The Weekly Extract from Extractable is a condensed roundup of digital experience news for financial services institutions, and our take from San Francisco.
This weeks we look at digital currencies and the possible impact to FIs. We note the increasing number of partnerships that look to change the industry. Finally, we look at digital banking differentiation among the same-old experiences from banktech companies.
The Future of Money: Central Bank Digital Currencies
The impact of the pandemic continues to affect all areas of life and the economy. This could explain the sudden interest in Central Bank Digital Currencies (CBDC). Last year when Facebook announced Libra, many people wondered if the announcement would be the impetus to make central banks issue their own currencies. The pandemic seems to be the event that is moving governments to consider the idea.
In March, as the US congress was drafting a stimulus package a democratic proposal included a mention of a digital dollar as a way to distribute stimulus payments. While the proposed scheme didn’t make it to the final bill, the idea has generated renewed discussion within Washington. A few weeks later in April, the China Daily reported that the Chinese government has begun trialling payments in its new digital currency in four major cities, Shenzhen, Suzhou, Chengdu, as well as a new area south of Beijing, Xiong’an.
This week in an article in Forbes, David Birch, makes the point that CBDC is now caught in a new “space race” between China and the US to be the dominant world economy. Birch writes, “Yes, it might make the US domestic economy more efficient but it’s really much more about maintaining the dollar’s dominant position in the global financial system. That makes it really important, much more important than it seems at first in a country full of Venmo and Cash and Paypal users.”
As noted by Birch, the conversation has further intensified after last week’s published report from the Digital Dollar Project by Accenture and the Digital Dollar Foundation. Per Mike Orcutt’s article in Yahoo Finance, the report makes “the case that the U.S. urgently needs to begin considering how it might design a digital dollar. Besides Facebook’s Libra and China’s digital currency project, an additional source of urgency is COVID-19.”
On Thursday, the House Financial Services Committee’s Task Force on Financial Technology held a hearing on how to better deliver stimulus money during emergencies like the COVID-19 pandemic. As expected, the topic of CBDC was covered.
Kollen Post, writing in Cointellegraph, notes “everyone seemed to agree that they could improve financial inclusion by giving people more direct access to FedAccounts, which may operate using a digital dollar.” Unlike many other topics, the idea of CBDC seems to have bipartisan support. “Congressman Warren Davidson (R-OH), a member of the Fintech Task Force as well as a noted crypto advocate, was pleased with the tone of the hearing, overall.” Davidson is quoted saying “It’s not really partisan in terms of where people are on this issue. It was encouraging to have a meeting where it’s not an outright rejection of it because it’s a threat to the dollar — because it is the dollar.”
While the hearing is encouraging to CBDC and digital dollar advocates, in particular, there are many concerns about security and privacy that will have to be addressed before the task force and congress, in general, can get behind the idea of CBDC.
Where do banks and credit unions fit into this picture? According to the Federal Reserve of Philadelphia, CBDC endangers FIs. The Fed published a new report that warns about the potential effects of issuing central bank digital currencies. According to the report, after the introduction of a CBDC the central bank would become “a deposit monopolist, attracting all deposits away from the commercial banking sector.”
Without deposits, FIs would have no funds to lend out and would in essence eliminate the ability for private banking to exist. Further, since the central bank doesn’t have the ability to underwrite individual loans lending would come to a halt.
Adrian Zmudzinksi in an article in Cointelegraph notes that experts don’t see the same outcome highlighted by the Fed. “Marshall Hayner, the CEO and co-founder of cryptocurrency firm Metal, told Cointelegraph that he does not believe that CBDCs endanger private banks.” Adrian quotes Hayner ”I don’t believe CBDC endangers retail banks, I find it highly probable they [CBDC] will become an integral part of the US banking system, and part of the existing regulatory structure, as the [Office of the Comptroller of the Currency] recently called on public comments on the topic of updating its rules on digital activities.”
Further, Hayner encourages the issuance of retail CBDCs to replace traditional fiat currencies. He believes that “the efficiencies and improvements greatly outweigh the negatives.” He explains: “As cash rapidly declines, the need for a digital alternative for the modern banks and fintech platforms has emerged. From fostering trust in monetary authorities, to creating competitive payment systems and enhancing money laundering enforcement, we are seeing the beginning of the global digital dollar.”
Whether stablecoins (coins pegged to an existing currency), token schemes like Facebook’s Libra, or CBDC, the future of money itself is likely to face major changes in the coming years. Banks and credit unions need to be aware of these developments as they may affect not only their digital transformation but all their business and their ultimate future.
