Expect the Unexpected

“If past history was all that is needed to play the game of money, the richest people would be librarians.” – Warren Buffett

#AOBA17 pre-conference intel
By Al Dominick, CEO of Bank Director | @aldominick

This may be a phenomenal—or scary year—for banks. Banks have benefited from rising stock prices and rising interest rates, which are expected to boost low net interest margins. Indeed, the change in the U.S. presidency has resulted in a steepened yield curve, as investors predict improved economic growth. Currently, many anticipate regulatory relief for banks and the prospect of major corporate tax cuts. Such change could have a significant impact on banks; however, those running financial institutions also need to keep an eye on potential challenges ahead.

As we head to our 23rd Acquire or Be Acquired Conference in Phoenix, Arizona, with a record breaking 1,058 attendees Jan. 29-Jan. 31, I am expecting the mood to be good. Why wouldn’t it be? But what is on the horizon are also fundamental changes in technology that will change the landscape for banking. What will your competitors be doing that you won’t be? Our conference has always been a meeting ground for the banking industry’s key leaders to meet, engage with each other and learn what they need to do deals. It is still that. Indeed, most of the sessions and speakers will be talking about M&A and growth.
But this year, more than 100 executives from fintech companies that provide products and services to banks join us in the desert, on our invitation. We want to help banks start thinking about the challenges ahead and how they might solve them.

Here are some things to consider:

  • How will the Office of the Comptroller of the Currency’s limited-purpose fintech charter enable more established fintech companies to compete with some of the incumbents in the room?
  • If smaller banks are indeed relieved of many of the burdens of big bank regulation, will they use the savings to invest in technology and improvements in customer service?
  • How will customer expectations change, and from whom will customers get their financial services?

To this last point, I intend to spotlight three companies that are changing the way their industries operate to inspire conversations about both the risks and rewards of pursuing a path of change. Yes, it’s OK to think a little bit beyond the banking industry.

Spotify
Rather than buying a CD to get their favorite songs, music-lovers today favor curated playlists where people pick, click and choose whom they listen to and in what order. There is a natural parallel to how people might bank in the future. Just as analytics enable media companies to deliver individually tailored and curated content, so too is technology available to banks that might create a more personalized experience. Much like Spotify gives consumers their choice of music when and where they want it, so too are forward-looking banks developing plans to provide consumer-tailored information “on-demand.”

Airbnb
The popular home-rental site Airbnb is reportedly developing a new service for booking airline flights. Adding an entirely new tool and potential revenue stream could boost the company’s outlook. For banks, I believe Airbnb is the “uber-type” company they need to pay attention to, as their expansion into competitive and mature adjacent markets parallels what some fear Facebook and Amazon might offer in terms of financial services.

WeChat
One of China’s most popular apps, the company counts 768 million daily active users (for context, that’s 55 percent of China’s total population). Of those users, roughly 300 million have added payment information to the wallet. So, WeChat Pay’s dominance in the person-to-person payments space is a model others can emulate. PayPal already is attempting such dominance, which Bank Director magazine describes in our most recent issue.

Many of those attending our conference also have done amazing things in banking. I can’t name all of them, but I’d be remiss to not mention CEO Richard Davis of U.S. Bank, our keynote speaker. After a decade leading one of the most phenomenal and profitable banks in the country, he is stepping down in April. We all have something to learn from him, I’m sure.  Let us think about the lessons the past has taught us, but keep an eye on the future. Let’s expect the unexpected.

*note – this piece first ran on BankDirector.com on January 26, 2017

Cybersecurity and the Fintech Wave

Earlier this month, at Bank Director’s FinTech Day at Nasdaq’s MarketSite in New York City, I noted how many technology firms are developing strategies, practices and tools that will dramatically influence how banking gets done in the future. Concomitantly, I expressed an optimism that banks are learning from these new players, adapting their offerings and identifying opportunities to collaborate with new “digital-first” businesses.  Unfortunately, with great opportunity comes significant risk (and today’s post looks at a major one challenging bank CEOs and their boards). 

