Future-Proofing Financial Institutions: Navigating Trends, Technology, and Strategic Innovation

The community banking industry is at a pivotal stage. Financial institutions have experienced continuing margin pressure over the past year, demonstrating less rate elasticity than many anticipated in the rising rate market. They also have seen increasing pressure from non-banking competition and rising customer expectations. With the drastic contraction of the number of deposit-holding institutions over the past several years, it is clear that some FIs will innovate and survive while others will refuse to change course and become bargain acquisitions. While the exact timeframe is unclear, industry experts believe it will range from a few years to just beyond a decade. Doing “business as usual” is not a sustainable forward-looking strategy.  

In a previous post, 5 Top Things to Keep in Mind When Selecting Your Core Banking System, we reviewed a short list of key items to consider when selecting a core system. In this post, Mike Neale, PRI Director of System Evaluation, takes a wider lens to consider industry trends affecting the FI space and the technology strategies that will support evolving business strategies into the future.  

Neale says for those banks looking for a longer-term approach, technology investment will continue its current track of being an outsized investment compared to decades prior. Why? Because human capital costs are at an all-time high and rising – and it’s one thing that FIs can control.

Emerging technologies in Artificial Intelligence (AI) and automation continue to advance in capabilities to replace human capital at ever higher levels of complexity. Once only capable of replacing the most repetitive tasks with no variation, now automation platforms have significant abilities to differentiate minor variances in individual task requirements. While the post-COVID environment provided lowered expectations of in-person experiences in and out of the banking industry, customers continue to demand ever more robust digital experiences.

“The BaaS window closed for all but a few FIs who have made early investments and developed expertise, so if you haven’t built that business yet, don’t pretend that it is an option going forward,” Neale said. “Banks will need to develop an approach to market differentiation and with a clear, unique value proposition to their customers and their prospects.”

The most important place to consider investment in premium functionality is in customer-facing channels. While some will find success by expanding retail branches where big banks are shutting them down (see Bank Branch Closures Exceeded 1,500 in 2023 | BauerFinancial), most will find the biggest bang for the buck is delivering their products through digital channels. When expanding to digital channels, a focus on individually curated content and experiences is increasingly important. 

To support this effort, three key building blocks must be considered: 

1.  Open architecture core. This doesn’t necessarily mean finding a “cloud-native” core solution, but it does require finding a solution with both a robust API platform to allow connectivity to third party solutions and easy accessibility to core data. 
2. Delivery channel solutions that provide unique, individualized experiences. Customer interaction can be personalized based on session input and available data in the core solution or other knowledge bases. Currently, generative AI is the most promising, rapidly evolving area to drive this personalization. If AI isn’t currently on your radar, it needs to be. 
3.  Staffing for technology investments. To remain competitive in today’s environment, FIs are required to operate efficiently with a lower head count. To do that, leadership must strike an effective balance of business and technology expertise within the management structure. 

“For years, a common phrase heard throughout all corners of community banks – except the back room where they lock away the fine folks with pocket protectors – is, ‘I’m not a technology person,’” Neale said. “To date that has mostly been workable but going forward, community banks must retain and find new staff with skills in evolving technologies.” 

While very little of the above is breaking news – save the rapid expansion of functionality in the AI and automation space – the fact is that the clock is ticking and the FIs that will survive and thrive in the years to come will be modifying their strategies to take advantage of opportunities. 

“Navigating this challenge may seem overwhelming, but there is a growing list of organizations that can provide assistance to develop new strategies and assimilate the new technologies,” Neale said. “The window for winning by providing banking as a service has closed. It’s about doing things more efficiently and thoughtfully.”

Emerging technology gives FIs the ability to understand and know their customers at a deeper level than ever before. Technology can deliver a more personalized service by allowing FIs to know what is needed during a customer’s financial journey and curating the experience for them. There are emerging opportunities to use technology to curate those experiences without burning human capital.

Resources:

5 Top Things to Keep in Mind When Selecting Your Core Banking System (profitresources.com)

Bank Branch Closures Exceeded 1,500 in 2023 | BauerFinancial

Profit Resources specializes in identifying profitability improvement areas for financial institutions through revenue growth, cost control, streamlining processes, and effective use of technology. Contact us to learn more about our personalized approach to propel growth and improve profitability.