The Financial Brand Insights - Spring 2023

#2 banking publication in the world. Nearly 2 million readers, and host of the fastest growing annual conference in banking.

SPRING 2023 VOLUME 4 - ISSUE 1

GO BEYOND TRADITIONAL BANKING

5 BUSINESS BANKING TRENDS TO WATCH IN 2023 PAGE 4 WILL FURRER CHIEF STRATEGY OFFICER AT Q2 PAGE 8 4 WAYS TO INCREASE CUSTOMER HAPPINESS AND LOYALTY PAGE 14 ATTRACT AND RETAIN DEPOSITS IN A RISING RATE ENVIRONMENT PAGE 20

FIGHT FRAUD BY CONNECTING FINANCIAL CHANNELS PAGE 24

In This Issue

4 Business Banking Trends to Watch in 2023 8 Enhancing the Digital Banking Experience 14 Why Financial Customers Aren’t Happy and 4 Ways to Fix It 20 Reeling in Low-Cost Deposits in a Rising Rate Environment 24 Fight Fraud by Connecting Your Financial Channels 28 Attracting the Next Generation of Credit Card Customers 32 Rapid Design and Deployment of New Credit Scoring Models 36 Retooling Lending to Meet Demand for Faster Decisions

Branch Out! Extend Your Relationships With Digital

Meet customers where they are—on your digital banking platform. And use the data, traits, and behaviors customers are sharing there to provide individualized experiences—just like they’ve enjoyed in your branch. Q2. Built for what’s next.

For more on personalization, check out our blog: “Digital Experiences Made Relevant, Dynamic, and Personal.”

THE FINANCIAL BRAND INSIGHTS SPRING 2023

Business Banking Trends to Watch in 2023 By Mandy Lopez Product Manager at Alkami

The digital banking landscape is constantly evolving, driven by rapid technological change and shifting customer expectations. Five trends financial institutions (FIs) should pay attention to right now include digital payments, rising interest rates, a focus on business continuity, treasury optimization and embedded banking. Plus, they need to understand the implications of the transition away from Libor

The digital banking landscape is in a constant state of change. FIs are preparing for a range of anticipated changes and trends that will impact the way they operate. Here are five key trends worth noting in the business banking world in 2023: TREND 1

TREND 2 Impact of Rising Interest Rates on Banking Operations After a long period of low rates, FIs are evaluating how rising rates will affect their operations. For example, tools like controlled disbursements and sweeps, which were not viable in a low-rate environment, may once again become useful. Additionally, the trend towards buy now, pay later financing options may change as the cost of borrowing increases.

Increased Adoption of Digital Payments for B2B Transactions

The gap between paper checks and ACH credits is widening, and businesses are starting to see the value in reducing float time (the time it takes for a payment to clear) and negotiating better payment terms by paying vendors via ACH credit. This trend is being driven by a variety of factors, including the pandemic, which has accelerated the shift towards digital payments, and the rise of international payments systems like ISO 2022 and FedNow. In addition to supporting faster payment settling and negotiating better terms, this trend is part of an overall move toward improving cash management. This is one area where the U.S. financial system is catching up with much of the rest of the world. Checks are not as widely used internationally. So this is a prime example of how rapid technology advances and, unfortunately, Covid-19, have brought global finance systems into closer alignment.

Tools like controlled disbursements and sweeps, which were not viable in a low-rate environment, may once again become useful .

TREND 3 Automation and Digitization of Financial Services for Business Continuity FIs continue to focus on reducing float time to improve cash flow and reduce risk. This could involve using digital payments, implementing automation and virtualization, or adopting new technologies like blockchain, digital account opening, or e-invoicing. During the Great Resignation, an increasing number of companies across all sectors faced sig- nificant business continuity issues. Without detailed

Businesses are starting to see the value in reducing float time and negotiating better payment terms by paying vendors via ACH credit.

4 THE FINANCIAL BRAND INSIGHTS SPRING 2023

THE FINANCIAL BRAND INSIGHTS SPRING 2023

price loans and hedge against region-specific risks, but it is being phased out of use in the U.S. More FIs are looking to the secured overnight financing rate (SOFR), produced by the New York Fed, as a replacement. The transition to SOFR is expected to provide FIs with an increasingly accurate and secure pricing benchmark, but exactly how this shift will affect the overall banking environment will become clearer in the months ahead.