By Al Dominick, President & CEO, Bank Director

To grow your revenue, deposits, brand, market size and/or market share requires both strong leadership and business strategy.  Right now, there are a handful of banks developing niche vertical lines of business to compete with the largest institutions. For instance, East West Bancorp, EverBank Financial, First Republic Bank, Opus Bank, PacWest Bancorp, Signature Bank and Texas Capital Bancshares.

Just as compelling as each bank’s approach to growing their business is the idea that new competitors in direct and mobile banking will spur the digitalization of our industry.  I am a firm believer that through partnerships, acquisitions or direct investments, incumbents and upstarts alike have many real and distinct opportunities to grow and scale while improving the fabric of the financial community.

However, with myriad opportunities to leverage new technologies comes significant risk, a fact not lost on the bank executives and board members who responded to Bank Director’s 2016 Risk Practices Survey, sponsored by FIS.  For the second year running, they indicate that cybersecurity is their top risk concern.

More respondents (34 percent) say their boards are reviewing cybersecurity at every board meeting, compared to 18 percent in last year’s survey, indicating an enhanced focus on cybersecurity oversight. Additionally, more banks are now employing a chief information security officer (CISO), who is responsible for day-to-day management of cybersecurity.

However, the survey results also reveal that many banks still aren’t doing enough to protect themselves—and their customers. Less than 20 percent of respondents say their bank has experienced a data breach, but those who do are just as likely to represent a small institution as a large one, further proof that cybersecurity can no longer be discussed as only a “big bank” concern.

For those thinking about the intersection of fintechs and banks, take a look at our just-released 2016 Risk Practices Survey. This year, we examine risk governance trends at U.S. banks, including the role of the chief risk officer and how banks are addressing cybersecurity. The survey was completed in January by 161 independent directors, chief risk officers (CRO), chief executive officers (CEO) and other senior executives of U.S. banks with more than $500 million in assets.

Key Findings Include:

  • Sixty-two percent of respondents indicate their bank has used the cybersecurity assessment tool made available by the Federal Financial Institutions Examination Council, and have completed an assessment. However, only 39 percent have validated the results of the assessment, and only 18 percent have established board-approved triggers for update and reporting. FWIW, bank regulators have started to use the tool in exams, and some states are mandating its use.
  • Seventy-eight percent indicate that their bank employs a full-time CISO, up from 64 percent in last year’s survey.
  • The majority, at 62 percent, say the board primarily oversees cybersecurity within the risk or audit committee. Twenty-six percent govern cybersecurity within the technology committee.
  • Forty-five percent indicate that detecting malicious insider activity or threats is an area where the bank is least prepared for a cyberattack or data breach.
  • Just 35 percent test their bank’s cyber-incident management and response plan quarterly or annually.

Clearly, banks are increasingly relying on complex models to support economic, financial and compliance decision-making processes.  Considering the full board of a bank is ultimately responsible for understanding an institution’s key risks — and credibly challenging management’s assessment and response to those risks — I am pleased to share this year’s report as part of our commitment to providing timely & relevant information to the banking community.

Fintech in 2016: A Whole Lot of Collaboration

While some of the largest and most established financial institutions have struck relationships with various financial technology firms (and not just startups / early stage), opportunities for meaningful partnerships abound.  At Bank Director’s annual FinTech Day at Nasdaq’s MarketSite in Times Square next Tuesday, we explore — with executives from the companies depicted above — what’s really possible when banks and fintechs collaborate to help each other’s businesses accelerate and scale.

By Al Dominick, President & CEO, Bank Director

A fundamental truth: individuals, along with business owners, have more choices than ever before in terms of where, when and how they bank. So a big challenge — and dare I suggest, opportunity — for leadership teams at financial institutions and fintech companies alike entails aligning services & product mixes to suit core customers’ current interests and prospective one’s expectations.

Yesterday, I shared how the fabric of the financial industry continues to evolve as new technology players emerge and traditional participants transform their business models. Indeed, many fintech companies are developing strategies, practices and new technologies that will dramatically influence how banking “gets done” in the future. However, within this period of change — where considerable market share will be up for grabs — I believe that ambitious organizations can leapfrog both traditional and emerging rivals.

Clearly, bank CEOs and their teams must seek new ways to not just stay relevant but to stand out.  While a number of banks seek to extend their footprint and franchise value through acquisition, many more aspire to build the bank internally. Some show organic growth as they build their base of core deposits and expand their customer relationships; others see the value of collaborating with fintech companies.

