In the ever-evolving landscape of financial services, competition is the one thing that remains constant. If you want your business to grow and succeed, staying ahead of the curve isn’t an option – it’s an absolute necessity. As the year comes to an end, it’s a natural time to reflect on the past and plan for the future.
The Bank Director 2023 Technology Survey asked bank executives from across the U.S representing organizations of asset sizes under $100 billion to share how they make decisions around technology across four competencies: strategy and adoption, serving customers, investment, and leveraging resources.
The report offers insight into what matters most in innovation and technology, highlights the challenges and opportunities facing your industry peers, and shares research findings to help you design your future strategic plans.
Competitive Landscape: Adapting to Change
The competitive landscape has shifted significantly in recent years, with banks facing challenges not only from traditional financial institutions but also from nonbank entities, especially fintech players. It’s more important than ever to understand the tech plans of not only your peers, but your competition. According to the survey, local banks and credit unions (61%), big super regional banks (56%), and neobanks (42%) are perceived as the top three competitive threats.
The rise of neobanks like Chime has become a notable concern for banks. Benefits like no monthly or overdraft fees and round-up savings presented in an easy-to-use interface make Chime the choice for many consumers. While digital payment providers like Square and PayPal aren’t considered as big a threat according to the survey, they too should be a concern for financial institutions. Payment firms are gaining traction with digital wallets and P2P (person-to-person) payments that offer speed, flexibility, and convenience to consumers and businesses alike.
This underscores the importance for you to reassess your competition and understand the unique value propositions that new players bring to the market.
Tech Spend: Investing in the Future
Eighty-three percent of survey respondents indicated they have already increased – or plan to increase – tech spending, with a median amount of $1.5 million earmarked for the fiscal year – a 10% overall increase. The survey also revealed that 15% of the tech spend is directed towards emerging technologies.
In a landscape marked by operating challenges and a talent crunch, technology is the glue that’s holding banks at the center of the country’s financial relationships. As competition intensifies and differentiation plus growth become more challenging, technology becomes the key to addressing these issues. You must leverage technology not only to stay competitive but also to navigate through the changing dynamics of the industry.
Just as with tech spend, organizations should also consider tech debt. Tech debt can be difficult to quantify because it’s an opportunity cost that is both relative and fluid. Tech debt is the difference between the cost to maintain current technology versus the cost to move to a modern alternative. What efficiencies can be gained and how quickly can costs to implement modern tech be recovered by the savings and efficiencies realized by new tech? All organizations must periodically evaluate their tech debt to determine the right time to deploy investments in new infrastructure or risk unit costs that become significantly higher than the competition.
Customer Experience: Meeting the Demands of Tomorrow
Of the money you allocate to tech spend, what are you investing in? The survey sheds light on where your peers plan to allocate their tech spending around customer experience. Digital business account-opening (53%) and payments capabilities (53%) tied for the top spot, with digital business lending coming in third (37%).
The focus on these areas is crucial, especially for community banks, as small businesses often form the backbone of their customer base. Research reveals that small business customers offer lower acquisition costs than retail customers and tend to have higher balances if they have a lending relationship. This emphasizes the importance of building deeper relationships with small businesses, as they are likely to stay loyal.
“Let’s be clear about the current state of small-business banking in the U.S.,” says Lee Wetherington, Senior Director, Corporate Strategy at Jack Henry™. “According to Javelin, community banks and credit unions have seen their share of primary business banking relationships shrink from 28% to 16% over the last five years, a staggering 43% drop. And that’s the result of a squeeze on two sides: megabanks on the one hand, and small business-focused neobanks on the other. The top 25 U.S. banks own 84% of primary banking relationships with small and medium-sized businesses.”
While this may be alarming, you have an opportunity here. If you can translate your relationship-based business model successfully in the digital context, you’ll not just win, but you’ll do so by differentiating in ways that megabanks and neobanks can’t replicate.
Harnessing the Power of AI
The integration of AI in banking is not just about technology – it’s about data ownership and utilization.
Over 50% of banks surveyed have considered allocating budgets to AI, with customer service (82%), fraud detection and prevention (79%), and enhancing sales capabilities (50%) being the top use cases.
Generative AI, specifically, has become an important buzzword this past year. This technology creates models that can take inputs such as text, images, audio, or video and generate new content. Generative AI in the banking context, in terms of customer service, is about helping people with their unique tasks. AI can significantly enhance customer service by assisting human bankers in providing accurate and real-time support through digital channels.
For example, one person might be able to serve 10, 15, or more customers at a time with help from generative AI popping in and suggesting – in real time – the best and most accurate answer to any question that comes in. “That argues for a new golden era of relationship-based banking in the near term, given generative AI must be mediated by human beings until a comprehensive compliance framework arrives,” says Wetherington.
There’s one hitch, though: successful AI implementation relies heavily on the quantity and quality of data. And that presents a problem for most banks because they don’t have a preponderance of their own customers’ financial data. The average consumer has multiple financial services relationships, meaning financial data is spread thin among fintechs and other financial services firms.
Addressing Financial Fragmentation
Studies show the average customer has 15 to 20 different financial service providers and 14 different financial apps on their phone. You’re just one of them. When you don’t have all the financial data of your individual customers, that’s financial fragmentation. And your first order of business in any effective data strategy is to mitigate it.
Successful financial institutions and fintechs use open banking rails to aggregate all the data from those different relationships customers have with other financial service providers and route it back to their organization. This gives customers a complete picture of where they are with their money in one place – your digital banking app, making it easier for them to move their money, even in and across those 15 to 20 different service providers. When you get to that point – if you leverage open banking rails to solve for fragmentation, bring everything home, give the single view, and make everything easy to both see and manage – you win. You've achieved first-app status.
The 2023 Technology Survey from Bank Director is your road map to navigating the banking challenges and opportunities of the next few years. By understanding the competitive landscape, strategically investing in technology, prioritizing the customer experience, and embracing the potential of AI, you can position your financial institution as a leader in a rapidly transforming financial services industry.
Watch An In-Depth Look at Bank Director’s 2023 Technology Survey Report to discover new perspectives about the study and hear firsthand interpretations from Bank Director and Jack Henry experts.
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