• Review procedures on remote working and cyber risk to reduce operational risk. • Make strategic improvements that will optimize operational efficiency with a keen focus on improving cash visibility and risk, improve liquidity management, considering regulatory, cultural and technological factors. Consider how this will support the organization’s strategic objectives. • Select the best solution: Identify the opportunities available, how the solution can be designed to take advantage of digital technologies without placing large demands on resources, what the expectations are, consider the costs of adoption or non-adoption, and what the value added will be to the organization. TREND 5 Embedded Banking The trend of technology and fintech companies integrating financial services into their platforms, creating a seamless "super app" experience for users. This trend reflects the blurring of lines between the tech and finance industries, with financial services becoming more integrated into other areas of business. One example of embedded banking is the inte- gration of buy now, pay later options into checkout screens for e-commerce websites. These con- sumer-focused buy now, pay later programs, which are essentially arbitrage between when different parties want to get paid for goods and services, are similar to traditional supply-chain finance tech - niques, so this trend could increasingly be adopted as a B2B short-term finance option. In the business banking world, this trend can be used to bridge liquidity gaps, allowing businesses to take advantage of earning assets while they wait to pay suppliers or receive payment from customers. However, it's important for businesses to carefully consider the terms and fees associated with these types of financing options, as they may not be as favorable as traditional supply chain finance options.

In the business banking world, embedded banking such as buy now, pay later options can be used to bridge liquidity gaps , allowing businesses to take advantage of earning assets while they wait to pay suppliers or receive payment from customers.

Back-end automation — especially in accounts receivable and accounts payable — can free up existing staff to do high-level work that is both more fulfilling and more likely to increase revenue.

The transition from the London Interbank Offered Rate (Libor) to the secured overnight financing rate (SOFR) is expected to provide FIs with an increasingly accurate and secure pricing benchmark .

business continuity planning, companies that suf- fered significant turnover might not have had any people left in-house who knew how to perform all their necessary business banking functions. Lacking the institutional knowledge and rigorous documen- tation of work processes, those businesses were left scrambling. That painful experience has helped spur increased interest in automating business banking procedures and processes—especially in accounts receivable and accounts payable—to make life simpler for companies running with reduced staff. On the FI side of the equation, this kind of back-end automation, deployed properly, can free up existing staff to do high-level work that is both more fulfilling and more likely to increase revenue. TREND 4 Treasury Optimization Since the pandemic, treasury optimization has become increasingly important for FIs. This includes enhancing liquidity management, digitization of treasury for future proofing, and optimizing operational processes. Here are some immediate steps organizations can take to optimize the treasury function, accord- ing to the Association for Financial Professionals’ recently published guide: • Use insights on cash to identify unnecessary costs and ensure processes are being adopted correctly within your company/organization.

This trend has the biggest implications for small businesses and the FIs that cater to them. There are vendors with digital banking integrations that can help small business owners become more sophisti- cated banking customers or members. For example, they could get an alert that tells them their cash flow in two weeks is going to drop and recommends reaching out to their bank or credit union for bridge financing or an extension on their line of credit. At the same time, these services can give FIs the granular data they need to judge the credit worthi- ness of these small businesses and possibly provide financing where they would not have been able to with confidence in the past. Conversely, such ser - vices can also alert small businesses when it’s time for them to think about investing and provide options the FI can offer to meet those needs as well. This is just one of the ways that FIs can begin to differenti- ate their business banking operations to service the widely varying needs of large and small businesses. Overall, embedded banking is a key trend to watch in the coming year, as it has the potential to significantly impact the way businesses handle their financial operations. It’s especially important for FIs to monitor because embedded banking options can draw more traditional consumer and business banking revenue to pure play e-tailer and fintech companies. But the good news is that FIs can leverage online banking vendors to stay ahead of the curve on the breadth and depth of digital financial services offerings. One additional ongoing trend to keep an eye on this year is the move away from the London Interbank Offered Rate (Libor). Libor is an index that was used by global financial institutions to

Whatever trends emerge in the coming months and years, Alkami is well-positioned to help FIs take advantage of them as they shape the future of digital banking. Alkami’s expertise in B2B payments makes it a valuable partner for FIs and businesses looking to navigate the rapidly changing landscape of digital payments, reduce float time, and streamline their operations. Alkami can also help with enhancing liquidity management for treasury departments, future proofing via its digital banking solution, as well as automating and improving cash flow and cash positioning wherever possible in operational processes. ▪ About Alkami Technology Alkami Technology, Inc. is a leading cloud-based digital banking solutions provider for financial institutions in the United States that enables clients to grow confidently, adapt quickly and build thriving digital communities. Alkami helps clients transform through retail and business banking, digital account opening and digital loan origination, payment security, and data analytics and marketing solutions. To learn more, visit www.alkami.com.

Treasury optimization, including enhancing liquidity management, digitization of treasury for future proofing and optimizing operational processes has become increasingly important for financial institutions.

