Mid-tier financial services (FS) firms are cool. These are the banks and capital markets firms that meet the local and regional needs of their clients with a goldilocks mix of just right community connection and customer experience. However, many of these firms are struggling to compete against large national competitors that are driving digital innovation at scale and smaller innovation-forward fintech challengers. Mid-tier FS firms are stuck in the middle, lacking the budgets of the big guys and the innovation appetites and expertise of the fintech challengers. But mid-tiers have something the others lack—community-based customer connections—they know their customers, often literally. As digital engagement and AI-driven everything pervade most facets of modern life, mid-tier FS firms need to ensure they invest in enough modernization to drive meaningful personalization as a digital extension of their local and regional brands.
HFS Research, in partnership with Cognizant, set out to better understand the unique needs of US mid-tier FS firms. We surveyed 151 leaders from US-based FS firms to identify their priorities, related investments, challenges, and what’s really delivering value. The sample included an intentional mix of IT and business leaders across banks and capital markets firms, including asset and wealth management firms and investment banks. The data shows a clear hunger for growth and distinct plans for modernization and innovation-led initiatives, but with a strong cost sensitivity and an acute awareness that technology and services firms are not prioritizing solutions for the mid-tier. Mid-tier firms need more than trickle-down digital to change, grow, and comply in a post-Silicon Valley Bank (SVB) world!
Key findings
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The problem statement: US mid-tier banks are fighting a massive cost and profitability battle amid rising revenue and anemic asset growth.
An analysis of 2022–2023 financial data for nearly 60 US mid-tier banks shows strong revenue growth (32%), but net income growth is -6%, cost-to-income ratios are rising (which is bad), and asset growth is anemic. Capital markets firms face similar cost challenges, but fee compression is killing their revenue growth despite rising assets under management (AUM). It’s no wonder that when asked about their top business outcome priorities, mid-tier FS firms cite growth, customer experience (CX), and profitability—a hopeful across-the-board mix of objectives.
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Investments to move the needle: Mid-tier banks and capital markets firms have different approaches. Banks are investing in foundational modernization, while capital markets firms are investing in data and digital—with expectations of return on investment (ROI) within a year.
These investment priorities reflect firm strategies to hit their growth, profitability, and CX levers through technology enablement to drive better CX and streamline operations. There are distinct nuances between banking and capital markets. Banks are investing in foundational modernization, while capital markets firms are investing in data and digital. The expected average time for ROI is 1.2 years—underscoring the need for transformation now—not three to five years down the road.
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Roadblocks to progress: Mid-tiers cite a lack of services and solutions designed for their needs as a top three challenge to realizing their strategic objectives.
“Trickle-down digital” plus systemic challenges, such as legacy technology and compounded tech debt, data quality and access, limited budgets to fund innovation, and issues finding and keeping the right talent, make it exceptionally hard to change and modernize enough to create a secure future for themselves and their clients. Mid-tiers need focused help designed for their unique needs.
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Driving value: 76% of mid-tier FS firms’ adoption and investment in emerging technologies is focused on driving bottom-line impact.
AI, automation, and analytics with a side of SaaS-based consumption of platforms top the list of adoption and investment in emerging technologies. Mid-tier firms are leveraging these technologies to drive cost impact through productivity as an antidote to the current profitability crunch.
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The ecosystem imperative: Mid-tier FS firms are expanding their partner ecosystems beyond SaaS platform providers with full-service firms, managed services providers, and fintechs.
74% of respondents indicate they are interested in a managed services model to help them achieve cost-effective modernization. Mid-tiers are on the hunt for partners that can help them move the needle without (literally) breaking the bank.
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The Bottom Line: Mid-tier FS firms need updated clarity on their vision, core strengths, and evolving ecosystem to change, grow, and comply in a post-SVB world.
Mid-tier FS firms need to ensure they retain a certain clarity of vision tied to maintaining and enhancing their unique community ties and strong customer intimacy. To execute their vision, these firms need to define their core strengths and identify areas where they potentially need third-party help. This sounds obvious, but it is changing rapidly as new business models and innovative ways of engaging with end customers and partners emerge. It’s time for mid-tier FS firms to demand offerings that better meet their unique needs at more favorable price points. There are distinct opportunities for managed services—service engagements that bundle technology, software, and services for a fixed price for mid-tier firms willing to try and services firms eager to deliver.
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