Does Digital Impact Bank Profits?

OBSERVATIONS FROM THE FINTECH SNARK TANK

A new report on digital banking metrics and the impact that digital banking is having on banks reveals some positive developments, but also a host of troubling trends that should give bank executives cause for concern.

The fourth edition of the Digital Banking Performance Metrics study from Cornerstone Advisors, commissioned by Alkami, captures digital banking metrics from banks and credit unions that reflect spending levels, the impact of digital investments, user adoption and usage of digital services, and how efficiently digital services are delivered by financial institutions.

Bank’s Digital Spending is Through the Roof

For the second straight year, spending on the digital channel and digital technologies has nearly doubled.

In 2021, digital investments averaged roughly $220,000 per $1 billion in assets. That number grew to $425,000 in 2022, and nearly doubled again in 2023 to $780,000.

With banks’ current focus on cost containment and reduction, it’s surprising to see this increase. Some of the participating financial institutions in the study reported more than 1,000% increases in spending between 2021 and 2023.

Four Troubling Trends

It would be nice to report that all metrics are moving up and to the right. But that isn’t the direction that a number of key metrics are going including:

• Productivity. One measure of digital productivity is the number of users supported by digital channel staff. That metric has dropped by 50% since 2021, going from roughly 30,000 users supported per digital FTE down to 20,000 in 2023.
• Digital account opening. Despite the heavy investment banks have made in opening checking accounts digitally, the percentage of new accounts opened in digital channels has dropped for the second straight year.
• Bill pay. For years, younger consumers have shunned using banks to pay their bills online, but even among those consumers that do, the average number of bills paid through the banks is declining.
• P2P payments. Only about one in 10 digital banking users makes person-to-person (P2P) payments through their bank’s digital banking app. Among those users, most banks saw just 1.5 P2P transactions per month.

It’s Not All Bad, However

There are some bright spots in the world of digital banking, however, including:

• Mobile deposit. The pandemic forced many older consumers to learn how to deposit checks using their mobile devices. Despite the downward trend in the number of checks written, since 2021, consumer adoption of mobile deposit is up 50% since 2021 and the number of checks deposited tripled.
• Mobile pay. Many of the participating banks and credit unions in the study were unable to report on their customers’ mobile payment usage, but among those that did, adoption grew from 22% to 34% year over year, with users making an average of five mobile payments per month.
• Digital support. Nobody likes to use a chatbot, right? Wrong. Banks with a chatbot averaged more than 4,000 monthly sessions in both 2022 and 2023—suggesting that the new chatbots got up to speed very quickly, as the percentage of banks offering customer support through a chatbot grew from 8% in 2022 to 23% in 2023.

Speed Bumps on the Path to Digital Transformation

With declining digital productivity, anemic digital account opening, and floundering bill pay and mobile payments, it’s hard to believe that banks are making much progress on their digital transformation efforts. What’s holding things back?

• Digital is more than a channel. Banks’ investments in digital are no longer strictly about customer access and support—increasingly they’re about internal productivity improvement. This is causing budgeting and prioritization issues in a lot of financial institutions as the “digital banking department” struggles to balance competing demands from the organization.
• Digital products are lacking. Fintechs and digital banks are dominating new checking account openings—in the first half of 2023, these companies accounted for 47% of new accounts opened, up from 36% in 2020. Why? Not because they’re digital, but because they offer a better digital product. Banks need to reinvent—or at least redesign—their core checking and payment accounts to meet consumers’ changing needs and expectations.
• Digital banking platforms need a refresh. Banks’ digital banking platforms have made huge improvements over the past 10 years, but need a new refresh to enable better integration with third-party applications, provide bank execs with better insights on user activity and trends, and integrate emerging AI-based tools and capabilities.

For a complimentary copy of the 2024 Digital Banking Performance Metrics report, click here.