THE FINANCIAL BRAND INSIGHTS SPRING 2023

when account holders would come into the branch or when a commercial banker would go out and spend time with an account holder. The essence of banking was helping the account holder get where they wanted to go, whether the journey was for them as an individual or for their business. For example, an account holder who had a relationship with their bank might have gone into their branch and asked their banker if they could skip a payment because they were in a financial bind. Those requests were made in person, and the banker would make a decision based on what they knew about the account holder and their personal relationship. The core of banking hasn’t changed. What has changed is the way consumers interact with their financial institution. Now that the vast majority of interactions are digital, it has become more challenging to build those personal relationships, understand the customers’ needs and deliver personalized experiences and products. But digital technology advancements are enabling financial institutions to understand their account holders’ needs to serve them better — and the key to this ability is data. This new frontier is a game changer in financial services — and most financial institutions understand this. In a recent Q2-sponsored survey conducted by The Financial Brand, nearly 95% of respondents said that using data to enhance or augment the digital banking experience is important (Figure 1).

By Will Furrer Chief Strategy Officer at Q2

What if every time you logged onto Netflix, you saw a list of movies that wasn’t curated for you? What if they offered you the same titles they offered every other account holder? Would you feel like Netflix understood you as a customer and knew what you like? Or would you start looking around for a streaming service that understood your tastes and preferences and evolved its offerings to suit your changing needs? The answer is the latter of course, and that’s pre- cisely where consumers and businesses find them - selves with financial institutions. For more than two decades, the financial industry has focused solely on how to digitize every banking function in one of two environments — retail or commercial banking. But now that personalized digital experiences have become the norm in other industries, the financial services industry is under pressure to provide better digital experiences that align with consumer and business customer expectations. From Handshakes to Keystrokes Historically, bankers have been successful by getting to know the needs of the individual account holder. That relationship used to be cultivated As financial options for consumers and businesses increase, banks and credit unions need to broaden their digital solutions beyond traditional banking products to stay relevant. It’s all about getting to know the customer and delivering personalized experiences — and leveraging data and fintech partnerships are the keys to success.

Enhancing the Digital Banking Experience

Figure 1

How important is using data to enhance or augment the digital banking experience to your institution?

Not at all important

Slightly important

Moderately important

Very important

Extremely important

10%

20%

30%

40%

50%

8 THE FINANCIAL BRAND INSIGHTS SPRING 2023

THE FINANCIAL BRAND INSIGHTS SPRING 2023

Despite this, only about 15% of respondents are very confident that they are adequately using data to enhance the digital banking experience (Figure 2).

Only about 15% of respondents are very confident that they are adequately using data to enhance the digital banking experience .

One way to create personal experiences is through digital chat. Embedding digital chat inside of the digital banking application illustrates that the bank or credit union understands that people will have questions while banking with them. Crucially, it brings context from a digital banking session to a conversation with a customer service representative. Going Beyond Traditional Banking with FinTech Partnerships One of the best ways for financial institutions to accelerate innovation and differentiate themselves in the market is to partner with a fintech. To begin with, people are attracted to fintechs: Nearly 90% of Americans are using some type of fintech solution, and 60% to 70% of small businesses partner with a fintech for a financial capability they could get from a bank. Our most recent survey found that roughly three quarters of small and medium-sized businesses are at least somewhat interested in their primary finan - cial institution offering fintech solutions (Figure 6).

Creating New Business Models with Personalized Experiences Most banking executives understand the importance of better digital experiences. In fact, seven out of 10 executives surveyed believed that providing personalized digital experiences to consumers and businesses is very important (Figure 4).

Figure 2

How confident are you that your institution is adequately using data to enhance or augment the digital banking experience?

Figure 4

Not at all confident

Leveraging Data Establishing a 360-degree view of each account holder by leveraging data is the key to creating the right digital experience for the right customer at the right time. One of the reasons banks and credit unions find it challenging to offer more personalized experiences is that they don’t have a handle on the data. The solution goes beyond merely collecting data. Effectively leveraging it requires financial institutions to aggregate account holder data across many siloed internal systems — including customer profile, transaction and behavioral data. From there, the aggregated data needs to be transformed to become actionable. For example, it may not matter that the account holder’s balance is $489.23 or $330.82 — but rather that the customer consistently has balances below $500. Once you have that information, you need the ability to make an offer or to have a digital conversation to lead them where they want or need to go. In short, the personalized solutions (an offer to delay a payment, for example) need to be embedded in the digital banking platform. There are myriad functions that need to come together to make personalized experiences are personal, so that they deliver the meaning and the outcomes that those account holders want. That means you need to have the ability to place ads, but it also means you have to be able to conduct surveys so you can learn more about those account holders. You want to build journeys within your application. Traditionally, we’ve thought about everything from the financial institution perspective — from the inside out. Now it’s time to reverse that and start with the consumer or business perspective and work from the outside in. And how do you do that? Use the data to create a digital experience that resonates with the account holder.

How important to your institution is providing personalized digital experiences to consumers and business customers?

Slightly confident

Moderately confident

Not at all important

Very confident

Slightly important

Extremely confident

Moderately important

10%

20%

30%

40%

50%

Very important

It looks like the other 85% might be correct in their lack of confidence, because 64% of small and medium-sized businesses surveyed don’t believe their financial institution understands their needs (Figure 3).

