Early Takeaways from Bank Director’s Growing the Bank Conference

With continuous pressure on bankers to grow earnings, developing clear strategies, repeatable practices and incorporating exceptional user-experience technologies has to be high on almost every executives to-do list.

How do you bank?

By taking a pause before answering this question, you will appreciate how, regardless of age, we all expect greater pricing transparency, ease of use and always-on access to personal information as part of an integrated banking experience.  The challenge for most bankers?  What many consider state-of-the-art today — in terms of features and services — quickly becomes part of the norm that will be expected and insisted upon in the coming years.

At this morning’s Growing the Bank Conference, I jotted down a few thoughts that builds on this “how do you bank” query.

  • When it comes to the classic build or buy technology decision, partnerships are now de rigueur — with 87% of our 240+ person audience indicating they see technology as presenting opportunities to banks (and not threats).
  • Historically, banks organize themselves along a line of products; however, many have suggested re-orienting operations around customer needs and expectations.
  • To retain deposits, banks should ramp up their customer relationship programs, increase cross-selling efforts and invest in product lines that attract stable deposits.

While we haven’t gotten deep into the payments space (yet), I do encourage bank executives to think about the dramatic growth in that area of banking  — which continues to transform how efficiently banks connect with their customers.  Likewise, I wasn’t kidding when I suggested attendees spend some time reading the OCC’s “Supporting Responsible Innovation” white paper.

Finally, a “did-you-know” that I meant to share from the stage during my conversation with Brian Read, Executive Vice President, Retail Banking, Umpqua Holdings Corp. and Umpqua Bank.  According to the Federal Reserve, 85% of mobile banking users — a bank’s “most advanced” clients — still use branches from time to time. So as he shared with us, there really is a place for a physical presence in banking today.

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*FWIW, we’re in Dallas at the Four Seasons Resort and Club Las Colinas in Dallas, Texas where the annual Byron Nelson golf tournament wrapped up yesterday evening.  The picture above is of Jordan Spieth — the former number one player in the Official World Golf Ranking and two-time major winner — a gift to some of my team who were intent on getting a photo of him.  As a former student of St. Marks, I will not hold it against him that he went to Jesuit, a rival high school.

Quick Guide: 2015 Growth Strategy Survey (Bank-specific)

Recently, Business Insider and the Wall Street Journal picked up Bank Director’s 2015 Growth Strategy Survey.  The research project reveals how many financial institutions continue to recognize growth in traditional areas — most notably, loans to businesses and commercial real estate — while struggling to attract a decidedly untraditional digital generation.  So in case you missed it, today’s piece highlights key findings from this annual research project. 

By Al Dominick // @aldominick

Over the weekend, our friends at the Wall Street Journal ran a very telling story about the efforts being made by the San Francisco 49ers to better engage with their millennial employee base.  Clearly, the NFL franchise’s challenge to “relate to a generation — generally described as 18-to-34-year-olds — that has been raised on smartphones and instant information” parallels that of most banks in the U.S.  In addition to being a fascinating behind-the-scenes look at what’s happening out in Santa Clara, it also sparked today’s post.

You see, as a 38-year old who runs a great privately-held company that employs quite a few folks under the age of 30, I have to admit that I am tiring of the broad strokes being used to describe millennials’ needs and ambitions.  However, I will admit to being surprised to learn that there are approximately 75 million people in the U.S. under the age of 34.  This is a huge number, especially when you hear that every day, for the next 15 years, 10,000 people will turn 65 (h/t to the CEO of Boston’s Chamber of Commerce for making me aware of this reality).

Surprisingly, 60% of the executives and board members that responded to Bank Director’s 2015 Growth Strategy Survey say their bank might not have the right products, services and delivery methods to serve the vast majority of this demographic.  While I haven’t run this by our very talented Director of Research (*hello Emily McCormick), to me, this shows that the relationships that community bankers nurtured for decades will be increasingly of less value with this emergingly-influential generation who have grown up in a digital world and who, stereotypically, value the speed with which it operates.

As the Wall Street Journal shared when reporting on our research results, “banks have watched less regulated finance companies ranging from mortgage lenders to private-equity firms encroach on many of their main businesses.  But ask an executive or board member at a bank what nonbank company they most fear, and they’re likely to name the world’s biggest technology company, Apple Inc.”  So what were our key findings?  Glad you asked…

Three key findings (click this title link to access the full report):

  1. Apple is the nonbank competitor respondents worry about most, at 40%  — just 18% of respondents indicate their bank offers Apple Pay.
  2. Bank mobile apps may not keep pace with nonbank competitors. Features such as peer-to-peer payments, indicated by 28% of respondents, or merchant discounts and deals, 9%, are less commonly offered within a traditional bank’s mobile channel. 49% of respondents indicate their bank offers personal financial management tools.
  3. Despite the rise of P2P lenders like Lending Club and Prosper in the consumer lending space, just 35% of respondents express concern that these startup companies will syphon loans from traditional banks.

