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How to Keep Balance Amid the Top Four Trends Shaking up the Financial Services Industry

By Grayson Clarke, Senior Vice President

What are the most pressing concerns that bank executives are facing this year, and how can they address them?

Between blockchain, advances in data analytics and a shift from competition to cooperation with fintechs, 2018 was a packed year for banks. However, 2019 is proving to be just as disruptive. Mastercard has identified some of the key trends we are seeing this year as well as strategies for success.

How to Keep Balance amid the Top Four Trends Shaking Up the

Proactively Managing Regulatory Obligations

Banking executives know all too well the enormous resources in time, capital and business focus that are necessary to meet recent regulatory obligations.

Globally, we have seen a number of new regulations, and more are on the horizon. In the last few years, Europe alone has seen EU-specific regulations such as Payment Services Directive 2 (PSD2), Market Abuse Regulation (MAR), and GDPR. In the United States, the new CECL standard affects the types and granularity of data and forecasts maintained by banks.

Rather than racing to respond to new regulations, banks can stay ahead and develop stricter policies than those required by law. For example, many issuers are implementing AI models to proactively detect account fraud prior to a customer report. By protecting their customers against fraud, issuers not only improve customer relationships but also pre-emptively address CFPB concerns.

Yet these efforts aren't only about competent and efficient compliance. Thanks to advances in regulatory technology (regtech) such as tax filing, risk management and financial reporting services, banks can use their enormous regulatory compliance efforts as an opportunity to provide additional business value and proactively support key strategic decisions.

Sharpening Credit Card Portfolio Risk Management

Towards the end of 2018, there were signs that the bull market was slowing. While the U.S. economy has continued to sail smoothly and the Federal Reserve has maintained a hawkish tone, a market slowdown can come at any time, with the ongoing shift in global trade agreements as one of the key concerns.

With a less predictable and potentially more volatile market, banks should look to reduce downside risk in credit card portfolios using advanced forecasts and models. From the charge-off peak during the last downturn, banks that implemented risk management models more effectively, and knew when to re-invest in growth, recovered most quickly.

Beyond forecasting risk at an enterprise-wide level, banks should develop and maintain robust forecasts for smaller groups of cardholders – such as by portfolio, credit segment, acquisition channel or cohort – as the attributes most predictive of losses may vary across groups.

Furthermore, there are a number of actions banks can take once an account is already delinquent to minimize charge-offs. The most effective collections strategy can vary across customer segments. A business experiment, where a bank implements varied approaches, can help identify the most effective strategy, whether the answer is richer incentives for some customer segments, and less outreach with others.

Refining Rewards

Credit card rewards are now ubiquitous, with issuers competing to offer the most generous rewards. However, in some cases, issuers may be giving away incentives to cardholders that will not generate incremental returns. Now, issuers should focus on refining rewards programs to offer each cardholder the most relevant offers. Yet, in a recent survey of 625 global business leaders across industries, only half reported that product offers are a current focus of personalization.

This leaves plenty of room for improvement when it comes to personalized credit card rewards. Banks have an opportunity to offer the right rewards to the right customers at the right time by incorporating small experiments into customer outreach. By varying the card products in outreach, and mix of marketing strategies, issuers can identify the optimal product offering for each customer. With existing cardholders, issuers can adjust outreach for spend offers to identify which offers and spend categories are most effective.

In addition to cash-back or points, issuers can work with partners to select the benefits most important to their customers, such as airport lounge access, cell phone insurance benefits or concierge services.

Eschewing a one-size-fits-all approach is increasingly essential in a marketplace where niche solutions for every type of customer continue to appear. If a bank doesn't meet customer needs, their customers will find one that does. Banks must identify the right groups and personalize their offerings accordingly, both to retain and grow business from current cardholders, and to acquire new cardholders.

Tech Giants Breaking into Banking

While new fintech startups seem to appear every day, they aren’t the only threat to banks. Many large and well-established tech companies are branching out and beginning to offer financial products. With large user bases, these companies have the ability to communicate seamlessly with customers and solve their problems faster.

Some e-commerce companies have partnered with payments processors to enable payments at brick-and-mortar locations, and others have introduced their own banking services. Companies that once focused on a small part of consumer banking, like peer-to-peer payments or investments, have sought to expand their relationship with customers by introducing deposit accounts and debit products. Social networks are leveraging their existing messaging solutions to enable peer-to-peer payments.

Although legacy banking systems and scale have made it challenging for incumbent banks to respond, they have enormous advantages over new financial services entrants that they have yet to fully exercise. Many strategies that are most effective to compete with startup fintechs may be similarly effective with entrants from other industries. In a recent survey of more than 300 financial industry executives, 65% responded that they believe fintechs will become a significant threat by 2022, and are already responding with new investments, including new products that take advantage of open banking, and new authentication strategies.

Moving Forward

The sea change in the financial sector has brought an unprecedented level of competition from both new challengers and incumbent banks, as well as regulatory oversight and rapid technological advancement. As a result, banking executives are responding with proactive strategies and moving to the forefront of financial innovation.

With an eye on risk management, customer experience and sophisticated use of data, 2019 is a crucial year in which banks have the chance to make strident moves forward.

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