Best practices for regional, community banks to create modern IT infrastructures

The banking landscape is in a state of flux. Emerging financial technology companies have built new services and offerings that place the customer experience front and center, providing a flexibility and speed that traditional banking institutions struggle to match.

Fintechs are carving into the essence of what regional and community banks have done for generations, and they’re doing so by thinking more like software vendors than financial institutions. These disruptors have none of the history, infrastructure and trust of regional and community banks. But equally, they do not have the burden of antiquated legacy technology.

Jason Burian, vice president of product, KnowledgeLake

This powerful combination of agility and technological know-how has seen the fintech segment more than double its value in the space of four years, and there’s no sign of this growth stopping any time soon. Analysts are predicting almost 20% annual growth through 2028.

First, be bold

In the face of such success, how can regional and community banks — institutions that do not have the large IT budgets of national bank brands — hope to compete?

The answer is that community financial institutions must be bold. That means rethinking established and possibly ingrained processes and beliefs while embracing input from existing customers, partners and other business stakeholders. They must build a modern IT infrastructure that enables them to quickly develop, iterate and deploy digital banking applications that are on par with fintech offerings, or risk losing additional market share.

Resist half-measures. Embrace new technologies. Don’t be afraid to envision a new landscape. Inevitably, the landscape is changing.

Precisely what the new landscape of financial services looks like will be unique to each bank. However, there are several vital technology infrastructure elements that virtually every regional and community bank must consider as they aim to modernize and compete.

An incremental approach

First, it’s essential to recognize that fintechs don’t necessarily hold all the chips. In fact, traditional banks hold several key advantages over their fintech rivals. Chief among these is their reliability and continuation of service — qualities that customers still value highly.

This lineage is an edge that regional financial institutions should carefully maintain. Therefore, it is essential that they continue to offer their existing services throughout any digitization process. Ripping out reliable and trusted offerings and systems to pursue exciting new technologies should be avoided at all costs.

Rather than throwing out the banking baby with the legacy bathwater, any digital platform should iterate and expand upon existing capabilities. In other words, banks and credit unions should seek to add value for customers rather than slashing services in pursuit of something new.

Extensible and open platforms

Implementing a new digital banking platform, a new mobile app or even launching a new digital-only product are all initiatives with discrete start and end points. Developing an IT infrastructure is very different. It will incorporate the aforementioned individual projects and more, and it will need constant oversight and maintenance. A modern IT infrastructure is something that remains in service and must be slowly expanded upon and improved for years — perhaps more than a decade — at a time.

For this reason, any banking deployed platform must offer two things: high extensibility and open integration. Extensibility focuses on the ability to add new capabilities or functionality to any existing platform quickly and easily. Integration extends this capability by enabling connectivity to other IT platforms and systems within (or outside of) the financial institution. McKinsey describes this as a move from “closed systems to ecosystems,” a core shift in mentality from the multiple application silo approach commonly deployed in recent years.

Indeed, it’s possible for this extensibility to include partnerships with the very fintechs that traditional financial institutions are worried about. As noted, small banks hold many advantages that fintechs would love to access, such as a bank charter and recognized compliance capabilities. These can be leveraged into partnerships that allow banks to offer new services, tap new markets and expand both businesses.

Remember, extensibility and openness do not just mean that a platform is easy to modify or integrate from a purely technical standpoint. It must also be resilient in the face of new business demands and market shifts. If the past few years have taught us anything, it’s that we can never entirely prepare for tomorrow’s challenges. Therefore, from the very first planning stages, banks and credit unions need to measure how easily they can build upon a prospective platform and how much effort it will take to achieve desired outcomes.

Iterate and improve

In some industries, lagging slightly behind the curve in terms of offering a modern experience from any device is a mere annoyance that can result in a few bad online reviews. When it comes to banking, however, stalling out on upgrades and security improvements can spell impending doom for both the platform and the business.

Business-critical IT systems and platforms must accommodate rapid iteration and development to avoid creating digital monoliths that are unable to adapt and evolve. Legacy systems do not help this situation. Coded in dying languages such as COBOL (now over 60 years old), IT applications are difficult to extend, require specific programming skills and do not integrate well with other applications.

