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US banks face tougher tests as fintech becomes mainstream

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US incumbent banks face an unforgiving competitive environment as nimbler technology firms start opening millions of accounts and achieving mass adoption. The proportion of US consumers using fintech swelled to 88% in 2021, compared with only 58% in 2020, according to research by fintech provider Plaid.

One of traditional banks’ biggest challenges is the widening expectations gap between younger and older customers. The latter tend to value in-person interactions, while younger Millennial and Gen Z customers often prefer social media or digital interactions with their banks. Providers must manage this disparity by maintaining their physical locations while continuing to innovate and offer a fantastic digital experience.

Another critical issue is the increasing threat of cyberattack. As dependence on technology and the internet increases, cyber threats have become a bigger concern and challenge for financial institutions. According to IBM, the average data breach cost has increased 12.7% in two years – from $3.86 million in 2020 to $4.35 million in 2022.

The threats have grown in range and sophistication too, with banks and their customers facing risks such as phishing emails, website hacks, and fake bank websites on a daily basis. In response, banks’ threat monitoring and mitigation need to be proactive; and they need the technology and personnel to monitor the risks in real-time.

Meanwhile in payments regulation, banks face a major transformation as they update messaging formats to comply with international data exchange standard ISO 20022. This brings huge resourcing challenges as they struggle to find the talent that can help them upgrade to new formats in time for the upcoming deadlines. But the new standard could also bring great opportunities if they act quickly.

Dealing with legacy systems

An overarching problem with these challenges is that many banks still have antiquated legacy systems.

The payments messaging transformation alone requires a major technology upgrade for many, as much software in current use was designed a long time ago and desperately needs replacing. These upgrades should be part of a long-term strategic solution rather than bolting on short-term fixes to fragile legacy infrastructures.

For example, according to a 2022 Cap Gemini report, 95% of incumbent bank executives believe their current outdated legacy systems and technological capabilities cannot fully optimize their data for customer-centric growth strategies.

Legacy systems are incompatible with the digital transformation experienced over the last decade and not agile enough for today’s data-led digital environment. Supporting these legacy systems is increasingly difficult. The required skills grow rarer as today’s developers and engineers want to work with more exciting technology. Finding personnel is costly and time-consuming.

A related problem is that US banks have faced significant operating cost rises. For many, these cost hikes threaten to outpace revenue growth due to rapid wage inflation and the increasing costs of technology investment. Over the last two decades, regulations such as Dodd-Frank and Basel III have also added to costs for US banks as they implement the significant changes necessary to ensure compliance.

Banks must streamline divisions that are not performing efficiently compared to their new fintech competitors, who often do not have the same costly infrastructure. Greater automation is essential for incumbent banks to tackle underperforming business areas and become more efficient. As competition from fintechs continues to increase and threaten market share, banks must also seek partnerships or acquire firms to help them upgrade technology, remain relevant in the digital age, and maintain their competitive advantage.

How Delta Capita can help

As these trends continue, financial firms cannot afford to lose their focus on ongoing digital transformation.

Delta Capita provide a wealth of skills and experience in helping companies manage these transformations – including in artificial intelligence, know your customer (KYC), client lifecycle management (CLM), and customer experience. Our consultants come from diverse backgrounds and have expertise across the payments and banking sectors.

This experience, combined with our deep technological know-how, gives us a unique market position; and allows us to bring insight, skills and capacity to help solve your pain points as your digital strategy evolves. Our vast experience and coverage also mean we can craft bespoke solutions to help you maximize commercial benefits from the ongoing tumultuous changes in the industry.

To find out more, visit our technology page, and contact us to speak to one of our experts.

This is the first in a series of articles looking at how US banks can tackle their ongoing competitive challenges.