Mele Kalikimaka

The banking marketplace today is dramatically different from what it was just three years ago.  Since returning to the industry in 2010, I’ve seen a lot of change — and not all good.  Nonetheless, I am bullish on the future of banking.  While some in the media tend to criticize financial institutions and harp on measures like one’s Texas ratio (which models a bank’s risk profile to fail — and also inspired this site’s name), I prefer to focus on financial institutions as the fabric of our neighborhoods and communities.  When I write About That Ratio it is in stark contrast to those who deride the importance of banks.  I am not blind to the problems facing many bankers today, nor ignorant of errors and indiscretions made by some of our larger names.  Still, count me an optimist that better times are ahead.  So before my family and I take off for Christmas in Tulum, Mexico, one last About That Ratio for 2013 that shares three things from the week that was.

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(1) While many year-end blogs take a look back,  Jim Marous authored a comprehensive forward-looking post on his “Bank Marketing Strategies” blog.  His 2014 Top 10 Retail Banking Trends and Predictions compiles opinions from 60 global financial services leaders — including bankers, credit union executives, industry providers, financial publishers, editors and bloggers, advisors, analysts and fintech followers.  I appreciated his invitation to contribute and thought to share the crowd’s top three trends for 2014:

  1. The “Drive-to-Digital” trend will impact delivery, marketing and service usage;
  2. Payment disruption will increase vis-a-vis new players, technologies and innovations; and
  3. Increased competition from “neobanks” and non-traditional players will accelerate.

Take a read through these and the subsequent seven points offered up.  As Jim writes, “disruption will continue at an unprecedented pace and that the industry will look different this time next year.”

(2) It is hard to escape the reshaping of the banking industry through merger activity; in particular, the return of negotiated, strategic bank combinations.  While in San Francisco a few months ago, I wrote about Heritage Financial’s combination with Washington Banking Co.  Forgive the use of “merger of equals” to describe the deal; however, that misnomer best represents the agreement.  Some see these deals becoming more popular as bankers seek to build value for the next few years in order to sell at higher multiples.  Others cite a desire to create more immediate value through cost cuts and efficiencies.  Regardless of who’s driving and who’s riding, there were quite a few notable deals in 2013; for example, Umpqua and Sterling and the recent “51/49” deal between United Financial Bancorp and Rockville Financial.  I get the sense that more boards will consider deals structured like these to accelerate “scaling up” without utilizing cash as the currency for an acquisition.  Time will tell if I’m right.

(3) Finally, I readily admit my excitement to welcoming men and women from across the country to various Bank Director events next year.  From our BIG M&A conference at the Arizona Biltmore in January to The Growth Conference at the Ritz-Carlton New Orleans in May to a peer exchange for officers & directors at the Ritz-Carlton in San Francisco, we have a lot planned.  These events are a big part of our 23 year-old company’s business — and its pretty darn cool to participate in various conversations that relate to growth, innovation and “what’s working.”  I’m not alone in thinking it is time for bank CEOs and their boards to go on the offensive.  Competing successfully in a marketplace, managing shareholder expectations, overcoming regulatory obstacles, developing talent and leadership for the next generation, and, most of all, ensuring that one’s institution has the option of choosing whether to “acquire or be acquired”… yup, topics galore for me to cover here in 2014.

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I end every Friday post with a nod to my mother-in-law (who passed away four years ago).  She lived on the Big Island for several years and became quite fond of the “Aloha Friday” tradition; hence, the sign off.  The only Hawaiian saying that puts a bigger smile on my face is today’s title: Mele Kalikimaka!

Can Banking Be Right-Sized?

Size matters?
Size matters?

Although its been said many times, many ways, I can’t tell you what size really matters in banking today. Pick a number…  $500M in asset size?  $1Bn?  $9.9Bn?  Over $50Bn?  7,000 institutions?  6,000?  3,000? Less?  As a follow-up to last week’s guest post by Bank Director magazine’s editor, I spent some extra time thinking about where we are heading as an industry — and the size and types of banks + bankers leading the way.  What follows are three things I’m thinking about to wrap up the week that shows that size matters; albeit, in different ways.