Modern banking technology platforms counter these challenges in several ways: They are developed in modern programming languages using cloud-native concepts that enable scalability, modularity, integration and overall flexibility. In addition, no-code and low-code development tools give everyday business users the ability to quickly configure just the solution they need, without the need for training or special knowledge. No-code/low-code tools extend IT platforms and expand the pool of employees who can enhance the systems beyond just highly skilled software engineers. This capability allows financial institutions to experiment and adapt faster and with greater agility — if they choose to.

For many banks and credit unions, improvement isn’t just a technology question but a question of wider business philosophy. The speed at which an institution needs to innovate is faster than ever, meaning that the IT team cannot solely be responsible for owning and enhancing the IT platform. The bank’s overall team must be able to expand existing offerings quickly, easily and with the minimum technical requirements.

Without this ability to iterate, any banking or IT platform risks becoming a severe drag on operation. That can have a costly impact on banks that need to invest significant human and financial capital into their digital transformation efforts.

It’s also trying for customers who have started to rely on new offerings and services. With brand loyalty continuing to drop off, it’s safe to assume that those customers won’t hesitate to look to other banks that provide up-to-date products and a better user experience.

Embrace change now, avoid customer attrition tomorrow

Banks are, by nature, cautious institutions. Indeed, for some customers, a reluctance to take risks can be a benefit. But this caution can sometimes manifest as resistance to change and an unwillingness to invest in new technologies and ideas.

For those banks and credit unions still using systems designed in the 1980s and 1990s, moving to a new IT infrastructure can be daunting. However, the move is arguably more important for these institutions than ever.

As more financial institutions begin to lean into digital services, the real danger lies in being left behind. Research and consulting firm Gartner estimates that banks spent $623 billion on technology in 2022 alone. If you’re not in the raft of organizations investing in new technology, you can be sure that your competitors are.

Jason Burian is vice president of product at KnowledgeLake. He has 15 years of experience helping customers solve automation and document problems, and manages the complete product lifecycle, including research, design, requirements, execution, enablement and launch.

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Why OCR Is Incompatible with True Digital Transformation

Optical character recognition (OCR) has been around for decades, and it’s still a technology that banks regularly use to scan and process paper or PDF forms, such as loan applications or account servicing requests. Although OCR is a well-established tool for data capture, it has a number of inherent problems that make it less than ideal when you’re thinking about true digital transformation.

We believe that OCR keeps your business trapped by thinking about forms inside the old “PDF paradigm” – viewing a form as a static and fillable document. Asking a customer to fill out a blank form by hand, or even complete a fillable PDF online, which then needs to get scanned via OCR, isn’t exactly a digital or mobile-friendly experience. Not to mention, OCR systems are notorious for data errors that result in high NIGO (not in good order) scores, which create more work to fix downstream.

Here’s how you might think differently about data collection and forms in the context of triggering and automating banking processes.

How Optical Character Recognition Works
Here’s how organizations typically use OCR solutions to manage forms data:

  1. A customer, employee or business partner downloads a PDF form or prints a paper one.
  2. They go through the form, gathering information and filling in each field by hand.
  3. They send the form back into the business, along with required documentation, where it enters a queue.
  4. Someone on staff has to scan that form and OCR technology parses the information to turn it into usable data.
  5. That data is sent to back office systems for customer management purposes – with a human needing to QA that data either before or after.

How OCR Scanning Stops Digital Transformation
While that process sounds simple and straightforward, it can go wrong in plenty of ways.

The Customer Has to Find the Right Form
The modern customer journey means making things as fast, easy and convenient as possible. Putting the burden onto your customer or financial advisor to find and download or print the right form, in the right language, feels like friction. Even if that form is a fillable PDF on your website, it’s not really a personalized experience.

Filling in Forms is Cumbersome and Awkward
No one likes having to fill in forms, especially when they’re lengthy and require lots of data. Bank form questions sometimes can appear complex, especially for processes like business lending. Unfortunately, for OCR scanning, it’s a necessary evil. The scanner and OCR software expects to see specific data in each field, and completing it wrong or missing data can cause errors.