Extremely important

10%

20%

30%

40%

50%

Figure 6

Businesses want to see more bank/fintech partnerships

However, only about 20% of those financial executives surveyed are very confident that they are providing personalized digital experiences (Figure 5).

Figure 3

Bank capability gaps are creating challenges for businesses

Q. To what degree does the following describe your business' beliefs? "My business wishes its primary FI would work with more emerging fintech providers to offer more innovative/helpful new products and services faster"

Figure 5

How confident are you that your institution is adequately providing personalized digital experiences to consumers and business customers?

Q. How challenged is your business by your financial institution not having the capabilities in its online banking offering that your business needs?

$100,000 to $999,999

24%

26%

25%

17%

$1 million to $4.99 million

$100,000 to $999,999

16%

28%

20% 9%

17%

28%

51%

$5 million to $9.99 million

$1 million to $4.99 million

19%

34%

32%

11% 4%

23%

34%

36%

$10 million to $19.99 million

Not at all important

24% 10% 1%

$5 million to $9.99 million

22%

43%

19%

30%

31%

19%

Total

Slightly important

$10 million to $19.99 million

15%

30%

27%

18% 9%

11%

28%

36%

25%

Moderately important

Absolutely describes

Describes very well

Describes somewhat

Mostly does not describe

Does not describe at all

Total

23%

32%

36%

Very important

Extremely challenged

Challenged Somewhat challenged

Not at all challenged

Extremely important

And financial institutions agree, with nearly 95% surveyed saying that offering fintech solutions to their customers is important (Figure 7).

10%

20%

30%

40%

50%

THE FINANCIAL BRAND INSIGHTS SPRING 2023

It’s clear that account holders benefit when their bank or credit union partners with a fintech. But those partnerships can also benefit financial institutions .

account holders. Spending time understanding what your consumer and business account holders (including large commercial accounts) need and want is mission-critical. Only then can you focus on finding the fintech partners that will help you deliver those solutions tailored to your account holders. Again, think from the outside in, from what your customer needs, not which fintech is the shiniest or getting the most press. The Bottom Line If they want to remain relevant and competitive, financial institutions must do three things: Leverage data, deliver personalized experiences and forge fintech partnerships. Those that can go beyond traditional banking and provide a broader set of financial solutions that align with their account holder needs will increase their market share and deepen relationships with their current customers. And then there’s the culture factor. Does the financial institution have a culture that’s open to new ideas and is willing to embrace thinking about digital delivery, digital service and the digital experience in new and different ways? Banks and credit unions must start with their people and change the culture. They need to embrace a culture that's not only open to new ideas but is willing to accept failure from time to time with some of the ideas that they put forth. Those that confine their offering to traditional banking products are at risk of losing relevance and market share. They won’t be Netflix. They’ll be Blockbuster. ▪

Figure 7

Figure 8

How confident are you that your institution is adequately offering fintech solutions to customers through digital banking?

How important to your institution is the ability to offer fintech solutions to customers through digital banking?

Not at all confident

Not at all important

Slightly confident

Slightly important

Moderately confident

Moderately important

Fintech and bank partnerships are not neces- sarily new, but technology advancements have significantly changed the partnership model. Now, digital banking platforms that are extensible and open enable fintechs to integrate on their own with a common integration method, versus creating one-off integrations for each individual financial institution. This significantly increases the speed and efficiency of offering new fintech solutions to target markets and eliminates the cost burden on financial institutions associated with integrating with fintech solutions. As an example, a mid-sized bank in the Midwest launched a small business accounting offering and at 8:30 a.m. on the first day offering was available, a small business company purchased the accounting solution. At 8:40 a.m., that small business sent the first invoice from the accounting package, and at 8:50 a.m., that business received the payment for that invoice. In less than 30 minutes, a business customer at a midsized bank signed up for the new service, sent an invoice and collected on that invoice. In another example, Texas Security Bank (with $1 billion in assets) recently rolled out six fintech solutions in 12 months through its digital banking platform. The partnerships opened new avenues for the bank to generate non-interest income opportunities and opportunities to win new deposits. Both cases illustrate how fintech partnerships can enable financial institutions to integrate innovations at a speed which have historically been unattainable. Despite the numerous advantages to partnering with fintechs and almost unanimous consensus that it’s important to do so (95% of financial institutions surveyed agreed), only one in five of those financial institutions are very confident that they are adequately offering fintech solutions to their account holders (Figure 8).