Instead of millennials, banks have been finding most of their growth in loans to businesses and commercial real estate.  Yes, 75% of respondents want to understand how technology can make their bank more efficient… and 72% want to know how technology can improve the customer experience.  But I find it telling that today, loan growth remains the primary driver of profitability for the majority of responding banks.  In fact, 85% of respondents see opportunities to grow through commercial real estate loans.  As we found, executives and board members also expect to grow through commercial & industrial (C&I) lending, for 56%, and residential mortgages, at 45%.  So for those looking to predict the future of banking, I think findings like these are quite telling.  Indeed, it would appear what’s worked in the past may be what to bet on for the future.

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The 2015 Growth Strategy Survey, sponsored by technology firm CDW, reveals how bankers perceive the opportunities and challenges in today’s marketplace, and technology’s role in strategic growth. The survey was completed by 168 chief executive officers, independent directors and senior executives of U.S. banks with more than $250 million in assets in May, June and July of this year.  Ironically, last year’s survey found that credit unions, not Apple, were the “non-bank” competitor that banks were most worried about.  In fact, can you believe that Apple didn’t even make the cut?  My, how quickly times can change.

Keeping Up With JPMorgan Chase

As much as executives at community banks need to focus on the emerging challenges posed by non-bank competitors, so too are the priorities of the globally systemic banks like Citi, BNY Mellon and JPMorgan Chase important to understand.  So file today’s post under “know thy enemy….”

At a time when many community bank CEOs sweat margin compression, efficiency improvements and business model expansion, it is very interesting to take note of the six areas of focus for JPMorgan Chase.  Last week, Gordon Smith, their Chief Executive Officer for Consumer & Community Banking, provided insight into the behemoth’s strategic agenda at the company’s investor day.  Their focus touches on the following key areas; the first five should resonate with bank leaders at institutions of all sizes:

  1. Continue to improve the customer experience and deepen relationships;
  2. Reduce expenses;
  3. Continue to simplify the business;
  4. Maintain strong control environment and automate processes;
  5. Increase digital engagement; and
  6. Lead payments innovation.

As Mr. Smith lays out, their deposit growth has been strong and core loans show continued improvement.  From a community bank CEO’s perspective, this is important as JPMorgan Chase’s organic growth may precipitate an even greater desire for smaller institutions to merge with another.  Indeed, I continue to see banks eyeing deposits, not just assets, as a catalyst for bank M&A (*this is not to suggest JPMorgan wants to buy another bank, as I don’t think regulators will allow any significant acquisitions from them nor do they seem to have even a sliver of interest. While they have a rich history of acquisition, I’m pretty sure they’ve reached their cap in terms of deposit market share).

Further, with their bank branches becoming more “advice centers,” it strikes me that many community bank operating models should aggressively shift to employing fewer people serving in more of a consultative capacity.  True, this model has been effectively emulated by some, most notably pioneered by Umpqua in the Pacific Northwest.  However, I see far too many local and community banks still arranged as if a bank will be robbed faster through the front door than it will the internet. The implication remains that a transaction trumps a relationship.  Finally, as banks like JPMorgan Chase divest various branches based on their drive for greater efficiencies, it should be helpful to think about some of their spun-off locations as potential targets that can bolster a regional presence.

So if you work for a community bank, it’s important to pay attention to the big banks. Sometimes, they can help you.

On Bank Branches and a Bank’s Brand

When I think about top performing banks, I typically consider those with the strongest organic growth in terms of core revenue, core noninterest income, core deposit growth and loan growth.  Sure, there has been a lot of talk about growing through acquisition (heck, last week’s post, “Seeking Size and Scale” looked at BB&T’s recent acquisitions and my monthly column on BankDirector.com was entitled “Why Book Value Isn’t the Only Way to Measure a Bank“).  But going beyond M&A, I’m always interested to dive into the strategies and tactics that put profits on a bank’s bottom line.

