Connectivity + Data + Experience = Growth The Ultimate Guide to the TOP 2021 BANK CHALLENGES 1 | mx.com About MX MX, the leader in open finance and creator of the Money Experience category, helps the financial industry deliver data-driven money experiences and improve the financial lives of millions of people. With MX, banks, credit unions, and fintechs can securely connect to the world’s financial data through account aggregation, bank APIs, and transactional data enhancement. Founded in 2010, MX is one of the fastest-growing fintech innovators, powering more than 2,000 financial institutions and 43 of the top 50 digital banking providers to improve the financial lives of tens of millions of people worldwide. Request a Demo *If you’re reading a hard copy of this guide and want to see hyperlinks to all sources cited, visit mx.com/library/ultimate-guides 2 | mx.com Executive Summary The Top Bank Challenges As the shift from traditional banking to digital banking accelerates in the wake of the Covid-19 pandemic, banks are at risk of losing their current customers, not attracting the next generation, and ultimately becoming irrelevant. Based on primary and secondary research included in this guide, we’ve found that these risks are often being driven by several challenges including: A LEGACY A BROKEN APPROACH NOT KNOWING YOUR MINDSET TO BUILD VS. BUY CUSTOMERS Fixating on costly branches and Building an ideal digital Not having a 360-degree view in-person interactions at the experience completely in-house of your customers means you expense of digital innovation is expensive, cumbersome, don’t really know them. increases your overhead and and slow. weighs you down. DATA POOR DIGITAL PARALYSIS BANKING Neglecting your internal Being stuck behind the curve data puts you at a long-term on digital banking features disadvantage. cripples your ability to retain customers and win new ones. In this guide, we’ll outline you how you can overcome these five challenges, differentiate yourself in the market, lower your operating costs, and become the primary financial institution for your customers. Let’s get started. 3 | mx.com Introduction Digital Challengers and the State of Banking in the Wake of a Pandemic Unlike anything before it, the Covid-19 pandemic has accelerated the shift to digital banking. For instance, in a global banking consumer study, Accenture Research found that half of consumers now use mobile banking at least weekly, compared to one-third who said the same just two years ago. Accenture also found that there has been a 30% to 40% decline in US in-branch transactions over the same period. 4 | mx.com And Deloitte writes, “It is now abundantly clear that Covid-19 has acted as a catalyst for digitization. In addition to accelerating digital adoption, the crisis has also served as a litmus test for banks’ digital “ It is now infrastructure. While institutions that made strategic investments in technology came out stronger, laggards may still be able to leapfrog abundantly competitors if they take swift action to accelerate tech modernization.” Forrester Research has come to the same conclusion, writing, “The clear that Covid-19 pandemic has inarguably fast-tracked the digital shift. From entertainment to shopping, consumers all over the world have tried Covid-19 has many digital services and products for the first time. Many consumers have also accessed their financial accounts online via their acted as a smartphone, opened a new financial product online, or made digital payments for the first time. As the majority of consumers migrate to digital-first experiences, the “early adopter” or “tech-savvy” profile catalyst for will apply to the mainstream market.” digitization.” These trends match with what we’ve found in our original consumer research. For instance, 87% of the 1,000 random U.S. consumers we DELOITTE RESEARCH surveyed for this guide say they’re now visiting their bank branch less often than they did before the pandemic. And 89% say they’re using mobile banking more often. 5 | mx.com In addition, 87% say they have an account with a digital-only banking service, with 81% saying they’re more likely to use such services in the future. All of this data correlates with a trend that Ron Shevlin, Managing Director of Fintech Research at Cornerstone Advisors, has discovered. He writes, “In January 2020, just 4% of Gen Zers and Millennials considered a checking account from a challenger bank their primary account. By December 2020, that percentage had grown to 15%.” 