will be used by the consumer.
6. Digital Banking Beyond Basic Mobile Apps
By now virtually every financial institution offers mobile baking to their customer base. Although some banking apps have more features and are better designed than others, “mobile banking” is becoming commoditized.
In the very near future, financial institutions will not only have to have state-of-art mobile banking full of personalization options, but also consider new applications for mobile banking apps. In other words, have the ability to identify early in the game what mobile banking areas will be adopted by the market and will be crucial for future relevance. For example, integration of mobile banking with Alexa, CarPlay, Google Voice, etc., could be next banking platform frontier.
7. Forward-Looking Focus for Data Analytics
Today, most financial institutions spend a tremendous amount of time and resources on descriptive and diagnostic analytics — i.e. what is happening or what has happened.
Relevant and high-performing financial institutions will spend most of their business intelligence and analytics time and resources on predictive and prescriptive analytics, on what will happen and future solutions to problems that haven’t materialized yet.
In this environment, the “State of Analytics” will include the following:
- Cloud-based data warehousing and governance, fully integrated and using an infrastructure-as-a-service model.
- Data sources and integration. Only vendors with available APIs will be selected by financial institutions. Process development will be performed in-house, with data sources directly connected to the data warehouse.
- Data reporting and visualization. All employees (from executives to reps) will be trained on how to build reports and dashboards — a true self-service environment.
- Two categories of data analytics: 1. Market/consumer insights, and 2. Predictive models to be used for data monetization of such functions as attrition, next-best cross-selling, engagement, fraud detection, Financial Health Index projections, etc.
- Recommendation engines will be built based on data modeling and segmentation and will be integrated into communication, sales, and fulfillment processes and platforms/systems with the primary purpose of data monetization and improving efficiency.
- AI and algorithm applications: Financial institutions will start to develop their own recommendation engines, algorithms and content based on customers’ personal preferences and digital data. Many lending approvals will be performed via algorithm only.
8. The ‘STEMization’ of Talent
Science, Technology, Engineering, and Mathematics are becoming the skillsets of the bankers of today and well beyond. It is predicted 35% or more of a financial institution’s employee base will be comprised of engineers and developers in order to deliver on this vision of the future.
The work of data scientists and engineers will become the epicenter of the customer and employee experience in banking.
Banks and credit unions must develop a Digital Transformation Strategic and Operational plan, emphasizing strategies to acquire, develop, and retain technical and scientific talent. The shifting of resources from back-office and branch functions (that can be automated) to engineering is inevitable for a financial institution to continue to be competitive and relevant in the marketplace and differentiate itself digitally.
9. Institutional Agility – Act Like a Start-Up
Financial institutions of the future will operate within an agile environment built upon the following factors:
- Freed-up capital resulting from the closure of more branches and the democratization of remote work.
- Team tech platforms such as Microsoft Teams, Slack, Jira will become the primary channel for employee communication and project management, at least partially replacing email and texting platforms.
- Streamlined organizational structure, resulting in three employee groups: 1. C-level responsible creating plans and key decisionmaking; 2. Individual contributors in the areas of DevOps and engineering, and 3. Marketing and sales employees responsible for the execution of strategic and operational plans.
- IT will evolve to TDI (Technology, Development and IT Operations). This will result in some individual contributors, especially engineers, reporting directly to C-level executives, further streamlining planning, decision-making, product and process development and go-to-market speed.
10. A New Approach to Technology and Product Development
Financial institutions will approach their products and services as platforms with open APIs, ready for development by DevOps teams.
Banks and credit unions have on average 18 tech stacks (martech, business intelligence tech, team tech, digital banking tech, payments tech, etc.). To be successful with all this tech, institutions will have to identify and design the essential attributes of their product and services platforms by roadmapping current and new technologies. This will result in reallocating resources — canceling contracts with inadequate vendors and shifting it to building a best-in-class DevOps team and acquiring new technologies.