Build Your Brand or Build Your Branch

Earlier in the week, KBW’s Global Director of Research and Chief Equity Strategist, Fred Cannon, shared a piece entitled “Branch vs. Brand.”  As he notes, “branch banking in the U.S. is at an inflection point; the population per branch has reached a record level in 2014 and is likely to continue to increase indefinitely. The volume of paper transactions peaked long ago and with mobile payment now accelerating the need for branches is waning. As a result, many banks see closing branches as a way to cut costs and grow the bottom line. However, branches have served as more than transactional locations for banks. The presence of branch networks has projected a sense of identity, solidity and ubiquity to customers that has been critical to maintaining a bank’s brand.”  He then poses this doozy of a question:

“If branch networks are reduced, what is the replacement for a bank’s identity?”

Fred and his colleagues at KBW believe banks need to replace branches with greater investments in brand. As he shares, “some of this investment will be in marketing, (as) a brand is more than a logo. We believe banks will also need to invest in systems, people, and processes to project the sense of identity, solidity, and ubiquity that was projected historically by branch networks.”

United Bank, An Example of a High-Performing Bank

One example of a bank that I think is doing this well is United Bank.  On Wednesday, I had the chance to check out their new financial center in Bethesda, MD.  With dual headquarters in Washington, DC and Charleston, WV, the $12.1 billion regional bank holding company is ranked the 48th largest bank holding company in the U.S. based on market capitalization. NASDAQ-listed, they boast an astonishing 41 consecutive years of dividend increases to shareholders – only one other major banking company in the USA has achieved such a record.  Their acquisition history is impressive — as is their post-integration success.  United continues to outperform its peers in asset quality metrics and profitability ratios and I see their positioning as an ideal alternative to the offices Wells Fargo, SunTrust and PNC (to name just three) operate nearby.

A Universal Priority

Clearly, United’s success reflects a superior long-term total return to its shareholders.  While other banks earn similar financial success, many more continue to wrestle with staying both relevant and competitive today.  Hence my interest in Deloitte’s position that “growth will be a universal priority in 2015, yet strategies will vary by bank size and business line.”  A tip of the hat to Chris Faile for sharing their 2015 Banking Outlook report with me.  Released yesterday, they note banks may want to think about:

  • Investing in customer analytics;
  • Leveraging digital technologies to elevate the customer experience in both business and retail banking;
  • Determining whether or not prudent underwriting standards are overlooked; and
  • Learning from nonbank technology firms and establish an exclusive partnership to create innovation and a competitive edge.

With most banks exhibiting a much sharper focus on boosting profitability, I strongly encourage you to see what they share online.

Aloha Friday!

Don’t Be Crowdsourced Out Of Business

This is the fifth and final piece in my series on emerging threats to banks from non-financial companies — one that shines a light on the pooling of money from many different people to make an idea happen. Click on any of these titles to read my previous posts: For Banks, the Sky IS FallingPayPal is Eating Your Bank’s LunchThe Bank of Facebook and Is WalMart the Next Big Bank.

Next week kicks off Shark Week on the Discovery channel… maybe you’ve been inspired by the endless commercials hyping this programming during Deadliest Catch?  Perhaps so inspired that you’ve come up with a brilliant new idea that just needs some money to get it off the ground!  As a creative type (you watch Shark Week after all), you can’t be bothered with your community bank’s draconian business loan process.  No, you want to start right away and are going all in with a crowdsourcing platform (there are some 700 or so) to rally the capital you need to get your project off the ground.  After all, your “financial backers” on such a platform will not profit financially — unlike those greedy banks that certainly will — while your great idea will flourish thanks to this oh-so-captivated audience that gave you their money with nothing expected in return.

Against this backdrop, banks have no chance, right?

Hyperbole aside, it may be easy to underestimate the impact of crowdfunding on financial institutions, dismissing these “purpose-driven marketplaces” as nothing more than online outposts where wacky ideas attract even wackier investors.  While banks possess inherent competitive advantages in today’s digital world (e.g. large customer bases, vast amounts of customer and transaction data along with the capabilities to enable payments, security, and financing), keep in mind a proverb that “the shark who has eaten cannot swim with the shark that is hungry.”  To this end, let me repurpose the thoughts of  LinkedIn’s co-founder Reid Hoffman, who opines:

“Crowdfunding relies on the wisdom of crowds to identify, fund and unleash entrepreneurial innovation far more efficiently than the credit rules of banks can.”

Having looked at the competitive stances taken by Wal-Mart, Facebook and PayPal in previous posts, let me shift my focus to two of the more well-known crowd funding marketplaces that are “democratizing access to capital, fueling entrepreneurship and innovation, and profoundly changing the face of philanthropy at unprecedented scale and impact.”  Rather than deep dive their business models, let me share, in their words, why people gravitate to their respective sites.