Very confident

Very important

Extremely confident

Extremely important

10%

20%

30%

40%

50%

10%

20%

30%

40%

50%

What accounts for the discrepancy? First, those institutions that lack confidence are probably not working with a platform or architecture that enables fintechs to embed solutions easily within them. The second obstacle is that many financial institutions aren’t acknowledging that their account holders really desire these incremental solutions to be embedded inside of their banking experience. So at some level they haven't quite embraced the reality of what's happening in the market. Third, they may not be aware that they can change the business model by partnering and by embracing this ecosystem — which opens the door to expand beyond the traditional revenue sources to capture new revenue opportunities. Those are the challenges. Now let’s look at solutions. It begins with getting to know your

Offering embedded fintech solutions is a sign that the financial institution is innovative and demonstrates that they are paying attention to the needs and the desires of their account holders. Fintechs can also enable banks and credit unions to offer digital features and functions that they’re not able to offer on their own. It’s clear that account holders benefit when their bank or credit union partners with a fintech. But those partnerships can also benefit financial institutions. First, they can provide avenues to new non-interest income through innovative products. Second, they foster deeper and stickier relationships with their customer base. If a business account holder utilizes accounting solutions offered through a fintech partnership, for example, it’s more difficult for that account holder to move on. Fintechs are great at solving specific problems and offering very specific products and services, but their big detraction has been that they operate independently and aren’t connected to their customers’ traditional financial operations. By partnering with fintechs, financial institutions have the opportunity to create a holistic view of the financial aspects of their account holders’ lives or their business customers’ needs and deliver a cohesive, seamless digital experience. That, precisely, is the attraction, and it’s the reason consumers and businesses are looking to their financial institution to offer more fintech solutions.

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THE FINANCIAL BRAND INSIGHTS SPRING 2023

By James White General Manager – Banking at Total Expert

Why Financial Customers Aren’t Happy

What’s the key to happiness? A new book on one of the longest-running studies of human happiness has an answer: warm relationships. Harvard Study of Adult Development research- ers have been studying two cohorts totaling more than 700 men since 1938, and their surprisingly simple conclusion is that people are fulfilled by genuine, deep relationships. But what does this Harvard sociological study have to do with financial marketing? Everything, potentially. Customer satisfaction and loyalty have been falling across the industry for the last five years. While consumers are juggling relationships with more financial institutions, fewer and fewer feel they have a meaningful relationship with any one of them. Consumers aren’t happy—and neither are the financial institutions struggling to earn their loyalty. What do customers want from a banking relationship? They want to be known and understood, and they want personalized service. Warm, genuine banking interactions matter at a time of declining customer satisfaction and increasing fragmentation. Harvard’s long-term study on human happiness offers insights financial institutions can harness as they strive to gain loyalty.

4 Ways to Fix It

14 THE FINANCIAL BRAND INSIGHTS SPRING 2023

THE FINANCIAL BRAND INSIGHTS SPRING 2023

We Used To Trust Banks. How Did We Get Here?

NUMBER 1 Keep in touch: Maintain consistent engagement so you’re their first choice Research on consumers that expanded their relationships with financial institutions showed the biggest driver is shockingly simple: The financial institution stayed in touch — reaching out regularly after a mortgage closed, for example. Gallup research dug further, finding a clear distinction between satisfaction and engagement. Customers who are satisfied and engaged are nearly twice as likely to expand products and services, compared to customers that are satisfied but not engaged. It's just like an interpersonal relationship: The longer you go without talking, texting or seeing someone, the less connected you feel. Knowing that frequent communication is essen- tial, the next three tips focus on what financial institutions should be talking about. NUMBER 2 By definition, you can’t have a relationship with a stranger. Relationships are with people you know, and the better the relationship, the more you know about the person. Today, banks and credit unions have fantastic customer journey analytics tools available. Use them. But make sure you’re addressing the biggest barrier that keeps financial institutions from getting value from analytics: data silos that typically exist among divisions (sales, mortgage, other lending, etc.). You need to integrate all your customer and business data — to start with the full picture of your customers — for customer journey analytics to deliver accurate, actionable insights. NUMBER 3 Show them you know them: Use that integrated data to drive personalization at scale One of the most awkward parts of talking to people you don’t know is “small talk.” Fumbling through fluffy topics, trying to find common ground; the conversation is rarely insightful, meaningful or memorable. This is often the level at which banks and credit unions are connecting with their customers. Get to know them: Break down data silos to understand your customers’ needs

A person’s relationship with a bank or credit union used to be one of the fundamental institutional relationships in their lives — along with perhaps a religious institution, a school and an employer. There are complex reasons why these other institutional relationships have decayed over the past several decades. But it’s clear that relationships with financial institutions are struggling now more than ever. As broad consumer expectations for hyper- personalized, ultra-convenient experiences have grown, the American Customer Satisfaction Index (ACSI) customer satisfaction scores for banks and credit unions have been falling for more than five years. And when you dig into the details of those falling scores, the biggest frustrations revolve around the banking experience becoming less personal. Consumers say financial institutions and their employees are less friendly and approachable. They’re frustrated that financial institutions don’t understand their needs, and they feel these institutions don’t communicate effectively.

