Banking continues through another year of seemingly accelerated change. The economic, geopolitical, monetary, and regulatory environments all add to the feeling of general uncertainty. Is the industry changing or is it the world around us? Change is seemingly everywhere. At times the signals are contradictory. In sailing, we call these “confused seas,” where the combination of countering wind, current, and wave action makes conditions difficult to drive through comfortably.
J.P. Morgan’s 2024 economic outlook and Deloitte’s 2024 banking industry outlook indicate a cautious but not overly pessimistic view from the banking sector regarding the U.S. economic direction. The general focus of many institutions is on managing risks associated with tighter credit conditions and a less favorable economic outlook, while also seeking growth opportunities in digital transformation and customer relationship strengthening that are important for long term viability.
Exploratory initiatives have taken a back seat to the fundamentals while still tackling strategic change. As industry experts, like Ron Shevlin have asserted, the era of “innovation as fad” is over. Banks are seeking practical solutions to clear and present challenges. Partner solutions must be able to draw the line to increased margins, revenue, or cost effective deposits.
It’s no wonder that more banks are taking a step into banking-as-a-service (BaaS) partnerships with Fintechs. These are the types of solutions that can generate revenue, efficiency, and deposits…occasionally all at the same time. And while regulators may continue to outline regulations and best practices, it’s pretty clear that these partnerships are around to stay so long as banks can ensure thorough compliance and oversight.
There is one catch, and it’s one which I hope bank leaders remain aware of. Leaning on BaaS is not a replacement for strengthening the core business. The BaaS business model has a dependency on venture capitalists (VCs) to execute. VCs are the drivers of these fintechs and their investments have normalized the fact that fintechs, and their bank partners, can capitalize on the VC-financed customer acquisition strategy. Fintechs are willing to pay significant customer acquisition costs because their equity market is willing to pay them outsized returns for the growth, despite the short term (so investors hope) losses.
Over the last decade we’ve accepted the fact that these direct to market fintechs burn enormous amounts of cash in pursuit of rapid customer growth. The prospect of big exits and big returns keeps venture capital coming back despite the fact that many of these challenger fintechs have yet to see the massive public exits investors were seeking. The fintech capital markets have been in winter for the last two years, which has caused many large fintechs to delay their IPOs. It’s rumored that 2024 might be the year some of these fintechs do finally IPO after the recent stock market performance coming into the year, but then again maybe it’ll have to wait until 2025. The outcome of these IPOs will be telling to venture investors and this will certainly impact future fintech investment appetite for the BaaS fintech partnership model.
The BaaS partnership model is novel. It’s a symbiotic relationship wherein VCs, fintechs, and banks are working together. It’s innovative, it improves delivery of services, and provides access to niche markets with unmet needs. Some BaaS or payments partnerships are very cost effective and may be less reliant on large VC rounds to achieve growth or profitability. Understanding a path to the fintech partner’s sustainability is a factor that should be taken into consideration. There are certainly ways to manage the risk and seize the opportunity for banks looking to embrace this line of business.
While BaaS fintech partnerships can deliver enormous value to chartered banks, they should remain complementary to the growth strategy for the bank’s core business. And that requires investment in attracting, growing, and retaining customers in the bank’s main service areas. This means investing in infrastructure, digital channels of convenience, and a focus on maximizing your customer relationships. While embracing BaaS partnerships, you’re still competing against similar businesses and large financial institutions for customer relationships.
Investing in Customer Growth
One of the best ways to ensure better financial performance is by strengthening existing relationships. Growing products per customer or products per client is an effective way to improve retention and profitability. And there is a lot of untapped potential within the existing client base. Consider that a mere 55% of active accounts are “primary relationships” according to the March 2024 “Power of Primacy” Digital Banking report. Said another way, 45% of your retail accounts present a significant growth opportunity.
But that is really just the surface when it comes to customer growth. According to our own insights, banks are leaving a lot on the table with existing consumer and business clients. In a study across 16 banks and 197 million transactions over a 12 month period, we found $23 billion in unmonetized transactions and deposit leakage with existing clients.
Getting more granular, the profile of one bank in the study with $2.5 billion in core deposits had significant unmonetized opportunity within the client base. This included $193 million in annual deposit leakage, over $800 million in unmonetized merchant volume, and $406 million in annual credit card volume.
Focusing on the core business is about more than engagement with existing clients or net new customer acquisition strategies. Building the right product ecosystem to serve the client is critical. Data may reveal the client needs, but banks must be willing to act on them. Building the right product and service relationships to ensure competitiveness helps the bank play on offense, but it also helps the bank play on defense as they get multi-service with their deposit base. The combination of insights, financial products, and engagement strategy work in tandem to multiply the impact of cross sell, retention, and profitability.
Insights also help banks focus their human capital on building long term relationships. According to Gallup, “the most efficient path to growth is to sell new products and services to existing customers” and personal client engagement can be one of the bank’s best sources of client growth. But banks must have the right discipline and skills to execute. Moving beyond training and tools – developing client coaching and “ensuring coaching conversations are triggered by something” are some of the keys to success. So what investments have you made in your human capital?
