By W.B. King
While many banking industry experts are unsure what will occur in the coming year, some executives surveyed for the Cornerstone Advisors’ report, “What’s Going on in Banking 2021 – Rebounding from the Pandemic,” feel optimistic.
“We quickly learned how to adapt in 2020 and are prepared to shift if there is another shutdown. We have also rolled out many new services and channels that allow our members to connect with us remotely,” noted Alltru Federal Credit Union’s CEO Carol Minges. “These have always been part of our ongoing e-services plan, but COVID reinforced the importance of providing our members with options.”
The report, which surveyed 260 community-based financial institutions, looked at a number of market indicators, including fintech partnerships, digital transformation, emerging technology and 2021 technology plans and spending.
While there is a sense of hopefulness among certain respondents, there are many executives who are still feeling 2020’s sting. To this end, four in 10 were “somewhat more” optimistic about 2021 relative to 2020, and 6% were “much more” optimistic about the upcoming year. About one in five, however, felt 2021 was going to be more in line with 2020.
“First, low interest rates make for very tight margins. The industry is too inefficient (high expense ratios), and the tight margins mean low profitability. Second, the continuing impacts from the pandemic haven’t fully hit yet,” said BellCo Credit Union’s CEO, Douglass Ferraro. “Delinquency and charge-offs will rise considerably in 2021. Combined with the low interest rates, FIs will take desperate actions to stay profitable.”
Some Shared Concerns for 2021
At 56%, survey respondents were most concerned with the interest rate environment and prospects for a weak economy, which is 13 percentage points higher than 2020. A “weak economy/loan demand” was second at 48%, which doubled 2020’s response. And, “credit quality/problem loans” jumped from 10% concern in 2020 to 42% in 2021.
Whereas there were increases in executive concerns, there were also dips. Respondents, for example, were less anxious about regulatory burdens at a rate of 18%, down from 22% in 2020; the ability to attract qualified talent was at a rate of 19%, down from 27% in 2020; and costs of funds was at a rate of 8%, down from 15% in 2021.
“While the rise in concern regarding credit quality was anticipated, it’s encouraging that this did not rise to the top,” said Cornerstone Advisors President, Steve Williams. “Instead, executives are most concerned about the lost revenue from the rate environment.”
The report also found that bank and credit union executives’ views of Big Tech firms, such as Apple, Amazon and Google, have shifted. In 2020, the perceived threat level was 61%. In 2020, the metric dropped to 49%.
“Despite the fact that many financial institutions see Big Tech firms like Google and Amazon as threats, some are partnering—or amenable to partnering—with them,” the report stated. “Three of the survey respondents are among the 14 institutions partnering with Google in 2021 to launch the new Plex checking account. Eight percent of credit unions are talking or plan to talk to Google about partnering.”
Partnering with Fintechs
According to the survey, 48% of banks and 42% of credit unions have partnered with fintech startups over the past three years. Credit unions indicated that these partnerships, cited as “very important,” declined from 30% in 2020 to 22% in 2021. Additionally, roughly a quarter of banks and 15% of credit unions have “no personnel dedicated” to fintech partnerships.
“On average, however, banks and credit unions have roughly two full-time equivalents (FTEs) dedicated to finding, vetting, negotiating and deploying fintech partnerships,” the report stated. “The institutions with 10 or more FTEs tend to be those with more than $10 billion in assets.”
Among banks that have partnered with fintechs over the past few years, the report found that 15% of banks experienced a greater than 5% improvement in loan productivity from fintech partnerships, while 13% noted that fraud losses dropped by more than 5% as a result of partnerships.
“Overall, most banks and credit unions that have partnered with fintech firms have either seen moderate gains (i.e., less than 5% improvement) or—disturbingly—have seen no impact at all,” the report found. “This points to a greater need to monitor and scale fintech partnerships and will require financial institutions to allocate more dedicated resources to partnering.”
The most popular partnership with fintechs for both credit union and banks has been those focused on digital account openings with roughly three in 10 institutions having “partnered” with a fintech for this type of technology.
“Looking ahead, that won’t change, as 42% of banks and 35% of credit unions are ‘very’ interested in ‘partnering’ with fintechs for digital account opening,” the report noted, adding that there is a distinction between a financial institution partnering with a fintech and being a partner. With regard to fintechs, the former applies.
While machine learning (ML) and artificial intelligence (AI) have been posited as technologies to watch, the report found that only a handful of credit unions have deployed machine learning, chatbots or other types of AI to date.
The following statistics underscore adoption and planned adoption rates:
· APIs: Have already deployed (53%), planning to invest or implement in 2021 (24%), have discussed at board level (12%), and not on the radar (12%).
· Cloud computing: Have already deployed (41%), planning to invest or implement in 2021 (24%), have discussed at board level (22%), and not on the radar (13%).
· Video collaboration/marketing: Have already deployed (29%), planning to invest or implement in 2021 (25%), have discussed at board level (35%), and not on the radar (12%).
· Robotic process automation (RPA): Have already deployed (18%), planning to invest or implement in 2021 (13%), have discussed at board level (25%), and not on the radar (45%).
· Chatbots: Have already deployed (18%), planning to invest or implement in 2021 (18%), have discussed at board level (44%), and not on the radar (20%).
· Machine learning: Have already deployed (10%), planning to invest or implement in 2021 (14%), have discussed at board level (45%), and not on the radar (31%).
· Artificial intelligence: Have already deployed (9%), planning to invest or implement in 2021 (16%), have discussed at board level (16%), and not on the radar (45%).
· Internet of Things (IoT): Have already deployed (7%), planning to invest or implement in 2021 (12%), have discussed at board level (44%), and not on the radar (37%).
“Despite the holdouts that still haven’t implemented them, 2021 should be the last year either cloud computing or API integration should be considered ‘emerging,’” said Cornerstone Advisors Partner, Quintin Sykes. “Cloud and API integration technologies continue to evolve and improve at a rapid pace, but it’s time they are considered mature, mainstream technologies.”
Will the Industry Rebound in 2021?
Cornerstone Advisors’ Director of Research Ron Shelvin noted in the “2020 What’s Going On in Banking” report that “2020 is likely to be a good year for the banking industry.” And in the 2019 report he said, “I hope I’m wrong about this, but 2019 is shaping up to be a challenging year for the banking industry.”
Shelvin conceded that he was wrong on both counts, pointing to the strength of 2019 and the unfathomable reality that came to define 2020 (the report was released before the pandemic hit).
“My take on 2021 is that it will be a mixed bag for the banking industry. One pleasant surprise will be lower loan losses than anticipated,” he said, adding: “Two unpleasant developments will be: 1) slower economic recovery, and 2) re-regulation of the industry—both the result of the policies of the new White House occupants.”