Overview
Every year brings its own set of challenges. And 2024 is no exception. Obviously, inflation and interest rates have dominated – and with higher rates (for longer?), we’re headed into a period where most banks anticipate lower growth. Loans are expensive, so businesses don’t borrow to invest – and lending is the primary way most banks make money. So … it's going to be a challenging year. But that’s just one of the challenges ahead – and smarter banks are facing into those challenges with programs of work that will help them succeed.
The following is a summary of what banks we’re working with are doing to address the headwinds in 2024. Each of these items is expanded upon below.
Loan Rates | When it's hard to differentiate on rates, differentiate on customer experience. Don’t offer steak knives, be the easiest to do business with and you’ll win more business. |
Deposit Rates | Deposits are critical for liquidity but more expensive right now. Marketplaces like MaxMyInterest are a good source of new high-quality deposits (typically High Net Worth individuals). You have to pay (with a competitive rate) to acquire them, but you then have a net new HNW client to market other products to. And that's valuable! |
Price Shopping | When belts are tightened, people (consumers and business owners) are more likely to price shop. Be competitive, be easier to do business with, and identify ways to help clients beyond typical banking products and services. |
Regulations | Death, taxes, and regulatory change are our only constants. Find the silver lining in the change and work with partners that support flexibility. Make compliance your super-power. |
Credit and Defaults | Diversify! CRE was the cornerstone of most community and regional banks. But with people working from home, office real estate is depressed. Leading banks are diversifying whilst figuring out how to deal with underperforming loans. |
Digital Fraud | Digital fraud, now powered by GenAI, has increased for over 90% of banks according to a 2023 report. Leaders are embracing tools and partners that can allow them to adapt in real-time, not wait for quarterly releases. |
GenAI | EVERY boardroom is asking about the bank’s GenAI strategy. Saying “We’re doing nothing right now” is probably not a good answer. But it needs to be measured. Leaders are organizing their data to educate large language models and building tools to make staff more productive. |
Loan Rates
“Higher for longer” was the expectation set by the Fed heading into 2024. And we’re seeing the impact on bank spending – many are tightening their belts. There have been generic articles about cost cutting such as this article from The Banker along with news articles regarding job cuts, with an obvious focus on the big Wall Street banks. According to PYMNTS.com, the big Wall Street banks cut at least 30,000 jobs in 2023: 5,000 at Citi, 4,800 at Morgan Stanley, 4,000 at Bank of America, 3,200 at Goldman Sachs 3,200 and 1,000 at JPMorgan Chase. The article refers to ‘deal-making and IPOs’ as the main contributors – but there are also general economic concerns.
With higher interest rates, businesses are less likely to borrow money for investment. And lending money is how most banks make money. So there are bumpy roads ahead.
However, smarter banks don’t believe they can ‘cut their way to success’. They are looking for opportunities to differentiate. And specifically, differentiate on customer experience.
This doesn’t mean offering muffins and Keurig coffee in the branch. It means being EASY TO DO BUSINESS WITH – through digital and assisted channels. If you’re easy to do business with, new leads will convert to customers. And those customers will tell their friends “OMG, Bank X is so easy to do business” resulting in referrals. Rocket Science? No. Easy to do? No. But with a focus on “easy to do business with”, we’re seeing clients succeed.
Examples of what RCG clients have been working with us to do:
STREAMLINE YOUR HOME PAGE. The website home page is the most valuable real estate you own. Tweak it. Recognize that people come to your website for two reasons:
...To Login to online banking - you should put a Log-In button top right corner. No other real estate is required on the home page for easy online banking login. A $10B credit union we worked with made this change and repurposed the real-estate to promote new products. They saw higher conversion rates. So easy.
...To get a product – Put the Apply Now button on your home page or, at most, 1-Click away from the home page. Don’t make people search. A bank we worked with required people to click through 7 pages before they could find the Apply Now button. They changed that and saw the result. Again, so easy!
REMOVE FRICTION. Yeah, yeah … we’ve been hearing this for years. However, one of our clients iterated and iterated on their account opening and drove completion rates for Checking Accounts from 45% to 74% in 12 months. Stop talking about it and DO IT! We have a set of best practices we can share. Find the points of pain and fix them. It's not that hard. The results will amaze you.
