Take a look at Bank Director’s just-published “Tech Issue.” In it, we look at how bank CEOs and executive teams can better engage with fintech companies, what the biggest banks are doing in terms of technology strategy and what the Internet of Things (IoT) means for financial institutions in 2016.
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A lean startup methodology enables entrepreneurs to efficiently build a company by searching for product and/or market fit rather than blindly trying to execute. I find it helps mature companies too — and thought the perspectives of Stanford Professor Steve Blank, Silicon Valley entrepreneur Ben Horowitz and Y Combinator’s Sam Altman might resonate with bankers, fintech companies and other small business CEOs that are thinking about how to adapt their businesses to new challenges and opportunities.
As someone who long aspired to build and run a company, I take great pride in leading a profitable, privately-held, twenty-person-strong small business. In the past, I have written about my “people > products > performance” approach to leading the Bank Director team. So when Ben Horowitz (co-founder and Partner of the venture capital firm Andreessen Horowitz) shares on his blog, “it’s not about how smart you are or how well you know your business; it’s about how that translates to the team’s performance and output,” I find myself nodding in total agreement.
Look, I am so very proud of our team’s accomplishments… but I am even more excited to adapt the lean startup methodology to scale our business. The approach we are taking builds on the wisdom and experience of others. So for anyone responsible for growing their business, allow me to recommend two “must reads:”
For me, we are “all-in” in terms of taking a lean startup approach to expanding our business without compromising our reputation for going narrow & deep, providing a “Four Seasons” level of experience at our events and delivering outstanding ideas and insights to a hugely influential audience. In addition, we are supremely mindful to do as Sam Altman says. That is, create something that a small number of people love rather than a product that a large number of people simply like.
H1: The Core Business
Admittedly, I am hesitant to call our approach to growing Bank Director a bootstrapping effort since the brand, relationships and revenue being generated enable us certain luxuries that many start-ups simply do not have. Nonetheless, let me show you how we adapted the Horizon 1 (H1) and Horizon 3 (H3) framework depicted above to our business.
What began in 1991 as a traditional publishing company now operates as a privately-held media enterprise delivering original content to CEOs, executives and board members of financial services companies via digital platforms, exclusive conferences and award-winning publications. Below is a visual example of our transformation vis-a-vis three magazine covers. As you can see, we have matured in style while expanding our frequency (from quarterly to monthly) as we expanded our distribution channels.
Going narrow and deep works for us since we generate our revenue from the annual conferences & events we host (e.g. our 800+ person Acquire or Be Acquired conference), publications and research we publish and education & training services we provide.
H3: Where the Wild Ideas Live
With three consecutive years of top line growth (and healthy bottom line results to boot), we are in the wonderful position to grow in some pretty cool ways. But doing so will take more than simple process improvements and expense control. As we have a strong business foundation in place, I did have to restructure my management team’s individual roles and responsibilities to better suit our H1/H3 setup. I did so because as Steve Blank points out, “Horizon 3 is where companies put their crazy entrepreneurs… these innovators want to create new and potentially disruptive business models.” As fun as living/working in H3 sounds, let me emphasize how much I rely on the H1 team to “defend, extend and increase” our core business.
Is it working? Well, we will formally announce a new venture, FinXTech, on March 1, 2016 at Nasdaq’s MarketSite in New York City. This is the first — and surely not last — project to emerge from our H3 world. But time will ultimately tell.
We are a collection of creative men and women and I am very optimistic about our future. Realizing that we want to continuously push to grow and innovate led me to appreciate “the need to execute (to the) core business model while innovating in parallel.” So today’s post isn’t an attempt to make me look smart; rather, my attempt to acknowledge the inspiration of others and share what’s working for us.
At a time when J.P. Morgan is getting smaller, the pressure is on for smaller banks to get bigger. As KPMG recently shared with BankDirector.com, there was a 25% increase in bank deals in the U.S. in 2014, compared to 2013, and there is a good possibility that the number of deals in 2015 will exceed that of 2014. One reason for this: a larger institution can spread costs (such as investments and regulatory burdens) across a larger customer and revenue base.
Not surprisingly, 67% of executives and board members responding to Bank Director’s 2016 Bank M&A Survey say they see a need to gain more scale if they are going to be able to survive in a highly competitive industry going forward. As our director of research, Emily McCormick, shared, “many of these respondents (62%) also see a more favorable climate for bank deals, hinting at a more active market for 2016 as banks seek size and scale through strategies that combine organic growth with the acquisitions of smaller banks.”
While the majority of bank executives and boards surveyed feel a need to grow, respondents don’t agree on the size banks need to be in order to compete today. A slim majority, 32%, identified $1 billion in assets as the right size… interesting, but not surprising, when you consider that 89% of commercial banks and savings institutions are under $1 billion in assets, according to the FDIC (*personally, I’m of the opinion that $5Bn is the new $1Bn, but that’s a topic for another day). On to the key findings from this year’s research:
Two-thirds report their bank intends to participate in some sort of acquisition over the next 12 months, whether it’s a healthy bank (51%), a branch (20%), a nondepository line of business (14%), a loan portfolio (6%) and/or a financial technology firm (a scant 2%).
