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Adjusting to the speed and scale of change

By resetting their strategic approach in several key areas, banks can keep up with the evolving needs of their business clients.

Mar 2, 2023 / Business Banking

Businesses of all shapes and sizes will be working toward the constant, all-important goal of revenue growth as 2022 comes to a close. In the U.S. at least, new-business growth continues, albeit at a slower pace than the scorching startup rate of 2021. And all of them share one basic operative need: to make payments and get paid.

This all adds up to opportunity for commercial banks, but supply chain issues and a potential recession are creating uncertainty about the economy in general and about these new businesses in particular.

One thing that is certain, however, is the need for banks to keep up with the pace of digital transformation. Banks must consider a reset of their strategic approach to keep up with the scale and scope of changes in payments technology as well as the changing needs of their business clients. The many changes they face include acceleration of cloud migration, API proliferation, new regulation activity and continuing disintermediation of nontraditional players.

It’s a lot. But if a financial institution wants to compete, here’s what a reset of three areas could look like:

DIGITAL TRANSFORMATION

Current strategy: Find funds and get executive buy-in for digital improvements. Digital transformation projects typically have a number of competing priorities, and picking one from column A and one from column B is not an acceptable strategy. The cold, hard fact is that 78% of banks fail at digital transformation, and one reason is siloed thinking and a lack of focus.

Strategy reset: Focus on APIs and their ability to open up new customer engagement channels. APIs are the building blocks on which innovation is created. Instead of taking a scattershot approach to digital transformation (or, as some call it, payments modernization), focusing on the intersection of data, technology and innovation is a surefire bet. To get a sense of the importance of the API economy, consider that the current $4.5 billion market is expected to grow to more than $13 billion by 2027, according to Dataquest.

But there’s a catch: At this point, APIs for payment and data exchange lack common standards, and regulation is limited to individual verticals. For example, health care APIs are highly regulated, and other verticals are still contending with standards. Standards or not, APIs will enable data sharing, which leads us to our next reset.

OPEN BANKING

Current: Stay up to speed with Consumer Financial Protection Board and ‘open banking’ regulations. This is a necessary exercise, but on its own it’s not enough to make a financial institution competitive. The CFPB is dragging its feet on regulating the data sharing that will define open banking in the U.S., which in turn is keeping banks on the sidelines because they want more clarity on requirements before they sign on.

Reset: Assume that open banking will arrive in earnest in 2023 and get ready to deploy it. If you define open banking as the ability to use open APIs to share client data and allow third parties to access that data, it’s already here. In fact, Aite-Novarica refers to the market term “open finance” as a precursor to how this new data initiative will play out.

RETHINKING RELATIONSHIPS

Current: Base payment relationships on payment volume. Certainly nothing is wrong with this. You want your best assets to match your best customers. But again, it won’t be enough to compete on when APIs and the move toward open finance increase the currency value of data.

Reset: Base relationships on data exchange and customer value. For example, Company A is a well-established manufacturer at the top of your client list when it comes to overall revenue and profit to the bank. However, Company A has reached that point by specializing in servicing established, legacy customers, and its growth rate is steady but slow. If your bank wants to find out what newer companies are doing, you may need to prioritize a relationship with a smaller company creating new business. You need data from both. Adapting priorities is a good future-proofing move in the reset.

These three areas of focus can make an immediate difference. So can doubling down on real-time payments, tripling down on fraud defense and other initiatives. The most important thing is that banks change the lens through which they see a changing world.

Jessica Cheney is vice president and head of product management for digital banking solutions at Bottomline.

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