Deposit Rates
If you’re reading this, you don’t need me to explain how (especially) important deposits are right now. Suffice to say, Wells Fargo is offering $300 for new checking customers and advertising it at the top of their home page, the most valuable piece of real estate in a $1.8TN bank.
S
o yes, you could do that, like Wells. Or you could offer a fantastic interest rate on a CD or High Yield Savings Account (HYSA). But you run the risk of annoying your existing customers because they didn’t get $300 nor are they getting 4.5% on their savings.
There is an alternative approach. Several of our clients have embedded their account opening in the MaxMyInterest.com marketplace. You still have to pay for the deposits with an attractive interest rate, but here’s the upside:
You get new high-net-worth clients (most MAX customers are HNW investors referred to the website by their financial advisor)
The investor pays for the service, not you (at the time of writing, MAX was charging investors 8 basis points ($800 per $1,000,000 on the platform)
Deposits are core deposits, not brokered.
Accounts are opened based on your KYC and AML service providers … as good as if they went through your own account opening process.
The new customer is YOUR customer. You can market other products and services to them – unlike some other savings marketplaces.
Customers get the benefit of maximized FDIC insurance as MAX will automatically sweep funds between accounts if any account exceeds $250,000 as interest accrues. OK – so this could be seen as a negative, but after the collapse of SVB, the average consumer and business owner is painfully aware of the importance of FDIC insurance.
We’ve helped several clients integrate into the MaxMyInterest marketplace. We know their APIs and have built an accelerator (AWS and Azure) to streamline the integration process.
Price Shopping
In a high-rate environment, costs for consumers and businesses go up. So they’re more likely to price shop on fees and interest rates. You need to be competitive for new customers. And if you are – be easy to open an account with. DON’T ask me to come to a branch, even as a business customer. Three of our larger bank customers are investing heavily in bringing the convenience of digital to commercial onboarding, and it’s paying off. One client saw ‘time to open an account’ for a new business customer go from days to minutes – with the fastest account opening to-date completed in 13 minutes.
And for your existing customers…retention, retention, retention. I had the pleasure of working with Personetics on a webinar late last year on the importance of data-driven insights in retaining customers. Simple insights such as “You have a $372 bill due in 5 days but insufficient funds in your checking account” are hugely valuable in going above and beyond for your customers. Similarly, telling customers they’re paying for two similar streaming services such as Spotify and Apple Music, thereby helping them to save money, could be vital in offering that customer a vital service they don’t get from the bank across the road, in the direct mailer or in the email marketing messages they get every day. Check out the Personetics webinar here.
Regulations
Thanks 2023 … the gift that keeps on giving, if you can call Regulatory Change a 'gift'. We saw a pullback in BaaS (banking as a service) and embedded banking considerations as a couple of notable institutions were slapped on the wrist. And then there was the CRA Modernization activity that, among other things, means banks need to find ways of extending more low-value credit offerings (Overdraft Protection - ODP, Credit Cards, Term Loans) to SMBs in the communities they serve. And of course, we’re waiting for the regulatory burdens enjoyed only by banks > $250B in AUM to be passed on to banks over $100B.
“In order to restore sufficient safety practices to the banking system and restore consumers’ confidence in the soundness of their banks, the Fed must immediately exercise its authority to apply enhanced prudential standards and supervision to banks with $100-$250 billion in assets,” according to Senator Warren and others. (Link here and here)
Thanks SVB 😊
But while compliance and finance teams figure out how to comply (essential obviously), banking leaders are also looking for the silver lining in these changes and proposed changes.
For example, as mentioned before, leading banks are looking for ways to streamline the process of offering overdraft protection digitally, during account opening. Using relationship managers for low-dollar value add-on services like ODP is not efficient. So digitize it! Same with credit cards and even C&I lending. So many banks use the same process for a $5M CRE loan as a $25,000 term loan – it's crazy! But that’s because the process is dictated by the loan origination system.
This may also require incorporating new service providers to help with KYB (Know Your Business) and Beneficial Owner KYC. But there are vendors here to help. Such as LexisNexis, MidDesk, and Alloy.com. We’ve worked with all these service providers to incorporate their onboarding capabilities into the Account Opening experiences for several of our clients. And they rock.
Use the regulatory change to drive business process and customer experience change.
