After many shakeups in the past year, 2024 is expected to be a difficult year for the entire banking sector. We recently connected with Jeff Nowicki, VP of Banking at Treasury Prime, the embedded finance software company, to discuss banking trends for 2024 and beyond.
Jeff Nowicki from Treasury Prime talked about the impact of inflation rates on big banks. He touched on what could be next for small community banks in 2024; the importance of adding and diversifying new business lines. And why 2024 could be an above-average year for M&A activity in the banking industry.
Our conversation with Jeff Nowicki is shared below.
Crowdfund Insider: Despite high rates impacting consumers and businesses, the US’s largest banks, such as Citigroup, Wells Fargo and JPMorgan Chase, all reported strong Q3 financial results. Will inflation and interest rates have a delayed impact on these big banks in 2024? Why or why not?
Jeff Nowicki: In 2024, I predict that the banking sector will see significant challenges, resulting in an overall difficult year for financial institutions. While well-run institutions are likely to weather the storm, the industry as a whole is expected to experience a decline in earnings.
I believe that one of the primary hurdles banks will encounter is the struggle to secure cost-effective deposits, in addition to deploying these funds into high-yielding and secure assets. This difficulty arises from a combination of factors, including economic uncertainty, changing marketing dynamics, and a potentially more cautious approach from both consumers and businesses in depositing their funds.
As the global economic landscape evolves, banks will need to adapt to changing circumstances, navigating through a complex environment characterized by fluctuating interest rates and regulatory changes.
Crowdfund Insider: What steps will community banks take to compete with larger financial institutions? For example, will we see more of these banks form partnerships with Fintechs?
Jeff Nowicki: I predict that community banks will adopt various strategies to compete with larger financial institutions in 2024. Two different approaches include exploring partnerships with fintech companies and expanding and diversifying service offerings.
When a community bank partners with an embedded banking software company, the bank is able to incorporate Banking as a Service (BaaS) into their offerings. Utilizing banking APIs provided by the embedded banking software company, banks can provide banking infrastructure and capabilities to enterprise companies and non-financial brands, allowing them to embed financial service products on their platform.
These partnerships allow banks to grow low-cost deposits. Several mid-size banks, such as Bangor Savings Bank, Grasshopper Bank and FirstBank, have already begun their partnerships with enterprise companies through BaaS,.
While partnering with fintechs is becoming more common, the regulatory landscape poses a challenge for community banks exploring these new partnerships. The current regulatory landscape may slow down the process, making it slightly more difficult for banks to “test the waters” in this space. Despite these challenges, the need to diversify and expand customer acquisition beyond traditional footprints is expected to drive strong growth in the BaaS sector.
Crowdfund Insider: How do you see BaaS evolving, including the vindication of the Bank Vendor Partnership model?
Jeff Nowicki: In 2023, there was a major shift in the BaaS industry due to increased regulatory scrutiny, with the Feds handing down interagency guidance on third-party relationships. There have been several instances of regulatory consent orders issued against banks that engaged in fintech partnerships lacking adequate oversight. This was particularly prevalent in cases involving the API Dealer model, where the BaaS provider, an unregulated entity, was responsible for compliance oversight.
Now, the tide is turning toward the more responsible Bank-Vendor Partnership Model in which the bank retains oversight of compliance and governance. This is a model Treasury Prime has championed since its founding in 2017. While the banking API connects the two parties, the bank and the tech company still have direct lines of communication with each other. This model is technically sophisticated and quick to integrate, combining the benefits of the Bank-Direct Model without its drawbacks.
The Bank-Vendor Partnership model is generally considered the most effective, the safest, and the cheapest at scale. It is the go-to option for many large fintech companies. Working directly with multiple banks through the BaaS platform, tech firms are able to scale and launch new products with other banks at the pace they want.
The Bank-Direct model, where the bank connects with a Fintech company without going through a BaaS provider, while also effective, has drawbacks such as less agility and much longer integration time. But the biggest disadvantage is that companies that work with just one bank expose themselves to concentration risk in case something goes wrong with the relationship or the bank itself. Migrating to a new bank can be time-consuming and costly.
Though technically proficient and theoretically expedient, the API Dealer model has faced regulatory hurdles that have led to recent high-profile failures.
Crowdfund Insider: What type of M&A activity do you believe we’ll see in the banking industry in 2024 and what will be the larger impact on the fintech ecosystem?
Jeff Nowicki: The banking industry is expected to witness a notable surge in M&A activity, surpassing the level we have seen in previous years. The market environment is likely to exert stress on financial institutions, particularly those grappling with stressed balance sheets.
This means that we will see larger financial institutions acquiring smaller banks as a means to expand their market presence, acquire new customer bases and access strategic geographic locations. These acquisitions could also provide opportunities for larger banks to diversify their portfolios and improve operational efficiency.
It’s important to note that the regulatory landscape will play a crucial role in shaping the nature and extent of M&A activity. Regulators are increasingly weighing financial system stability concerns and the merits against “too-big-to-fail” concentration risk, given the fallout of bank failures in 2023.
Crowdfund Insider: Banks need to invest in more compliance with all the regulatory scrutiny – what are the trends you’re seeing on the banks’ side for expenses?
Jeff Nowicki: In its early days, some viewed BaaS as a silver bullet or quick win, assuming it could eliminate the need for hefty expenses associated with opening new branches and avoiding traditional overhead. In 2023 and moving into this year, the perception has evolved, and the consensus now recognizes that treating BaaS as a standalone business line is imperative. To ensure the success and safety of BaaS operations, banks must allocate appropriate resources and implement robust compliance practices.
Crowdfund Insider: How do you think AI will impact the banking industry this year?
Jeff Nowicki: The future of AI in banking is unclear. The financial services industry is highly regulated, and while there is great potential for AI to transform various aspects of banking, the regulatory framework plays a crucial role in determining the scope and capabilities. This lack of regulatory clarity can pose challenges for businesses aiming to make early investments in AI.
Crowdfund Insider: Will we see more fintech/bank “breakups” this year?
Jeff Nowicki: I don’t think that we will see an increase in breakups between banks and fintechs. The relationship between fintechs and banks follows a natural lifecycle. Typically, these collaborations involve multi-year contracts, indicating a commitment over an extended period. If the partnership is not proving to be financially viable, it may prompt a reevaluation of the relationship.
Crowdfund Insider: What other trends do you predict for 2024?
Jeff Nowicki: I believe we will see an increasing number of banks recognizing the necessity of having a more hands-on and proactive role in the regulatory adherence of their embedded finance partners. The traditional model of maintaining an “arms-length” distance from partner compliance processes is being reconsidered as banks understand the importance of direct involvement in ensuring partner regulatory compliance and risk management. This trend signifies a departure from treating compliance as a separate and somewhat detached function but as a critical aspect of overall business strategy.