Time to Partner Up
Last week Capgemini and EFMA released a new World Retail Banking Report 2020 (WRBR). The report finds that incumbent FIs have focused on short-term profits while delaying dealing with legacy technologies ultimately “affecting customer experience and operational excellence. Yet, despite legacy system challenges and the advantages of a modern core, banks are reluctant to take transformative action because of the levels of resource required and the risks associated with inefficient implementation.”
The WRBR outlines “how banks can overcome their challenges and approach core banking transformation through strategic, integrated and collaborative orchestration. Research shows that progressive modernization is the preferred evolution method (54%) among bank executives, allowing banks to upgrade the most critical functions and incrementally transform legacy systems.”
The report also highlights partnerships as a way to accelerate success. “Two-thirds (66%) of bank executives say it takes 1-2 years to innovate and launch a new concept when working alone; 58% reported that it takes less than a year to launch a product in collaboration with FinTechs/BigTech partners. Regulatory and compliance issues (72%) and poor IT compatibility (72%), however, are identified as barriers to effective collaboration. The Open X model acts by helping banks lower operational costs and move from a high fixed investment in IT development to a more cost-effective and flexible cost model that incorporates specialized players in the ecosystem.”
Partnerships aren’t only for legacy banks, however. This week Samsung announced a partnership with the San Francisco based fintech SoFi and Mastercard to provide “a mobile-first money management account and branded debit card.” The card is an Apple Card competitors, as it will “become part of Samsung Pay,” as noted by an article in Fintech Magazine. The notable difference, of course, is that the card is a debit card attached to an account held at SoFi.
Another notable partnership announced this week is between Goldman Sach’s Marcus and Amazon. As described in an article in Seeking Alpha, small businesses using Amazon’s marketplace will receive offers from Marcus for revolving lines of credit. The lines will have rates between 6.99% and 20.99%.
A related aside, Marcus also announced a temporary halt on new UK savings accounts. According to an article in CNBC, “over 500,000 British users have opened an account with Marcus, collectively depositing more than £21 billion.” It must be hard to be so successful.
As partnerships blur the line between legacy FIs, like Goldman, big tech firms, like Samsung and Amazon, and fintech firms, like SoFi, community-based FIs need to be more responsive and open to partnerships that make sense for their clients. It’s clear to us, FIs that manage all relationships with a one-size-fits-all vendor management process will not succeed going forward, as we noted in our blog entry last month. Community banks and CUs must start defining partnering strategies that will allow them to compete.
Differentiation in Digital Banking
Despite the increased interest in digital banking through the pandemic, we’re still hearing from bank and CU executives that digital isn’t a priority. Their position is that they already have mobile apps and “relationships are only built person to person.” Perhaps if there were some studies that showed correlation between differentiated experiences and customer satisfaction, they might listen.
According to an article in DBusiness Magazine, “a series of new studies of bank and credit card mobile app and online users released by J.D. Power, find that ease of use, speed, and accessibility of common features are the variables shared by the best-performing digital platforms.” The study finds that national banks have higher satisfaction than regional banks “with a higher expectation for proactive guidance and help and a higher expectation for advanced digital capacities.”
Jennifer White from J.D. Power notes “It’s never been more important for banks and credit card companies to make their digital offerings easy to access and use. Across these studies, the common trait among top performers is clear, smooth functionality that loads quickly and puts the information that customers need front and center.”
It is difficult for community banks and CUs, who rely heavily on identical digital experiences from the same banktech providers, to compete with the larger banks. Another strategy noted by the Capgemini and EFMA in their World Retail Banking Report 2020 might offer a hint in how to move forward. The report notes that “platform-based banks find it up to two-times easier to increase operating profits, unlock new sources of value, and improve operational efficiencies.”
Banks that embrace platform models “can expand their market reach, improve operational efficiencies, increase business profitability and offer differentiated, personalized products and services over their traditional competitors. By shifting to a platform-based model, banks that were experiencing incremental customer growth can create new business models to monetize some of their strengths.”
At Extractable, we work with Banks and CUs to exactly do that. We believe FIs that move away from undifferentiated digital banking systems and adopt platforms where they own their destiny will be the winners. Standing out in a sea of sameness has never been more crucial. Community banks and CUs that lead with relationships cannot afford to outsource their digital experiences — just like they would never dream of outsourcing their branch experiences.
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