As the banking industry changes and evolves, some buzzworthy concepts are rising to the top of board room conversations. In this two-part blog, we’re looking at some of those buzzwords and what they mean to community financial institutions.
Digital Transformation. “Old school” banking, also known as when everything was done in person and on paper, is a thing of the past. However, digital transformation goes much farther than simply digitizing an FI’s operations. The term refers to truly transforming the company and strategically changing the way it operates as a business model.
“Digital transformation means improving every process using technology, and it’s not a one-time initiative,” says Brady Chianciola, PRI consultant. “This is a conversation happening in every boardroom, but there really is no end point. It’s an ongoing evolution and never-ending way to do business. PRI helps our clients implement digital transformation in a way that fits into their overall business strategy.”
Banking as a Service. As companies like Uber offer banking as a service, many FIs are testing the waters to grow a new revenue stream. They are experimenting with opening their APIs to allow fintech companies to utilize their services to sell a product on their own and the banks reap the benefits of an expanded customer base. This can be a fruitful approach if implemented within the FI’s overall business and profitability strategy.
Embedded Finance. In a time when every company can be a bank, the concept of embedded finance represents a huge risk to community banks in the short and long term. Many furniture stores, for example, now embed extending credit, a loan, and Buy Now Pay Later (BNPL) options to their customers at the time of purchase to enhance the customer experience. They are typically partnered with a bank or BNPL company to administrate the loan, but in this arrangement, the FI is losing out on interchange income of the card or loan interest.
However, the bigger risk is that “Buy Now Pay Later” companies will succeed in becoming the new customer’s bank. Many offer a virtual card that works like a credit card so their customers can use it instead of their debit cards at thousands of physical stores where the BNPL card is accepted.
FIs should work through their digital transformation strategies to incorporate fintech partnerships for additional revenue streams. If community banks want to compete in this space, Chianciola advises investigating offering BNPL and other embedded finance options as community banks have stronger relationships with their customers than the up-and-coming fintech providers do.
“Mitigating these losses is very difficult and will require a strong strategy, innovation and time,” Chianciola said. “It’s better to have these strategic conversations today so that as EF continues to grow, the community banks won’t be too far behind. We are at the beginning stages of EF becoming mainstream, and customers are deciding if they like the options.”
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.