Receiving and Scanning Forms Takes Too Long
In the digital era, consumers want to interact quickly and efficiently. Unfortunately, posting a form back and then waiting for it to be scanned before processing can add several days to processing lead times. Meanwhile, your prospective customer gets tired of waiting and may choose a competitor.

OCR Scanning Can Introduce Data Errors
No matter how well a form is filled out, or how good the OCR scanning hardware and software, perfect scanning isn’t possible. This creates inefficiencies and duplication of effort in your business. Not to mention compliance errors. Going back to the customer to make corrections or gather more information just takes more time.

Data Capture and Digital Transformation: Rethinking Forms
Instead of relying on traditional forms to collect customer data in a process, many banks are moving toward creating intelligent, guided digital interviews, prefilled and personalized to the customer, state or jurisdiction, and business process – essentially enabling a two-way conversation designed for the digital world. What does this look like?

  • Ask customers “what do you want to do today” and guide them, instead of asking them to find and complete the right form
  • Personalize the interview experience with information you already know in your system, and allow customers to confirm known data rather than rekeying it
  • Enable customers to use more of the capabilities of their mobile phones, such as geo location and cameras to add photos
  • Eliminate the need for customers to figure out confusing if/then statements and simplify the journey with business rules that govern which questions are relevant
  • Enable customers can start the process on one device and switch to another without starting over – and securely add supporting documents as needed
  • Synch data automatically back to core banking and CRM systems, without the need for intermediate steps like OCR
  • Generate personalized documents correspondence, agreements or loan packages automatically – tied to e-signing for fast close and auto archived as needed
  • Incorporate workflows to update the right people and systems at the right time

This is a truly digital way to go about collecting information from customers. Everything is seamlessly provided online, you only ask the questions you really need to, and due to the verification process, error rates fall to almost zero.

OCR is a one-trick pony – all it can do is bring data into your core system. But most banking processes require information to flow back and forth from a customer and back out to them again in the form of agreements and correspondence. Accelerating this process can deliver both revenue and cost savings.

Don’t get caught in the scanning cycle – make the true leap into digital transformation, starting at the point of customer need. If you’ve got dozens or hundreds of existing forms, and you need to move them to digital, Smart Communications can help. Read our white paper explaining why forms shouldn’t be a four-letter word, and then learn more about how our SmartIQ solution can help you transform your PDF forms into a truly interactive customer experience.

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What’s Next in Default Management: Reducing Cost & Risk with Better Digital Experience

Debt collection is challenging even during times of economic expansion, so when a recession looms, banks and lenders (and the customers you serve) are in even more of a bind. Higher interest rates are making debt more expensive and potentially more challenging for customers to stay current on payments, especially when facing job loss or other consequences of a recession. This means defaults are rising. Meanwhile new (and constantly changing) regulations put banks at risk of heavy fines for breaking the rules, especially around consumer protections.

This current economic reality means that banks, lenders and credit servicing agencies need to take a hard look at the ways they communicate with borrowers, especially in default or collections scenarios. Improving the content and delivery of your communications has positive short-term implications, to be sure. But it can also result in higher longer-term loyalty when the customer seeks access to credit again in the future. If you treat a customer well during financial difficulties, that can form a lasting impression that results in additional revenue down the road.

So how can you reduce risk of potential losses and improve the customer experience, while staying compliant with the Consumer Financial Protection Bureau (CFPB) and other regulators? The research is clear: traditional methods aren’t working anymore. Even before the pandemic, the average collections rate was below 20 percent, the lowest in 25 years, according to EY Parthenon. Moreover, banks’ outbound collections strategies have been costly and inefficient, with their success rate standing at roughly 5 percent. Despite poor response rates, 65 percent of bank-initiated contact related to debt collection is still through “traditional” channels (phone, voice, mail or letter). Meanwhile CFPB has already put limits on channels like phone calls.

With that, it’s no surprise that lenders are shifting to digital channels for communications:

  • Digital-first customers who are contacted through electronic means make 12% more payments than those sought out through traditional channels, according to a 2019 McKinsey report.
  • Lenders favoring digital-first solutions have seen monthly installment payments triple across portfolios and the cost of collections fall by more than 15%, McKinsey reports.

