By W.B. King
In the ninth annual addition of Cornerstone Advisors’ What’s Going On In Banking study, author Ron Shevlin used the lyrics of The Grateful Dead, The Who, Stevie Wonder and others minstrels to tell the tale of a credit union industry that is “catching a wave” that will bring “technological, societal and business model change.”
The 2024 study included 359 respondents from financial institutions (FIs), 92% of whom work for FIs in the $250 million to $50 billion asset range. Fifty-four percent of respondents were from banks, 46% from credit unions, noted Shevlin, Cornerstone Advisors’ chief research officer. Nearly three-quarters of respondents were C-level executives with the balance from the ranks of executive vice presidents, senior vice presidents and vice presidents.
“The purpose of the report is to help both financial institutions and the technology companies that serve and partner with them better understand what’s going on in the industry and plan for the changes,” noted Shevlin. “Like farmers who must plant seeds to see their crops grow, bankers must plant the seeds of their future capabilities and strategies. ‘If they plant ice, they’ll harvest wind,’” said Shevlin, borrowing a line from the Dead tune, “Franklin’s Tower.”
Swift Undertow: Challenger Bank Threats are the Real Deal
While fintechs, neobanks, Big Tech (i.e., Amazon, Apple, Google) juggernauts and challenger banks (e.g., Chime, Varao) have posed threats to the credit union industry in recent years, Cornerstone’s latest survey data found that more executives are flagging the issue and calling for a time out.
“The percentage of bankers that now consider large fintechs, neobanks and Big Tech companies to be ‘significant threats’ rose significantly from previous years,” the study noted. “Even the threat from neobanks like Chime and Varo, which fewer executives saw as a threat in 2023 versus 2022, is now seen as significant by four in 10 bank and credit union executives.”
With regard to Big Tech, in 2024 57% of executives noted this segment as “significant threat,” up from 39% in 2023. Threats from mega banks also rose from 38% in 2023 to 56% in 2024. The big fintech was 47% in 2023 and 60% in 2024, and finally, challenger banks were viewed by 21% of executives as a threat in 2023 opposed to 40% in 2024.
Don’t You Let That Deal Go Down: Real-Time Payments
In early 2024, the Federal Reserve reported that over 400 FIs are now participating as senders or receivers in its FedNow real-time payments (RTP) program. In July 2023 that number stood at 35. The institutions adopting the service reflect a diverse range of banks and credit unions, headquartered in 45 states and ranging in size from under $500 million to more than $3 trillion in assets, the Fed noted.
“These are still early days for the FedNow Service, and we are pleased with the robust level of adoption over the first few months as we transition from launch phase to standard operations,” said Ken Montgomery, first vice president of the Federal Reserve Bank of Boston and FedNow program executive. “We commend the growing number of financial institutions, service providers and other organizations in the payment ecosystem that are embracing the vast potential of this modern instant payments system.”
While still early days, Cornerstone found that RTP has become a “high priority” for banking executives.
“If their plans come to fruition, by the end of 2024, 50% of banks and credit unions will be up and running with RTP,” the study noted. “Roughly half of financial institutions plan to offer RTP through FedNow.”
Eighteen percent of banks and 14% of credit unions said they have launched a RTP strategy, with 32% and 36%, respectively, saying the plan will be implemented in 2024. Twenty-eight percent and 34%, respectively, said they would implement in 2025 or later, whereas 20% and 16%, respectively, said they don’t know if or when a strategy will be adopted. The balance, 3% and 1%, respectively, does not plan to implement.
When asked which RTP rails they will use, 23% of banks and 12% of credit unions said The Clearing House (TCH), while 51% and 52%, respectively, said FedNow. For those FIs that have already launched a RTP program, 86% of banks and 73% of credit unions are currently receive only. Whereas 14% of banks and 27% of credit unions offer receive and send.
“Business-to-business (B2B) payments are one of the most important use cases for banks’ RTP strategies,” the study found. “Compared to the 2023 survey, the percentage of banks mentioning last-minute consumer payments as an important RTP use case increased from 18% to 23%, while the percentage citing account-to-account transfers declined from 38% to 23%.”
While banks cited B2B (35%), payroll (25%) and account-to-account (23%) as leading use cases, credit unions cited account-to-account (45%), last-minute consumer payments (31%) and payroll (22%) as leading reasons to adopt.
“Increased attention on real-time payments has helped stimulate interest in payments hubs. In both 2022 and 2023, just four percent of banks and credit unions selected a new or replacement payments hub,” Shevlin noted. “For 2024, the percentage that plans to invest in a new payment hub or replace an existing one jumps to 15%.”
Don’t You Worry ‘Bout a Thing: Generative AI
Referencing The Who’s song “My Generation,” Shevlin compared ChatGPT in 2023 to Lotus 1-2-3 in 1983. “Although it wasn’t the first PC-based spreadsheet on the market, when it was introduced in early 1983, it sparked a boom in the adoption of personal computers and was considered the ‘killer app’ for PCs,” he said.
“Lotus 1-2-3 also sparked a boom in employee productivity. It enabled people to track, calculate and manage numerical data like nothing before it,” he continued. “Few people in the working ranks today remember how we (oops – I meant ‘they’) had to rely on HP calculators to make calculations and then write stuff down.”
To this end, generative artificial intelligence (AI), which is capable of generating text, images or other data using generative models, is a tool banking executives will have to adopt in some form, especially as data harvesting becomes more sophisticated. Shevlin said guidelines are required, including the ability to proofread generative AI output.
“Businesses have spent the past 10 years on a ‘digital transformation’ journey, where the focus has been on digitizing high-volume transaction processes like account opening and customer support,” the study noted. “That focus is changing — expanding would be a better word — to enhancing the productivity of knowledge workers in the organization — IT, legal, marketing, et cetera.”
In the short term, Shevlin said “you’d be crazy to trust generative AI tools to run the company without human intervention and oversight.” He continued. “There’s too much bad data leading to too many ‘hallucinations.’
In the long run, he noted that generative AI will be “disruptive” and “a game changer.” CEOs, he offered, need to be proactive and take “big steps” to ensure these disruptions and changes are positive for their organizations.
Poised for Flight: Fintech Partnerships
Once considered questionable by certain skeptics in the credit union space, in recent years fintech partnerships have had a positive impact on the industry. Cornerstone’s survey, however, found that “bloom” might be coming off the red rose.
Thirty-percent of banks and 20% of credit unions said they don’t see a fintech partnership as a driver of growth in 2024. Forty-nine percent and 54%, respectively said fintechs are a moderate driver of growth, and 21% and 26% respectively said it’s a strong driver of growth.
“The percentage of banks and credit unions that say fintech partnerships are a strong driver of growth dropped between 2023 and 2024. Those who consider partnerships to be a moderate driver of growth picked up the slack, however,” the report continued. “The percentage of banks that see partnerships as a growth driver — strong or moderate — grew from 68% to 70%. Among credit unions, the percentage rose from 72% to 80%.”
The survey also found that help is on the way for fintechs. Data, for example, shows that FIs aren’t simply partnering with fintechs; they are investing in them in greater numbers.
“Banks and credit unions have become the new venture capitalists. Among banks that see fintech partnerships as a driver of growth, roughly four in 10 plan to invest in fintechs in 2024, up from 35% in 2023. Three in 10 will invest in two or more fintechs, up from 20% in 2023,” the report offered. “Among credit unions that see fintech partnerships as a driver of growth, nearly half expect to invest in fintechs in 2024, and nearly three in 10 will invest in two or more fintechs.”