Contrary to popular belief, originating accounts and loans digitally is not risky, or expensive. However, most mid-market banks have yet to make the transition to digital banking channels that actually drive revenue and acquire new customers. Almost every bank has made some sort of commitment to “get digital”, especially in the Covid-19 economy, when access to branches is limited and many customers just won’t engage any other way but digitally. But banks aren’t moving fast enough.
When MeridianLink did a market analysis in early 2020, before the pandemic, we found that less than half of US banks under $25b assets had any ability to digitally onboard a new personal deposit account and only a startling 5% could open a new business deposit account online. On the lending side, only 28% have the capability to do an online/mobile personal loan and a miniscule 3% can make a business loan online.
In spite of all the commitments and good intentions, the numbers listed above have barely budged, which is an unfortunate trend for the future of mid-market banks. As they slowly make their way through analysis paralysis, the biggest banks, credit unions, and fintech's are going all-in on new technology to take share away from smaller institutions. And they’re winning.
There’s really no need for that. Spinning up a digital account opening or digital lending presence has never been easier or less expensive. The ROI is obvious. The market demand is undisputed. The upside is unlimited, and there’s zero downside. Banks aren’t betting their whole business to open these now-mandatory digital channels. Implementing digital account opening and digital lending will not be a major disruption to the bank’s business – we’re not talking about a core replacement here, just adding some long-proven complementary technology.
Let’s examine the key perceived barriers to quick adoption of digital account and loan origination and explain why they’re not good reasons to move more slowly than the market requires:
- It’s Disruptive – These digital channels are purely additive. Nothing needs to change in core banking systems. Existing business processes can continue, during and after implementation. After establishing the initial goals, only a few bank staffers need to be actively working on it through implementation and even fewer to administer once in production.
- It’s a Fraud Risk – Digital channels done right can be less susceptible to fraud than in-person account opening or lending. There’s nobody to socially-engineer. Multiple layers of authentication and verification can be deployed. Automated process flows can be configured to quickly flag and hold anything remotely suspicious.
- It’s Expensive – Let’s take some of the mystery out of the costs of digital account opening and digital lending – it’s not expensive: Financial institutions typically pay somewhere between $20k and $50k to fully deploy and integrate a solution. Ongoing costs typically range between $25k and $35k annually. Becoming a digital branch, with access to more customers, will actually offset the costs.
- The ROI is Unclear – Digital account opening and digital lending solutions easily and quickly pay for themselves. The key to the ROI calculation is Customer Lifetime Value (CLV). Most banks should know those numbers, but a simple calculator can be found here. Using some standard baseline CLV calculations for mid-market banks, on the low end a personal customer with a $5000 average deposit account or loan balance is worth about $100 in profitability per year. On the higher end, a business banking customer with a $400k commercial loan is worth about $5000 per year.
- When the digital branch pulls in 250-350 new personal customers per year, it has paid for itself.
- When the digital branch pulls in 5-7 new business customers who open $400k lines of credit, it has paid for itself.
- When it does both, as most do, it’s paid back double the investment.
A fine-grained ROI analysis can be done at any bank, but it doesn’t need to be overthought - contrast those profit numbers against the number of lost customers who come to a bank’s website ready to do digital business and can’t. 99 out 100 of those people are never coming into a branch to open an account or apply for a loan. If one bank can’t deliver, others will.
- It Might Not Work as Expected – With a clear scope of requirements, and some fairly simple vendor diligence, expectations and reality usually align. But even if they don’t, banks aren’t betting their whole business on digital account opening or digital lending software. These are additive components, not foundational pillars of a bank’s technology stack. Most are delivered as Software as a Service (SaaS) solutions, with zero infrastructure costs. If the bank’s experience with a vendor is poor after a couple of years, or some other vendor introduces substantially better options or services, the cost to switch is basically equivalent to the initial implementation costs. Hanging on to a sub-optimal solution is the old sunk cost fallacy and SaaS costs are considerably lower. Compare the numbers above to the sunk cost of opening a brick and mortar branch that doesn’t perform—it’s a no-brainer.
- It Takes a Long Time to Implement – It can, but it sure doesn’t have to. At MeridianLink, we move as quickly as our customers do. When bank staff commits appropriate time and planning, implementation can take a few months of mostly part-time work. Most of the timeline control resides with the bank.
- We Need an RFP – Inside industry secret: We see dozens of RFPs every month at MeridianLink and 99.9% of them ask the exact same questions. Sometimes rephrased, some are 50 pages, some are 5 pages, but we haven’t seen a brand-new question in about 10 years. Obviously, banks need to do diligence work to satisfy auditors and regulators, but when evaluating vendors with long track records and hundreds of customers, RFPs can stick to the things that are specifically important to the bank’s unique requirements.
A recent MeridianLink webinar hosted by digital banking guru Jim Marous delivered the latest survey results for digital adoption by financial institutions. A question at the end asked, “Why are so many banks waiting do this when then risk is minimal and the demand is incredibly obvious?” Jim’s answer was, "Legacy thinking is the biggest contributor to FI's inability/desire to adopt a full digital transition. Let a partner help you understand why it's important. It'll be in your best interest, guaranteed."
As simple as that may sound, it’s completely correct. Fundamentally, there aren’t any good reasons for banks to not take the necessary digital steps, NOW. It’s time to break through the legacy thinking and Just Do It. The competition is coming for your customers right now and showing up to the digital banking battle with in-person-only options is a lot like bringing a slingshot to the digital gunfight. The only real risk at this point is not doing it or waiting to do it. Reach out to a partner that can propel your growth!