2025 Strategic Planning Priorities: A Q&A with PCBB’s CEO

As community financial institutions (CFIs) look ahead to 2025, they face a rapidly evolving landscape shaped by technological advancements, shifting economic conditions, and new regulatory challenges. In this Q&A, we sit down with PCBB’s CEO Curt Hecker, a seasoned expert in banking strategy, to discuss the key trends CFIs should be focusing on as they navigate these changes. From adopting open banking to managing fintech partnerships and embracing artificial intelligence, Curt shares his insights on how CFIs can stay competitive and mitigate risks while preparing for an unpredictable future. The below is an abbreviated version of our conversation.Q: What trends do CFIs need to adopt as we move toward 2025?Curt: The biggest trends are open banking, embedded finance, and usage of AI. Open banking has been a revolutionary force in the financial sector, providing unprecedented access to account information, payment initiation services, financial data and fostering a more competitive and innovative banking environment. As we look towards 2025, several key trends and predictions are emerging that will shape the future of open banking. Further, embedded finance will encompass more financial products and services, not just banking. Embedded finance will be much larger and have a bigger scale than Open Banking. Most CFIs are still in the nascent stage of developing a strategy focused on embedded banking, but competitive execution of the strategy will be at risk if not implemented in the next 18 to 24 months. Success will be afforded to CFIs’ abilities to compete with greater speed and flexibility associated with an open ecosystem. Finally, predictive AI already supports many banking services, like chatbots in call centers. As generative AI evolves to large language content, it can improve CFI employee and customer service, language content, images, and coding, to name a few. Data management, analyzing existing systems, and identifying process challenges that software can optimize are necessary for CFI success with AI systems and platforms. We need to explore these developments and what they mean for financial institutions, businesses, and consumers.Which makes understanding and adopting open banking as a strategic approach crucial. While fintechs lead in product innovation, CFIs are better at compliance, risk management, and managing traditional payment systems, like ACH, FedNow, and RTPs. By embracing open banking, CFIs can combine these strengths to offer personalized, innovative services that meet evolving customer needs and gain access to new markets.Integrate open banking into your long-term strategy, but remember that it’s important to make sure it’s well thought-out, “regulator-approved,” and business-approved.Q: As CFIs look to form more fintech partnerships, what are the biggest risk factors they should consider?Curt: Fintech partnerships provide access to innovative products, but they come with risks. CFIs must ensure that these partnerships align with their core values to avoid potential pitfalls. Beyond that, some fintechs fail or get bought out by larger competitors, which can cause significant disruption to the partnership. Other fintechs may struggle financially and go bankrupt, leaving CFIs exposed to reputational and operational risks.You're going to have to be very nimble and have a very solid plan with these partnerships, because not all fintechs are created equal, but it is your reputation on the line. While there are a lot of benefits to these partnerships, if they’re poorly executed and not well thought out, unanticipated challenges will inevitably arise. So, you have to position now, before you just roll this stuff.CFIs are educated, so I cannot emphasize enough that they really think through this process. CFIs should take a proactive approach in selecting fintech partners, focusing on those with strong financial stability and aligned goals. It’s important to think through contingency plans so that your institution is protected if the fintech is sold or fails. Don't jump into it too fast without a completed strategic plan for these partnerships to weave into your overall corporate plan.Q: What role do you think technology, particularly AI, will play in shaping strategic priorities?Curt: Technology is driving us now, and the proliferation of artificial intelligence and machine learning will continue to play a pivotal role in the evolution of banking. These technologies will enable more sophisticated data analysis, allowing banks and fintech companies to offer highly personalized services and proactive financial management advice. AI-driven chatbots and virtual assistants will become more prevalent, providing customers with instant support and tailored financial recommendations.AI is one of these things that is unlimited in terms of what we can do with it and learn from it. But I throw caution to our CFIs around privacy and cybersecurity — you've got to do that right first. You can be late to market on some things. But you can't error there, because some of the very first-to-market people learn this the hard way when they miss critical vulnerabilities.There's Good AI, and there's Bad AI; the Good AI allows us to grow, be more efficient, and do all kinds of things way better than what we