Indiegogo
Founded in 2008 and headquartered in San Francisco, this site was one of the first to offer crowd funding.

Indiegogo is no longer unique; indeed, numerous crowdfunding sites make billions of dollars of capital accessible to upstarts and entrepreneurs alike.  However, it is one of the most established in the space.  As they share “people usually contribute to campaigns for four different reasons: people, passion, participation, and perks. Often, people contribute to support other people—maybe contributing to the campaign of a friend or another inspiring individual. Others contribute because they’re passionate about a mission, such as women’s health or elementary education. Others are motivated by a desire to participate in something big, like building a new community center in their hometown. And often, people contribute to receive perks, the cool things or experiences they get in return for their contributions.”

Kickstarter
A global crowdfunding platform with a stated mission to help bring creative projects to life.

As the company explains, “Mozart, Beethoven, Whitman, Twain, and other artists funded works in similar ways — not just with help from large patrons, but by soliciting money from smaller patrons, often called subscribers. In return for their support, these subscribers might have received an early copy or special edition of the work. Kickstarter is an extension of this model, turbocharged by the web.”

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The reason I wrote today’s piece — and the previous four — is simple.  I am convinced that many community banks have real opportunities to expand what banking means to its individual and business customers by offering services that go beyond their traditional business model.  While many bankers recognize the threats presented by Bank of America to their long-term survival, I am concerned that non-bank competition poses an even greater threat.  Essentially, I think more bank CEOs and boards need to take their conversations beyond just cutting branches and full-time employees and consider how they make the bank more efficient by reinventing how they do things.

Whether you agree or disagree, I’d be interested in your thoughts. Feel free to leave a comment below by clicking on the white plus sign (within the grey circle at the bottom of this page) and I invite you to follow me on Twitter (@aldominick) where you can publicly or privately share your thoughts with me.

Is Walmart the Next Big Bank

Part four of a five piece series on emerging threats to banks from non-financial companies. To read parts one through three, click on “For Banks, the Sky IS Falling,” “PayPal is Eating Your Bank’s Lunch” and “The Bank of Facebook.”

At the risk of crashing through an open door, did you know that the retail juggernaut Wal-Mart Stores Inc. launched Bluebird in partnership with American Express late in 2012 so users can direct deposit their paychecks, make bill payments, withdraw cash from ATMs and write checks?  Yes, customers also have access to mobile banking, which includes features like remote deposit capture and person-to-person (P2P) payments.  So does this position Wal-Mart as the next SIFI (*no disrespect to CIT following their announced acquisition of OneWest in a $3.4Bn stock & cash deal earlier this week)?

Walmart bank logo.001

Cue Robin Thicke

According to Wal-Mart, 95% of Americans live within 15 miles of one of its stores.  So I think its fair to say that Wal-Mart continues to blur lines between banking and shopping as it added yet another financial service to its stores across the country.  Indeed, the retailer announced this spring that customers can transfer money to and from any of its 4,000 stores in the U.S. and Puerto Rico.  As this article in Forbes highlighted, low income workers who don’t have traditional bank accounts are turning to prepaid cards and alternatives to checking accounts.  Banks like JPMorgan Chase and Wells Fargo are trying to fill that gap with prepaid and reload able cards — something Wal-Mart has been offering for years.

Where Is That Achilles Heel?

Unlike online competitors to a bank, Wal-Mart enjoys huge brand recognition and an established customer base that feels comfortable walking into their local “branch.”  In fact, banks that already operate inside Walmarts reap among the highest fees from customers of any banks in the nation, according to a WSJ analysis.  But the very demographic the retail company serves — one that expects and demands rock-bottom pricing — may not favor a “B of W.”

Indeed, banking at Wal-Mart is a lot more expensive than shopping there.  As noted by in the WSJ, most U.S. banks earn the bulk of income through lending.  Among the 6,766 banks in the Journal’s examination, “just 15 had fee income higher than loan income — including the five top banks operating at Wal-Mart.”  Would the company really want to race to the bottom in terms of pricing its financial products (ones that would not be federally insured) and compete with its own tenants?

If At First You Don’t Succeed…

It is worth noting that Wal-Mart has tried to get into banking since the late 1990s.  It was thwarted in attempts to buy a savings-and-loan in Oklahoma and a bank in California — and later dropped a bid for its own banking charter in 2007.  While I’m not suggesting the new logo depicted above is anything more than a simple rendering by yours truly, it wouldn’t surprise me if the company explored even more creative ways to compete with financial institutions in the future.

