A version of this article appeared in the BAI Special Report: The continued digital evolution in banking. You can find more insight within on sustaining deposits via digital channels, tapping BaaS for an enhanced branch role and making fraud protection a priority during digital growth.
Carlos Lopez is the lead digital analyst of corporate strategy at Jack Henry. He covers all things digital—in both mobile and online channels. He also covers core banking research topics, including next-gen core modernization research. He is passionate about eradicating the barriers to better financial health through collaboration and thought leadership.
As we approach the last quarter of 2024, which trends in the digital evolution of banking have had the most impact this year?
Across the industry, there is a lot of prep work going on in two areas: AI and open banking. Both are still in the earlier stages of adoption in the industry, so many banks and credit unions are looking at how they are going to utilize them in their digital roadmaps. I believe we have hit the tipping point where a solid business case can be made for both, but I don’t see us anywhere near mass adoption at this point.
The other more mature trend focuses on banking for small business customers. Over the past 10 years, small businesses have increasingly looked to big banks, fintechs or even neobanks to meet their banking needs, driving the share of community banks and credit unions serving as the primary financial institution (FI) for the sector all the way down to 16%. But community banks and credit unions are working to revitalize that relationship and prioritize small business banking within their roadmaps. In a recent Jack Henry survey, we found that 78% of our clients are expanding products and services for SMB accountholders—including payments, business credit and lending, as well as merchant service—as they target small businesses.
Looking ahead, which of those trends should banks and credit unions prioritize to meet customer and member expectations?
Open banking should be a top priority, especially when it comes to utilizing it for inbound embedding. There are two reasons for that. First, leveraging third parties to offer services, features and experiences that aren’t native to their systems allows FIs to become more of a primary hub where consumers can manage their entire financial life. This is one of the best ways to fight the financial fragmentation we see in many consumers’ lives and drive more consistent traffic to that FI’s digital banking platform.
The other reason open banking is so important is the simple notion that when it comes to digital evolution, data is king. Consumers are looking for hyper-personalized digital banking experiences that provide them with offers and advice crafted for their unique financial situations and goals. Because consumers’ lives are so broken up across all their financial relationships, there is a lot of data and activity that a single FI misses out on. By leveraging open banking rails, FIs can create a much more vivid and detailed financial picture of each individual, which allows for much more effective marketing and relationship-building that is simply not possible with siloed, disparate data.
What role does digital banking play in attracting and retaining accountholders?
When COVID hit, we entered a “digital banking arms race” as everyone worked to aggressively expand the features and functionalities to meet consumer needs in the moment. Now, many digital banking features have become table stakes to consumers—with one caveat: not having a digital banking feature is bad, but having one that does not work well can often be worse. What drives many consumers to change FIs are negative experiences with their current FI. Maybe it is poor customer service, a data breach or even just fees they deem excessive—every digital workflow and experience must be built with the consumer’s perspective in mind, because each aspect can become a pain point that pushes people to move to a new account.
Retaining customers and members comes down to a keyword: relationship. That is the number-one advantage community banks and credit unions have in keeping accountholders for the long term. If you can make somebody feel like they actually matter and you’re going to provide actionable, relevant advice for their personal financial situation, you’ll have an accountholder for life. People are crying out for an FI that treats them like more than just an account.
Does attracting business vary by potential accountholders’ generation?
It does. When it comes to younger Millennials and Gen Z, they often have a “mobile-first” mindset. We have research that shows mobile banking features are the number-one thing younger consumers look for when choosing a new primary institution, surpassing fees in priority.
However, surprisingly enough, the leading generations adopting mobile banking are the Silent Generation and Baby Boomers. When you dig into the data, you see a rather weird random fact: one of the biggest drivers for those generations in terms of adopting mobile banking is getting a new phone. As older phones lose support and they are pushed to upgrade, many begin to take advantage of their FI’s mobile banking apps for the first time, which has led to higher relative growth in this channel versus younger consumers.
Which banking service is the most common entry point for accountholders adopting digital banking?
Again, it varies by generation. For the younger generations, it may be driven by the Great Wealth Transfer. If you are someone who has just inherited a six-figure sum, you’re going to look for an institution you feel can help manage that, especially for consumers who have never had that amount of money before. They will be looking for a partner to utilize, protect and grow their new assets. Surveys show that three-quarters of people expecting to inherit assets are planning to move these assets to a new institution to receive this long-term support and advice.
On the other hand, if you’re starting or currently running a business, you’re likely trying to utilize features like real-time payment rails, payroll solutions or cashflow forecasting tools. If your FI doesn’t offer that or offers an underperforming tool, you’ll find one that meets your needs.
Bottom line: it pays for banks and credit unions to understand their marketplace. Competition is not just the bank across the street. It’s the big banks. It’s the fintechs. It’s the neobanks. There is a growing competitive marketplace out there for all niches, and they are all rolling out some incredible new technology. Trying to compete everywhere will leave you stretched too thin. You need to first clearly define your unique strategy and then look to see what other competitors are playing in that space. Once you can clearly define the players for your competitive benchmark, that’s where you’ll need to keep pace when it comes to digital banking.
Carlos Lopez is Lead Analyst, Digital for Corporate Strategy at Jack Henry.
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