There are more than 10,000 US based and over 25,000 global fintech organizations according to Statista. It’s estimated that by 2025 banks could lose 60 percent of their profits in consumer finance, 34 percent in payments and small business lending, 30 percent in wealth management, and 20 percent in mortgages, according to a McKinsey report.
Community bank CEOs and other leaders are aware of this growing competition and many have implemented digital strategies in their own banks to directly compete with fintech offerings and meet the needs of their diverse customers. However, a mindful approach is key before pushing the go-live button on any new technology services or strategies.
What are the issues bank leaders should consider when entering the competitive fintech landscape and pondering their own digital transformation?
Here are top three essential questions every CEO should weigh:
1. What do your customers want?
While mobility and banking apps are helpful resources to many banking consumers, some community banks may find customers prefer the more traditional relationship-driven banking resources of local branch services, tellers and in-person loan officers. Developing a multichannel approach to meet the needs of various consumer groups can be daunting.
Knowing your customers’ needs, lifestyle preferences, banking behaviors, transaction histories and more can help you pinpoint the right technology and delivery channel for your bank’s situation. What’s relevant to the customer? What is the most convenient channel of delivery for them? You can get at these answers by conducting customer surveys and market assessments. Use this data to paint a picture of your target customers’ needs and wishes. Eliminate the guesswork and use the data to drive your next steps. Offering fintech-type services may be a great way to remain competitive in the marketplace, or it may not make sense at this time. And, if your institution is adding new technology services, be sure to communicate these resources to your customers, noting how the services are part of your existing culture and your ongoing commitment to meeting their needs and changing preferences.
2. What’s needed to implement and manage the change?
Along with customer needs, there are a variety of other things to weigh when implementing new technologies, including what is the cost of implementation, can the bank develop the technology in-house, will the existing infrastructure support this change or is a third-party provider needed to implement and launch? Or, further still, should the bank partner with a fintech business to provide new services on an ongoing basis?
Community banks are tasked with providing a multitude of services from loans and money transfers to wealth management and investment services. Fintechs, on the other hand, typically provide a single service to their customers and focus all resources on that particular service. Banks can take advantage of these efficiencies within their own operations. These services aren’t always customer-facing offerings; they can be back-office or analytical in nature. Acquiring or partnering with a fintech on a needed service to gain speed, competencies and more can be a great opportunity for business improvement and expansion for a community bank. However, that fintech partnership or third-party provider must be carefully managed, from the selection process to launch and beyond. Tasking a multifunctional team within the bank to assess change needs and management, and using a third-party relationship management program can help ensure appropriate steps are taken at the start, and the partnership is the right fit for your institution.
3. What are the risks?
In terms of digital transformation and fintech partnerships, this may be the one question that truly keeps CEOs up at night. The risks in leveraging third parties or fintechs to deliver technology solutions can be vast. From cross-border privacy issues to anti-money laundering risks, the challenges are broad, and given community banking’s highly regulated environment, these wide-ranging exposures cannot be ignored.
Stringent practices related to internal controls as well as regulatory compliance diligence is essential. While fintech and third parties may not be subject to the rigors of strict compliance, as soon as they become engaged with your bank, these parties must shoulder the same standards, regulations and controls. Failure to comply could mean the bank’s exposure to criminal risks, security breaches, steep financial penalties, damage to institution reputation and more.