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Versatility: A key differentiator in digital banking

Digital banks need to focus on versatility through diverse deposits, fintech partnerships, hyper-personalization and Banking as a Service.

Aug 1, 2023 / Digital Banking

Small business banking needs are as diverse as the businesses that bank. Over the last two decades, banking has transitioned from a one-size-fits-all model to one that offers an array of services to meet the varied needs of small and mid-sized businesses. Yet, new digital banks are developing niche services to survive in an increasingly crowded market. One might specialize in financial modeling, while another targets payments. It is an understandable move in the face of steep competition, but a narrow business model misses the mark. 

Savvy small businesses need a multidimensional digital banking system to meet their operational needs and support long-term stability, and digital banks must embrace versatility to support this demand. Digital banks can use four key tactics to develop a versatile business model with a well-rounded suite of services and products. 

Maintain diverse deposits

In an effort to carve out a market niche, many digital banks have concentrated on a single business sector—but that strategy can hinder growth and expansion and increase risk exposure. Instead, digital banks should source deposits from a diverse customer pool. 

The best approach to engage with businesses across industries is through data and analytics software. Using data, digital banks can connect with prospective clients and build a program that responds to varied business functions. When banks serve diverse clients, innovation follows. The bank is inclined to create a broader spectrum of services and products, resulting in a truly personalized experience. 

Scaling is difficult when the bank only serves a single industry. However, diversity of deposits also helps to mitigate downside risk. The collapse of Silicon Valley Bank (SVB) earlier this year was a stark example of what can happen to the most seemingly successful bank when deposits are too concentrated. Many experts attributed SVB’s failure, at least in part, to a lack of diversity. SVB was exposed entirely to one community—the technology sector. In the aftermath of the collapse, an article published on PBS read, “When this close-knit community of depositors talked to one another—using digital channels to do so quickly—the bank likely became more vulnerable to rumors and a run.”

Pursue fintech partnerships

The future of banking is married to technology, and fintech companies are providing the infrastructure and innovation that is revolutionizing the banking sector. Digital banks must establish a strong technology foundation—after all, this is a digital experience—by partnering with fintech companies. Fintech partnerships ensure that digital banks are prepared for future technology innovation and staying at the forefront of advancement.   

There are a lot of new technologies, and it can be difficult to discern where to invest and pursue partnerships. There are a few key areas where digital banks will get the most value. Operating systems, anti-money laundering software and Know Your Customer technologies are all important ways to augment a digital platform. In addition, finance automation technologies are rapidly advancing and providing meaningful value, along with software to manage payment processing and risk management.   

Offer hyper-personalized products

Every business has different priorities. Digital banks need to create a hyper-personalized experience that is more than a list of products and services, moving to one that provides an emotional and personal connection with each customer. According to research from Deloitte, this type of deep connection fosters loyalty and customer satisfaction. In a look at the importance of emotion-driven engagement, Deloitte says that “emotionally connected customers are more than twice as valuable as even highly satisfied customers.” EY goes even further, suggesting that financial institutions that adopt a hyper-personalized experience will lead the post-pandemic market.  

Specifically, digital banks can use comprehensive data analysis technology, like automation and machine learning technologies, to track client behaviors, market trends and emerging risks to create a financial strategy that best reflects the client’s needs, goals and core mission. 

Invest in BaaS

Banking as a Service, or BaaS, facilitates embedded digital services and products to create a seamless client experience, marked by ease and convenience. An embedded experience, where all products are digitally available at the touch of a button, is an opportunity for digital banks to stand out. Through API and core technology partnerships, clients can do everything from opening an account, depositing checks and transferring funds to managing invoices and tracking cash flow.  

This type of experience is vital to busy small business customers who expect to have easy access to their financial portfolio and the ability to manage accounts and payments, all through a single digital platform. A digital experience is now standard, with more than a quarter of Americans using a digital-only bank. The most successful platforms give businesses hands-on control of their banking, along with human support and BaaS professional experts. 

Business owners need more than a bank account; they need a banking partner. To be a great partner, versatility provides the answer with a return to traditional relationship banking, ensuring that digital banks become a pillar of the financial market.  

Danielle Kane is the Director of Small Business Banking at Grasshopper Bank.