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380 - Finance Digest │ Financial Literacy │ Financial PlanningBy Jason Chorlins, CPA, CFE, CAMS, CITP, is a Risk Advisory Services Principal at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.

In 2023, banks will focus even more on digital transformation, with more investment in technology and focus on innovation. Their goals will center on digital-device-driven customer experiences, new revenue sources, and more efficient and effective efforts to deter financial crimes. For many banks, this will mean new and deeper partnerships with other platforms, especially FinTechs.

Deepening partnerships with FinTechs leads to changing risks

Until recently, banks’ relationships with FinTechs have largely been one-way, with banks processing financial transactions for tech-driven financial services companies. Banks were able to make use of their liquidity and gain new revenue streams. These relationships will become two-way partnerships as banks increasingly look to leverage technologies developed by FinTechs to reach their own digital transformation goals.

Partnerships will focus on streamlining banks’ back-office operations, offering better digital experiences to bank customers and expanding bank service offerings. Specific services FinTechs will provide to banks include digital verification of customers, online account opening and providing third-party monitoring solutions.

FinTechs, meanwhile, are looking to diversify their banking partnerships, with many aiming to have between two and four banks they work with. They want access to transaction processing and other services with multiple providers if something disrupts a partner relationship.

These expanded bank–FinTech relationships come with expanded compliance risks. Banking as a service (BaaS) is under increasing regulatory scrutiny, and banks are responsible for evaluating and mitigating risks from their unregulated FinTech partners’ services, products and activities.

There is already at least one bank under an Office of the Comptroller of the Currency (OCC) order to improve its oversight of FinTech partnerships. The bank is required to write and implement specific guidelines for assessing and addressing Bank Secrecy Act (BSA), compliance, liquidity, credit and operations risks that come from FinTech partnerships. It must audit its FinTech partners’ activities. And, the OCC must approve any new FinTech contracts and any new products the bank offers with its current partners.

As banks partner more deeply with FinTechs and other technology firms, they will need to expand their risk assessment and financial-crimes-compliance processes to those FinTechs. FinTech Partners need to be risk-rated, and risk-based due diligence will be required so banks fully understand the types of transactions they’ll be processing, who owns the FinTech, where its funding is coming from and other potential risks. With bank compliance departments stretched thin, many will leverage third parties to conduct relevant due diligence or co-source such activities to ensure the process is still managed by the Bank.

Banks will also need to implement better monitoring and analysis of their FinTech partners’ transaction data for consumer privacy and financial crimes compliance. To overcome the challenge of obtaining, normalizing and analyzing data that is typically not consistent, banks will need to invest in more technology and resources.

Leaning into technology

We see investment in IT infrastructure growing even faster as banks leverage automation to increase back-office efficiency and deploy solutions that enhance banking customers’ experiences. Increased use of automation, data and analytics will allow much smaller units to run value-added tasks, such as deal origination, know your customer (KYC) validation, basic data collection and distribution of data throughout the organization and more.

One area of growth will be automation of repetitive processes through robotic process automation (RPA) and digital process automation (DPA). Their benefits include cost reduction, greater accuracy and increased efficiency – as well as faster and more enjoyable customer experiences. We also expect significant growth in spending on application programming interfaces (APIs) and other data links in order to make both internal and customer processes as seamless as possible.

Artificial intelligence (AI) will also be increasingly important in compliance systems, and more companies will offer AI and machine learning models that can be implemented within existing systems or processes.

As banks realize the benefits of automation beyond improved efficiency, incentives to speed up adoption will grow. To do so, many banks will rely on external providers with past experience whose solutions can be scaled at a reasonable cost.

Personalized, distributed digital banking

Banks will continue to focus more on meeting consumers’ expectations for digital banking experiences. They’ll move beyond offerings that let consumers go paperless and cashless and continue to shift to a more distributed, personalized, technology-driven banking model.

Personalization of each consumer’s banking experience will become an important differentiator for banks. Already, traditional institutions are struggling to compete with neobanks, also known as “challenger banks,” that use technology and AI to personalize the online services they offer to customers.

Consumers expect their banks to behave like their favorite retailers and consumer brands, delivering the intelligent experiences they’ve come to expect from streaming entertainment, food delivery services and rideshares. They want their bank to understand who they are, anticipate their needs and reward them for brand loyalty. Because banks have so much information about each consumer’s daily activities, the expectations are high for real-time, customized offerings of services, rewards and perks. Customers also want their bank to respond to changes in their financial profile with appropriate product recommendations and financial advice.

Traditional banks will seek new ways to reach, engage and connect with customers who may  never step foot in a branch. AI, data and analytics will drive more personalized interactions. Conversational AI, in the form of chatbots or virtual assistants, will make customers’ banking interactions more proactive and human-like.

To serve today’s increasingly digital-focused consumers, banks require digital-first back offices. Delivering a truly seamless digital customer experience requires investments in providing more efficient new account opening, online customer onboarding, digital loan application management and other consumer services.

More talent shortages

We see a shortage of IT, cybersecurity and compliance talent as the biggest obstacle to banking innovation. The financial services industry has struggled to identify, recruit and develop the workforce it needs. Plus, top tech and cyber talent are being lured to FinTechs, which may offer more opportunities to work on the cutting edge of technology.

This shortage will drive compensation up, and banks will need to consider new types of incentives to attract and retain talent. Retention bonuses and equity offers will need to be considered and evaluated.

Future innovation

For now, banks will continue to face the challenges of competing for customers and talented employees, offering digital-first services that consumers demand, and growing regulatory burdens. Their focus will be on finding ways to balance these demands while competing with FinTechs, which can recruit talent, develop new technologies and draw in customers without the same regulatory pressures.

However, the banking industry will become more skilled at leveraging its vast troves of consumer data through the use of automation and AI. The result will be a better banking experience for customers, as well as more automated and streamlined front- and back-office operations.

As return on investment grows, heavy reliance on innovative technology will become the norm for banks.

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