(1) Not a single de novo institution has been approved in more than two years (astonishing considering 144 were chartered in 2007 alone) and the banking industry is consolidating.  Indeed, the number of federally insured institutions nationwide shrank to 6,891 in the third quarter after this summer — falling below 7,000 for the first time since federal regulators began keeping track in 1934, according to the FDIC.  Per the Wall Street Journal, the decline in bank numbers, from a peak of more than 18,000, has come almost entirely in the form of exits by banks with less than $100 million in assets, with the bulk occurring between 1984 and 2011.   I’ve written about how we are “over-capacity;” however, an article on Slate.com takes things to an entirely different level.  In America’s Microbank Problem, Matthew Yglesias posits America has “far far far too many banks…. (that) are poorly managed… can’t be regulated… can’t compete.”  He says we should want the US Bankcorps and PNCs and Fifth Thirds and BancWests of America to swallow up local franchises and expand their geographical footprints.  He sees the ideal being “effective competition in which dozens rather than thousands of banks exist, and they all actually compete with each other on a national or regional basis rather than carving up turf.”  While I have no problem with fewer banks, limiting competition to just the super regional and megabanks is a terrible thought.  Heck, the CEO of Wells Fargo & Co. wrote in the American Banker this August how vital community banks are to the economy.  So let me cite a rebuttal to Slate’s piece by American Banker’s Washington bureau chief Rob Blackwell.  Rob, I’m 100% with you when you write “small banks’ alleged demise is something to resist, not cheer on” and feel compelled to re-share Mr. Stumpf’s opinion:

…we need well-managed, well-regulated banks of all sizes—large and small—to meet our nation’s diverse financial needs, and we need public policies that don’t unintentionally damage the very financial ecosystem they should keep healthy.

(2) To the consolidation side of things, a recent Bank Director M&A survey found 76% of respondents expect to see more bank deals in 2014.  Within this merger mix exists strategic affiliations.  While the term “merger of equals” is a misnomer, there are real benefits of a strategic partnership when two like-sized banks join forces.  Case-in-point, the recent merger between Rockville Bank and United Bank (which will take the United name).  Once completed, the institution will have about $5 billion in assets and be the 4th largest bank in the Springfield, MA and Hartford, CT metropolitan area.  According to a piece authored by  Jim Kinney in The Republican, United Bank’s $369 million merger with the parent of Connecticut’s Rockville Bank “is a ticket to the big leagues for both banks.”  In my opinion, banks today have a responsibility to invest in their businesses so that they can offer the latest products and services while at the same time keep expenses in check to better weather this low interest rate environment.  United Bank’s president-to-be echoed this sentiment.  He shared their “dual mandate in the banking industry these days is to become more efficient, because it is a tough interest rate environment, and continue to grow… But it is hard to grow and save money because you have to spend money to make money.”   Putting together two banks of similar financial size gives the combined entity a better chance to this end.

(3) In terms of growth — and by extension, innovation — I see new mobile offerings, like those from MoneyDesktop, adding real value to community banks nationwide.  This Utah-based tech firm provides banks and credit unions with a personal financial management solution that integrates directly with online banking platforms.  As they share, “account holders are changing. There is an ongoing shift away from traditional brick & mortar banking. Technology is providing better ways for account holders to interact with their money, and with financial institutions.”  By working directly with online banking, core and payment platforms, MoneyDesktop positions institutions and payment providers as financial hubs and offers marketing tools that dramatically impact loan volume, user acquisition and wallet-share.  As technology levels the playing field upon which institutions compete, banks that leverage account holder banking information to solidify relationships bodes well for bank and customer alike.

Aloha Friday!

Building for the Future

Typically, my Friday columns on About That Ratio highlights three thoughts from the previous week; case-in-point, “On Fee Income + Staying Relevant.”  To vary things up, I’m expanding today’s piece by looking to five of the leading financial technology companies for inspiration.  In no particular order, something I learned from each specific to financial institutions’ efforts or opportunities to build for the future.

(1) Let me open with this visual representation about “engaging with digital consumers.”  Infograhphically speaking (their words, not mine), Infosys took a look at the complex behaviors consumers display when sharing their personal data.  Specifically, the technology company polled 5,000 “digitally savvy consumers” in five countries about how they trade personal data in the retail, banking and healthcare sectors. Their resulting study shows the key challenge facing business is to navigate the complex behaviors consumers display when sharing their personal data.

digital-consumer-circle

(2) Given these digital consumers’ growing use of smartphones — and comfort with their built-in cameras — image capture is a logical next step for bill enrollment and payments via mobile devices.  So it makes sense that Fiserv recently launched “Snap-to-Pay” — a feature that enables consumers to pay bills with a snap of their smartphone cameras.  Essential bill information, such as the company to be paid and the amount due, is captured by taking a picture of a paper bill and then used to automatically populate the appropriate fields on the smartphone screen.  Yup, another cool addition to the payments space.

(3) Competing with Infosys and Fiserv for financial institutions’ business and loyalty is FIS, the world’s largest provider of banking and payments technology.  For the third year in a row, the company achieved the No. 1 ranking on the FinTech 100, an annual listing of the top technology providers to the financial services industry compiled by American Banker, Bank Technology News and research firm IDC Financial Insights.  As I perused their site, I paused on their mobile prepaid solutions to see what they offer for the un-banked and under-banked consumers.  These potential customers represent a significant opportunity to financial institutions, and the suite of mobile offerings offered by FIS looks to robust and user-friendly.