Credit Defaults
Commercial Real Estate or CRE has been the cornerstone of most community and regional banks for decades. And CRE is made up of multi-family buildings, retail, factories, and office buildings. But with people continuing to work from home post-pandemic, office real estate is depressed and in some cases, retail is significantly impacted as highlighted in this article from Matthew Maginley that caught my eye on LinkedIn.
Smarter banks are using the opportunity to diversify their loan portfolio (whilst figuring out how to deal with underperforming assets). One of four clients launched their BNPL offering for SMEs with an initial focus on service industries – meaning a business customer in the home improvement business can offer customers the ability to spread payments over time. It’s a perfect product offering for the current market and allows the bank to diversify.
As mentioned earlier, leaders are optimizing the effort for C&I loans, Business Credit Cards, and ODP. By making the application process more convenient and digital – they’re driving growth and operational efficiency in a single hit.
And we’re even seeing banks compare their auto-loan process to that of Tesla and investing in ways to deliver next-generation auto loans. We’ve worked with Temenos to create an accelerator for auto loans that combined mobile carrier data, phone camera, VIN look-up, and eSignature to streamline the process for an auto loan to under 5 minutes (including Loan Agreement eSigning). Have you spent time waiting for the finance manager at a dealership to walk you through a tedious loan application? Your customers are doing the same thing! Fix it!
Digital Fraud
According to the State of Fraud Benchmark Report in 2023, 91% of banks surveyed said fraud had increased YoY. And that was before ChatGPT was launched and fraudsters figured out how to use the amazing power of this tool to attack us all.
I was personally blown away by the statistic shared by JP Morgan Chase’s Mary Erodes at Davos that the bank repels 45 Billion (yes, with a “B”) fraud attacks per day.
Every bank must invest in a multi-faceted approach to fraud mitigation. And we have experts that work in multiple areas. Two areas that we’ve seen a rise in focus and investment from our banking clients are:
Fraud Identification in Onboarding – Leaders are dispensing with solutions like Out-Of-Wallet or Knowledge Based Authentication (KBA) questions and investing in Behavioral Analytics (BehavioSec, NeuroID) and Digital ID Verification (email and phone verification – has the email or phone been associated with the ID and if so, for how long).
Transaction Monitoring Fraud Detection – It's all in the data. With the correct enterprise data solution in place, transactions can be monitored and flagged in real-time. One client identified and stopped over $400,000 in Zelle-related fraud in a single year after go-live, basically paying for the project.
Fraudsters are getting smarter. Smarter banks are working with partners to beat them back.
GenAI
Since its launch in Nov 2022, ChatGPT has risen to a level where even my 86-year-old father in Dublin asked me about it. It's quite a challenge to explain something like Generative AI to someone born in 1937. I should have asked ChatGPT to explain itself in terms a senior citizen would understand! Didn’t think of that.
But ChatGPT and GenAI is a conversation in every bank boardroom around the country. And rightly so. (Thankfully The Metaverse didn’t rise to that prominence as some pronounced it would!) Many of the banks we work with have established GenAI Task Forces or Committees to focus on understanding the opportunities and risks associated with GenAI.
And what most of these groups are realizing is that:
GenAI has massive potential to transform their business and drive greater productivity.
GenAI is not ready to be put in front of bank customers. We still need a human-in-the-middle (personally don’t like that phrase as it sounds too much like the hack referred to as a ‘man-in-the-middle’ attack).
To be effective, the bank needs an enterprise data strategy and an ability to tag their content appropriately so the Large Language Model (LLM) can be built based on the bank’s own content.
As an initial foray into AI, leaders are organizing their data to inform these large language models and building tools to make staff more productive. We’re seeing more and more GenAI powered Bots being delivered for bank staff to make them smarter and faster, but not replace them.
And at the same time, experiments are being conducted in dozens of areas from Regulatory Compliance to Fraud Detection and Loan Underwriting. All with one underlying theme – if the regulator ‘asks’, we can’t say “The AI did it!”. We need to have traceability and explainability in the models.
It’s a huge opportunity – and we’re here to help with your Data and AI strategy through to execution.
Every year brings a unique set of challenges and opportunities. Leading banks are identifying the ‘gold in them hills’ and the partners that can help them mine it. Reach out if you want to talk more - I'm here to help. Help comes in many forms for our clients:
- High-quality low-cost technical resources
- Proven experience to jump-start initiatives
- Customer experience improvements
- Data and AI initiatives
- Innovation