Among the unusual sports that didn’t last in the Olympics is the 200-meter obstacle swimming event, which made its only appearance in Paris in 1900. Just 12 people competed in a race consisting of three obstacles spaced out along the course. They had to climb over a pole, then over a row of boats, before swimming under another row of boats. It is possible that community financial institutions (CFIs) sometimes feel as if they are in such a race, as a stream of new regulations and technology developments come their way.In the second of three articles, we review three more key challenges that have shaped the financial industry this year and look at some of the strategies CFIs have adopted to overcome them.1. Increased Regulatory Scrutiny Financial institutions have had to contend with increased regulatory scrutiny across many areas of their business, from third-party relationships, fair lending, and M&A to open banking, cybersecurity, capital planning, and liquidity management, among others. What’s more, CFIs have additional requirements to deal with, such as updates to the Community Reinvestment Act (CRA), implementation of the small business lending data collection rule, and adherence to the new FDIC signature. CFI Strategies:
- Employing enhanced risk management practices. CFIs have taken proactive steps to manage the demands of heightened regulatory scrutiny. This involves assessing potential risks, developing and implementing risk frameworks and controls, and supporting ongoing monitoring and review to ensure compliance. Moreover, cultivating a compliance-first culture and communicating frequently with regulators has proven effective in minimizing regulatory risk.
- Investing in technology. Many institutions have turned to technology to meet increasingly complicated regulatory requirements. According to Infosys, growth of IT spending for regulatory projects — which was projected to increase 4% from April to September 2024 — is expected to outpace overall growth in IT spending.
- Advocating for change. Groups such as the Independent Community Bankers Association (ICBA) and the American Bankers Association (ABA) Community Bankers Council have been lobbying for regulations to be tailored to the size and complexity of each institution, in addition to an overall reduction in the compliance burden.
2. Rise of Open Banking Open banking has been a revolutionary force in banking with its promise to enhance customer engagement, drive innovation, and fuel sustainable growth. Consumers will be able to access personalized services, compare offerings from different providers, and make more informed financial decisions. The global market for open banking was valued by Mordor Intelligence at $20B in 2024, and it is expected to grow at a CAGR of 15% in the next five years. The US accounts for nearly one-third of that growth.CFI Strategies:
- Exploring with caution. While recognizing the opportunities offered by open banking, many CFIs are still unsure whether the risks associated with it, such as fraud and data security, outweigh the potential benefits. Some choose to focus on smaller initiatives, such as real-time integrations for account opening, which allow them to expand valuable offerings without a full-scale overhaul.
- Focusing on regulatory compliance. CFIs interested in this space are having to contend with a patchwork of existing laws, guidelines, and evolving regulations, such as the Gramm-Leach-Bliley Act (GLBA) on data security and the CFPB rule 1033 on sharing financial information. The latter has recently been finalized, and although it exonerates CFIs with less than $850MM in assets, they too are likely going to have to comply.
- Developing strategic partnerships. Many CFIs have chosen to partner with fintechs to integrate innovative products such as digital wallets, personal financial management tools, and payment solutions. This allows them to expand their customer offerings without significant internal infrastructure investments.
3. Faster Payments The demand for faster payments took a leap forward in the last year. A survey by the Fed found 86% of businesses and 74% of consumers used some form of faster payment in 2023. Digital wallets experienced particularly strong growth, with a more than 30% increase. According to Bank Director’s Technology Survey, FIs are on board, as an overwhelming majority of them recognize the importance of offering real-time payment capabilities to all client segments. Just over one-third of survey respondents currently offer these services to small business customers.CFI Strategies:
- Taking a gradual approach. Most CFIs are taking a step-by-step approach, starting by developing the ability to receive faster payments, as this requires less processing and compliance capabilities. Many are still cautious about sending, as they are concerned about fraud and end-user interfaces. The Faster Payments Council’s recent survey found that 70%-80% of financial institutions are likely to receive instant payments by 2028, while only 30%-40% will be able to send them by the same year.
- Adopting the FedNow® Service and RTP. Most CFIs are turning to key platforms designed to facilitate faster payments, such as the FedNow Service and the Clearing House’s RTP networks. As of October, there are more than 1K FIs participating in the FedNow Service, 95% of which are small and mid-sized FIs. Its rival RTP network recently counted about 652 FIs, and in November, it hit a new record of 1.46MM transactions in a single day. Others utilize the Zelle network for consumer-to-consumer payments or integrate with Banking-as-a-Service platforms.
In 2024, increased regulatory scrutiny has provided additional hurdles for CFIs across several aspects of their business. They have responded by boosting their risk management practices and investing in technology. Other trends, such as the rise of open banking and the adoption of faster payments, have provided some opportunities for growth, while also presenting several challenges, leading CFIs to take a cautious and gradual approach. Be on the lookout for our final article in this three-part series reviewing 2024 trends for CFIs, out next Monday.