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To comment on this piece, please click the white plus sign in the bottom right gray circle on this page or share your thoughts with me via Twitter (I’m @aldominick).  Next up, how crowdsourcing sites like Kiva and Kickstarter allow customers to bypass their bank to get funding for a business idea.

Who Says There Is No Growth In Banking

Two big takeaways from the second day of Bank Director’s 2nd annual Growth conference (#BDGrow14): institutions of all sizes are challenged when it comes to standing out from the crowd & enhancing your mobile banking presence should be a top priority for all boards of directors.

A 2 Minute Recap on the Past 4 Months

 

Take No Risk, Make No Money
While some may not think about enterprise risk management in the context of growing one’s bank, Crowe’s Jennifer Burke made clear that proactively identifying, mitigating, and in some cases, capitalizing on risks provides a distinct advantage to a bank.  Keep in mind that even smaller institutions — with less complex business structures — face myriad risks that might significantly affect their ability to meet their growth plans.  As Jennifer shared, those that proactively identify and respond to risks and opportunities gain a competitive advantage over their peers, especially in responding to our ever-changing business environment.

Millennial and the End of Banking?

The Times-Picayune ran a nice story in today’s edition based on The Growth Conference.  The newspaper noted that “younger generations report more comfort with online and mobile banking tools, posing a hurdle for banks used to ginning up business through face-to-face interactions.”  So it is fair to ask if banks should be scared of the millennial generation.  According to Daryl Byrd, president and CEO of IberiaBank, the answer is no.  As mentioned in this piece (Will Millennials be the end of banking as we know it? Bank execs weigh in at Growth Conference in New Orleans), Byrd was among a panel of industry leaders gathered at the Bank Director Growth Conference to discuss business trends, including the challenges in reaching younger customers.  Byrd, “who noted he is the father of three Millennials, said his children, like many in their generation, aren’t building wealth as much as they are taking on debt. That means their demand for banking services will be limited in the near term,” he said.

Trending Topics

The issues I took note of this morning were, in no particular order:

  • Just like “synergy” became a cliché, so too might “omni” when it comes to delivering a consistent customer experience (e.g. omni-screen, omni-channel, etc);
  • Not all customers are created equally;
  • A bank’s board has the chance to re-set strategies to target, acquire, engage, grow and retain customers… but need to look ahead to what’s possible as opposed to the past to see what has historically delivered results.

To comment on this piece, click on the green circle with the white plus sign on the bottom right. Safe travels home to all who joined us in New Orleans this week (and yes, Aloha Friday!)

The Single Greatest Constraint on Growth

With the revenue pressures facing the banking industry being some of the most intense in decades, banks need to think more constructively about their businesses. At the same time, changing consumer behavior could drive the industry to reallocate its resources to less traditional growth channels in order to stay ahead.  In my view, the words of an English naturalist reflect the single greatest constraint on growth today.

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Powerful Forces

One of our long-term corporate sponsors, PwC, recently shared their thoughts on the future of the retail banking industry.  In their view, “powerful forces are reshaping the banking industry, creating an imperative for change. Banks need to choose what posture they want to adopt – to lead the change, to follow fast, or to manage for the present. Whatever their chosen strategy, leading banks will need to balance execution against… critical priorities and have a clear sense of the posture they wish to adopt.”  If you, like our friends from PwC, are joining us in New Orleans later this week to dive into this very topic, their compelling “Retail Banking 2020” report might make for good airplane company.

Looking Back in Order to Look Ahead

Last year, John Eggemeyer, a Founder and Managing Principal of Castle Creek Capital LLC, helped me to kick off our inaugural Growth Conference.  As a lead investor in the banking industry since 1990, he shared his views on our “mature industry,” That is, banking follows a historic pattern of other mature industries: excess capacity creates fierce competition for business which in turn makes price, not customer service, the key differentiator.  While offering myriad thoughts on what makes for a great bank,  John did share some hard-to-swallow statistics and opinions for a crowd of nearly 200 bankers and industry executives:

  • Publicly traded banks from $1 billion to $5 billion in assets saw their stock values rise at about half the rate of the broader market as a whole since early 2009.
  • Of the 300 or so publicly traded banks in that size range, only about 60 of them traded at their pre-recession price multiples.
  • In the last 40 years, bank stocks always followed the same pattern in a recession: falling in value quicker than the rest of the market and recovering quicker.

I share these three points to provide context for certain presentations later this week.  Some build on his perspectives while others update market trends and behavior.  Still, an interesting reminder of where we were at this time last year.

