Rapidly evolving technology, with a growing demographic preference for digital-first banking, has widened the technology gap for small and mid-market financial institutions. This, coupled with a laissez-faire regulatory attitude toward financial technology (fintech) companies, has increased urgency for banks to adopt these digital product trends.
Financial institutions must address new trends, new demographics, the skills gap, strategic factors, and risks to successfully implement and support fintech product offerings. For many of these cases, a product risk assessment or an understanding of how to develop or transform digital products to meet the new market is crucial. This assessment should be monitored and measured as institutions’ customers’ needs change.
Address the new trends and demographic changes
Millennials and Generation Z are increasingly involved in the financial market. These demographics are looking for new, accessible ways to bank and purchase products and services.
McKinsey’s annual survey “New trends in US consumer digital payments” highlights significant up trending market penetration for:
- Digital payments
- Buy now, pay later (BNPL) financing
- Cryptocurrency investing
Four in five Americans used some form of digital payment method such as PayPal or Stripe to purchase goods and services in 2021. The survey highlights that three times as many individuals in the 18-34 age brackets utilize in-app payments and digital payment systems relative to the 55 and older age demographic. This is a significant disparity.
In addition to digital payments, BNPL financing continues to see market penetration. Many respondents indicated that payments for their purchases were supported by or carried out by the BNPL options from credit card or banking competitors. Some competitor examples included Affirm, Klarna, and Afterpay.
Lastly, cryptocurrency as an investment has more than tripled in market penetration over the last year based on survey results.
Address the skills gap to compensate for new trends and demographics
To keep pace with these technological changes, institutions must develop or recruit several new skills.
In a survey of over 600 chief banking and fintech professionals, Banking Circle warns that ”63% of FinTechs (56% of banks) expect to see their Payments IT team/resource increase in the next 12 months. 34% of all respondents are not confident that their recruitment plans are fit for purpose for the future.”
To combat this, increasing technology budgets will need to focus on how tech infrastructure can support digital payments overhauls. Collaboration with outsourced providers and vendors will be essential, but that may not be enough. Many institutions express concerns over recruitment and retainment efforts for the in-house expertise gap.
Leveraging a good mix of in-house and outsourced expertise will grant institutions a great opportunity to support these new trends. Simultaneously integrating tools such as cloud infrastructure, artificial intelligence, and machine learning into operations will help organizations stay ahead of the curve.
When performing a product and service risk assessment, these are factors that need to be considered. A strong knowledge base to conduct strategic plans supports an institution’s ability to effectively manage opportunities and project risks.
Address the strategic factors that support new trends
Given all these strategic aims, it is important for institutions to understand their position in the market, as well as which of their situationally unique strategic factors should be changed or supported. For instance, many mid-tier institutions get caught in a value-trap with legacy systems. Institutions must recognize the flaws in legacy systems, such as their inability to flexibly support a myriad of new product offerings and services in a rapid go-to-market strategic landscape. How will your institution’s overall infrastructure support new technological offerings? How will these legacy systems support onboarding and customer support to new strategies? These are important factors to consider.
Additionally, consider allocating more budget resources toward innovation and new product offerings, and determine how to best measure their effectiveness through key indicators.
Address risk and plan ahead
To build a plan that meets an institution’s long-term goals, it is essential to address these strategic opportunities and risks. An executive team that is clear-sighted on how to collaborate with all business units, functions, and partners has the greatest opportunity to succeed in achieving transformation.
To establish and communicate this plan with all stakeholders, an enterprise risk management (ERM) program that aligns with current and future strategic initiatives is paramount. Key performance indicators and project plans will provide executives with an understanding of success and returns on investments and budget.
These factors are essential to establishing a strong strategic plan that addresses technology gaps and fintech product integration. Building a practical and well-informed ERM program that monitors emerging products and services can support institutions in their growth and reach.