Banking’s core functions — deposit taking and lending — may not have changed much so far. Yet few would dispute that in many crucial respects banking is changing rapidly. To fall behind the curve with these developments risks more than relevance. Potentially it means losing large portions of an institution’s customer base.
This is particularly true for community financial institutions and many mid-sized institutions as well, according to Todd Clark, CEO of CO-OP Financial Services. Clark, a 30-year veteran of the payments business, recognizes the serious threat that Chime, SoFi, Robinhood and other neobanks and fintech providers pose. As he says, the “crisp, clean service” these mobile-powered competitors provide, combined with consumers’ rapid uptake of digital banking and ecommerce, has turned more than two out of five consumers into what Clark describes as “nomads” — people willing to shift providers with a few touches of a smartphone screen.
The payments executive doesn’t think it’s game over, however.
In an interview with The Financial Brand Clark describes how community financial institutions, by focusing on a handful of key technology and payment trends, still have a good shot. His views are based not only on his own experience at CO-OP Financial, First Data, and several startup companies, but on research conducted jointly by CO-OP Financial and Ernst & Young.
One Notable Tech Difference
CO-OP Financial, which Clark describes as basically a big fintech, is a payments provider for the credit union industry. It began as a shared ATM network in California 40 years ago, but now has hundreds of products and about 2,000 employees.
In comparing community banks with credit unions, Clark observes that aside from the obvious difference of cooperative versus stockholder ownership, the core business models of these institutions are essentially the same. But in their use of technology, one thing sets the two apart, he says: Most credit union core systems operate in real time versus the batch mode still widely used by banks. Real-time processing matches well for many current banking and technology trends ranging from real-time payments to mobile fraud alerts.
What It Means:
All community financial institutions need to ‘lean into’ technology if they want to compete with the top five banks and the neobanks.
5 Technologies Community Institutions Must Stay Up With
In the interview, Clark listed five technology trends that are, or will, impact banking significantly.
1. 5G communication. When true 5G network coverage becomes widespread, it will raise consumer expectations for speed of delivery of all digital services, including banking, says Clark. With true 5G (some early rollouts of 5G did not apply the highest speed available), streaming a movie in a restaurant using cell service, for example, will be as fast as if you were in your living room with wi-fi, he says. “It’s going to be necessary for banks and credit unions to keep up with that,” Clark maintains.
2. Artificial intelligence. This category of software covers a lot of ground. Clark sees AI as especially useful right now as an effective fraud fighting weapon. “The vectors by which the bad guys attack us and financial institutions continues to grow exponentially and it would be impossible for humans to keep up with that,” he says. AI, however, and specifically machine learning,can keep up. (More on this below.)
3. Data analytics. Closely related to AI, analytics is essential for community institutions to use as they grow, especially through mergers and acquisitions. As the number of financial institutions shrinks and their customer base grows “financial institutions will be forced into a situation where they won’t know the name of everybody who walks in the front door. So they’re going to have to do that using data analytics,” says Clark. This is even more true for the growing number of banking customers who rarely, if ever, come into a branch.
4. Migration to the cloud. Banking is a cyclical business, Clark observes. Having technology and transactions handled in the cloud allows institutions — and their technology providers — to do two things more effectively. One: Easily deploy software, which enables both vendors and institutions to operate in an agile environment. Two: Scale up as needed. “It really is almost as simple as turning a dial to do this,” Clark states. “And that is a huge advantage.”
5. Open banking. Clark maintains that open banking, currently operating in Europe and the U.K., among other places, is coming to the U.S. for the simple reason that all the big banks with overseas operations “are not going to code their systems for Europe, totally different from their systems for America.”
In fact, data aggregators like Plaid are making open banking a reality here already, he says, whether the financial institutions want it or not. “So banks and credit unions might as well get on board — allowing fintechs or others to partake in that information — and figure out a way to monetize it,” Clark states.
4 Important Payment Trends to Watch
Based on its survey with Ernst & Young along with its own client transactions, CO-OP Financial points to the emergence (or continued growth) of several payment-related trends.
- Contactless. Clark points out that in the wake of the pandemic contactless payment transactions via either cards or mobile wallets like Apple Pay and Google Pay have continued to grow. He sees no reason this will change.
- P2P payments. More and more transactions are moving to payment apps such as Zelle, Venmo and Cash App. Says Clark: “I used to pay my yard guy in cash, now I pay him via Zelle, which he prefers. But these digital transactions are also more efficient for both credit unions and banks.”
- Card controls. These have proven to be very popular, says Clark. “If you give consumers the ability to help you manage fraud, they will do it,” he says. “They literally will turn the card on and off between every transaction to help protect it from being compromised.”
- “White box” fraud monitoring. Clark is particularly excited by the potential of using machine learning to allow CO-OP Financial to communicate in real-time with their credit union clients the reason why a transaction was turned down. Old “black box” fraud models didn’t allow you to understand the exact reason, he says. Machine learning does.
Meeting The Primary Account Threat
Digital-first banking providers like Chime and SoFi build simple, easy-to-use apps that typically address one segment of financial services, Clark observes. With Chime this was basically a mobile debit card.
“They established their beachhead [now approximately 13 millions users] through one single feature,” says Clark, “giving consumers their paycheck or government payment two days early.” Even though that’s really only a one-time benefit, he notes, it has paid off in spades for the neobank.
People will try new fintech apps in a flash. Trust can counter that if paired with popular features and great mobile experience.
“There’s not a credit union in the country that couldn’t offer that same service,” Clark states, “but they just didn’t get there first and Chime did.” Why that matters is because right now consumers are much more willing to move to new providers for an attractive feature. “We call such people nomads,” says Clark. He pegs the percentage of consumers in that category as between 40% and 44%. “If you’re not doing a good job for these people, they will move. And they can move fairly quickly thanks to the power of the mobile phone.”
The way to counteract that, Clark believes, is for community financial institutions to use technology to enhance the considerable trust that consumers have in them, so that people don’t feel the need to go to Chime.
Time matters, however, because the Chimes of the world are already busy expanding their “beachheads” with additional services.