Getting Social-er

Yesterday, I shared the hashtag for The Growth Conference (#BDGrow14).  Thanks to our Director of Research — @ehmccormick — and Director of Marketing — @Michelle_M_King — I can tell you that nearly 30% of the attending banks have an active twitter account; 78% of sponsors do.  On the banking side, these include the oldest and largest institution headquartered in Louisiana — @IBERIABANK, a Connecticut bank first chartered in 1825 with over $3.5 billion in assets — @LibertyBank_CT and a Durham, NC-based bank that just went public last month — @Square1Bank.  On the corporate side of things, one of the top marketing and communications firms for financial companies —@wmagency, a tech company that shares Bank Director’s love of orange — @Fiserv and a leading provider of personal financial management — @MoneyDesktop join us.  Just six of many institutions and service providers I’m looking forward to saying hello to.

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More to come — from New Orleans, not D.C. — tomorrow afternoon.

Its Growth Week

Its finally here… “Growth Week” at Bank Director.  Yes Discovery Channel, you can keep your shark week.  What we’re about to get into is far more interesting (at least, to some): what’s working in banking today.  Most of our team heads down to the Ritz-Carlton in New Orleans tomorrow and Wednesday for our 2014 Growth Conference.  Before they do, the first of five posts dedicated to building a business.

Growth-Key-Card-1

Think Distinct

Innovation means doing things differently.  Not just offering new products or offerings — but doing things differently across the entire business model.  Going into this event, I know many believe there are simply too many banks offering similar products and services.  I tend to think institutions are challenged when it comes to being distinctive compared with the competitor across the street.  This is not a new issue; however, there are more and more strategies emerging and enablers coming to market that can drive brand value, customer satisfaction and profitable growth.  Case-in-point: the work of our friends at StrategyCorps, whose idea is “be bold… go beyond basic mobile banking.”  One of the sponsors of the conference, I am excited to hear how  financial institutions, like First Financial, benefit from their mobile & online consumer checking solutions in order to enhance customer engagement and increase fee income.

Looking Back in Order to Look Ahead

While easy to frame the dynamics of our industry in terms of asset size, competing for business today is more of a “smart vs. not-so-smart” story than a “big vs. small.” During one of my favorite sessions last year — David AND Goliath — Peter Benoist, the president and CEO of St. Louis-based Enterprise Financial Services Corp, reminded his peers that as more banks put their liquidity to work, fierce competition puts pressures on rates and elevates risk.  As I went back to my notes in advance of this week’s event, my biggest takeaway from his presentation was we all talk about scale and net interest margins… but it’s clear that you need growth today regardless of who you are.  It is growth for the sake of existence.

Getting Social

To keep track of the conversation pre-, on-site and post-event on Twitter, use #BDGrow14 and/or @bankdirector + @aldominick.  In addition, I plan to post every day this week to About That Ratio, with tomorrow’s piece touching on the diminished importance of branch networks to underscore the importance of investments in technology.

FI Tip Sheet: Is 2014 the Year of the Bank IPO?

Good things come in threes — like insightful/inspiring meetings in New York, Nashville and D.C. this week.  By extension, keep an eye out for a Sunday, Monday and Tuesday post on About That Ratio.  Yes, I’m heading to Chicago for Bank Director’s annual Chairman/CEO Peer Exchange at the Four Seasons (#chair14) and plan to share my thoughts and observations on issues like strategic planning, risk management and leveraging emerging technologies each day.  Finally, I hope the three points I share today (e.g. a look at what the future holds for branches to a rise in public offerings) prove my original sentiment correct.

banking2020-hero1

I’ve been surprised… by the # of conversations I’ve had about branch banking.

With many of the mega and super-regional banks focused on expense control, I find myself talking fairly regularly about how these institutions are taking a “fresh look” at reducing their branch networks.  Typically, these conversations trend towards well-positioned regional and community banks — and how many now look to branch acquisitions as low risk and cost effectives ways to enter a new market or bolster an existing market.  I expect these conversations to continue next week in Chicago — but thought to share today as it again came to the fore earlier this week in NYC.  While there, I had a chance to catch up on PwC’s latest offerings and perspectives.  Case-in-point, one of their current research pieces shows that, despite the emergence of new competitors and models:

“the traditional bank has a bright future – the fundamental concept of a trusted institution acting as a store of value, a source of finance and as a facilitator of transactions is not about to change. However, much of the landscape will change significantly, in response to the evolving forces of customer expectations, regulatory requirements, technology, demographics, new competitors, and shifting economics.”

banking2020-hero3

The two images above come from an information-rich micro-site (Retail Banking 2020) PwC shares.  Personally, I found these statistics fascinating and foreshadow my second point about creative approaches to win new business.

