With a potential recession on the horizon, we know you want resources to help your business master the moment. We've put together our Agility & Excellence Resource Center to bring you strategies and solutions with a finger on the pulse of what's ahead.

In the pulse of the modern era, the banking landscape is surging forward in a transformative evolution shaped by pioneering technologies, innovative business models and a tumultuous economic climate. Sitting at the helm of this shift is the CFO, steering the financial future of their company amidst these complex dynamics.

From digital banking to the rise of open banking, the landscape is evolving at a breakneck pace, offering both challenges and opportunities for financial leaders. But it’s not just about keeping up with the latest trends and technological advancements — the current economic climate with rising interest rates and much tighter credit standards has become a minefield that CFOs will need to deftly navigate.

Banking Goes Digital

Over the past few years, the banking industry has experienced a massive transformation thanks to the advent of sophisticated financial technology (fintech). The COVID-19 outbreak only accelerated this shift, with consumers rapidly embracing online and mobile banking to replace in-person branch visits. But it's not just individual customers who have switched to digital banking. Businesses have also adopted fintech services to handle transactions and manage their finances. In fact, various forms of digital banking have become the go-to option for many businesses looking to streamline their financial operations and cut down on administrative costs.

Fintech companies have disrupted the traditional banking industry by offering innovative products and services, especially loans, that are often faster but not necessarily cheaper. However, these options are often more convenient than traditional banking services, especially for consumers and businesses with revenue below $5 million.

Open Banking

Another trend in the banking industry will be the adoption of open banking. Open banking involves putting the infrastructure in place to facilitate data sharing. This should encourage banks to provide innovative products and services based on customer needs. In the US, private companies, primarily Fiserv Inc., Jack Henry & Associates and Fidelity National Information Services, Inc (FIS) dominate the market.

Open banking will allow banks to customize financial products. Customers will gain greater control over their money with wider personalization, while banks benefit from more effective targeting. This can offer insights into customer habits and needs. It can also spur innovation by allowing banks to mine data in novel ways to create new products and services. However, while open banking offers many benefits, banks must consider potential risks, such as data privacy and security issues. These concerns are part of why the federal government, through the Consumer Federal Protection Bureau (CFPB), is looking to legislate this flow of data in order to give consumers the right to control and share their financial data via the Open Banking Rule.

High-Interest Rates & Tighter Credit Standards Pose Challenges

In the current economic climate, higher interest rates and especially tighter credit standards are having a two-fold effect on banks and their customers. While these higher rates may boost a bank's profit margin on loans by allowing them to charge borrowers more, they also increase the cost of borrowing, potentially deterring consumers and businesses from seeking loans. With the deposit gathering focus at an all-time high, if banks do not make loans, they will need less deposits. This dynamic may prove difficult for banks as one of their mandates is to make loans. Moreover, rapidly rising interest rates, which most banks did not project to occur when they did, are placing pressure on borrowers and leading to increased defaults and credit risk rating downgrades. A credit risk rating downgrade requires banks to increase reserves which will negatively affect profitability.

However, businesses can adopt proactive measures to navigate these turbulent waters. Diversifying financial sources, when possible, and fostering solid relationships with banking institutions are crucial. Spreading the deposits, as well as the loans, to multiple banks can be an effective strategy, especially today. A year ago banks were more inclined to make loans and not require deposits. That philosophy has changed and now banks will no longer consider making a loan without deposits.

Copyright © 2023, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).