Consumers’ Fragmented Financial Lives Lead To Lower Satisfaction

Consumers don’t want to be sold to. They’ve grown up surrounded by marketing. They’re wise to it. They see through it. They don’t

One source of declining customer satisfaction is the increasingly fragmented nature of Americans’ financial lives. Most consumers have relationships with multiple financial institutions, and again this fragmentation is typically greater among younger demographics. But it’s not just a matter of holding traditional checking, savings and loan accounts with multiple banks or credit unions. Consumers’ “shadow” financial lives have grown to include doz - ens of relationships such as specialty credit cards, mobile payment platforms, investing and financial management platforms, and even specialized apps for dedicated savings and checking products (to support a health savings account, for example). The Harvard Study of Adult Development confirms what most people have experienced anecdotally: More relationships do not equal more happiness. Rather, juggling more relationships can make it harder for any one of those relationships to feel deep and meaningful. In other words, it’s not just financial institutions that want consumers to consolidate their financial lives — consumers will also be happier if they can de-fragment their financial lives and build a deeper relationship with their primary financial institution. But banks and credit unions need to give them a reason to make that move.

trust it. And they actively dislike it.

Consumers want the same type of experience they get from leading retailers , and with few exceptions, major banks have been the only ones to keep up with these rising expectations.

What Does a Better Banking Relationship Look Like? Of course, a healthy banking relationship will vary from customer to customer. It will also depend on the financial institutions’ business and brand differentiators (i.e., is your value proposition centered on price, service, conve- nience, etc.) But here’s what every financial institution needs to remember: Consumers don’t want to be sold to. They’ve grown up surrounded by marketing. They’re wise to it. They see through it. They don’t trust it. And they actively dislike it. Instead, it’s useful for financial institutions to think about building genuine relationships in much the same way we think about building relationships between two people:

Consumers want the same type of experience they get from leading retailers, and with few exceptions, major banks have been the only ones to keep up with these rising expectations. Major banks have taken over the majority of consumers’ primary financial institution status. This troubling trend is even more pronounced among younger generations.

THE FINANCIAL BRAND INSIGHTS SPRING 2023

NUMBER 4 Help them: Build credibility by providing helpful content Healthy relationships are a two-way value exchange: Both parties get something useful. For financial institution customers, the products and services themselves aren’t enough — rightly or wrongly, these are often seen as interchangeable and undifferentiated. They don’t want to be told why a particular checking account or savings product is great. Instead, consumers want their financial institutions to be trusted advisors — to help them define their goals and the path to achievement. This is borne out in studies from Raddon Research that show financial literacy is a growing priority for consumers of all ages, and is particularly sought out by younger demographics. Bringing together the first three points, consumers respond to regular engagement with financial literacy content (email newsletters, blogs, videos, interactive guides, etc.) that are hyper-targeted to where they are in their financial journey. The pitfall here is that targeted content can get stale quickly. Customers’ challenges and concerns, along with best practices, evolve with the macroeconomic climate. Outdated content is less credible and less useful. As financial institutions build a customer engagement program, they need to keep fresh, hyper-relevant content in the pipeline, with topics focused on what consumers are thinking about right now. At the moment, that means inflation, recession worries, rising interest rates, housing market uncertainties, etc. Just like consumers crave better relationships with financial institutions, all of us in the industry know that our jobs are more fulfilling when we have more meaningful relationships with our customers. We didn’t get into this business to sell people a checking account. We need to keep connection front and center as we build our marketing strategies and take some simple cues from the basics of human relationships. Get to know the other person. Use that knowledge to make your conversations more interesting. Make sure the other person is getting something meaningful from you like any good, trusted friend. And above all else, just keep in touch. ▪

of financial institutions say they are not personalizing communications at all — they’re just sending the same messaging to everyone.

25% MORE THAN

say they are manually combing through customer data to try to do segmented messaging.

1 in 3

say they try to do personalization, but don’t have access to relevant data .

1 in 4

say they’re leveraging integrated, connected data to drive personalized communications.

15% ONLY

Breaking down the data silos and using analytics to understand your customers is the first step. But just knowing them isn’t enough — you need to show them you know them by using those insights to drive personalization. Traditionally, personalization has been directly at odds with frequency (the “keep in touch” part). But today, leading financial institutions use purpose- built customer engagement platforms to deliver personalization at scale, automating workflows that pull together data, extract insights and turn those insights into action faster.

Consumers want their financial institutions to be trusted advisors — to help them define their goals and the path to achievement .

