Q2 Announces 2024 State of Commercial Banking Report
- Liquidity management takes center stage with deposit growth remaining a challenge.
- Regulatory changes expected to impact capital strategy and pricing.
- Interest rate hikes driving repricing risk on maturing deals.
- Renewed focus on automation and systems integration for greater back-office efficiency.
- Technology helping bridge the talent gap in financial institutions.
- Opportunities exist to drive deposit growth from small businesses.
- None.
Insights
The commercial banking sector is undergoing significant changes, influenced by macroeconomic factors, regulatory shifts and technological advancements. The focus on liquidity management underscores a critical pressure point for banks, as they grapple with balancing loan and deposit growth in a challenging economic environment. The report's emphasis on scarce liquidity and elevated interest rates suggests that banks may need to innovate deposit acquisition strategies and reassess their loan pricing models to maintain profitability.
Furthermore, the anticipation of regulatory changes, particularly the implementation of Basel III, indicates a forthcoming need for banks to adjust their capital strategies. This could have a ripple effect on lending practices and the overall stability of financial institutions, necessitating a keen understanding of regulatory compliance and risk management.
Advancements in financial technology are playing a pivotal role in addressing the talent gap within the banking industry. The integration of automation and systems is not only a means to improve back-office efficiency but also a strategic move to empower a less experienced workforce. This shift towards technology-driven solutions highlights the sector's adaptation to a changing labor market and the importance of investing in digital transformation to remain competitive.
The report's mention of technology as a facilitator for small business deposit growth reveals a significant market opportunity. By leveraging cost-efficient technological platforms, banks can target and nurture small business relationships, potentially unlocking a new avenue for deposit acquisition and customer engagement.
The report's findings on the impact of higher interest rates and the shift towards floating rate structures indicate a changing landscape for commercial lending. The increased repricing risk on maturing fixed-rate deals could lead to heightened sensitivity to interest rate fluctuations among borrowers and lenders alike. Banks may need to develop more sophisticated interest rate risk management strategies to protect their margins and maintain customer relationships.
Additionally, the focus on automation and systems integration suggests that mid-size to large businesses are seeking to streamline operations, potentially leading to cost savings and improved customer experiences. This could foster a more competitive environment where financial institutions that fail to adapt to technological advancements may lose market share.
Report reveals commercial banking trends and the role technology investments play in addressing industry talent challenges, strengthening business banking relationships and improving back-office efficiency
“The commercial banking market is at a pivotal point in its evolution,” said Gita Thollesson, manager, Strategic Advisory Services, Q2. “Last year, bankers focused on navigating uncharted waters as they faced macro-economic challenges. In 2024, with regulatory changes on the horizon and technology advancing at lightning speed, it is more important than ever to prioritize strategic foresight and adaptability to prepare for an uncertain future.”
This report is based on findings from Q2 PrecisionLender’s proprietary database of 2023 commercial lending deal flow, along with economic data from several public sources, including the Federal Deposit Insurance Corporation (FDIC) and Federal Reserve, and industry research. Q2 PrecisionLender data reflects commercial relationships from more than 160 geographically diverse banks and credit unions in
Key Takeaways from the Report:
- Liquidity management takes center stage: Deposit growth remains an industrywide challenge. Scarce liquidity is leading to supply-side contractions, while elevated interest rates are slowing loan demand;
- Regulatory changes are expected to impact capital: Even though the final form of Basel III Finalized hasn’t been determined, it’s already leading bank treasurers and capital subject matter experts to rethink capital strategy and pricing;
- Higher rates are driving repricing risk on maturing deals: Interest rate hikes have driven a shift toward floating rate structures and significantly increased the repricing risk on maturing fixed-rate deals;
- There’s a renewed focus on automation and systems integration: A need for greater back-office efficiency in mid-size to large businesses is driving demand for more automation and integration between their banking and back-office systems;
- Technology is helping bridge the talent gap: The talent shortage is hindering financial institutions’ ability to compete and win, and they are looking to technology to help bridge the gap for less experienced employees; and
- Opportunities exist to drive deposit growth from small businesses: Small businesses can be a potential source of deposit growth if financial institutions target and nurture those relationships effectively. Technology advancements are making it more cost-efficient to do so.
Click here to learn more and register for the 2024 State of Commercial Banking webinar on Thursday, February 8, at 12:30 p.m. CST. All registrants will receive a copy of the report following the webinar.
Join Thollesson and report co-writer Debbie Smart, senior product marketer for Q2, for a related session at the Acquire or Be Acquired (AOBA) conference today, January 29, at 2:25 p.m. MST.
To learn more about how Q2 delivers simple, smart, end-to-end banking and lending solutions for commercial financial institutions, visit https://www.q2.com/commercial.
About Q2 Holdings, Inc.