For a bank CEO and his/her executive team, knowing who’s a friend, and who’s a potential foe, is hugely important.  Personally, I have found this to be quite difficult for many regardless of their size or market.  Moreover, I find this to be a two-sided challenge in the sense that for a fintech founder or executive, identifying those banks open to partnering with, investing in or even acquiring a company like the one they run presents as great a challenge as it does opportunity.

So as more & more fintech companies look to partner with legacy players — and banks warm to such a dynamic — I am excited to think about the creative new partnerships that can be explored to ease payment processes, reduce fraud, save users money, promote financial planning and ultimately, move our giant industry forward.

What’s Happening at Acquire or Be Acquired

Throughout the first day of Bank Director’s 22nd annual Acquire or Be Acquired Conference, I found quite a few presentations focused on the emergence of mid-sized regional banks that are growing through the consolidation of smaller banks.  Clearly, mergers & acquisitions provide an avenue for some banks to drive improved operating leverage, earnings, efficiency and scale.  At the same time, the pressures prompting larger banks to innovate — sluggish loan demand, depressed revenue, higher compliance costs — are the same ones forcing smaller banks to pursue a sale.

By Al Dominick, President & CEO, Bank Director

For those unfamiliar with “AOBA,” this annual event explores issues like the one mentioned above.  Since the conference kicked off at 8 AM on a Sunday, this morning’s post shares three short video recaps from my time at the Arizona Biltmore followed by links to recent posts specific to this conference.

In addition to these videos, below are links to four of my posts specific to the event:

If these types of conversations interest you, take a look at what we’re sharing on BankDirector.com.  Additionally, I invite you to follow me on Twitter via @AlDominick, the host company, @BankDirector, and search & follow #AOBA16 to see what is being shared with (and by) the 930 men & women in attendance.

Current Challenges Facing Bank Executives in 2016 (a video overview from Acquire or Be Acquired)

The fun began bright & early here at the Arizona Biltmore, home of this year’s Acquire or Be Acquired conference.  This annual event explores a bank’s financial growth opportunities — and brings a significant number of bank CEOs, board members and C-level executives to the desert.  In this short video, I share a few key take aways from this morning’s presentations specific to the challenges being faced by bank CEOs in attendance.  Sorry, no mention of a flat yield curve (even though the interest rate environment certainly merits more then just this mention).

While Everybody’s Talking About the Future of Banking…

It seems like everyone has an opinion about what the future holds for banking… but what does banking actually look like today?

By Al Dominick // @aldominick

For the past few years, Bank Director magazine’s Editor-in-Chief, Jack Milligan, has spearheaded our Bank Performance Scorecard, a ranking of the largest U.S. publicly traded banks and thrifts. The most recent version, which appears in our third quarter issue, ranked all banks and thrifts listed on the New York Stock Exchange and Nasdaq OMX.  Jack and his team sorted them into three separate asset categories: $1 billion to $5 billion, $50 billion to $50 billion and $50 billion and above — and we ranked them using a set of metrics that measured profitability, capitalization and asset quality based on 2014 calendar year data.

While this data shines a light on some of banking’s standout performers, my last few months of travel across the U.S. has revealed less familiarity with the banking industry then I expected. So today, instead of focusing on economic, political, demographic or technological forces reshaping the banking landscape, allow me to share some statistics I think are important to know:

  1. Banks with less than $10 billion in assets have lost over half of their market share in the past 20 years.
  2. The corollary? The five largest banks now hold almost 44% of all banking assets in the country.
  3. Despite totaling 89% of all banks, institutions under $1B in assets hold only 8.3% of the industry’s assets.

With competition coming from both the top of the market and from non-traditional players, I have talked with numerous bank CEOs and various members of their executive teams who tell me how imperative it is for them to really focus on improving efficiencies and enhancing organic growth prospects.  In addition, as big banks invest in customer acquisition, and non-traditional players continue to eat away at earnings potential, it strikes me that of all of the risks facing a bank’s key leadership team today (for instance, regulatory, market and cyber) knowing when to buy, sell or grow independently has to be high on the list. After all, the most profitable financial companies are often those whose strategies are intentional, focused and differentiated… and are showing current revenue growth with strong visibility towards future performance.

