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US must embrace global innovation or face a banking crisis

Six months after the dramatic collapse of Silicon Valley Bank (SVB), institutions across the US financial landscape are still on life support. Multi-million-dollar Fed bailouts continue to steady the ship, with US banks and credit unions reportedly owing $880 billion in outstanding loans.

Regional banks around the US have been hit the hardest and the spotlight has remained heavily fixated on how these institutions can keep afloat.

We know the pressures that regional banks face. Deposit flight, new monetary policies, volatile commercial real estate prices, high interest rates, and an uncertain economic outlook are all ultimately out of banks’ control.

But where they choose to invest is firmly within their control. Innovation has stagnated in recent decades and the US is lagging behind the world by not pushing the boundaries of what mobile banking can offer. It’s starting to come to the surface with dramatic effect, and many will suffer the same fate as SVB if they don’t adapt.

Regional banks are the lifeblood that fuels local economies, but they have become too reliant on traditional lending. With the high interest environment pushing down lending income, some banks are curbing their consumer offerings in a bid to cut costs.

But that’s precisely the wrong approach.

The US must leave its financial ego behind and look to wisdom from outside their own borders. Quote

This might not be a popular opinion, but the US must leave its financial ego behind and look to wisdom from outside their own borders.

Regional banks must learn from developing markets and at least double their investment heavily in their mobile banking applications and UX. They must match the level of innovation we’re seeing in countries like China and truly future-proof their offering. They must commit to opening up integrated ecosystems that bundle traditional banking services with non-financial services and offer individualised banking experiences.

I’ve been in the trenches with a struggling bank and understand there’s no silver bullet turning around a faltering and flailing financial institution. We acquired Jusan Bank in Kazakhstan when it was on the brink of bankruptcy before steering it to $1.2 billion profits. We did that by doubling down on creating an ecosystem that created a deep-rooted, loyal customer-base. And it paid off.

Replicating this in a North American context has its challenges. The banking regulatory framework isn’t always conducive to bundling non-financial services and established institutions can be reluctant to look beyond the four walls of traditional banking.

But digital banking ecosystem that incorporate financial and non-financial products is the future of banking and our regional banks are perfectly poised to lead the way.

Regional banks are smaller, more agile and closer to consumers. They can adapt faster than their national counterparts. They can better use advancements in AI technology to maximum efficacy, tailoring services that their customers actually want to use.

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By 2030, I believe US banking customers should be able to access the same wide variety of services that consumers in a developing economy like China.

China's payment economy was never tied to the traditional payment providers of MasterCard and Visa, and retail banks could therefore open up direct QR payments. This was revolutionary for the retail banking sector as it enabled them to cut out the middleman of network payment providers and reduce their fees. They were able to build an entire payment ecosystem and it changed the relationship customers had with their banks.

But it’s not related only to payment providers. A customer who travels often should be able to book flights and hotels using their mobile banking app, rewarded for doing so with discounts and incentives. For a different customer who likes to shop online, they should have access to online retail via their bank.

I have no doubt that the first regional bank in the US to adopt this strategy and heavily invest in their UX and mobile innovations could double their market cap and become the leaders of a new wave of tech in the US consumer finance space.

However, the ball is not entirely in the banking sector’s court. US based regulators must also come to the party and take a chance on a new era of consumer banking. The focus should shift from short-term life support measures to delivering a framework that positions the needs of the consumer front and centre. Prioritising the consumer through mobile innovation will lead to the sustainable success that the sector so desperately needs.

Embracing these concepts will require the US to take radical steps inspired by success abroad, and US legislators, regulators, and regional banks alike could do worse than to consider what other countries are getting right.

1

Yerbol Orynbayev is the former Deputy Prime Minister of Kazakhstan.

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