18 THE FINANCIAL BRAND INSIGHTS SPRING 2023

By Kasasa

We’re witnessing a historical rise in interest rates. The Fed has been extraordinarily aggressive with rate hikes. And it looks like that trend will continue until the central bank is satisfied that it has tamed inflation. This has created the need for financial institutions to evaluate deposit pricing. And the current environment could cause unexpected deposit runoff for banks that aren’t prepared. Getting core deposits from reward checking accounts offers an advantage over certificates of deposits. The difference? CD consumers are likely to rate-shop and leave if they find a higher interest rate. In addition, reward checking accounts benefit from behaviors that earn and save annual income — creating significant savings . They also engage consumers in a way that leads to primary financial institution status, which, when compared to traditional accounts, leads to higher loan balances, more debit card transactions and more profit per account.

Reeling in Low-Cost Deposits in a Rising Rate Environment

4.5% APY

4.0% APY

2.30% Cost of funds

1.32% Cost of deposits

Kasasa Cash

Inside the Numbers For the sake of demonstration, let’s say a financial institution is looking to increase deposits by $10 million. And let’s use a 4.0% CD rate as compared to a 4.5% reward checking account. A 4% rate on a two-year CD results in an annual cost of $400,000. On the other hand, we have a reward account offering an even better rate of 4.5% on a much more liquid product. Logic would assume that this rate will cost the bank $450,000 annually but applying this simple math doesn’t account for a unique product design and strategy that brings added annual savings, reducing the true costs of the deposits.

Not Magic, Just Math The unique product design of the reward account, along with a smart strategy, allows community financial institutions to offer a higher promotional rate and pay hundreds of thousands less than they would with a CD. While the CD’s cost of funds (COF) stays at 4%, the reward account's COF drops significantly because not all accountholders qualify for the promoted rate each month. In this example, those that don’t qualify only receive 0.05%. Those that do qualify will only receive 0.25% for any balances above the predetermined cap of $25,000. This brings the COF down to 2.30%, lowering the annual

But we’re not done yet. The fact that this is a checking account means the bank will be earning non-interest income from debit card transactions of accountholders who have to complete the qualifying behaviors each month. In this example, the reward account earned $151,559 in non-interest income from the healthy debit card activity required for account holders to receive the promoted rate, while incurring $53,371 in noninterest expense. The difference brings the

As interest rates continue to rise, retaining and attracting deposits is a major challenge for financial institutions. But CDs may not be a bank’s best option. Discover the advantages of using high-yield reward checking accounts in a rising rate environment.

annual expense down by $98,188 to $131,972. That

represents a 1.32% true cost for the $10 million deposits. In total, this 4.5% checking account saves $268,028 compared to the lower 4% CD.

expense from $450,000 to $230,160 — a savings of $219,840.

20 THE FINANCIAL BRAND INSIGHTS SPRING 2023

THE FINANCIAL BRAND INSIGHTS SPRING 2023

When we look at the numbers side by side, it is clear how the reward account in this example allows banks to offer an appealing product that saves them a significant amount of money while also deepening consumer relationships and loyalty

Since competing products like CDs and money markets enjoy no discount, the COF savings with a reward checking account offers a formidable fund- ing advantage in an economic environment where rates are rising. A Strategy for Success A community financial institution with a deposit mix that includes a sizeable reward checking base has a major competitive advantage over those that don’t. Reward checking combats interest rate risk by reducing the margin compression of more traditional deposit products as rates go up. A focus on short-term risk mitigation can lead to the belief that CDs will help mitigate longer- term interest rate risk, but comparative modeling shows this is not the best approach. As rates rise steadily over a period of time, the two-year CD rate eventually rises as well, with a sharp jump once it reprices. A reward checking portfolio may reprice more quickly than CDs, but in the long run, it will actually result in widening margins as rates rise. Regardless of a bank’s appetite for credit risk or ability to deploy funds into assets, any COF below the federal funds rate means a return that is essentially risk-free (through a lower interest rate paid on accounts than earned on overnight loans to other institutions). This added income operates as yet another hedge against interest rate risk. The Best Weapon Against Rising Rates The numbers don’t lie. When examined closely, reward checking accounts prove to be a stable, long-term defense against interest rate risk. As rates continue to rise at a pace not seen in the last 20 years, community financial institutions will benefit from stronger non-interest income, greater operational flexibility, broader consumer appeal and interest margins that widen versus peers who depend on funding sources more sensitive to interest rate risk. Dive deeper in the eBook — Playing offense and defense in a rising rate environment. ▪

Certificate

Kasasa Cash

Total balances $10,000,000 $10,000,000

Promoted interest rate

4.00% 4.00%

4.50% 2.30%

Cost of funds

Annual interest expense

($400,000)

($230,160) ($53,371) $151,559 ($131,972)

Annual non-interest expense Annual non-Interest income

$0 $0

Due to the blended qualification rate and the above cap rate 81% of account holders adopt e-statements to qualify for their reward Account holders make 26.5 debit card transactions per month

Annual marginal cost/profit ($400,000)

Effective cost of deposits

4.00%

1.32%

See how much you can save. Calculate now.