Not only are digital methods more effective, but they also hold the potential to demonstrate that empathy. Frequency of contact, tone and the ability to “opt out” are tracked much more easily via digital channels, with some technology solutions offering a full audit trail of every communication sent and received.

Modernizing Collections Communications

Lending and default operations leaders should look at these four areas related to digital-first customer conversations to improve total performance:

  1. Think about a holistic collections customer journey that makes it easier (and less embarrassing) for customers to get the help they need online, when and how they need it, while improving the amount you can recover. Make it easier for customers to remain current on their payments with digital reminders. Make it easier to consider simplifying repayment with debt consolidation, pointing to digital resources. Replace paper or static web forms with smarter digital interviews that guide borrowers to request a skip-a-payment, loan deferral or modification. Equip your contact center with these as well, so they can lead customers to the right offers.
  2. Make it easier to update language in your communications across every channel. The more you can empower business users instead of IT to make changes to dunning letters and digital forms – the greater the business agility. At the same time, give your contact center reps places where they can personalize correspondence to the individual to provide a better customer experience, while locking down other sections to ensure compliance. Make it easy for a customer service person to see what communication was sent to what customer, in what channel. And find a solution that gives you a full audit trail on who changed what, when, to support your compliance team.
  3. Use content intelligence tools to optimize your collections communications for impact. Messages should be clear and easy to read. This is important for regulators too, as noted above. Content intelligence tools are popular for just this reason: they allow you to optimize the readability, tone and sentiment within your communications, enabling you to focus on what you are striving for – truly engaging with your customers. Artificial intelligence tools can also help you coordinate across channel, so you can start maybe with email or SMS, and then fall over to print and mail letters automatically based on customer response.
  4. Look for customer communications solutions that are cloud-native and have API-driven integrations with best-in-class tools and workflow automation. Many organizations are moving from on-premise credit management solutions to composable, cloud-native solutions, like Salesforce or CGI Credit Studio. When you connect your CCM solution to core collections systems like these, or process automation tools, you can automatically trigger the right communications at the right time, which can help improve repayment rates.

Whether borrowers run into financial challenges affecting their ability to pay – or they simply lose track of the due date – it’s important for lenders to communicate with empathy. This is especially important when it comes to vulnerable or at-risk customers. No one wants to end up in collections, but it can also represent an opportunity to build the customer relationship.

Learn how the Smart Communications Conversation Cloud™ platform enables banks and lenders to solve these challenges, and about our integrations with core systems and download the eBook: Changing the Lending Conversation.

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Protect Your Bottom Line With 3 Proven Strategies

Countless American consumers and businesses are struggling to manage their money in meaningful ways that allow them to take advantage of long-term financial opportunities – living paycheck-to-paycheck, operating with minimal to no cash buffers, and trying to borrow without access to affordable credit.

Research shows that upwards of 80% of consumers want financial advice from their primary financial institution, but only 14% are getting it.[1] And failing to address these needs results in things like:

  • Lost customer loyalty.
  • Decreased revenue opportunities.
  • Declining share of wallet and app.

The gap in expectations between what customers want and need to help improve their financial health and the services they’re getting (or not getting) from their primary banks has also led to damaging financial fragmentation. As customers try to build a financial foundation by making better efforts to save, spend, borrow, and plan, they’re discovering gaps in what their local bank offers – forcing them to turn to non-bank competitors in their moments of need. And with each new financial relationship a customer forms, their primary bank moves farther away from being at the center of that customer’s financial life.

The good news is there are three key proven strategies community and regional banks can focus on today to protect your bottom line while simultaneously addressing root causes and potential outcomes of the financial health crisis:

  1. Become the financial hub.

The key to fighting financial fragmentation lies in becoming a financial hub. That means having access to – and offering – the right technology, reliability, control, and access.

  1. Offer the right tools.

The key to being first in line for new services and relationships is offering the right tools that support the execution of a comprehensive financial health strategy.

  1. Defend customers and strengthen trust.

The key to protecting customers and strengthening trust is balancing powerful technology with a strong human connection.

For more information about how your bank can protect your bottom line, better serve customers, and reap the rewards with these three proven financial health strategies, visit today.

[1] Achieving Financial Wellness: Innovative Companies Empowering Consumers, Aite, May 2021, 4 ­– 5.

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