can already. Bad AI produces negative outcomes like bias, discrimination, cyberattacks, and other consequences due to insufficient security. While Good AI is helping to keep the hackers out, Bad AI will evolve and counter, enabling cyberattacks in ways we've never seen before. So, we have to maintain a strong, consistent approach and be cautious. Which is also an area that I think the government could step up faster regulation. I'd love to see some more regulation to help. We’ve got to keep moving with it [AI], but we’ve just got to be careful! I think that the regulators are going to be pretty tough on banks, as they should be, but they don't yet know all the things that they need to be really watching out for.For any bankers that may be considering AI for their institutions, I’d say, start small. Focus on areas like fraud detection or back-office operations where there's less risk. This allows you to build experience and refine your approach before rolling out AI in more customer-facing areas. Another key focus should be real-time data. Adopting platforms that offer real-time dashboards can improve both operational efficiency and customer experience. But with all this innovation, don't lose sight of privacy. Ensure that data protection and cybersecurity are at the forefront of your strategy. Rushing into tech adoption without a strong privacy framework could erode the trust you've worked so hard to build.Q: What is one factor you think CFIs are underestimating in strategic planning? Curt: I think that there’s a massive transformation in the way that we work. You've got an older banking group that has a lot of the traditional knowledge, understands the ups and downs of economic cycles, and understands banking very well, but may not be as technologically adept. As we're seeing the baby boomers retire and move out, we've got a missing factor — historical knowledge. While younger generations may have the tech background, they lack an understanding of the business of banking, which is also rapidly changing. So, that lends to more of a perspective of “let's come up with a technology solution and not have to continue to bring on more people,” but I still see that as being difficult for CFIs, and I hear that from them as well. Ultimately, to avoid this problem, CFIs must plan ahead to identify and address their most critical staffing gaps, so they can build sustainable strategies that balance technology with skilled human resources.Q: How will the timing and quantity of potential rate cuts impact CFIs' strategies for next year?Curt:  We’re not going to be able to reprice deposits real fast, and CFIs are still facing liquidity challenges. While declining rate trends will spur loan growth, liquidity management will remain a top concern. However, we should see loan demand and portfolios improve. Credit quality will benefit from declining rates, but inflation remains a significant issue. A steepening yield curve hopefully is coming our way, and we'll begin to move towards normalization.To ensure financial stability in a shifting economic landscape, CFIs should prioritize liquidity management by maintaining adequate liquidity to meet rising loan demand, while safeguarding overall financial health. It’s also crucial to monitor credit quality, taking advantage of the current positive outlook but continuing to assess risk as portfolios expand. Lastly, prepare for inflation by factoring inflation trends into strategic plans, adjusting both lending and deposit pricing strategies to stay ahead of economic changes and maintain competitiveness.Q: What challenges and potential pitfalls do you expect CFIs to face in strategic planning this year, and how can they avoid them?Curt: A key challenge is the soft net interest margin and liquidity management. We're not going to be able to reprice deposits quickly, and CFIs are still facing liquidity pressures. They don't want to be challenged with a liquidity problem, so they will need to keep their deposit levels high. At the same time, loan demand has been low for the past few years, but we expect it to pick up soon, especially with the declining rate trend. However, even as loan portfolios grow, liquidity management remains top of mind.Economic recession is a challenge for us. We’re right on the cusp, and inflation is still high compared to a few years ago, so we have to navigate carefully. It’s also hard to manage interest rates and inflation while dealing with uncertainty in the market.Another concern is geopolitical uncertainty and Black Swan events that can tip the scales in unpredictable ways. These external factors add complexity to the strategic planning process, and CFIs must prepare for unforeseen risks that can disrupt operations. We can't grow aggressively without being aware of potential risks in liquidity and credit quality.As CFIs plan for the future, the key takeaway is clear: success will hinge on balancing innovation with risk management. Whether it’s integrating open banking, navigating fintech partnerships, or adopting AI, institutions must remain adaptable while staying grounded in robust, well-thought-out strategies. By taking proactive steps in areas like technology adoption, liquidity management, and staffing, CFIs can position themselves to thrive in a landscape that is both challenging and full of opportunity.