(4) I’m a loyal American Airlines frequent flier (1,417,248 program miles to-date and going strong) and frequent user of their mobile app.  So when I saw that American Airlines Federal Credit Union completed its conversion to a new core processing system offered by Jack Henry & Associates earlier this week, I took note.  While I’m not a customer, I knew about the credit union thanks to in-flight magazines and connections through DFW.  What I didn’t realize is the size of the Texas-based credit union. It has more than $5.6 billion in assets and operates as the thirteenth largest in the United States.  Likewise, I didn’t realize that Jack Henry & Associates’ products and services are delivered through just three business units, with one supporting more than 750 credit unions of all asset sizes.

(5) Thinking about the airlines makes me think of government control and oversight (hello FAA, TSA, etc).  Just as some try to treat the airline industry as a public utility (it is not), so do some look at the banking space (again, it is not).  Still, increased regulatory involvement and tighter credit markets require greater emphasis on IT governance and risk compliance.  For this reason, numerous North American and European banks rely on Cognizant for risk management solutions across their operations in credit risk, operational risk and market risk.  As they share in Tackling Financial Crime, financial institutions seeking new revenue streams have “taken refuge in technologically advanced IT-enabled solutions… to stay ahead of the competition.”  However, the increasing use of plastic money, e-commerce, online banking and high-tech payment processing infrastructure has opened up new opportunities for financial criminals.  Hm, how to end on a positive.  Perhaps a link to the governance, risk and compliance solutions bank officers & directors might want to learn more about to defend against such cyber crime…

Aloha Friday!

Swimming With Sharks

A resident of the Mandalay Bay in Las Vegas
A resident of the Mandalay Bay in Las Vegas

I’ve been on a lot of planes lately, and while I read a ton, I also listened to several interesting podcasts to pass the time.  One in particular brought statistician Nate Silver and author Malcolm Gladwell together with ESPN’s Bill Simmons to discuss how periodicals are adjusting to the Internet age (ok, some sports came up too). I liked their premise that it doesn’t take much skill to be the first to do something, but the later you are, the smarter you have to be.  Much as the publishing/media industry needs to speed up the creative process, so too do financial institutions of all sizes.  Take a listen to the podcast if you’re interested in their take; for three things I’m thinking about based on the last four days, read on.

(1) Yes, credit unions and banks are both financial institutions; this, however, is where the similarities end in my opinion.  I spend so much of my time with bankers that I decided to flip the script and attend the National Directors’ Convention for credit unions in Las Vegas this week.  As I depart the Mandalay Bay (today’s draft title was “Banking on Sin”), today’s tongue-in-cheek title is a nod to those organizations that compete with banks.  True, I enjoyed the cheerleading aspect of certain sessions; for example, “A Higher Purpose: Why Credit Unions Are Different Than Banks.”  Nonetheless, as session after session juxtaposed a credit union’s marketing, lending and risk & compliance efforts with those of community banks, I’m not sure why credit unions should continue to be exempt from taxes as they are.  Look, my Grandfather helped set up a credit union in Massachusetts, and I appreciate why credit unions were initially granted nonprofit status.  But as they directly compete with banks, the tax question stirs the pot at our conferences… and does have me scratching my head about the fairness of an uneven playing field.

(2) Woody Allen is credited with saying 90% of life is showing up. But John Kanas and his team at Florida-based BankUnited (which has $12.6 billion in assets) are doing a lot more than that.  At least, that’s what I’m thinking after reading “A Steal of a Deal” by our very talented Managing Editor, Naomi Snyder.  While a lot of attention in Bank Director’s current issue goes to “The Top Performing Banks” due to our scorecard that ranks all NYSE and NASDAQ listed banks, Naomi’s piece is a must-read.  As you will see, the best mid-sized bank in the country is headed by an incredible dealmaker with an appetite not just for risk but with an eye for long-term growth.

(3) Thinking about growing a bank puts a board’s role in strategic planning front and center.  So when Promontory’s founder and CEO, Gene Ludwig, writes that “Big Changes Loom for Bank Boards,” I think it’s an appropriate link to share.  In a piece that runs on American Banker, the former head of the OCC writes “the do’s and don’ts of board governance are still emerging, and there is an honest debate over the core topics — how effective new and detailed expectations are at improving safety and soundness, and whether new standards are merging the concepts of governance and management. However, the fact of the matter is that regulators are not going to back away from their enhanced expectations for the board. Board members and managers who do not take heed proceed at their peril.”  Take a read if you’re interested in his nine points a bank and its board might consider in today’s highly charged regulatory environment.

Aloha Friday!

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