6 | mx.com That growth rate — nearly 3x in under a year — was likely propelled in part by the Covid-19 pandemic and the decreased desire many people feel about venturing to a bank branch. For instance, our primary consumer research in the Ultimate Guide to the New World of Banking shows that 36% of people say they don’t plan to go into the branch as often as they did before the pandemic, even after all restrictions have been lifted. These branch-wary sentiments almost certainly represent a sustained shift toward increased digital banking use and not just a passing trend. As Parker Conrad, co-founder and chief executive officer at the IT platform Rippling, asks, “Who wants to go back to filling out insurance paperwork with a pen and trying to find a fax machine? No one.” Likewise, as more people realize how many of their typical banking processes they can do via a digital device, TWO-THIRDS the desire to return to physical methods (such as signing a bunch of customers at Chime, the most of paperwork) will diminish. It’s no wonder that the global research popular digital fintech challenger, team at CACI estimates that by 2022, 88% of all interactions at name it as their primary bank. banks will be mobile. What’s perhaps even more worrisome for traditional banks is that Cornerstone Advisors also found that two-thirds of customers at Chime, the most popular digital fintech challenger, name it as their primary bank. 7 | mx.com This places Chime high on the list — just barely behind Citi — of institutions with the most people in the U.S. who call it their primary bank. If Chime were just another traditional player on this list, that would be one thing. But given that they’re a company that saw a 3x increase in young customers in under a year, it doesn’t bode well for traditional financial institutions — particularly those institutions that don’t have a solid digital strategy to win over future generations. 8 | mx.com In fact, Accenture’s study found that 17-18% of young people say they already use a neobank for most of their transactions. To win these future generations, financial institutions must partner with leading fintech providers that can give their customers (especially their young customers) a digital experience that competes with upcoming challengers. Without help on the digital front, it’s bound to only become more difficult to retain the edge that traditional players have held in this space. Fortunately, there are many fintech companies, including MX, that partner to help traditional banks offer a customized mobile banking experience that wows customers. 9 | mx.com But it’s not just basic account services people are looking for. It’s also a better lending experience. This is partly why the share of personal loans that have gone to fintech companies has been climbing from 2013 to 2018 (the latest data currently available). What’s more, the average personal loan size at a fintech is nearly as large as those offered by banks, with TransUnion pinning the average amount from a fintech at $10,338 and the average amount from a bank at $13,514. It’s no wonder that bank executives are focused on a key set of priorities right now, leading with improving the digital experience. 10 | mx.com What often gets overlooked is the fact that a foundation has to be laid before a bank can truly improve the digital experience for “ It all starts their customers. Here are the steps you can take to get there. with changing 1. Adopt a digital-first mindset 2. Get beyond build vs. buy your mindset 3. Know your customers with a 360-degree view 4. Build a data flywheel and culture.” 5. Optimize and personalize the digital banking experience It all starts with changing your mindset and culture. 11 | mx.com Step #1 Adopt a Digital-first Mindset For centuries, people were stuck with whatever bank had good enough service at a location close enough to them. They wanted banking nearby. But a phone in the pocket is even nearer than a branch down the street. And that changes everything. As Chris Skinner, author of Digital Bank, puts it, “We built an industry on the physical distribution of paper in a localized world, and we’re now having to get to grips with the digital distribution of data in a networked world.” Unfortunately, too many bankers still haven’t realized the full implications of this shift or the need to flip old models on their head. To illustrate this need in his book Banking on Digital Growth, James Robert Lay, CEO at the Digital Growth Institute, talks about a pyramid growth model. He writes, “When digital came on the scene, digital was bolted onto the pyramid, retrofitted to the old structure.” But, as Lay shows, that approach no longer works. Today, digital must be the primary entry point at a bank. This means that the traditional pyramid must be flipped: Lay writes, “What we’re trying to do is flip the growth pyramid upside down: transform the entire growth model so it’s now three-fifths digital and two-fifths physical — at a very minimum — as digital becomes the primary driver for growth, regardless of whether someone applies online, calls into a call center, or comes into a physical branch location to apply for a product.