Transform or Risk Customers Ghosting Your Bank
Community banks are fighting for their lives. They either digitize or die.
It may sound overly apocalyptic, but this existential battle should come as no surprise. Over the last several years, our world has been leaning further and further into the digital realm, largely thanks to a younger, more tech-dependent generation.
As of January 2020, this struggle looked like one that smaller institutions had years—not months—to overcome. However, that extended timetable was obliterated by a public health crisis like no other. COVID-19 forced immediate change upon us in every imaginable way. Banking was no exception.
Of course, community banks answered the immediate call and re-directed customers to online, mobile and call center channels. That tactical pivot was important, but in and of itself, it is not a digital banking strategy.
Smaller institutions have various rationales for not fully digitizing, from hesitancy about making necessary investments to fear of regulatory compliance or operational risk repercussions. Just months ago, those excuses seemed valid. Today, however, they embody community banks’ greatest risk. Without a fully digital operation, it won’t be long before those banks have no customers to serve.
Customers Embrace Digital Banking
Online and mobile banking use has grown over the last few years, but universal adoption has remained elusive. The pandemic is quickly changing that.
Consumers and businesses previously hesitant to migrate or rely on digital channels are now enjoying the convenience and speed they afford, thereby increasing the likelihood that this change in habit becomes permanent.
Even prior to 2020, most of Generation Z and millennials didn’t distinguish digital banking from traditional banking. It’s all just banking to them. The same is now quickly becoming true for everyone else.
Regulators Adjusting for a Digital Age
The Office of the Comptroller of Currency (OCC) recently published an Advanced Notice of Proposed Rulemaking (ANPR) that encourages federal regulators to recognize this fast-moving trend toward digitization and provide modern guidance to support it. The OCC notes its history of and further intention to “regulate banking in ways that allow for the responsible creation or adoption of technological advances and to establish a regulatory and supervisory framework that allows banking to evolve.”
The ANPR invites feedback regarding various issues related to digital activities, including whether current guidance presents unnecessary hurdles to modern-age banking and therefore needs revision. Among other things, it solicits information about distributed ledger technology and AI usage in the banking industry.
Community Banks Need to Catch Up
With consumers fully on board, banking regulators weighing in and larger banks already operating in a digital-first mode, community banks have no choice but to adapt. Otherwise, they risk being left behind.
Here are the three big-picture essentials for a true digital banking strategy:
1. Top-down digital mindset: According to the KMPG report Digital Decree, “Acceleration of digitization is as much about embracing a culture of breaking with past traditions as it is anything else.” It starts with the institution’s board and CEO embracing the idea of enterprise-wide digitization in both word and deed. That means investing in the human and technical resources that can envision and empower this transformation to serve customers through digital means. In addition, senior management must champion the imperative for such a change through frequent and widely distributed communication to all institution stakeholders, from employees to shareholders.
2. CX Focus: Community bank digital strategies must work to continuously improve the bank customer experience (CX). As The Financial Brand notes, “a consumer’s satisfaction is becoming more dependent on the quality of engagement than on the differentiation of products and services.” After all, it’s no longer unique to offer online account opening or remote deposits. Now, the competitive advantage lies in a frictionless, personalized and cybersecure experience no matter the channel or transaction processed. This requires rethinking all internal processes with the customer perspective as the focal point and considering how they look and work in a digital environment.
3. Self-Service and Consultation: The final piece of the puzzle is transitioning digital channels from self-service only transactions to more offerings featuring a consultative layer. The EY Future Consumer Index, an analysis of changing behaviors in banking, found that customers are looking to their banks for help while preparing for an increasingly uncertain future. Moreover, 25 percent of the study’s respondents indicated a willingness “to pay a premium for products that promote well-being,” signifying a deep well of opportunity. Sooner rather than later, community banks need to implement a digital strategy that provides contextualized consultation around savings, investment and insurance products and services.
Moving Forward: Risk Management in Digital Banking
Even though customers demand digital transformation, making it a reality comes with certain inherent challenges and risks. Once you identify these hurdles, they can be addressed and mitigated so that your institution can move forward.
The most pressing digital banking risk management issues break down into two categories.
Organizational Challenges and Tips for Overcoming Them:
- Outdated corporate culture: Entrenched processes and perspectives can hold back your digital transformation. Promoting a more forward-thinking culture must start at the top and flow down for the entire institution to embrace change.
- Unwillingness to change: KPMG notes that, “Current executives and professionals will either become fast believers or they will hold back your progress.” The imperative is to identify the former category and empower them to lead your digital transformation.
- Lack of innovative thought leadership: It will take real out-of-the-box thinking to digitally compete with the big banks and emerging fintech companies. If that kind of modern thinking doesn’t already exist within your institution, invite it in.
- Misguided beliefs: Squash any notions that a mobile banking app is the only component of a digital strategy, or that digital first means that personalization is no longer needed. Back-end operations and internal processes must fully support a digital environment that effectively identifies and fulfills individual customer needs based on their actions and behaviors.
Regulatory Risks and Ways to Mitigate Them:
- Digital compliance and cybersecurity: As the OCC’s ANPR notes, banks operating in a digital environment must still comply with all applicable laws and regulations. This includes paying particular attention to uniquely digital processes that are covered under specific rules, such as electronically signing documents per the E-Sign Act. However, as the OCC also points out, “technological innovations are helping banks comply with the complex regulatory framework and enhance cybersecurity to more effectively protect bank and customer data and privacy.” Investing in these advancements can decrease your overall risk.
- Third-party risk management: Out of necessity, many banks are outsourcing all or part of their digital strategy to fintechs and other third-party vendors. But institutions are still ultimately responsible for all functions, whether they are performed internally or externally. A robust vendor management program is key to ensuring that no unqualified third-party provider is hired. A provider must understand the applicable regulatory requirements, be able to adhere to them and guarantee compliance.
- Fraud and identity theft: More banking without face-to-face interaction can increase the risk of synthetic identity fraud, traditional identity theft and account takeovers. Community banks can meet these challenges by reviewing and strengthening their Bank Secrecy Act/anti-money laundering (BSA/AML), Know Your Customer (KYC), customer due diligence (CDD), cybersecurity and other relevant compliance programs. Fortunately, digitizing internal processes yields more data and the ability to use AI to help monitor customer behaviors and more quickly flag potential fraud.
Learn More About Digital Banking Risk Management
There is no doubt that digitization can increase certain risks for the community banks that do transform. The answer to this dilemma is enhanced digital banking risk management. Learn more about best practices to fight cybercrime and receive practical advice to protect customers from increasing incidents of fraud by watching our Digital Banking Security webinar.