Opportunities and Challenges in Banking’s Core Offerings

Commercial lending: The escalating demand for business loans gives banks a prime opportunity to bolster their commercial lending revenue. However, to effectively compete, they must streamline cumbersome legacy processes. According to a study by S&P Global, almost half of mid-size businesses find the loan application process overly complex, driving them toward alternative lenders.

Banks can significantly simplify and expedite commercial loan processes by leveraging technology, including digital portals, AI-powered credit risk analysis, and API integrations with accounting software.

Leading banks are pursuing commercial loan growth both organically and through acquisitions. Truist Financial, for example, at year-end 2018, had commercial and industrial loans of $62 billion.

By year-end 2022, following the merger with BB&T in 2019, the company’s commercial and industrial loans increased to $164 billion. JPMorgan Chase is automating underwriting and credit models to boost commercial lending. Regional banks are also fortifying balance sheets for example, Texas Capital Bancshares expanded its commercial loans by an impressive 24% in 2022.

Small business lending represents a promising growth avenue, especially as platforms like Stripe, Square and PayPal aggressively expand their presence. By embracing technology, reimagining processes, and adopting agile strategies, banks can seize these opportunities and thrive in an ever-evolving financial landscape.

Wealth management: The wealth management landscape presents a colossal opportunity, with over $68 trillion in generational wealth transfers underway. However, harnessing this potential requires a meticulously coordinated strategy combining personalized advice and cutting-edge digital capabilities. As highlighted by McKinsey’s research, establishing an omnichannel high-touch/high-tech service model is paramount in this endeavor.

Top-quartile wealth management offerings consistently deliver two to three times higher returns and income growth than their median counterparts. To achieve this level of excellence, banks are increasingly acquiring registered investment advisors (RIAs) to enhance their trust capabilities and build automated investment platforms.

Morgan Stanley now manages over $1.4 trillion in client assets after strategic acquisitions.

The convergence of human and robo-advisory services forms the foundation for creating comprehensive omnichannel offerings. Integrating financial planning, investing, and borrowing provides a holistic view of clients’ financial landscapes. Banks successfully executing this strategy will capture outsized growth opportunities within the wealth management sector.

Small business services: Small businesses represent a substantial growth avenue for banks, but fully capitalizing on this potential necessitates more than just offering a basic business checking account. Banks can establish themselves as true financial hubs for small business customers by providing an integrated suite of products and services. This holistic approach should encompass banking, payments, accounting, payroll, insurance, and more, all seamlessly consolidated within a unified platform.

According to J.D. Power research, only 29% of small businesses feel that their bank truly understands their specific needs. Part of the problem is that many customers work with different financial institutions, each providing niche services, but none have a complete picture of the business client. “I don’t see many underserved businesses, but I do see a lot of overbanked businesses,” notes Gilbert.

To bridge this gap, banks must tailor solutions that address all the unique challenges small businesses face, including managing cash flow, paying vendors, accessing capital, and minimizing administrative burdens. Collaborating with fintech partners proficient in areas like bookkeeping, invoicing, and payments can enhance banks’ value propositions and meet the diverse needs of small business clients, making it less likely that they’ll parcel out different parts of their financial service needs.

Leading banks are adopting both “build” and “buy” strategies in pursuit of this goal. JPMorgan Chase, for example, acquired SB payment processor Renovite to develop a cloud-native, next-generation payment processing platform.

Similarly, Wells Fargo is focusing on blending internal technological capabilities with external fintech innovations, in a commitment to improve its services for small business clients. Small business lending is also a promising avenue, with traditional banks still holding over 50% market share.

International expansion: Developing regions such as Southeast Asia and Latin America represent promising growth frontiers for banks, driven by rising incomes and increasing adoption of financial services. Securing a first-mover advantage is crucial in the face of formidable competition. Banks can focus on specific country opportunities, such as Mexico’s burgeoning middle class or Vietnam’s digitally-savvy population.

Adapting products and distribution to align with local customer needs and regulatory nuances is imperative for successful international expansion. Partnerships or acquisitions of regional players can facilitate market entry and aid in navigating regulatory landscapes. According to Bain’s research, developing market opportunities have the potential to contribute up to 25% of global revenue for leading banks by 2024

Some top banks are actively pursuing international expansion through organic growth and strategic deals. For example, in 2021, HSBC announced ambitious plans to invest over $6 billion in its Asian operations. Bank of Montreal recently acquired BNP Paribas’ Bank of the West, showcasing its strategic growth trajectory.

Meanwhile, Toronto-Dominion Bank, despite its unsuccessful attempt to merge with First Horizon, remains poised for potential expansion. With agile execution and a deep understanding of local markets, international growth can be a resilient pillar for banks amidst an uncertain domestic landscape.

Responsible innovation: As technological shifts accelerate, it becomes increasingly vital for banks to strike a balance between innovation and responsibility. While pushing the boundaries of what’s possible, banks must also uphold depositor trust and financial stability. Robust oversight frameworks should ensure that ethical considerations and security principles guide the applications of nascent technologies.

It’s crucial to recognize that when untethered from human accountability, technology carries the risk of misuse and unintended consequences. The banks of the future must prioritize responsible innovation, pushing the boundaries of what’s achievable while also considering the wisdom of those advancements. AI guided by human values will be paramount, as will thoughtful regulation that fosters innovation while safeguarding the community’s interests.

By combining ambitious technology with a steadfast commitment to stewarding community interests, the Bank of 2030 can play a pivotal role in profoundly improving the financial lives of its customers and society. Responsible innovation will be the cornerstone of the banking industry’s success in the future.

Reference source: The Financial Brand

Compiled by the DTSVN author group - Digital transformation solutions for the Finance and Banking industry.

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