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Two Trends Now Shaping Financial Institutions

Financial industry leaders to plan strategically for regulatory compliance and technological innovation

Earlier this year, Javelin Strategy & Research, a leading provider of quantitative research focused exclusively on financial services topics, issued a report that identified the top 10 trends likely to transform the financial industry in the months ahead.1 Delivering Value takes a closer look at two of these trends.

Trend: Regulatory backlash forces financial institutions to re-evaluate business models

The past year has been marked by widespread calls for changes in the regulatory system.2 A case in point has been the consumer and media reaction to overdraft fees and the ensuing changes to Regulation E. And, as this issue of Delivering Value went to press, sweeping financial reform legislation that has the potential to reshape the industry was signed into law by the president.

These regulatory changes and the need for mandatory compliance are forcing a fundamental shift in thinking among banks and credit unions. Proactive institutions will use this opportunity to innovate and plan strategically in order to find new sources of fee income, cut costs and attrition, increase cross-sell and boost profitability. Javelin highlights an important caveat: Consumers are willing to pay for premium, high-value services, but not for services they are accustomed to getting for free.3

Javelin encourages financial institutions to intensify the search for new ways to bundle products, including offering a premium level of service for select account holders. Forward-thinking financial institutions will position themselves as consumer advocates via the introduction of services that enhance account holders' ability to manage their finances while simultaneously reducing the institution’s overhead.

Indeed, David McConney, executive vice president of Client Services at Harland Financial Solutions, said in an interview in Credit Union Journal that the trend is toward smaller credit unions merging in order to better manage the increased costs of compliance. Along with tightened regulations, risk management in particular will become ever more important to banks and credit unions, according to Harland Financial Solutions, to mitigate unexpected credit losses and to introduce greater transparency and controls into the lending process.

Chris Fleischer, market research manager for Harland Financial Solutions, adds that financial institutions will need to make changes to products and pricing, and compliance with new regulations will put a growing burden on even the healthiest institutions, perhaps necessitating partnerships with strong providers. This means re-evaluating in-person and electronic services, as well as onboarding and rewards programs. Being proactive in risk mitigation solutions demonstrates to regulators that a financial institution understands risk, especially in loan portfolios, and that the institution is managing it well.4

Trend: Prioritizing investments becomes critical as hard times hinder innovation

The success of financial institutions will depend on their ability to make smart, long-term investments in technologies that will shape the future of the industry. Javelin points out that banks and credit unions need to do more with less, which is especially true for smaller financial institutions — regional banks, community banks and credit unions — that cannot afford to develop innovations internally. According to Javelin, this "creates a void that must be filled by vendors … that can deliver affordable upgrades that can easily plug into existing systems…"

The technologies that hold the most promise, Javelin indicates, are online and mobile banking solutions. Account holders want a simple way to manage their finances, and online and mobile banking products can help meet that need by integrating account monitoring and bill paying into an easy, one-stop financial portal. However, the transformation is likely to be a slow process, because the first step may be simply getting account holders to try online and mobile banking, and convincing them that such services are practical and safe. This is confirmed by a Javelin survey conducted this year, which found that nearly half of mobile phone users had not tried mobile banking because they did not see the value in it (44 percent) or trust that it was secure (42 percent).5

Furthermore, Fleischer points out that dated and inflexible technology applications often are at the root of inefficiency. Yet today's economic pressures make financial institutions less likely to tolerate inefficiencies. This lends further support to the need for long-term investment in upgraded and innovative technology.

Sam Kilmer, vice president of market development for Harland Financial Solutions, recently asked several financial executives for their approach to improving efficiency. All agreed that upgraded and efficient technology is a priority. Todd Erickson, chief operating officer of First Flight Credit Union in North Carolina, noted that his credit union outsourced its core system so the technology department could shift from daily maintenance to enabling business services. And Kay Spieler, vice president and cashier of Lee County Bank & Trust in Iowa, added that customer usage of online bill pay has increased. "Solutions are integrated, which has really had a positive impact on our efficiency gains," she said.

Fleischer adds that the growing integration of data, applications and business processes is an effective way to reduce expenses and increase organizational efficiency. "Integration is an opportunity to bring about improved connectivity of solutions, whether those solutions are internal or via external third parties," he says.

While these two industry trends — planning strategically for regulatory compliance and investing wisely in innovative technology — pose long-term challenges for financial institutions, the good news is that within these challenges is great opportunity.

Gen Y Customers Are Significantly More Likely to See Ways for Banking via Social Networks - chart

Question: What factors might motivate you to use social media (i.e., Facebook, Twitter) to interact with your bank or credit union?

March 2010, n= 5,211, 1,208 Base: All consumers, Gen Y © 2010 Javelin Strategy & Research

Eight Additional Trends Affecting the Financial Services Industry

In addition to the two trends explored in the accompanying article, Javelin Strategy & Research identified the following eight trends impacting banks and credit unions in 2010:

  1. Financial services institutions will open their software platforms to third-party application developers, driving innovation.
  2. Person-to-person (P2P) payment services will be more widely used as they are integrated into online platforms. Eight percent compound annual growth for online P2P transfers is predicted through 2014.
  3. Merchants will demand more power in the transaction market, due to higher expenses for payment acceptance and fraud management.
  4. Increased use of cloud application software — or data that is accessed by users remotely via the internet — will revive interest in federated identity solutions, which enable financial institutions to allow account holders to log on to multiple websites with one sign-in process.
  5. Real-time data will become essential as account holders grow frustrated with hours-old batched data when using online and mobile applications.
  6. End-to-end encryption, tokenization and EuroPay MasterCard Visa will generate interest as merchants deal with the rising cost of data breaches and Payment Card Industry compliance.
  7. Remote attacks on ATMs and debit PINs will escalate, putting the standard four- or six-digit PIN at risk and requiring higher standards of encryption.
  8. The social web will be the new frontier for fraud, necessitating a need for better security and best practices.

To learn more about industry trends, and about planning for regulatory compliance, risk management, efficiency improvement and integration, contact Harland Financial Solutions at 1.800.815.5592.

1 Javelin, "10 Trends That Will Shape Banking, Payments and Security in 2010," January 2010

3 Javelin, "10 Trends That Will Shape Banking, Payments and Security in 2010," January 2010
4 Javelin, "10 Trends That Will Shape Banking, Payments and Security in 2010," January 2010
5 Javelin, "10 Trends That Will Shape Banking, Payments and Security in 2010," January 2010