CI recently caught up with Jamie Dominguez of Q2 Holdings to discuss how banks are re-imagining banking as competition from digital banks increases.
As background, Q2 (NYSE: QTWO) is a provider of digital transformation solutions for financial services, serving banks, credit unions, alternative finance companies, and Fintechs in the US and internationally.
Dominguez shared his perspective on what is driving the increasing demand for personalized banking experiences and why more customers are turning to alternative banking options like neobanks or digital banks.
He touched on why regional banks are increasingly adopting embedded finance to stay competitive with larger financial institutions.
Our chat with Jaime Dominguez, Principal Product Marketer from Q2, is shared below.
Crowdfund Insider: What is driving the growing demand for personalized banking experiences, and why are more customers turning to alternative banking options?
Jaime Dominguez: The growing demand for personalized banking experiences is driven by the desire for consumers to have convenience, relevance, and engagement. It’s no longer enough to just have a place to deposit and withdraw funds. Consumers want their banking experiences to be the same as what they get from services in other areas of their lives. Think Amazon, Netflix or Uber.
Consumers expect their financial institutions to understand their unique needs and preferences, providing them with tailored services and recommendations. The rise of these capabilities comes from the ability to harness data and analytics to deliver these personalized experiences more effectively.
Additionally, the increasing competition from fintech companies and alternative banking options has pushed traditional financial institutions to innovate and prioritize consumer-centric approaches to stay relevant and retain their account holder base. As a result, more consumers are turning to alternative banking options that offer seamless, personalized, innovative solutions that cater to their evolving financial needs.
Crowdfund Insider: Why are regional banks increasingly adopting embedded finance to stay competitive with larger financial institutions?
Jaime Dominguez: Regional banks are increasingly adopting embedded finance to diversify revenue streams, enhance consumer experience, remain competitive, and stay relevant with a new generation of consumers who have high expectations for how they want to interact.
Consumer loyalty within the banking sector continues to be a challenge for these financial institutions, and they must complement traditional banking features with those that provide additional daily value to the end-users.
These financial institutions can change the consumer mindset that banking is a commodity by continuing to innovate in areas that the larger financial institutions don’t invest in or prioritize.
Existing Relationships (Tech Companies, Healthcare, Insurance, Retail, etc.): Regional banks often have strong relationships in specific verticals (tech, healthcare, insurance, retail, etc.) for which they offer traditional banking services. Often, they have the opportunity to further expand these relationships by providing those clients with embedded finance. Embedded finance allows these clients to offer more valuable products to their customers. Embedding payments, deposits, and lending into vertical-specific workflows (vs. linking out to a third party) allows clients to have stickier and more robust relationships with their customers.
Embedded finance can also drive revenue for the bank or credit union and the client. Offering this new service ultimately protects the financial institution’s most important relationships while also providing a potential double-digit growth line of business.
“Channel” to acquire new relationships: Acquiring new customer relationships is often a significant challenge for financial institutions. Embedded finance creates built-in customer “channels,” providing access to customers the institution doesn’t currently serve—and might otherwise find difficult to reach.
Complementary Partners: Modern technology and effective marketing are often weaknesses of regional banks. Embedded finance offers a complementary model for regional banks in which they can lean on their customers for what they are good at – effectively marketing to new and existing customers and developing new software, technology, and products that solve industry-specific problems.
Crowdfund Insider: How will digital banks respond to the rise of fintech partnerships with smaller institutions?
Jaime Dominguez: Digital banks must form strategic partnerships to enhance their offerings, improve consumer experience, and expand their market reach.
This will allow digital banks to leverage fintech innovations while maintaining their regulatory expertise and infrastructure. These banks will need to continue to strike the balance of maintaining a frictionless, user-friendly experience with increasing regulatory pressure to focus on risk and compliance.
Digital banks must embrace the notion that if they do not build the product or service, someone else will. It’s an ongoing race to a non-existent finish line, and those banks that invest in a “digital-first” mindset will be better positioned than those opting for traditional strategies.
Digital banks can adapt by:
Adding new differentiated features. Digital banks must continue to add differentiated features that meet the needs of the market segments they focus on. They cannot assume that a basic digital banking offering will provide sufficient value to differentiate them from their competitors in the future.
Embracing partnerships. Digital banks should also embrace partnerships with fintechs where they have gaps in their existing portfolios.
Exploring new go-to-market models. Digital banks need to consider partnering directly with financial institutions and license some of their existing services (like the approach fintechs have taken).
Crowdfund Insider: What consumer banking trends can we expect to see emerge in 2025?
Jaime Dominguez: We just completed our current 2025 Retail Trends Banking Trends and Priorities report in collaboration with the Digital Banking Report and Jim Marous, which will be released in February.
According to the report, financial institutions are strongly focused on the continued improvement of the consumer experience. We’re also seeing increased focus on improving and enhancing the use of data and AI to drive personalization and fraud detection. We believe there will be an increased focus on working with fintechs to enhance innovation and improve processes like account opening.
Crowdfund Insider: In addition to embedded finance, what other strategies are regional banks and credit unions using to better serve their customers?
Jaime Dominguez: Banks and credit unions are still focusing on digital transformation, which is ongoing to keep up with consumer demands. These financial institutions must identify technology providers that embrace an open banking structure, allowing for a faster deployment of third-party products and services relevant to the end-users’ financial lives.
They’re also enhancing fraud and security capabilities, focusing on personalized financial services, and investing in community engagement to better serve their consumers. These concepts have always been at the core of what community financial institutions stand for, and it is key to keeping them strong in the communities they serve.
Regional financial institutions are implementing a number of strategies including:
1. Laser focus on customer experience. Customer experience expectations have greatly increased with the growth of fintechs. Hence, banks have looked to improve their customer experience via digital transformation and tech-forward omnichannel customer service strategies
2. Doubling down on in-person and in-branch interaction models. Some financial institutions have realized they have an opportunity to differentiate on their existing strengths – building strong “in-person” relationships in their local communities. They have launched strategies to increase their marketing and physical presence in target markets.
3. Niche strategies/digital brands. Financial institutions have also seen success with the challenger brand model, in which they select a specific customer niche/segment that they believe they can serve and launch a new digital sub-brand that forges an emotional connection and meets the specific financial needs of the particular segment.
4. Fraud detection. In the digital banking world, where customer interactions and transactions happen faster than ever, fraud attacks have grown significantly. Banks and credit unions are prioritizing enhancing fraud and BSA/AML strategies and competencies.