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It Only Gets Better as Rates Rise

How Do Reward Checking Accounts Work? This significant COF discount occurs because the blended qualification rate and the above-cap rate reduces annual expenses: 1. Not every accountholder qualifies for the promotional rate in a given cycle. These accountholders are paid a nominal “base rate,” which in this example is 0.05%. 2. Accountholders who do qualify are paid the highest promotional rate only on balances up to a predetermined balance cap. Dollars above that cap receive a lower interest rate, which in this example is 0.25% on balances above $25K. In addition, accountholders are required to perform certain behaviors to receive their reward each month, which increase non-interest income and reduce expenses. These are important factors in determining the true cost of deposits. On aver- age, reward accountholders perform behaviors that qualify them for their rewards, including*: • More debit card transactions per month. • More accountholders adopting e-statements. • More monthly ACH transactions. These behaviors are designed to engage accoun- tholders and establish primary financial institution relationships, which ultimately leads to more loyalty and higher loan volume. In fact, some reward accounts see 68% higher loan balances than tradi- tional checking accounts (Kasasa analytics, 2022).

Reward checking accounts are the only major deposit products that enjoy this significant COF discount — an advantage that is often overlooked. Even more noteworthy, this advantage increases as rates rise. Reward accounts already pay rates that consum- ers perceive as premium, and the inherent advan- tages of these accounts allow community financial institutions to price promotional rates further out on the yield curve. Assuming an institution keeps the same promotional rate and balance cap and those accountholders qualify at the same rate, simple math demonstrates reward checking has a growing advantage when rates rise, as shown below.

Change in the cost of funds discount for reward checking as rates rise

Promoted rate Average earned rate

1.6%

1.2%

0.8%

0.4%

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22 THE FINANCIAL BRAND INSIGHTS SPRING 2023

Fight Fraud by Connecting Your Financial Channels

Figure 1

By Patti Reid VP, Product Strategy & Delivery, Card Services at Fiserv, Inc.

Tagged fraud attempts by transaction type

24% Increase

Digital wallets, chip cards and cardless transactions. In-person, online, in-app and mobile purchases. Phone calls, branch visits and emails. Signature, personal identification number (PIN) and biometric authentication. Tap, swipe, dip and wave. Whew! Consumer payments capabilities continue to expand in their variety of interactions, methods, transaction types and purchasing channels. But as almost everything about payments rapidly evolves, so too do the efforts of swindlers to deceive, cheat and steal. Total debit and credit card fraud attempts tracked by Fiserv on behalf of its risk office clients increased approximately 200% from January 2018 to December 2022 — with nearly 9 mil- lion fraud attempts observed during 2022, account- ing for almost $800 million in attempted client theft. And the attacks have accelerated as more con- sumers have increased their use of online channels. According to tracking performed for Fiserv clients, e-commerce accounted for over 75% of all card fraud attempts in 2022 (Figure 1) — a 24% increase over the 2018 calendar year — accounting for 83% of the total fraud dollars at risk. The financial services industry continues to take prudent steps to keep card transactions secure — most recently with “card present” transactions using EMV chip cards. Yet the industry’s efforts are inevitably lagging behind a plethora of new scams, swindles, cons and tricks being perpetrated by aggressive fraudsters. More must be done. Fraud. It’s only one word, but it generates a thousand negative reactions. By focusing on connecting their consumer financial channels and touchpoints, financial institutions can create a holistic view of their customers, maintain transaction volumes and keep consumers safe.

75.69%

72.31% 74.34%

61.19% 58.51%

2018

2019

2020

2021

2022

Keyed

Fallback

eCommerce

Swiped

EMV

Connect Consumer Interactions and Transactions Financial institutions can help reduce consumer anxiety and friction quite efficiently by creating a 360° view of their consumers. By understanding customer behavior more fully, financial institutions can deliver faster, more intelligent fraud detection. By analyzing data that includes a holistic look at all of a customer’s interactions and transactions with the financial institution, banks can improve their consumer authentication decisions. Here’s how it works. A bank connects its consumer financial channels and touchpoints — including debit and credit card transactions, online and mobile banking activity, ATM interactions, P2P transactions, rewards programs, contact center activity, bill pay activity, ACH transactions, tokenization and wires activity. In doing so, it can create an in-depth profile of an individual’s financial services behaviors and patterns (Figure 2). This comprehensive, cross-channel knowledge, combined with industry data, will empower the bank to more accurately identify unusual or suspicious activities that might indicate fraud. This linked approach enables financial institutions to heighten their vigilance and maintain a positive consumer experience across the payments spectrum.

24 THE FINANCIAL BRAND INSIGHTS SPRING 2023

THE FINANCIAL BRAND INSIGHTS SPRING 2023

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