Q2 is a leading provider of digital banking and lending solutions to banks, credit unions, alternative finance companies, and fintechs in the
Forward-looking Statements
This press release contains forward-looking statements, including statements about: increasing pressure on net interest margin; financial institution focus on developing and executing strategies to foster primacy and drive deposit growth; financial institutions commitment to creating a collaborative environment for treasury and loan officers; the ability of cross-sell combined with treasury to generate additional return on equity; banker conservatism in pricing decisions; trends and stress impacting the office sector; the importance of active portfolio management in mitigating risk and maximizing risk-adjusted returns; the importance of cross-selling, focusing on fee-based business and relationship expansion; the future impact on net interest margin of future interest rate changes; and, the importance for financial institutions to remain nimble and embrace collaboration between treasury and loan officers while also focusing on cross-sell opportunities to deepen client relationships and compete. The forward-looking statements contained in this press release are based upon Q2’s historical performance and its current plans, estimates, and expectations and are not a representation that such plans, estimates or expectations will be achieved. Factors that could cause actual results to differ materially from those described herein include risks related to: (a) uncertainties in the banking and financial services industries, including as a result of recent bank failures, and the potential impacts on Q2’s customers' prospects and Q2’s business sales cycles, Q2’s prospects' and customers' spending decisions, including professional services which are more discretionary in nature, and the timing of customer implementation and purchasing decisions; (b) the risk of increased or new competition in Q2’s existing markets and as Q2 enter new markets or new sections of existing markets, or as Q2 offer new solutions; (c) the risks associated with the development of Q2’s solutions and changes to the market for Q2’s solutions compared to Q2’s expectations; (d) quarterly fluctuations in Q2’s operating results relative to Q2’s expectations and guidance and the accuracy of Q2’s forecasts; (e) the impact that inflation, rising interest rates, an economic stagnation or slowdown in the economy, or challenges in the financial services industry, financial markets and credit markets have had to date or in the future could have on account holder or end user, or End User, usage of Q2’s solutions, including the promotion and adoption of Q2’s Helix and payment solutions, and on Q2’s customers' prospects and Q2’s business sales cycles, Q2’s prospects' and customers' spending decisions, including professional services which are more discretionary in nature, and the timing of customer implementation and purchasing decisions; (f) the risks and increased costs associated with managing growth and the challenges associated with improving operations and hiring, retaining and motivating employees to support such growth, particularly in light of the macroeconomic impacts of increased employee turnover, labor shortages, wage inflation and extreme competition for talent; (g) the risks associated with Q2’s transactional business which are typically driven by end-user behavior which can be influenced by external drivers outside of Q2’s control; (h) the risks associated with effectively managing Q2’s cost structure in light of the challenging macroeconomic environment, challenges in the financial services industry and from the effects of seasonal or other unexpected trends; (i) the risks associated with the general economic and geopolitical uncertainties, including the heightened risk of state-sponsored cyberattacks on financial services and other critical infrastructure, and continued or increased inflation partially driven by increased energy costs or other unpredictable economic impacts that have and may continue to negatively affect demand for Q2’s solutions; (j) the risks associated with managing Q2’s business in response to continued challenging macroeconomic conditions, challenges in the financial services industry and any anticipated or resulting recession; (j) the risks associated with accurately forecasting and managing the impacts of any macroeconomic downturn or challenges in the financial services industry on Q2’s customers and their end users, including in particular the impacts of any downturn on financial technology companies, or FinTechs, or alternative finance companies, or Alt-FIs, and Q2’s arrangements with them, which represent a newer market opportunity for us, a more complex revenue model for us and which may be more vulnerable to an economic downturn than Q2’s financial institution customers; (k) the challenges and costs associated with selling, implementing and supporting Q2’s solutions, particularly for larger customers with more complex requirements and longer implementation processes, including risks related to the timing and predictability of sales of Q2’s solutions and the impact that the timing of bookings may have on Q2’s revenue and financial performance in a period; (l) the risk that errors, interruptions or delays in Q2’s solutions or Web hosting negatively impacts Q2’s business and sales; (m) the risks associated with cyberattacks, data and privacy breaches and breaches of security measures within Q2’s products, systems and infrastructure or the products, systems and infrastructure of third parties upon which Q2 relies and the resultant costs and liabilities and harm to Q2’s business and reputation and Q2’s ability to sell Q2’s solutions; (n) the difficulties and risks associated with developing and selling complex new solutions and enhancements with the technical and regulatory specifications and functionality required by Q2’s customers and relevant governmental authorities; (o) regulatory risks, including risks related to evolving regulation of artificial intelligence, or AI, machine learning and the receipt, collection, storage, processing and transfer of data; (p) the risks associated with Q2’s sales and marketing capabilities, including partner relationships and the length, cost and unpredictability of Q2’s sales cycle; (q) the risks inherent in third-party technology and implementation partnerships that could cause harm to Q2’s business; (r) the risk that Q2 will not be able to maintain historical contract terms such as pricing and duration; (s) the general risks associated with the complexity of Q2’s customer arrangements and Q2’s solutions; (t) the risks associated with integrating acquired companies and successfully selling and maintaining their solutions; (u) litigation related to intellectual property and other matters and any related claims, negotiations and settlements; (v) the risks associated with further consolidation in the financial services industry; (w) the risks associated with selling Q2’s solutions internationally and with recent expansion of Q2’s international operations; and (x) the risk that Q2’s debt repayment obligations may adversely affect Q2’s financial condition and cash flows from operations in the future and that Q2 may not be able to obtain capital when desired or needed on favorable terms.
View source version on businesswire.com: https://www.businesswire.com/news/home/20240129059101/en/
MEDIA CONTACT:
Carly Baker
Q2 Holdings, Inc.
210-391-1706
carly.baker@q2.com
INVESTOR CONTACT:
Josh Yankovich
Q2 Holdings, Inc.
512-682-4463
josh.yankovich@Q2.com
Source: Q2 Holdings, Inc.
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