The Best of FinXTech’s Annual Summit

Quickly:

  • FinXTech’s annual Summit brought together senior executives from across the financial space to focus on new growth strategies and opportunities related to technology.

PHOENIX — I’ve spent the past few days with bank leaders, technology executives, investors and analysts interested to explore emerging trends, opportunities and challenges facing many as they look to grow and scale their businesses.  So as I prepare to head home to DC after some wonderfully exciting days at Bank Director’s annual FinXTech Summit, a few highlights from my time in the desert.

The 10 Finalists for 3 FinXTech Awards

For me, one of the signature pieces of this year’s program occurred on Thursday evening.  Under the stars, we recognized ten partnerships, each of which exemplified how banks and financial technology companies work together to better serve existing customers, attract new ones, improve efficiencies, bolster security and promote innovation.  The finalists for this year’s Best of FinXTech Awards can be seen in this video.

Winners of the 2018 Best of FinXTech Awards

We introduced these awards in 2016 to identify and recognize those partnerships that exemplify how collaborative efforts can lead to innovative solutions and growth in the banking industry.  This year, we focused on three areas of business creativity:

  • Startup Innovation, to recognize successful and innovative partnerships between banks and startup fintech companies that have been operating for less than five years.
  • Most Innovative Solution of the Year, to highlight forward-thinking ideas, we recognized partnerships that have resulted in new and innovative solutions in the financial space.
  • Best of FinXTech Partnership, a category to recognize outstanding collaboration between a financial institution and fintech company, we based this award on growth by revenue, customers and/or reputation plus the strength of integration.

The winners? Radius Bank and Alloy for Startup Innovation, CBW Bank and Yantra Financial Technology for Innovative Solution of the Year and Citizens Financial Group and Fundation for Best of FinXTech Partnership.  To learn more about each, check out this cover story on BankDirector.com

Favorite #FinXTech18 tweet

Well played with the ZZ Top reference — now we just needs to grow out that beard and drop a pair of RayBans into the shot.

Favorite picture

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Three timely (and paraphrased) comments

  1. COMMUNICATION is key…. said nearly every presenter.
  2. Make the tough call to kill bad tech or a bad relationship. You’ll lose customers if you don’t react quickly (h/t to our VP of Research, Emily McCormick).
  3. Change is the key to being valuable; start thinking and working like a startup (h/t @nabeelmahmood).

Video Recaps

During our time in the desert, we shared a number of videos on BankDirector.com.  The page with all videos can be found on FinXTech Annual Summit: Focusing on What’s Possible.  To get a sense of what these short videos look like, here is an example:

Thanks to all those who joined us at the Phoenician.  For more ideas and insight from this year’s event, I invite you to take a look at what we’ve shared on BankDirector.com (*no registration required).

3 Ways Banks Can Pick Up their Pace of Creativity

Quickly:

  • Financial institutions need a culture that allows for, and encourages, leadership teams to test & implement new approaches to traditional banking.

PHOENIX — Many financial institutions face a creativity crisis.  Legacy systems and monolithic structures stifle real change at many traditional banks — while newer technology leaders move quickly to pick up the slack.  During the first day of our annual FinXTech Summit at the Phoenician, I picked up on a few practical ideas to break down a few of the most common barriers to innovation inside financial institutions.

As our managing editor, Jake Lowary, wrote for BankDirector.com this morning, “the cultural and philosophical divides between banks and fintech companies is still very apparent, but the two groups have generally come to agree that it’s far more lucrative to establish positive relationships that benefit each, as well as their customers, than face off on opposite ends of the business landscape.”

So with this in mind, I invite you to follow the conference conversations via our social channels, where our team continues to shares ideas and information from Day 2 of this event using @BankDirector and @Fin_X_Tech on Twitter. In addition, you can search & follow #FinXTech18 to see what’s being shared with (and by) our attendees.

Kicking off FinXTech’s Summit

Quickly:

  • Technology continues to transform nearly every aspect of the financial services industry — from mobile payments to peer-to-peer lending to financial management.

PHOENIX — Tomorrow morning, we kick off our annual FinXTech Summit.  As I wrote yesterday, this annual event serves as our “in-person” bridge between banks and qualified technology companies.  Personally, I am so impressed to witness numerous financial institutions transforming how they offer banking products and services to businesses and individuals.  As such, I find myself eager to engage in tomorrow’s conversations around:

  • Partnerships, collaboration and enablement;
  • How and where banks can invest in cloud-based software; and
  • The business potential of machine learning, advanced analytics and natural language processors.

Joining us at the Phoenician are senior executives from high-performance banks like Capital One, Customers Bank, Dime Community Bancshares, First Interstate Bank, IBERIABANK, Mechanics Bank, Mutual of Omaha Bank, PacWest, Pinnacle Financial, Seacoast National Bank, Silicon Valley Bank, South State Bank, TCF National Bank, Umpqua, Union Bank & Trust, USAA and US Bancorp.  Long-time tech players like Microsoft share their opinions alongside strong upstarts like AutoBooks during this two-day program.  So before I welcome nearly 200 men and women to this year’s conference, allow me to share a few of my preliminary thoughts going into the event:

For those with us here in Arizona, you’ll find nearly every presentation explores what makes for a strong, digitally-solid bank.  So to see what’s trending, I invite you to follow the conference conversations via our social channels. For instance, I am @AlDominick on Twitter — and our team shares ideas and information through @BankDirector plus our @Fin_X_Tech platform.  Finally, search & follow #FinXTech18 to see what’s being shared with (and by) our attendees.

3 Key RegTech Themes

Quickly:

  • Machine learning, advanced analytics and natural language processors dominated conversations at yesterday’s RegTech program at NASDAQ’s MarketSite.

NEW YORK — Where will technology take us next?  As many banks embrace digital tools and strategies, they inevitably grapple with regulatory uncertainty.  This naturally creates friction in terms of staffing levels, operational expenses and investment horizons.  With so many regional and national banks continuing to grow in size and complexity, the responsibility to provide appropriate oversight and management escalates in kind.

Likewise, as more and more community banks rely on technology partners to transform how they offer banking products and services, management teams and boards of directors grapple to assess how such relationships impact compliance programs and regulatory expectations.  Can technology truly deliver on its promise of efficiency, risk mitigation and greater insight into customer behavior?

To address questions and observations like these, my team hosted the Reality of RegTech at NASDAQ’s MarketSite on April 18.  Entering the MarketSite, we aspired to surface ideas for banks to better detect compliance and regulatory risks, assess risk exposure and anticipate future threats by engaging with technology partners.

Over the years, our annual one trek to NASDAQ’s New York home afforded us opportunities to:

  • Learn how BNY Mellon encourages innovation on a global scale;
  • Identify where early-stage technology firms realistically collaborate with financial services providers; and
  • Explore lending strategies and solutions for community banks.

This year, we focused on the intersection of technology with regulation, noting that banks can and should expect an overall increase in regulatory constraints on topics including supervision, systemic risk (such as stress tests), data protection and customer protection.

For Forward-Thinking Banks

At Bank Director, we see the emergence of regulatory-focused technology companies helping leadership teams to bridge the need for efficiency and security with growth aspirations. However, understanding how and when to leverage such technologies confounds many executives.  As our Emily McCormick wrote in advance of the event, forward-thinking banks are looking within their own organizations to figure out how the deployment of regtech fits into the institution’s overall strategic goals while matching up with culture, policies, processes and talent.

Key Takeaways

  1. RegTech is, by its very nature, constantly evolving.  Current solutions focus on one of two things: reducing the cost of compliance via automation or leveraging technology to deliver more effective compliance.
  2. The flip side to the promise of these solutions is a skepticism and concern by both regulators and banks that RegTechs really are in this for the long-haul, are reliable and “safe” to work with.
  3. A first step for banks not already using RegTech?  Develop an implementation road map for one specific need (e.g. BSA / AML) which aligns to the overall strategic vision of the organization (in this case, a desire to grow through acquisition).

Interesting Reads on RegTech

Multiple presentations touched on how and where banks can maximize the potential benefits of their RegTech endeavors by addressing key risks; for instance: uncertain development paths, provider reliability, increased regulatory scrutiny, limited judgment and privacy concerns.  For those looking to go deeper on these issues:

  1. PwC authored a Regulatory Brief that discusses (a) how banks are using RegTechs, (b) the current RegTech landscape, and (c) what banks should do to prepare for RegTech.
  2. Continuity offers an e-book along with a step-by-step system for predictable, repeatable compliance results.
  3. Ascent blogs about the impact of artificial intelligence on regulatory compliance in its Top 5 Ways AI in Compliance Will Affect You in 2017.

Multiple members of the team shared insight and inspiration with #RegTech18 on Twitter (usually tying into our @Fin_X_Tech and @BankDirector handles).  Finally, be sure to check out BankDirector.com (no subscription required) as our editorial team offers up a number of perspectives on RegTech and this year’s event.

Trending Topics from CBALive!

Quickly:
  • A few quick-hit thoughts from this week’s CBALive! conference, where I spent the past three days engaged in conversations about consumer behavior and emerging digital initiatives.

ORLANDO, FL — When the Former Director of the National Security Agency and the Central Intelligence Agency says that the private sector needs to step in and take more responsibility for cyber safety and protection, it is a lede I dare not bury.

To paraphrase General Michael Hayden, now a Principal at The Chertoff Group, nation-states like North Korea and Iran pose major challenges to the fabric of our financial industry.  The Russians, though, remain in a class of their own.  As he explained, their focus on information dominance, not just cyber dominance, reflects a coordinated and concentrated fight to control the American public’s perceptions. As the recent presidential election proved, their ability to create “information bubbles” gives them a weapon with which to hurt companies’ reputations in addition to using other cyber hacking techniques to corrupt an institution’s data or to steal money.

While many bank boards have a tight pulse on their organization’s cybersecurity preparedness, Gen. Hayden made clear that the U.S. government views cyber as a new domain of warfare (alongside the traditional domains of air, sea, land and space).  Whether they want to or not, banks of all sizes form the cavalry that needs to ride to the country’s rescue as the cyber threats continue to proliferate.

Gen. Hayden discussed our virtual vulnerabilities and the real risks for our country during his afternoon’s keynote presentation at the Consumer Bankers Association CBALive! conference at the Hilton Orlando Bonnet Creek.  In addition to these remarks, I made note of three key issues that tie into their conference theme of “beyond the bank:”

The race to grow deposits continues.

The digital presence and marketing efforts of the biggest banks in the U.S. continue to enable them to acquire an outsized share of consumer and commercial relationships.  Given that deposits proved the big theme at our Acquire or Be Acquired Conference, I made note of Novantas‘ perspectives as they apply to community banks trying to grow and compete.  Given their involvement with financial institutions — the firm provides information, analyses and automated solutions designed to improve revenue generation — they believe acquisitive banks must apply the same discipline to evaluating a potential acquisition bank’s deposit portfolio as they historically have given to the lending book.  As they shared in a white paper, “the importance of such rigor has increased with higher rates: the low-rate banks of yesterday can wind up with unattractive deposit positions tomorrow.”

Artificial intelligence remains the ultimate buzzword.

Alistair Rennie, General Manager, Solutions at IBM Watson Financial Services opined on the promise of machine learning and artificial intelligence, highlighting the intersection of digital, offline and social identity data as a means to improve enterprise-wide visibility into regulatory and internal compliance controls.  As he shared, cognitive technologies promise to fundamentally change how banks identify customer behaviors and patterns. Personally, I found his most interesting point for bank leadership came from his first audience-specific question (*see the image that leads off today’s post).

Can you really “own” the customer experience?

Forgive me if you caught me rolling my eyes during presentations that began with “banks need to own the customer experience,” especially when delivered as if a novel approach to business.  Marketing 101 starts with a basic premise: know your customer — and give them what they want.  So when looking for the characteristics of disruption that might strengthen a relationship, I liked this particular tweet:

While we covered a lot of ground, these three thoughts accompany me on my flight home to D.C.  My thanks to Richard Hunt and his team at the CBA for inviting me and our CMO, Michelle King, to join them in Orlando.  The CBA represents America’s retail banks and does a great job bringing together some of the biggest institutions in the U.S. to address issues such as these.  If you’re not following Richard on Twitter, his handle is @cajunbanker and for the CBA, check out @consumerbankers.

5 Trending Topics at the Acquire or Be Acquired Conference

Quickly:

  • Large buyers are not in the bank M&A game right now; indeed, banks $25Bn and below continue to drive M&A activity. Case-in-point, 95% of total M&A deals since 2011 have buyer assets less than $25Bn. Might this change in 2018?

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

PHOENIX, AZ — Michael Porter, the noted economist, researcher and teacher, once said, “strategy is about making choices, trade-offs; it’s about deliberately choosing to be different. The essence of strategy is choosing what not to do. No one can tell you which rules to break, but you can acquire more skill in determining which rules to break given your talents and circumstances right now.”

Porter’s perspectives came back to me while listening to KBW’s CEO, Tom Michaud. Yesterday morning, Tom talked about the strategic paths that a bank’s CEO might consider in the years to come. As he shared, pressure from investors to deploy capital stimulated M&A discussions in 2017 — and will continue to impact deals in 2018. He also noted that pressure placed on deposit costs, as interest rates rise, contributes to the potential acceleration of bank consolidation. These were just two of the many notes I jotted down during the first day of our annual event. Broadly speaking, what I heard fell into five categories:

1. Economic trends
2. Regulatory trends
3. Small business lending trends
4. Management succession trends
5. Technological innovation trends

Many banks enter 2018 with steady, albeit slow loan growth — while recognizing modest margin improvement as they continue to focus on controlling expenses. Accordingly, I thought to elaborate on the issues I found interesting and/or compelling. Feel free to comment below if other points caught your eye or ear.

Economic Trends

FJ Capital authored a piece in late October that noted how, as the Fed progresses further into the tightening phase of the interest rate cycle, banks will find it more difficult to fund loan growth by raising new low‐cost deposits. Their view, which I heard echoed here, is banks with low‐cost core deposits will become more valuable over the next few years as banks wrestle with increased funding costs. In addition to this idea, I made note that banks with a strong deposit base could be more attractive to buyers as interest rates rise. However, a remark I’ve heard at past events re-emerged here. Namely, making a small bank profitable is hard; exiting, even harder.

Regulatory Trends

Given the audience here, I wasn’t surprised by the continued talk of removing the synthetic $10Bn designation. If the Fed, FDIC and OCC raise the $50Bn threshold as spelled out in Dodd Frank, we could see more banks in the $20Bn – $40Bn range come together. Given that large regional banks usually can pay high prices for smaller targets, unleashing this capacity could reignite more M&A and boost community bank valuations. In addition, the Community Reinvestment Act remains a major headwind in bank mergers. Many here want improvements in the CRA process, which in turn could reduce regulatory risk for bank M&A.

Small business lending

When it comes to the lifeblood of most banks — small business lending — a recurring question has been where and how community banks can take market share from larger banks. My two cents: closing loans faster is key, as is structuring loans to fit specific borrower profiles while being supremely responsive to the customer. Oh, and credit is a big theme right now — and the best clients typically have the best credit.

Management succession

An inescapable comment / observation: aging management teams and board members has been a primary driver of bank consolidation of late. I noted that the average age of a public bank CEO and Chairman is 60 and 66, respectively. It was suggested that this demographic alone plays a key factor in the next few year’s consolidation activity.

Technological trends

When it comes to bank mergers, one of the big drivers of deals is the rise in technology-driven competition (*along with regulatory costs and executive-succession concerns). I sense that most traditional banks haven’t really figured out the digital migration process we’ve embraced as a world. Finally, it appears that the biggest banks are winning the war for retail deposits.  This is an issue that many management teams and boards should be discussing…

_ _ _

For those of you interested in following the conference conversations via our social channels, I invite you to follow me on Twitter via @AlDominick, the host company, @BankDirector and our @Fin_X_Tech platform, and search & follow #AOBA18 to see what is being shared with (and by) our attendees.

10 Questions I Plan To Ask During Acquire Or Be Acquired

Quickly:

  • Despite improving economic conditions, the business of banking remains difficult.

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

PHOENIX, AZ — For all the talk of bank consolidation, there are still 5,700+ banks in the United States.  But let’s not kid ourselves.  For many community banks today, earnings pressures + regulatory and compliance costs + the continued impact of technology = a recurring challenge.

While the number of banks in business will inevitably shrink over the next 10 years — perhaps being cut in half — I remain bullish on the overall future of this industry. If December’s tax reform spurs capital spending and job creation by small- and medium-sized businesses, many of the banks joining us here in Arizona stand to benefit. But will the recent tax cut induce companies to invest more than they already planned to? This is but one of a number of questions I look forward to asking on stage through the first day of Bank Director’s Acquire or Be Acquired Conference.

Below, ten more questions I anticipate asking:

  1. Are FinTechs the industry’s new de novos?
  2. What does it mean that the banking world is deposit rich yet asset poor?
  3. Why are certain credit unions thinking about about buying banks?
  4. In terms of technology spending levels, where are dollars being earmarked and/or spent?
  5. With respect to small business lending, do credit unions or FinTechs pose a more immediate challenge to community banks?
  6. What is an appropriate efficiency ratio for a bank today?
  7. Will big M&A buyers get back in the game this year?
  8. What are some of the critical items in due diligence that are under appreciated?
  9. What does an activist investor look for in a bank?
  10. Is voice recognition the next huge source of growth for banks?

We have an exciting — and full day — coming up at the Arizona Biltmore. To keep track of the conversations via Twitter, I invite you to follow @AlDominick @BankDirector and @Fin_X_Tech.  In addition, to see all that is shared with (and by) our attendees, we’re using the conference hashtag #AOBA18.

21 Reasons I Am Excited About Acquire or Be Acquired

Quickly:

  • Making banking digital, personalized and in compliance with regulatory expectations remains an ongoing challenge for the financial industry. This is just one reason why a successful merger — or acquisition — involves more than just finding the right cultural match and negotiating a good deal.

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

PHOENIX, AZ — As the sun comes up on the Arizona Biltmore, I have a huge smile on my face. Indeed, our team is READY to host the premier financial growth event for bank CEOs, senior management and members of the board: Bank Director’s 24th annual Acquire or Be Acquired Conference. This exclusive event brings together key leaders from across the financial industry to explore merger & acquisition strategies, financial growth opportunities and emerging areas of potential collaboration.

AOBA Demographics

The festivities begin later today with a welcoming reception on the Biltmore’s main lawn for all 1,125 of our registered attendees.  But before my team starts to welcome people, let me share what I am looking forward to over the next 72 hours:

  1. Saying hello to as many of the 241 bank CEOs from banks HQ’d in 45 states as I can;
  2. Greeting 669 members of a bank’s board;
  3. Hosting 127 executives with C-level titles (e.g. CFO, CMO and CTO);
  4. Entertaining predictions related to pricing and consolidation trends;
  5. Hearing how a bank’s CEO & board establishes their pricing discipline;
  6. Confirming that banks with strong tangible book value multiples are dominating M&A;
  7. Listening to the approaches one might take to acquire a privately-held/closely-held institution;
  8. Learning how boards debate the size they need to be in the next five years;
  9. Engaging in conversations about aligning current talent with future growth aspirations;
  10. Juxtaposing economic expectations against the possibilities for de novos and IPOs in 2018;
  11. Getting smarter on the current operating environment for banks — and what it might become;
  12. Popping into Show ’n Tells that showcase models for cooperation between banks and FinTechs;
  13. Predicting the intersection of banking and technology with executives from companies like Salesforce, nCino and PrecisionLender;
  14. Noting the emerging opportunities available to banks vis-a-vis payments, data and analytics;
  15. Moderating this year’s Seidman Panel, one comprised of bank CEOs from Fifth Third, Cross River Bank and Southern Missouri Bancorp;
  16. Identifying due diligence pitfalls — and how to avoid them;
  17. Testing the assumption that buyers will continue to capitalize on the strength of their shares to meet seller pricing expectations to seal stock-driven deals;
  18. Showing how and where banks can invest in cloud-based software;
  19. Encouraging conversations about partnerships, collaboration and enablement;
  20. Addressing three primary risks facing banks — cyber, credit and market; and
  21. Welcoming so many exceptional speakers to the stage, starting with Tom Michaud, President & CEO of Keefe, Bruyette & Woods, Inc., a Stifel Company, tomorrow morning.

For those of you interested in following the conference conversations via our social channels, I invite you to follow me on Twitter via @AlDominick, the host company, @BankDirector and our @Fin_X_Tech platform, and search & follow #AOBA18 to see what is being shared with (and by) our attendees.

Blockchain: What It Is and How It Works

Quickly:

  • Many speculate that blockchain could turn out to be one of the most revolutionary technologies ever developed.

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

WASHINGTON, DC — J.P. Morgan’s CEO, Jamie Dimon, recently threw some big time shade at bitcoin.  However, as the Wall Street Journal shared this morning, he’s “still enamored with the technology that underpins it and other virtual currencies.”  For those wondering about where and why blockchain might revolutionize the business of banking, take a look at our just-released Q4 issue of Bank Director Magazine.  We dedicated our cover story to “Understanding Blockchain,” and this post teases out some of the key concepts bank executives and board members might focus in on.  Authored by John Engen, the full piece can be found, for free, here.  As you’ll read, the article covers three major points:

What is Blockchain

If you’re on the board of a typical U.S. bank, odds are that you don’t know much about blockchain, or distributed ledgers, except that there’s a heavy buzz around the space—and a lot of big bets being made. As John Engen wrote, being a know-nothing might be fine for now, but going forward could be untenable.

At its most basic, blockchain is a digital-ledger technology that allows market participants, including banks, to transfer assets across the internet quickly and without a centralized third party.

Some describe it as the next, inevitable step in the evolution of the internet; a structure to help confront concerns about security, trust and complexity that have emerged from a technology that has opened the world to sharing information.  To others, it looks more like business-process improvement software—a way to improve transparency, speed up transaction times and eliminate billions of dollars in expenses that markets pay to reconcile things like credit default swaps, corporate syndicated debt and other high-volume assets.

Where are things heading

“Trying to guess how blockchain is going to affect us in the next 20 years is kind of like standing in 1995 and trying to imagine mobile-banking technology,” said Amber Baldet, New York-based JPMorgan Chase & Co.’s blockchain program leader, in an online interview. “I’m sure the ultimate applications are things we can’t even imagine right now.”

For now, the space certainly has the feel of the 1990s internet, with hundreds of startups and billions of investment dollars chasing distributed-ledger initiatives.  Armonk, New York-based IBM Corp., a big blockchain supporter, estimates that 90 percent of “major” banks in the world—mostly those with trading, securities, payments, correspondent banking and trade finance operations—are experimenting with blockchain in some way.

Collaboration is the current buzzword

Most large banks are involved in consortiums with names like Ripple, Hyperledger, R3 and Enterprise Ethereum Alliance.  Smaller banks are taking more of a wait-and-see approach.  For all the promise of speed and efficiency, blockchain’s real power lies in its transparency, which makes data both trackable and immutable.  Ultimately, blockchain could usher in new business models, which require different ways of thinking.

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For members of a bank’s board, we created this “Blockchain 101” video.  In it, I touch on the potential application of blockchain in terms of digital identities, digital banking and cross-border payments.  In addition, the ten minute video surfaces key concepts and business ideas that remain material to many today.

*This video is just one of the offerings found in our Bank Services program designed to help board members and senior executives develop strategies to help their bank grow, while demonstrating excellence in corporate governance that shareholders and customers deserve and today’s regulators demand.

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.

The Paths High Performing Banks Take to Growth and Innovation

Quickly:

  • I’m in Utah at the Montage Deer Valley for the second day of the Association for Financial Technology’s Fall Summit.
  • This afternoon, I shared my thoughts on the pace of change impacting banks as part of AFT’s Fintech Leadership Industry Update.

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

PARK CITY — For those that attended Bank Director’s Acquire or Be Acquired conference this January, you may recall slides illustrating the consolidating nature of the banking industry over the past 25 years.  This decrease in the number of banks is the result of several major factors; most notably, changing banking laws, changing technologies, changing economics and changing consumer behaviors.

Given the audience we share information with (e.g. bank CEOs and their leadership teams), I continue to hear talk about steady, albeit slow, loan growth, some margin improvement and a continued emphasis on expense control.  However, it is apparent from the outside looking in that many banks still lack the true flexibility to continually innovate in terms of both products and services — and how they are delivered.

This is downright scary when you consider that Amazon’s Lending Service surpassed $3 billion in loans to small businesses since it was launched in 2011.  As I shared in my remarks, Amazon loaned over $1 billion to small businesses in the past twelve months.  Over 20,000 small businesses have received a loan from Amazon and more than 50% of the businesses Amazon loans to end up taking a second loan.  This is a major threat to the established financial community, because if there is one thing community banks and large banks agree on, it is that the small business market is important.  This will not change any time soon, and for community banks in particular, a greater share of the small business market may be their only path to survival.

So what I shared this afternoon were real-world examples of bank CEOs focused on carrying out a long-term growth strategy in creative, yet highly focused, ways.  For instance, several of the banks I referenced are attempting to re-engineer their technology and data infrastructure using modern systems and processes, developed internally and augmented through partnerships with fintech companies.  For instance, I cited a newer partnership between First Horizon’s First Tennessee bank unit and D3 Banking. In addition, I used examples like US Bancorp, PNC and Fifth Third before highlighting five more institutions that range from $10Bn to $50Bn in asset size.

I did so because we are witnessing an intense struggle on the part of financial services providers to harness technology in order to maintain relevance in the lives of their customers.  The eight banks I cited today have different leadership approaches; all, however, are considered high-performers. For those interested, here is a link to my presentation: Bank Director and FinXTech 2017 AFT Presentation.

The caveat to my presentation, remarks and writing: it might appear easy to create a strategic direction to improve efficiency and bolster growth in the years ahead. But many bank executives and their boards are being cautioned to prepare for false starts, unexpected detours and yes, stretches of inactivity — all of which impacts tech companies like those here in Park City at AFT.  Still, a vision without action is a dream; action without vision, a nightmare.  For these banks, strong leadership have set a clear course for their futures.

What Makes M&T A Great Community Bank?

A few months ago, the Wall Street Journal ran a story about M&T Bank appearing “to be just another big regional lender — but that doesn’t account for its CEO.”  Their piece coincided with our editorial team’s preliminary analysis of this strong financial institution.  We wondered: what’s behind M&T’s consistent success, why and how does M&T work like a community bank — and how is M&T playing a unique role reshaping public schools in Buffalo, New York?  These questions form the basis for Bank Director Magazine’s current cover story.  Authored by our Editor-in-Chief Jack Milligan, what follows is an account of how this upstate New York bank grew by making “quality loans to worthy borrowers” while following the lead of its dynamic Chief Executive..
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Any bank that exceeds $50 billion in assets carries the regulatory designation of being a Systemically Important Financial Institution, or SIFI. As such, they are subject to stricter supervision by the Federal Reserve than smaller banks receive, including higher capital requirements and mandatory stress testing. A community bank is an amorphous concept that means different things to different people, but certain characteristics are implied in the common understanding: It usually has a strong business focus and makes most of its money from lending, it has deep roots in the community because that is where its customers are located, and it is small. “Small” within this context is also imprecise. Certainly any institution that meets that definition under $1 billion would be considered a community bank, although many institutions over that threshold level would make the same claim.

But what about a Buffalo, New York-based $123 billion asset bank that operates in eight states and the District of Columbia?

M&T Bank Corp., the top ranked bank in Bank Director’s 2017 Bank Performance Scorecard for the $50 billion and above asset category, lives in both worlds.  M&T is the country’s 18th largest commercial bank and must adhere to all the requirements of a SIFI. But it also has deep roots in the communities it serves—as deep as most smaller banks. M&T not only meets the consumer and business banking needs of those communities, but also spends time and money trying to make them better places to live.

In this, M&T reflects the interests and values of its 83-year-old chairman and chief executive officer, Robert G. Wilmers, who has run the bank since 1983 when it had just $2 billion in assets. Wilmers believes deeply in the importance of strong local communities, if his 2016 letter to M&T’s shareholders is any guide. In the letter, Wilmers expressed concern about the health and well being of middle-class families and small-business owners who form the foundation of M&T’s customer base. The culprits that Wilmers identified are a monetary policy that has kept interest rates low, and excessive regulation. Low rates have benefited the wealthy more than middle-class families, who tend to be savers rather than investors. And M&T’s customer research has found that while small companies could benefit from borrowing at today’s low rates, many business owners are reluctant to expand in what they feel is an overregulated environment.

“Policies designed to benefit the majority have perversely only benefited a few,” he wrote. “The impacts of these decisions … are real,” Wilmers added. “In particular, the middle class and small businesses are losing ground. So, too, are their communities.”

M&T has a relatively straightforward business model compared to other institutions its size. M&T focuses its lending on consumers and small- and middle-sized businesses, and also provides wealth management and fiduciary services through its Wilmington Trust subsidiary to individuals and corporations. It doesn’t have a capital markets operation or wide array of specialty lending businesses, so it has some of the business model characteristics of a community bank, if not the size.

As is common with many Scorecard winners, M&T’s performance was marked by its balance. It did not place first in any of the five metrics that make up the Scorecard—return on average assets, return on average equity, the ratio of tangible common equity to tangible capital, nonperforming assets as a percentage of loans and other real estate owned, and net charge offs as a percentage of average loans. Its best scores were fifth place finishes for return on assets and net charge offs out of 22 banks in the $50 billion and above category. Scorecard winners tend to be those banks that do well on all of the metrics rather than dominating one or two.

The bank reported net income for 2016 of $1.32 billion, a 22 percent increase over 2015. Although fee income growth was essentially flat in a year-over-year comparison, loan growth was strong in 2016, with commercial and industrial credits growing 11 percent and commercial real estate loans 15 percent for the year. Residential real estate loans actually declined 14 percent last year as the bank let many of the jumbo mortgages that came with its 2015 acquisition of Hudson City Bancorp run off. M&T also shed nearly $2.6 billion in interest-bearing deposits it acquired with Hudson City, a thrift that relied on certificates of deposit for most of its funding. This 34 percent decline in high-cost liabilities, combined with its strong loan growth, resulted in a 22 percent rise in the bank’s net interest income for the year. M&T’s efficiency ratio dropped from 58.0 percent in 2015 to 56.1 last year, and this improvement also helped boost its profitability.

Over the long term, M&T has been a good performer in terms of asset quality and their earnings profile … and they tend to do well among large bank peers,” says Rita Sahu, a credit research analyst who covers M&T for Moody’s Investors Service. Sahu points out that M&T’s expenses were higher in 2014 and 2015 because of some charges related to the Hudson City purchase, and also because the bank had to spend heavily to strengthen its Bank Secrecy Act compliance infrastructure before the Fed would approve the Hudson City acquisition. Putting those issues behind it also helped boost the bank’s profitability last year.

M&T has attracted a strong following among institutional investors who value its predictability. The bank hasn’t posted a quarterly loss going back to 1976, and also had the lowest percentage of credit losses among money center and superregional banks during the financial crisis. Investors especially appreciate how much the bank’s stock price has, well, appreciated. Frank Schiraldi, an equity analyst at Sandler O’Neill + Partners who covers M&T, says the stock’s total return since June 1997 is 747 percent. This performance easily beats both the S&P 500 and SNL Mid Cap U.S. Bank Index for total return. M&T’s own investor presentation points out that just 23 of the 100 largest U.S. banks that were operating in 1983 when Wilmers took over are still around today. Among those, M&T ranks number one in stock price appreciation, with a compound average growth rate of 15 percent. “That’s pretty special,” Schiraldi says.

An important contributor to M&T’s performance last year was the acquisition of Hudson City, which closed in November 2015. Headquartered in Paramus, New Jersey, Hudson City operated on a traditional thrift model with its reliance on high- cost time deposits to fund a home loan origination platform that was heavily focused on jumbo mortgages, a product that M&T did not offer. So why did M&T do the deal? “If you looked at our distribution network prior to Hudson City, it was like a bagel and New Jersey was the hole,” explains Vice Chairman Rich Gold. “We had it surrounded, but we had nothing in New Jersey. This strategically filled a hole and now when you look at our distribution we’re covered from New York all the way down to Richmond, Virginia.”

While Hudson City was important for its geography, there were certain things it didn’t offer. As a traditional thrift, it had only a small percentage of core deposits and little in the way of business or consumer loans. “Our challenge now is to make something more out of the franchise than what it was,” says Gold. That transformation is underway, and it’s a process that M&T is very practiced at. Hudson City was M&T’s 23rd acquisition of either branches or whole institutions since 1987, and many of those deals involved thrifts. Gold says that successfully introducing a bank culture to a thrift takes time, and is facilitated by taking experienced M&T managers and seeding them throughout the old thrift franchise. “They understand the drill,” he says. “They understand what needs to be done. They understand the cultural complexion of [M&T] and are able to not only represent that but teach it.”

Announced in August 2012, the Hudson City deal would take over three years to close because of deficiencies the Fed found in M&T’s risk management infrastructure, particularly its BSA and anti-money laundering compliance efforts. The acquisition of Hudson City was going to substantially increase M&T’s asset size, and the Fed required that the bank strengthen its risk management program accordingly. “We probably did outgrow our infrastructure,” says Gold. “That’s shame on us. We missed that cue and we shouldn’t have, and I think we all recognize that and readily admit that.” M&T would eventually invest hundreds of millions of dollars building out an enterprise risk management infrastructure, including BSA and anti-money laundering compliance, an effort that was led by Gold.

And yet for all that, Hudson City has still turned out to be a good acquisition for M&T, even if it took much longer for the benefits to surface than anyone there expected. “It was still accretive from an earnings standpoint and from a tangible book value standpoint, so financially it was still a very good deal,” says Schiraldi. The Hudson City deal could also turn out to be a big driver of M&T’s growth over the next couple of years as the bank continues to build out the New Jersey franchise.

The bank made a $30 million tax-deductible cash contribution to the M&T Charitable Foundation in the fourth quarter of last year, which reduced its net income by $18 million, or 12 cents of diluted earnings per common share. For all of 2016, the M&T Charitable Foundation contributed $28 million to more than 3,600 not-for-profit organizations across its footprint, and its employees contributed over 234,000 volunteer hours.

Of course, many banks support community activities with their time and money. But few bank CEOs have stated their commitment quite so publicly as Wilmers has, and one undertaking in particular reflects both his values and interests—as do many things at the bank. With an undergraduate degree from Harvard College and an MBA from Harvard Graduate School of Business Administration, Wilmers has put his stamp on the bank during the 34 years that he has run it. Its relatively simple business model of checking accounts, loans and investment management advice fits comfortably with Wilmers’ description of the role that banks are supposed to play. “Banks are there to take care of people’s surplus liquidity, and help them buy a car and build a house and manage a business,” he said in an interview. “Part of that is making sure that things go well in the community, and that’s sort of like being for Mother’s Day.”

Wilmers is not the easiest interview for a journalist. He is polite and courteous, but has a tendency to reply to most questions with a brief answer or a deflection. An hour spent with him is to experience a fox hunt from the perspective of the hound. But Wilmers’ commitment to community—and particularly education—is real. He gives full voice to both in his 2016 shareholders letter, with roughly half of its 34 pages devoted to those concerns. (He also spent a lot of time complaining about bank regulation.) But when asked whether the American Dream, as it is embodied in middle-class families and small-business owners, is beginning to fray, Wilmers had this to say: “[Thirty years ago], 70 percent of the work force didn’t have a high school degree. Thirty years from now, 70 percent of the work force will need more than a college degree, in a time when arguably our educational system is getting worse, not better. That’s a big, big problem.”

And it’s a problem that M&T has spent its own time and money on. In 1993, the bank took over School 68, a poorly performing public school in the northeast section of Buffalo, an inner city neighborhood where, today, 33 percent of the residents live below the poverty line, and the unemployment rate is nearly 12 percent. School 68 was converted to a not-for-profit charter school in 2004 and renamed the Westminster Community Charter School, and today it teaches 550 students in kindergarten through the eighth grade. M&T has invested $16.6 million in the school to date, which includes a significant renovation to the building, and it manages all of the school’s operations. “Bob’s whole goal with Westminster was to see if he could change student academic outcomes and students’ lives and [their] families’ lives,” says Pamela Hokanson, president and senior director of schools for Buffalo Promise Neighborhood (BPN), an umbrella organization that oversees the school. As a charter school, Westminster receives about 60 percent of its funding from the State of New York. M&T and the Annie Casey Foundation provide the balance of the funding.

Walking through the facility with Hokanson and Principal Rob Ross on an afternoon in late May of this year, the halls were full of the joyful noise of children who seemed very happy to be there. Tuition is free and the school has a 95 percent attendance rate, the highest of any school in the City of Buffalo, according to Ross. “Of course, social ills creep in every now and then, but our goal is that the students’ experience in school should be safe, it should be positive, and we want them to walk away thinking of something they did today, whether it was the book they read or how they solved a problem with classmates as they were working through math or science,” Ross says.

In 2011, M&T was awarded a five-year, $6 million grant by the U.S. Department of Education to establish BPN, which M&T matched and Hokanson was then able to use as leverage to raise an additional $18 million from other organizations. The Buffalo Promise program now includes two additional schools, one of them an early learning center that was built in 2013 and acts as a feeder to Westminster. M&T contributed $3.5 million toward its construction. The bank also spent approximately $1.5 million renovating homes in the BPN footprint in 2014 and 2015.

M&T’s financial support is vital to BPN in other ways as well. Hokanson is actually an employee of the bank—her bank title is administrative vice president—but she is just one of eight bank employees who work for BPN. Sixteen other BPN employees are funded through an Annie Casey Grant and the M&T Charitable Foundation.

It is doubtful that M&T makes much, if any, money off of the nearly 12,000 residents who live in the BPN community. But it is a community that Wilmers and M&T have invested heavily in nonetheless. And there are children at Westminster whose lives are being changed as a result. Some years back, BPN created a scholarship program, also funded by M&T, that pays the tuition for its best students to attend the top private high schools in Buffalo. There are currently 30 students in the program. In May, the school hosted a dinner that was attended by all of the previous scholarship winners, plus the new class. Ross smiled when he talked about “seeing the dining hall filled with grandmas, and moms and dads and realizing that every one of those kids—yes, they got a scholarship—but they were working really hard not just to keep the scholarship but excel.”

Trying to make lives better. By anyone’s definition, that’s the work of a community bank.

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Our Bank Performance Scorecard is a ranking of the 300 largest U.S. banks, broken into three asset size categories. For a full explanation of the Scorecard and all of the rankings, click here.