I’ve been thinking about… fin’tech companies + their “solutions.”

Here, I want to give major props to our friends at the William Mills Agency in Atlanta.  Their annual “Bankers as Buyers” report shares ideas, concepts and research about financial technology from 30 of the top influencers in the country and those forces driving change today.  This year’s report lays out trends for the coming year, including:

  • Branch Network Transformation;
  • Mobile 3.0;
  • Big Data Drives Marketing & Fights Fraud;
  • Payments Technology Stampede;
  • Banks Focus on Underbanked and Wealthy; and
  • Compliance Strategies.

Take a look at their work and download the free report if you’re interested.

I’ve been talking about… the number of banks going public.

Is 2014 the year of the bank IPO? According to Tom Michaud, the president and CEO of Stifel Financial’s KBW, it just might be.  I had a chance to get together with Tom earlier this week and he got me thinking about how many are going to pursue a public market to raise capital versus doing so privately.  He shared the story of Talmer Bancorp (TLMR), which went public on Valentine’s Day.  When it did, it marked the biggest bank IPO in three years (yes, KBW’s Banking & Capital Markets teams completed the $232 million Initial Public Offering, acting as joint bookrunner).  As he shared their story with me, it became clear that as more banks go public, we will see more buyers entering into the M&A market — since most bank deals are being done with stock these days.  It strikes me that going public presents an alternative for private banks… rather than sell now, they might find a more receptive market should their story be a good one.

Aloha Friday!

FI Tip Sheet: The Innovator’s Dilemma

Over the past few years, I have seen significant change within the banking community — much of it defensive or in response to government intervention and oversight.  According to a white paper recently published by McLagan, “a great deal has been said about the excesses and errors of the past; however (sic), the current focus for banks, in particular, must be on the need to innovate or risk becoming stagnant and losing the ability to compete for exceptional talent.”  This morning’s column focuses on the “innovator’s dilemma,” vis-a-vis three questions.

Everything is AwesomeDo We Need Sustainable or Disruptive Technology ?

I have talked with a number of Chairmen and CEOs about their strategic plans that leverage financial technology to strengthen and/or differentiate their bank.  After one recent chat, I went to my bookshelf in search of Clayton Christensen’s “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail.”  His book inspired today’s title — and fuels this first question.  Christensen writes about two types of technologies: sustaining and disruptive.  Sustaining technologies are those that improve product performance.  As he sees it, these are technologies that most large companies are familiar with; technologies that involve improving a product that has an established role in the market.  Most large companies are adept at turning sustaining technology challenges into achievements.  However, large companies have problems dealing with disruptive technologies — an observation that, in my view, does not bode well for many traditionally established banks.

“Discovering markets for emerging technologies inherently involves failure, and most individual decision makers find it very difficult to risk backing a project that might fail because the market is not there.”

While risk is inherent to banks of all sizes, taking chances on emerging technologies continues to challenge many officers and directors.  To this end, I thought about the themes explored in Christensen’s book after spending time in Microsoft’s New York City offices last week.  While there, I heard how big banks are generating revenues by acquiring new customers while retaining, up-selling and cross-selling to existing customers.  I left impressed by the various investments being made by the JP Morgans of the banking world, at least in terms of customer relationships and experience management along with analytics and core system modernization.  I do, however, wonder how any entrenched bank can realistically embrace something “uber-esque” (read: disruptive) that could truly transform the industry.

Do We Have the Staff We Need?

Consider the following question from the perspective of a relatively new hire: “I have a great idea for a product or service… who can I talk with?”  A few months ago, Stephen Steinour, the President & Chief Executive Officer at Huntington Bancshares, keynoted Bank Director’s annual Bank Executive & Board Compensation conference and addressed this very thing.  As he shared to an audience of his peers: “the things I assumed from my era of banking are no longer valid.”  Rather than tune out ideas from the field in favor of age and experience, he explained how his $56Bn+ institution re-focused on recruiting “the right” employees for the company they wanted (not necessarily what they had), with a particular emphasis on attracting the millennial generation into banking.  He admitted it’s a challenge heightened by public perception of the industry as one that “takes advantage of people and has benefited from government bailouts.”  Still, he made clear the team they are hiring for reflects a new cultural and staffing model designed to drive real, long-term change.  I wonder how many banks would (or could) be so bold?

Do We Have The Right Business Model?

