Bank CEOs and Their Boards Can Lay Claim to These 5 Technologies

Quickly:

▪ Regional and community banks continue to lay claim to innovative technologies that attract new customers, enhance retention efforts, improve efficiencies, cut costs and bolster security.

By Al Dominick, CEO of DirectorCorps — parent co. to Bank Director & FinXTech

ATLANTA — The digital distribution of financial goods and services is a HUGE issue for bank executives and their boards.  Margins on banking products continue to decline due to increased competition.  In my opinion, this provides ample incentivize for banks to seek partnerships with specialized product and service providers.

I shared this thought earlier today at Bank Director’s annual Bank Board Training Forum. During my remarks to an audience of 203 officers and directors (representing 84 financial institutions), I laid out five potential area of collaboration that community bank CEOs and their boards might spend more time discussing:

1. New core technologies;
2. Machine learning / Artificial intelligence applications;
3. RegTech;
4. Payments; and
5. White labeling product offerings.

I elaborated on why I think our audience needs to explore each area before expanding on how banks might take steps to incorporate such technologies into their culture and business.  I wrapped up by providing examples of companies in each space that attendees might learn more about.

For instance, when it comes to the core technological systems offered by Fiserv, Jack Henry and FIS, many banks are investing in “integration layers” to bridge the needs of client‐facing systems with their core system. While these layers have proven valuable, banks are also aware of the need to migrate away from legacy cores should the flexibility they desire not come from these companies.  Hence the advent of companies like Finxact, a cloud banking platform promising to be the most transparent and open core banking system available.

In terms of machine learning and artificial intelligence, I see five potential use cases for banks to consider: smarter customer acquisition, better Know-Your-Customer efforts, improved customer service, smarter and faster account openings and the ability to offer more competitive loans.  Here, I am impressed with the work being done by companies like Kasisto, whose conversational AI platform is pre-loaded with thousands of banking intents and millions of banking sentences.  It promises to fulfill requests, solve problems, predict customers’ needs and improve performance on its own using sophisticated machine learning.

Given the cost and complexity of compliance, RegTech offerings promise to simplify fraud prevention and detection, improve the interpretation of regulation while accelerating reporting functions.  Further, RegTech companies held simplify data access, storage and management while strengthening risk management efforts.  There are quite a few companies in this fast-growing space that I highlighted.  One is Fortress Risk Management, a company whose advanced analytics predict and detect financial crime while its tool enable efficient case management, dispute management, reporting and regulatory compliance.

With respect to payments, our rapidly changing and oh-so-interconnected markets of debit, credit, mobile, prepaid and digital payments proves both a blessing and a potential curse for traditional institutions. As we move toward a cashless society and payments become less visible, banks need to maximize their opportunities to become the default payment method, and keep abreast of innovations in credit scoring, faster payments, analytics, security and fraud detection.  Case-in-point, BluePay delivers non-interest income to banks of all sizes by aggregating customer data coupled with the latest merchant processing technology.

Finally, white label product offerings are nothing new.  However, technology companies like SimplyCredit and StrategyCorps continue to help banks reshape and rethink customer engagement, setting new and higher bars for their’s clients’ experiences.  For banks seeking innovations like rapid loan adjudication, partnering with technology providers like these enables a bank to keep pace with the customer experience expectations set by large technology firms.

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If you weren’t able to join us in Atlanta and are curious about today’s featured image, here is a link to the pdf: 2017 Bank Board Training Presentation (Tech-focused). As I shared, New Zealand’s All Blacks are the world’s most successful sporting outfit, undefeated in over 75% of their international rugby matches over the last 100 years.  Their willingness to change their game (and their culture) when they were at the top of their game inspired me — and allowed me to challenge our attendees to think if they are willing to do the same with their banks.  I’m also inspired by my colleagues who helped develop this year’s program. From our conference team to editorial group, marketing to data departments, I’m proud to work with a great group dedicated to the idea that a strong board makes contributes to a strong bank.

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.

The Growth Conference – Thursday Recap

It is obvious that the most successful banks today have a clear understanding of, and laser-like focus on, their markets, strengths and opportunities.  One big takeaway from the first full day of Bank Director’s Growth Conference (#BDGrow14 via @bankdirector): banking is absolutely an economies of scale business.

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A 2 Minute Recap

 

Creating Revenue Growth

At events like these, our Publisher, Kelsey Weaver, has a habit of saying “well, that’s the elephant in the room” when I least expect it.  Today, I took her quip during a session about the strategic side of growth as her nod to the significant challenges facing most financial institutions — e.g. tepid loan growth, margin compression, higher capital requirements and expense pressure & higher regulatory costs.  While she’s right, I’m feeling encouraged by anecdotes shared by growth-focused bankers considering (or implementing) strategies that create revenue growth from both net interest income and fee-based revenue business lines. Rather than lament the obstacles preventing a business from flourishing, we heard examples of how and why government-guaranteed lending, asset based lending, leasing, trust and wealth management services are contributing to brighter days.

Trending Topics
Overall, the issues I took note of were, in no particular order: bank executives and board members need to fully embrace technology; there is real concern about non-bank competition entering financial services; the board needs to review its offerings based on generational expectations and demands;  and those that fail to marry strategy with execution are doomed. Lastly, Tom Brown noted that Bank of America’s “race to mediocrity” actually makes it an attractive stock to consider.  Who knew being average can pay off?

