By Jaideep Chadha & Sandeep Singh
Regional banking has been embedded in the fabric of banking in the United States. Traditionally, regional banks and credit unions were market leaders in their regions and served their communities through personalized relationships and specialized knowledge of their customer’s needs. Globalization made bigger national banks more attractive to customers and now with FinTech companies, regulatory requirements, and digital transformation of the banking industry, regional banks, and credit unions are having trouble keeping pace with their competitors.
Digital transformation in the banking industry is not a new trend but one that was fast-tracked during the pandemic as customers preferred newer innovative products and capabilities from their banking partners. This digital transformation has seen the larger banks and FinTech companies invest significantly in their information technology infrastructure, digital offerings, and data governance and security practices. These changes have resulted in fee compression due to increased automation and quicker responses by the bank in areas including new accounts, loans, and transactional processing.
While previously, regional banks and credit unions understood customers better than their national counterparts, that may no longer be the case as national banks have developed robust data warehouses and models. These new innovative methods provide a personalized banking experience, including personalized offers, targeted marketing based on expected lifecycle events, and complete banking products.
In addition to the changing customer engagement preferences of simpler and more effective digital banking and innovative products and offerings, regional banks and credit unions also face a harder challenge meeting the increasingly complex regulatory requirements. Where national banks can employ teams of analysts to verify compliance with complex regulatory requirements, regional banks and credit unions often have one or two individuals focused on risk and compliance. Now that regulatory compliance includes international, federal, state, and local regulations to follow, there is increased scrutiny on the regional banks and credit unions. This is only further pressurized due to the numerous different topics of compliance that need to be reviewed, including data, cybersecurity, lending, and accounting management.
In order to stay competitive and get regional banking back at the forefront, institutions must respond with their own digital transformation. Due to the advancement in technology, there is an opportunity to build efficient operating platforms in a cost-effective manner using cloud technology. This would allow banks to incorporate automation in their processes while having flexibility to scale on a pay-as-you-go basis. Since cloud offers an endless scope of technological refinement, a core system on the cloud would provide more flexibility and easier customization that will allow better operational efficiencies within the Bank, specifically within change management. This serves as a long-term investment that will allow IT departments to increase the agility and effectiveness of change management going forward
Moving to the cloud will also allow regional banks and credit unions to build and offer microservices to their customers while also increasing the speed of innovation. Cloud also offers more effective data usage through linkages within different data warehouses that work in tandem in real-time. This provides more actionable data to the decision-makers while providing transparency to customers.
Since change management will be easier and cheaper, innovative ideas and products will be easier and quicker to implement. This would position the bank as a market-leader by truly establishing a niche or being creative in its offerings to their best customers. Better technology will directly lead to more effective asset-liability and risk management.
The biggest roadblock to the land of technological utopia is the reliance on legacy technology that is outsourced or managed by third-party vendors, primarily the clunky core systems, CRMs, workflow systems, and data marts. As these systems are not conducive to change management and are not easy to change, the decision to migrate to the cloud requires an enterprise-level commitment and a long-term strategic mindset.
Furthermore, since data has not been a priority in the past, preparing the data for predictive analytics and effective decision-making will require substantial effort. As data is cleaned and synchronized, establishing data governance practices and security protocols is imperative for sustainably and successfully transforming any financial institution.
Lastly, a significant roadblock remains is the resistance to change in organizations. Most regional banks and credit unions have been successful doing business as normal and do not want to invest time, effort, and resources into something they do not fully understand. Having a designated leader to champion the transformation is critical for the adoption and buy-in from all business units within the financial institution.
The roadblocks are real and pose a significant risk to the organization going through the transformation. Using the right partner or subject matter expert is critical for a successful outcome. When evaluating third-parties that provide services, keep the following questions in mind: