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Digital Banking

Digital Transformation in Banking and Financial Services

Melanie Reneris
Jan 31, 2023

What Its Impact on Financial Health Means for Your Organization

Financial health (or the lack thereof) is regularly written or spoken about as a challenge facing individuals, families, and even businesses.

Unfortunately, this is for good reason: Only 31% of individuals are considered financially healthy according to the 2022 Financial Health Pulse® 2022 U.S. Trends report, and Dun & Bradstreet’s U.S. Overall Business Health Index shows declining business health and a riskier outlook for U.S. businesses in the next 12 months.

Less frequently discussed – but of no less importance – is how the financial health crisis impacts community and regional financial institutions. Financial “unwellness” leads to lost revenue, fractured relationships, and decreased share of wallet.

Fintech and the Digital Transformation of Financial Services Creates Financial Fragmentation

The financial lives of today’s consumers and businesses grow more and more complex. The average consumer has 20 – 30 financial accounts, while Millennial families regularly sport 30-40 financial relationships.

Some of these relationships are created outside the traditional banking experience by design – like 401k and retirement accounts, health savings accounts, and investments. Others are created out of convenience or in response to an immediate moment of need.

Either way, this financial fragmentation has fractured the relationships between financial institutions and their accountholders.

Without the tools to see their complete financial status, individuals lack the information to make sound decisions and plan effectively. To support their financial health, people and businesses look to their primary financial institution for guidance, but only 14% receive the help they desire.

Why? Hindered by the inability to see an accountholder’s full financial picture, community and regional banks and credit unions are unable to provide timely financial advice or promote appropriate solutions. As a result, they miss out on the chance to educate and deepen relationships with accountholders.

Save, Spend, Borrow, and Plan

The Financial Health Network shows that Americans are struggling when it comes to the four key components of financial health: spend, save, borrow, and plan.

Attempting to meet these needs at community and regional banks and credit unions has led many accountholders to discover service gaps or encounter friction. So, when non-bank fintech and big tech providers stepped into the marketplace with targeted financial solutions that leverage the modern design and smooth digital experience consumers expect, they quickly gained market acceptance.

In fact, 88% of Americans now use fintech services to augment or replace their interactions with community and regional financial institutions. As many as 22 million people use fintech or challenger banks as their primary financial institution, further adding to the problem of financial fragmentation.

Even more concerning to community and regional banks and credit unions is the fact that digital-only relationships can be as strong as (or stronger than) those of a traditional financial institution. Neo-bank Chime users overall average a whopping 6.2 products or services, showing that digital transformation in banking and financial services doesn’t necessarily mean weaker relationships.

The profusion of fintech and the digital transformation of financial services has led to expensive financial consequences for banks and credit unions:

  • Buy now, pay later (BNPL) services have helped Americans finance $75.6 billion dollars of purchases in 2022 to avoid paying credit card interest, to make purchases that otherwise wouldn’t fit into their budgets, or borrow money without credit checks.
  • $250 billion in payments volume was siphoned away from incumbent financial institutions in 2020.
  • More than 15 million consumers call PayPal or Square Cash App their primary checking or spending account provider.

Business Challenges

The mass adoption of fintech and non-bank competitors addressing essential financial needs isn’t limited to consumers. Businesses are also finding solutions to their financial needs outside of the traditional financial services market.

Access to consistent and reliable cash flow creates significant challenges for many businesses. A J.P. Morgan Chase report revealed that 50% of small businesses that have fewer than 15 days of cash buffer, signaling a precarious position for owners and operators.

Rather than turn to their primary financial institution, small- to medium-sized businesses (SMBs) are overwhelmingly using non-bank business services to meet their financial needs rather than relying on banks or credit unions. Sixty-seven percent of SMBs use one of the top five business platforms to help them manage cash flow, attain loans, accept payments, or strengthen their finances, leading to an estimated loss of $370 billion in business revenues. And only 16% of SMBs use electronic invoicing tools provided by their bank or credit union.

There’s also the estimated $5 trillion dollar funding gap between the financing needs of SMBs and the institution-based financing available to them, opening the door to digital lenders, non-bank service providers, and specialized fintech providers that regularly use AI-based underwriting to lend more openly, capturing interest income opportunities not sought by traditional banks and credit unions.

Adopting A Comprehensive Financial Health Strategy

The headwinds may feel strong, but there’s a way forward. Banks and credit unions can address these challenges by adopting and implementing a comprehensive financial health strategy. Aside from protecting and strengthening your business, a financial health strategy will simultaneously help improve the financial lives of your accountholders – a win for all.

Here are a few ways you can get started:

  1. Start with an open tech stack. Ensure your technology is built for third-party integration and innovation. Look for providers that embrace openness and encourage industry collaboration.
  2. Think like a platform. Remove silos and create encompassing experiences across digital, lending, payments, and other key touchpoints for accountholders. When possible, use platform technology rather than disparate solutions.
  3. Leverage open banking. Provide bi-directional account aggregation, enabling a 360-degree view of all financial activities that benefits accountholders and financial institutions.

    (As a reminder, Jack Henry™ recently announced an expansion of its existing relationship with Mastercard® that will enable credit unions and banks to provide their accountholders the ability to securely see all of their financial accounts – within and outside their primary financial institution – in one place. This establishes a partnership that makes secure, API-based data-gathering affordable for community and regional financial institutions.)
  4. Deliver across all four pillars of financial health. Provide ways for accountholders to save, spend, borrow, and plan within their banking experience. Look for gaps that cause your existing accountholders to find solutions somewhere else.
  5. Remove friction from service delivery. Make access to new and existing solutions readily available across channels. Can accountholders apply for loans or new deposit accounts online? Request changes to their credit limit or line of credit without completing physical paperwork? Take steps to solve problems in the accountholder’s moment of need, regardless of the hour or physical location.
  6. Provide actionable insight to financial data. Affordable financial management tools improve cash flow, while transaction enrichment brings clarity and insight to financial data.
  7. Think beyond the technology. Businesses and individuals are looking for more than just funding or technology from their financial institutions. Remember, only 14% of consumers receive the financial help they desire from their primary institution. More than three-quarters (76%) of SMBs are interested in receiving financial advice from their bank or credit union. But only 15% report receiving “comprehensive advice,” according to the 2022 U.S. Small Banking Satisfaction Study from J.D. Power.

The digital transformation has created challenges for accountholders and financial institutions alike. But by choosing to embrace a comprehensive financial health strategy, banks and credit unions can overcome these hurdles and create a more secure financial future for all.

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