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To comment on this piece, click on the green circle with the white plus (+) sign on the bottom right.  More tomorrow from the Ritz-Carlton New Orleans.

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.

Since You Can’t Own a Car Dealership

As my colleague Jack Milligan writes in our 2nd quarter issue of Bank Director magazine, just because a bank can’t own a car dealership doesn’t mean there isn’t “enormous flexibility in determining a bank’s strategy.” Curious what this means? Read on.

2Q14

A Sneak Peek at the Core Revenue Champs

Each year, Bank Director magazine looks at all U.S. banks and thrifts to identify the strongest growth banks. We rank the top performers across four separate categories: core deposits, core noninterest income, net loans and leases and the most important, core revenue. Since the magazine mails today, I thought to offer a sneak peek of the results:

Screen Shot 2014-04-24 at 6.06.07 AM

What I find interesting about the top two banks on this very strong list: both Customers Bank and EverBank Financial designed their business models around technology from their very beginnings.

Find Your Balance

As I read through an advance copy of the issue, it strikes me that many business areas that historically provided revenue growth are simply not growing fast enough to overcome new capital and regulatory requirements.  In this light, you can understand why many say times couldn’t be more challenging for growth in community or regional banking. The corollary to this? Balancing organic and external growth is a key focus area for bank management and boards.

Increasingly, I hear that growth-focused banks are considering (or implementing) strategies that create revenue growth from both net interest income and fee based revenue business lines — think government guaranteed lending, asset based lending, leasing, trust and wealth management services. Clearly, as interest margins and loan volumes remain subject to compression and intense competition, the “optimization” of fee-based revenue is becoming pivotal in enhancing shareholder value.

‘Sup Big Easy

True, a number of banks seek to extend their footprint and franchise value through acquisition. Yet, 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 leverage product innovation or focus on their branch network. I bring these approaches up in advance of next week’s Growth Conference at the Ritz-Carlton, New Orleans. We designed this event to showcase strategies, structures, processes and technologies that a bank’s CEO and board might consider to fuel their own growth.

Unlike trade shows and other events, we limit participation to a financial institution’s key officers and directors to ensure those joining us are not just committed to distinguishing their performance and reputation, but also are appropriate peers to share time and ideas with. From companies like StrategyCorps, Ignite Sales and VerifyValid to PwC, Fiserv and IBM, we have a tremendous roster of companies joining us in Louisiana to share “what’s working” at the myriad banks they support. As I’ve done for our other events (e.g. the sister conference to Growth, Acquire or Be Acquired), I’ll be posting a number of pieces next week from the Crescent City and invite you to follow along on Twitter via @aldominick, @bankdirector and using #BDGrow14.

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!

On Fee Income + Staying Relevant

Cloud Gate in Millennium Park
Cloud Gate in Millennium Park

So I shared my excitement for the RedSox World Series victory earlier today… Before I pack my things for a trip to the JW Marriott in Chicago, let me share three things I learned this week that relate to bank CEOs and their boards, not baseball and beards.

(1) As our very talented editor, Jack Milligan, wrote in the current issue of Bank Director, when it comes to fee income, “drivers tend to fall into three general categories, beginning with a variety of consumer-based fees from such things as foreign ATM withdrawals, overdraft protection plans, debit card transactions and some checking accounts.”  I bring this up as Jack and the team at Bank Director magazine ranked the top 50 publicly traded banks based on their ratio of non-interest income to total operating revenue for 2011 and 2012. The totals for both years were then averaged, which determined the order of finish. All banks listed on the New York Stock Exchange and NASDAQ Stock Exchange were included in the analysis (which was performed by the investment banking firm Sandler O’Neill + Partners in New York). At the top of the ranking are New York-based Bank of New York Mellon Corp., State Street Corp. in Boston and Chicago-based Northern Trust Corp.  For a full look at the results, click here.  For the story itself, register for free on BankDirector.com to access the digital issue of the magazine.

(2) Clearly, banking’s profit model is going through a period of transition.  Here, companies like StrategyCorps play an interesting role in helping financial institution meet their needs for more fee income without upsetting its customers.  No one — at least, that I know — wants to  pay for basic, traditional retail banking services.  They resent when a new fee is added on to an existing free service or product with no additional value (case-in-point, Bank of America’s $5 debit card fee debacle).  So as Mike Branton wrote in the Financial Brand, “financial institutions must seek new ways to incorporate non-traditional services that connect with consumers’ lifestyles.”  StrategyCorps took to Finovate’s Fall stage in NYC in September to demo, in less than 7 minutes, how financial institutions can use an enhanced mobile experience to successfully bring in fee income.  Take a look.

(3) Finally, I will be tweeting throughout our annual Bank Executive & Board Compensation conference next week (using hashtag #BEBC13).  This year’s 9th annual event focuses on compensation trends, talent acquisition/attraction and retention strategies. In addition, it looks at how the next few years’ merger activity might influence incentive compensation plans and performance-based pay structures.  I intend to post a few “postcards” from Chicago throughout the week — the first (tentatively set for Tuesday) on how companies develop executives, attract leadership and approach compensation in today’s highly competitive and economically challenging world.

Aloha Friday!