SRM's experts spent much of 2023 tracking emerging developments in technology, regulation, and general trends in the financial markets.
Over the past 12 months, we've covered many relevant topics, including deposit challenges, blockchain developments, instant payments, financial inclusion, and data security. Not surprisingly, a few issues generated significantly more buzz than others across our content stream.
Here's a brief recap of the top five SRM blogs in 2023 and what drove their popularity.
The Future of Credit Cards Under Threat
A group of lawmakers, led by Sen. Dick Durbin (D-Ill.), reintroduced the bipartisan Credit Card Competition Act of 2023 (CCCA) over the summer.
The bill would require regulations to ensure that banks in four-party card systems with over $100 billion of assets offer at least two networks over which an electronic credit transaction may be processed. At least one of the networks must be outside the top two largest networks, which means that a combination of Visa and Mastercard would not comply.
"The CCCA would jeopardize the economic viability of credit cards for all issuers, including those with less than $100 billion of assets," Keith Ash explained in his blog. "Credit cards will be unprofitable, and issuers will likely restrict access to credit."
While certain consumers may lose access, others will see material fee increases in other banking products. SRM believes the proposal could impact financial institutions of all sizes – and their customers.
Making Sense of the EWS Digital Wallet Initiative
In March, SRM's Prakash Natarajan gave readers an early take on Paze, the then-unnamed digital wallet platform created by seven large U.S. banks through the jointly owned Early Warning Services (EWS).
"The announcement signals that banks want to accelerate their role as technology players, behaving more like fintechs and introducing more competition against established providers," he wrote. "It's also a prompt for FIs of all sizes to revisit their payment blueprint."
While Paze's launch has been pushed back to next year, it is reasonable to assume that, like other EWS offerings, the digital wallet will be made available to other banks and credit unions. While cannibalizing card volume could be troubling for smaller financial institutions, fighting the trend – as opposed to leveraging it – is likely pointless, given younger generations' credit-averse/debit-friendly mindset.
Looking at AI and Large Language Model Use Cases for Financial Institutions
Artificial intelligence (AI) platforms were a hot topic for everyone in 2023, leading to a White House executive order laying out ground rules for the groundbreaking technology.
Connor Heaton was ahead of the curve, writing about large language models (LLMs) in a March blog.
"Awareness of the opportunities for disruption around these new AI tools is spreading in financial services, with established technology vendors scrambling to integrate them into their offerings, and a surge of investment in AI and new startups," Heaton noted.
Our blog included several potential use cases for financial institutions, including technical support, fraud detection, code generation and review, and web/mobile design.
Debit Interchange Finds Itself in the Fed's Crosshairs
Myron Schwarcz and Keith Ash sounded the alarm about the Fed's proposal to lower the cap on debit interchange fees – a change that would reduce the revenue tied to those fees by roughly 30%.
While the proposal would apply to banks with more than $10 billion of assets, smaller issuers would inevitably face pricing pressure. It's a fundamental economic premise. Covered and exempt FIs compete in the same market, so the pricing does not exist in a vacuum.
SRM's experts asserted that the proposal would further strain the banking system in the wake of recent bank failures, liquidity challenges, deposit flight, macroeconomic headwinds, labor supply issues, and high inflation. The fact that many small, covered issuers will lose money on their debit programs will likely drive more industry consolidation, limiting consumer choice and eroding attempts by many at financial inclusion.
Transaction Accounts: The Key to Deposit Funding
Deposit outflows and liquidity challenges were a big part of the banking panic that concerned financial institutions over the spring. While the panic has subsided, attracting and retaining low-cost deposits remains challenging for many banks and credit unions.
While Tim Keith had a series of blogs looking at various aspects of deposit gathering, his breakdown of checking and savings accounts received the most attention from our readers.
"Data analytics and carefully targeted market messaging will be essential to execution," he wrote. "We believe opportunities within a financial institution's existing customer base likely exceed those available from pursuing new prospects."
Financial wellness messaging and outreach to transaction-oriented digital banking users are critical to engaging with consumers. On the commercial side, proactive outreach to key clients is advisable. Bankers should look hard at data tied to their retail customers to identify potential side hustles that need transaction accounts.
The Bottom Line
While 2023 was an eventful year, we believe the year ahead could be even more pivotal for banks and credit unions due to revenue challenges, erosion of credit quality, anticipated regulatory change, and emerging technology.
As the industry evolves, SRM will continue to provide updates as circumstances change. We look forward to sharing more insights with you all in 2024!