Of course, any discussion about the world in which banks live today has to acknowledge two significant business threats. Since most banking products tend to be commodities that are available at any number of bank and non-bank providers, the first concerns customer acquisition costs. Personally, I believe such costs will increase as existing customers become less likely to refer their bank to others. This leads to the second threat; namely, banks will lose revenue as customers leave for competitors and existing customers buy fewer products.

So a high-level look at where things are today. I realize this takes a very broad brush to a mature industry. Still, to understand where banks might be heading, I find it helpful to be grounded in where they are today.

5 Fintechs I’m Keen On

My first post in 2015 focused on three “up & coming” fintech companies: Wealthfront (an automated investment service), Kabbage (an online business loan provider) and Dwolla (a major player in real-time payment processing).  Since writing that piece, I’ve kept tabs on their successes while learning about other interesting and compelling businesses in the financial community.  So today, five more that I am keen on.

By Al Dominick // @aldominick

With continuous pressure to innovate, I’m not surprised to see traditional financial institutions learning from new challengers, adapting their offerings and identifying opportunities to collaborate with emerging players.  From tokenization to integrated payments, security tools to alternative lending platforms, the investments (and efforts) being made throughout the financial sector continues to impress and amaze me.  As I shared in 15 Banks and Fintechs Doing it Right, there are very real and immediate opportunities to expand what banking means to individual and business customers.  Personally, I am excited by the work being done by quite a few companies and what follows are five businesses I’ve learned more about while recently traveling between D.C., San Francisco and New York City:

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i2c, a global card processing company, provides back-end processing and settlement for cards, virtual accounts and mobile payments.  What’s interesting about them? According to a brief shared by Bridge by Deloitte (a web platform connecting enterprises with startups to accelerate innovation and growth), i2c recently teamed up with Oxfam, Visa and Philippines-based UnionBank to channel funds to people in disaster-affected communities through prepaid cards.

adyen-logo

With Money20/20 fast approaching, expect to see a lot of #payments trending on twitter.  Trending in terms of financial investment: Adyen, a company receiving a lot of attention for wrapping up a huge round of funding that values the payment service provider at $2.3B.  Adyen, which provides its services to a number of large organizations including Facebook and Netflix, excels in having a highly integrated platform, unlike others with multiple platforms.

Blend labs

When it comes to technology “powering the new wave of mortgage lending,” take a look at the work being done at BlendLabs.  Developing software & data applications for mortgage lenders, the company acknowledges that “accommodating complex rules and regulation changes is time-consuming and costly.” For this reason, the company has quietly rolled out technology that empowers some of the country’s largest lenders to originate mortgages more efficiently and compliantly than ever before while offering their borrowers a more compelling user experience.

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As the head of a company, I know first-hand how much time and effort is spent on efforts and ideas designed to maximize revenue and profits.  So the promise and premise of nCino is hugely attractive.  Co-founded by a fellow W&L grad (and the former CEO of S1) nCino is the leader in cloud banking.  With banks like Enterprise in St. Louis (lead by a CEO that I have huge respect for) as customers, take a look at their Bank Operating System, a comprehensive, fully-integrated banking management system that was created by bankers for bankers that sits alongside a bank’s core operating system.

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While not solely focused on the financial industry, Narrative Science is a leader in advanced natural language generation.  Serving customers in a number of industries, including marketing services, education, financial services and government, their relationship with USAA and MasterCard caught my eye.  As FinXTech’s Chief Visionary Officer recently shared with me, the Chicago-based enterprise software company created artificial intelligence that mines data for important information and transforms it into language for written reports.

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In addition to these U.S.-based companies, you might look at how Fidor, a digital bank in Europe that offers all-electronic consumer banking services, links interest rates to Facebook likes and give cash rewards based on customers’ level of interaction with the bank (e.g. how many customer financial questions answered).  Clearly, the fabric of the financial industry continues to evolve as new technology players emerge, institutions like Fidor expand their footprint and traditional participants transform their business models.  So if you follow me on twitter (@aldominick), let me know of other fintech companies you’re impressed by these days.