I’ve heard it said that “forces of change” will compel banks to reinvent their business models.  Take the business model of core retail banking. According to a piece authored by McKinsey (Why U.S. Banks Need a New Business Model), over the past decade, banks continued to invest in branches as a response to free checking and to the rapid growth in consumer borrowing.  But regulations “undermining the assumptions behind free checking and a significant reduction in consumer borrowing have called into question the entire retail model.  In five years, branch banking will probably look fundamentally different as branch layouts, formats, and employee capabilities change.”  Now, I’m not sure banking’s overall business model needs a total overhaul; after all, it still comes back to relationships and reputations.  Nonetheless, many smaller banks appear ripe for a change.  And yes, the question of how they have structured their business is one some are beginning to explore.

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To comment on this piece, click on the green circle with the white plus sign on the bottom right.  Looking ahead, expect a daily post on About That Ratio next week.  I’ll be in Nashville at the Hermitage Hotel for Bank Director’s Bank Board Training Program.  Leading up to, and at, this educational event, I’ll provide an overview on the various issues being covered.  Namely, risk management and auditing issues, compensation, corporate governance, regulation and strategic planning.  Thanks for reading, and Aloha Friday!

FI Tip Sheet: The Size of the Sandbox

Just as an Apple store conveys a community and market presence, so too does a bank’s branch.  While younger customers may no longer visit more than a front-of-the-house ATM, I do think many of us choose our bank based on their proximity to where we live and work.  Today’s tip sheet builds on this thought — beginning with a look at the economics of deposit taking, followed by a visual reminder of our industry’s size before ending with an acquisition by a a big-bank based in Madrid.

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Face-to-Face Trumps Technology?

To borrow a few lines from a recent CDW white paper, as the U.S. financial industry emerges from the recent financial crisis, “the surviving institutions are leaner and more focused than ever before. In some cases, this means lowering overhead — doing more with less — to effectively maintain operations.” While the future of banks proved a popular conversation starter during my travels around Washington D.C. and New York City this week, it is a report shared by Fred Cannon — the Director of Research at Keefe, Bruyette and Woods — that caught my eye. I am a big fan of Fred’s prose and the perspectives he offered in “Branch Banking in Retreat” demonstrates that real branch transformation continues to elude many financial institutions. To wit:

“The economics of bank deposit taking is poor in the age of Bernanke and Yellen (low rates) and Durbin (reduced fees). But beyond rates and politics, technology is also undermining the role of traditional branches as the payment system has moved sharply towards electronics in the last decade… Yet, overall banks are responding slowly to the changes in economics and technology of branching. While the number of bank branches has fallen since 2009, the population per branch in the U.S. is still at the same level as the mid-1990s.”

Most branch transformation initiatives I have seen seek to simultaneously reduce costs while improving sales. Here, size matters. Smaller banks can re-invent themselves faster than the big guys; however, its the biggest banks that can financially absorb the most risk in terms of rolling out something new (and expensive).

A Visual Reminder That Financial Size Matters

Fred’s research piece, focused on small and mid-sized banks along with the BofA’s and Wells Fargo’s of the country, inspired me to create the following infographic.  I’ve shared variations of these statistics in prior posts — and thought to illustrate how our industry breaks down in terms of asset size.

Screen Shot 2014-02-21 at 9.42.29 AM

(*note: while I hoped to serve this infographic up in a dynamic way, the image I created from Infogr.am isn’t embedding in WordPress.  Still, you get an idea of the market with this screenshot)

Old School Acquires New School

For smaller institutions, the size (and ability to scale) of their larger counterparts can be cause for alarm.  Indeed, Accenture shared “becoming a truly digital business is key to how we innovate and differentiate ourselves from our competitors. And if the last decade has been the playground of the digital start-ups, the coming decade will see the emergence of the traditional companies as the digital giants.”  I was thinking about this as I read the New York Times’ Dealbook story “BBVA Buys Banking Start-Up Simple for $117 Million.

This acquisition is notable as the buyer of this upstart is a 150-year old financial services corporation that operates in a number of markets, is a leading player in the Spanish market, as well as one of the top 15 banks in the U.S. and a strategic investor in banks in Turkey and China.  As noted by TechCrunch, “while not itself a bank, Simple operates as an intermediary between users and FDIC-insured institutions to provide users with access to data around their financial history, as well as tracking of expenditures and savings goals, with automated purchase data collected when its customers use their Simple Visa debit card.”  I wonder if this acquisition starts a consolidation trend of bigger banks buying newer fintech players to accelerate — while differentiating — their offerings…

Aloha Friday!