The belief of many that we are sailing into economic headwinds isn’t news at this point. Even the World Bank said in a statement, “The world may be edging toward a global recession in 2023.” More important is how financial institutions can deal with a downturn and continue to grow.
With that in mind, Q2 commissioned a white paper to explore opportunities for financial institutions during times of economic downturns and beyond. Titled “Banking Transformed: Digital Banking Transformation Strategies to Withstand a Recession,” the paper was written by Financial Brand Associate Publisher Jim Marous and Ron Shevlin, Managing Director and Chief Research Officer at Cornerstone Advisors. The paper draws on insights from financial institutions from around the world as well as from third-party organizations.
Banks and other businesses that say digital transformation has slowed from a year ago, or will slow58%
All too often, banks and credit unions scale back in uncertain times, but that can be the wrong response. As our white paper notes, “Executives often make short-term decisions that affect long-term strategy. This includes broad-based reductions in investments in technology, innovation, talent, back-office modernization and customer experiences. With many financial institutions in the midst of major business model changes, cost cutting must be much more strategic — with some savings reinvested in the areas of greatest long-term value.”
The paper outlines six strategies financial institutions can employ now so they’re ready for growth once the economy recovers.
1. Double-Down on Digital Banking Transformation
We believe that financial institutions understand the importance of digital transformation, from the back end through to customer-facing products and services. After all, their customers operate in a digital world.
And yet, a 2022 study from Workday found the pace of digital transformation has slowed in the past year. In the study, which polled leaders from several industries, including banking, 58% of respondents said digital transformation has either slowed from where it was a year ago, or they expect it to slow in the future.
That’s not surprising. With everything that’s happening in the economy, financial institutions are being a little more conservative. They want to step back from investing additional dollars into technology. But one of the things that they’re not realizing is that it isn’t just about them. This is a world that encompasses tech companies and other entities outside of the banking industry that are providing similar capabilities to consumers.
During a recent presentation to financial institutions on small-business banking, I asked leaders a crucial question: Do you see what you offer as a digital channel or a digital ecosystem — that is, a digital platform that can extend its capabilities now and into the future? The majority affirmed that they see digital as a channel rather than an ecosystem managed by a digital platform.
Narrow View of Digital Banking:
Most financial institutions see digital as a means for a consumers to interact with their institution, not as a means of expanding their own competitive capabilities.
This more restricted view of digital banking is a big problem, because the majority of the people banks and credit unions are going after are members of generations that expect a range of digital capabilities — and there are other competitors, including fintechs, meeting those expectations.
The bottom line is that financial institutions that lag in digital transformation risk being left behind by customers who demand innovative digital offerings.
2. Increase Automation for Improved Operational Efficiency
If it feels like the industry has been talking about automation forever, that’s not surprising. After all, financial institutions have processes that have been in place for 50, 60 and in some cases, even 100 years. But those that want to be competitive (and innovative) need to rethink some of their processes. Onboarding is a great example.
An article from McKinsey explains how improving the onboarding experience of business clients can be a key differentiator for banks, increasing efficiency and growing revenue. According to McKinsey, it can take up to 100 days to onboard a new corporate client.
The article goes on to delineate the advantages of streamlining the onboarding process and the challenges of doing so. Namely, research cited in the report found that half of all banks lack tech solutions for many onboarding processes. Of course, these challenges are not limited to business customers; we see it across the board, but particularly among Millennial and Gen Z consumers.
Now is the time for financial institutions to really rethink who they want to be five years from now — how they want to compete in the market and how they want to differentiate themselves — and then redefine their process to be more efficient. Technologies like RPA (robotic process automation) and AI (artificial intelligence) must play a huge role, but there needs to be a balance. Today’s consumers (yes, even the younger ones) are looking for high tech and high touch in their banking experience.
3. Invest in Modern Technology
Financial institutions can’t build everything themselves, and this is where technology like a digital platform that is open to, and uses, APIs (application programming interfaces) or machine learning can assist in multiple concepts. For example, using RPA to automate repetitive manual business procedures.
This frees up employees who were doing the repetitive work to focus on things that are more important for the organization, including relationship-building with customers (which increases stickiness and retention). These technologies bring that balance between high tech and high touch.
Likewise, APIs are a great example of creating the open ecosystem mentioned earlier that will allow financial institutions to take external capabilities from fintechs and “plug and play” them into their ecosystem, so they can offer capabilities beyond financial services.
In short, if a bank or credit union is not investing in technology, its ability to offer capabilities that go beyond banking will become much more limited.
4. Pursue Fintech Acquisitions
We’ve been beating this drum at Q2 for a while. It’s time that financial institutions stop viewing fintechs solely as competitors, and vice versa. As I wrote in these pages, “We’re now at an inflection point, and banks and credit unions have an opportunity to recapture a growing SMB market by partnering with the same fintechs they once competed against.”
Banking is at a point on the digital growth curve where financial institutions and fintechs can help each other out.
Financial institutions that want to compete and grow need to innovate. But they may not have the resources to do that on their own, which impedes innovation. Partnering with a fintech will allow them to offer capabilities beyond financial transactions.
Secondly, as noted in our Banking Transformed paper, legacy financial institutions are experiencing slower growth than fintechs, but the fintech sector is also being hit hard by the economic downturn, with a significant drop in investment. That means it’s a great time for fintechs to leverage financial institutions for growth and for financial institutions to leverage fintechs for capabilities beyond banking.
5. Upskill, Reskill and Hire Strategically
Labor shortages produced in part by the “Great Resignation” and skyrocketing labor costs are pushing organizations across industries to improve efficiency, which is often done through upskilling and reskilling. But the current economic climate is also ripe for strategic hiring. This is especially pertinent for financial institutions for a couple of reasons.
First, banks and credit unions may lag when it comes to investment in technology, opening an opportunity to boost their tech talent.
Second, as noted above, the fintech industry is experiencing a drop in investment and many aren’t able to keep up with labor costs, necessitating layoffs. That presents an opportunity for financial institutions to scoop up some of those workers.
The time is ripe for financial institutions to focus heavily on pursuing high-impact technology hires. In order to be competitive three and five years from now, banks and credit unions need to have the right technology and the right people.
6. Tap the Power of Embedded Banking and Banking-as-a-Service
This last strategy goes back to our argument for pursuing fintech partnerships: It’s a win-win. As noted in our white paper, it’s narrow-minded to think of nonfinancial brands as threats. Fintechs and other nonbank firms are potential distribution channels that can position banks, particularly midsize banks, to reach more customers and more types of customers than they could without them.
Again, the time is right. The state of the economy forces people to think differently about how they’re going to grow and stay competitive — and how they can leverage different capabilities to do that. Providing banking-as-a-service to fintechs or other nonbank companies and pursuing the related strategy of embedding financial services within a nonbank platform are key components to the future success of banking.