7 Retail Banking Challenges and Key Data Strategies to Meet Them

The banking industry's roller-coaster ride from post-pandemic euphoria to the crushing impact of inflation on spending — and on the home-buying market in particular — is giving the industry a case of whiplash as they budget for 2023. Sorting out the key challenges helps, as do suggestions for turning at least some of them into positives.

Due to a fluid economy, technology changes and other factors, financial institutions face numerous challenges as they undertake budget planning for the coming year. In “Navigating the Economic Impact: 2023 Financial Institution Budgeting & Data Strategies,” we delve into some of the challenges we’re seeing in the industry today and strategies for overcoming them.

Below is a synopsis of the findings and strategies, beginning with seven current challenges for financial institutions. (To get a copy of the full report, follow the link at the bottom of this article.)

Challenge 1: Rate Impact on Home and Personal Loans

Mortgages, which powered bank earnings for several years when rates were exceptionally low, are now a pain point for borrowers and lenders alike. Interest rates have been a moving target all year since the Federal Reserve began its push to put the brakes on inflation.

ATTOM, a leading source of real estate data, released its report on Q1 2022, and the news was not good. Mortgage originations saw the biggest annual drop since 2014 down 27% year over year.

Since then, after a brief drop in mortgage rates over the summer, the challenge resumed. The average 30-year fixed rate moved toward 7% in October, more than double the 3% rate of a year earlier. As a result, affordability was crashing by the fall.

The picture isn’t entirely bleak, however. Healthy labor markets have been a modest positive for mortgage lending, and adjustable rate mortgages gained momentum, accounting for 12.8% of applications by mid-October, according to the Mortgage Bankers Association.

Challenge 2: Shift in Credit Card Usage

Given the spike in interest rates, it would stand to reason that people would be focusing on paying down their credit card debt. But the opposite has been true. NerdWallet’s annual Consumer Credit Card Report reveals that credit card use is up, not down, with inflationary pressure a major factor driving increased usage. Consumers using credit cards for essentials or to get by between paychecks is never a good sign.

In the wake of this increased credit card reliance, financial institutions should look at their own in-house credit card offers to analyze whether their products meet consumer expectations.

Challenge 3: The Growing Subscription Economy

Today, it seems there’s a subscription for everything. It’s getting so popular that our economy is shifting around it, moving from the traditional business model of one-time payments to subscriptions that automatically recur monthly, quarterly or yearly. The model is a win-win for businesses and consumers.

For consumers, it’s easy and convenient and the fixed expenses help them budget each month. For businesses, recurrent subscription payments create effortless revenue and customer loyalty.

For financial institutions, the wins aren’t always so clear. Account holders need to pay for those subscriptions and they have a choice of payment vehicle when signing on the virtual dotted line. If they choose their debit or credit card issued by their financial institution, those transactions will provide increased interchange revenue for their financial institution. But, if they choose bill pay or ACH transactions, it may result in lost revenue for their financial institution.

Challenge 4: Buy Now, Pay Later’s Strong Appeal

The buy now, pay later (BNPL) trend is booming, despite increased regulatory attention. The allure: paying in installments over time, without interest, and without having to qualify or have it impact a consumer’s credit score. That’s because BNPL generally doesn’t do a hard pull on applicants’ credit scores.

However, just like with traditional credit cards, late payments will affect a consumer’s score negatively, and on-time payments will reflect positively.

Some interesting findings from a Lending Tree survey show that BNPL use is up, but so is the number of Americans who have made late payments on those accounts. The biggest problem for financial institutions: Increased consumer loyalty to their BNPL accounts erodes loyalty to their financial institution.

Challenge 5: Dealing with Crypto Fluidity

Financial institutions have been riding the crypto roller coaster for months now. At the beginning of 2022, it seemed like crypto was the new cash. Now? The jury is out due to its volatility. But one thing is for certain. Consumers want education, advice and guidance on how, when and if to invest in this new medium.

According to Arizent Research, the number of financial institutions planning to offer cryptocurrency services by the end of 2022 has doubled, to 44%. If financial institutions don’t meet a consumer need, those consumers will go elsewhere.

Challenge 6: Impact of Generational Trends

Simply stated, fintech providers are eroding relationships between younger account holders and their financial institutions. Period. Alkami Technology’s 2022 Digital Banking Transformative Trends Study found great differences in how generations view their relationships with their financial institutions. For regional and community banks and credit unions, this is an urgent problem.

The study found younger generations are “significantly more likely to state that a neobank, big tech company or fintech company is their primary financial provider.” Younger people are leaving financial institutions that don’t have robust, fast, easy and convenient digital banking options. A striking 80% of younger consumers said a good website and app is their No. 1 requirement for choosing a new primary financial institution.

Challenge 7: The DRIP Factor — Data-Rich and Information-Poor

DRIP. It’s an apt acronym. Not using the unparalleled quantity of data available to financial institutions now is a missed opportunity, like water dripping from a faucet and disappearing down the drain.

Consider the facts: A remarkable 90% of the data in the world has been generated in the past two years alone. According to Forbes, 2.5 quintillion bytes of data are generated each day. Yet only 10% of financial institutions frequently harness data to drive their marketing.

Mining transaction data and converting it into usable intelligence can help financial institutions craft meaningful messages and strengthen customer loyalty. These actions in turn can keep customers in the fold rather than succumbing to the siren song of a competitor.

Data Strategies to Combat Banking’s Challenges

Simply put, a focus on data isn’t a “nice to have” anymore. Especially now, with issues banks and credit unions are facing, it’s a must. Here are four data-based suggestions to create an effective strategic response to the above challenges.

Execute a data-driven strategy. Financial institutions can gain a deeper understanding of account holder behavior and spending patterns by improving how they manage and analyze their data. In an aggressive and disruptive marketplace, committing to this process can yield a decisive advantage.

Utilize predictive artificial intelligence modeling. Anticipating what customers want and need isn’t mind-reading — the information is all there in the data. Building and deploying predictive models can help any bank improve customer engagement.

Integrate data with email channel delivery. Email marketing has become critical. With a data-driven approach, banks can target and deliver on opportunities with surgical precision.

Leverage marketing technology (martech). Understanding account holder behavior both within your institution and with your competition requires tools that can combine all sources of data into one platform.

Bottom line, executing on these data strategies will help financial institutions to grow and command a growing share of wallet. A financial institution can identify and accurately measure for share of wallet through product utilization and competitive indicators found within transaction data.

Analysis of this data results in the knowledge needed to feed opportunities for acquisition campaigns, product engagement, product innovation, financial wellness and account holder satisfaction that matches consumer expectations.

For more information, download our eBook, “Navigating the Economic Impact: 2023 Financial Institution Budgeting & Data Strategies.”

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