Respondents indicate that credit culture, at 32%, and retaining key talent that aligns with the buyer’s culture, at 31%, are the most difficult aspects of the post-merger integration process.
More institutions are using social media channels to communicate with customers after the close of the deal. 55% of respondents who purchased a bank in 2014 or 2015 used social media, compared to 42% of 2011-2013 deals and just 14% of 2008-2010 deals (*FWIW, Facebook, at 26%, is the most popular channel for respondents).
Fifty-six percent of respondents have walked away from a deal in the past three years. Of the respondents who indicate they declined to buy, 60% cite deal price while 46% blame the credit quality of the target institution.
Why do banks sell? Of the executives and board members associated with banks sold from 2012 to 2015, 55% say they sold because shareholders wanted to cash out. Despite concerns that regulatory costs are causing banks to sell, just 27% cite this burden as a primary motivator.
The full survey results are now available online at BankDirector.com, and will be featured in the 1st quarter, 2016 issue of Bank Director magazine. In addition, for those executives interested in connecting with many of the key decision makers driving the deals mentioned above, our annual Acquire or Be Acquired Conference will be held at the Arizona Biltmore from January 31 through February 2.
Our 2016 Bank M&A Survey, sponsored by Crowe Horwath LLP, examines current attitudes and challenges regarding bank M&A, and what drives banks to buy and sell. The survey was completed in September 2015 by 260 chief executive officers, independent directors and senior executives of U.S. banks, and former executives and directors of banks that have been acquired from 2012-2015.
A fundamental truth about banking today: individuals along with business owners have more choices than ever before in terms of where, when and how they bank. So a big challenge — and dare I suggest, opportunity — for leadership teams at financial institutions of all sizes equates to aligning services and product mixes to suit core customers’ interests and expectations.
“The financial service marketplace in the United States has been has crowded with nonbank companies that have competed fiercely with traditional banks for decades. But we seem to be in a particularly fecund period now. Empowered by advances in technology and data analysis, and funded by institutional investors who think they might offer a better play on growth in the U.S. economy than traditional banks, we’re seeing the emergence of a new class of financial technology – or fintech – companies that are taking dead aim at the consumer and small business lending markets that have been banking industry staples for decades.”
Truth-be-told, the fact he successfully employed a word like ‘fecund’ had me hunting down the meaning (*it means fertile). As a result, that particular paragraph stuck in my mind… a fact worth sharing as it ties into a recent Capgemini World Retail Banking Report that I devoured on a tremendously turbulent, white-knuckling flight from Washington, D.C. to New Orleans this morning (one with a “minor” delay in Montgomery, AL thanks to this morning’s wild weather).
Detailing a stagnating customer experience, the consultancy’s comprehensive study draws attention “to the pressing problem of the middle- and back-office — two areas of the bank that have not kept pace with the digital transformation occurring in the front-office. Plagued by under-investment, the middle- and back-offices are falling short of the high level of support found in the more advanced front-offices, creating a disjointed customer experience and impeding the industry’s ability to attract, retain, and delight customers.”
Per Evan Bakker for Business Insider, the entirety of the 35-page report suggests “banks are facing two significant business threats. First, customer acquisition costs will increase as existing customers are less likely to refer their bank to others. Second, banks will lose revenue as customers leave for competitors and existing customers buy fewer products. The fact that negative sentiment is global and isn’t limited to a particular type of customer activity points to an industry wide problem. Global dissatisfaction with banks is likely a result of internal problems with products and services as well as the growing number of non-bank providers of competing products and services.”
While dealing with attacks from aggressive, non-bank competitors is certainly not a new phenomenon for traditional banks, I have taken a personal interest in those FinTech companies looking to support (and not compete with) financial institutions. So as I set up shop at the Ritz-Carlton New Orleans through Wednesday for our annual Bank Board Growth & Innovation conference, let me shine the spotlight on eight companies that may help address some of the challenges I just mentioned. While certainly just the tip of the FinTech iceberg, each company brings something interesting to the table:
As unregulated competition heats up, bank CEOs and their teams need to continue to seek ways to not just stay relevant but to stand out. While a number of banks seek to extend their footprint and franchise value through acquisition, many more aspire to build the bank internally. Some show organic growth as they build their base of core deposits and expand their customer relationships; others see the value of collaborating with FinTech companies. To see what’s being written and said here in New Orleans, I invite you to follow @bankdirector, @aldominick + #BDGrow15.
Yesterday, Bank Director released its annual Risk Practices Survey, sponsored by FIS, the world’s largest global provider dedicated to banking and payments technologies. As I read through the results, it became immediately apparent that cyber security is the most alarming risk issue for individuals today. So while I layout the demographics surveyed at the end of this piece, it is worth noting that 80% of those directors and officers polled represent institutions with between $500 million and $5 billion in assets — banks that are, in my opinion, more vulnerable than their larger counterparts as their investment in cyber protection pales to what JPMorgan Chase, Wells Fargo, etc are spending. In fact, the banks we surveyed allocated less than 1% of revenues to cybersecurity in 2014. Accordingly, I’m gearing my biggest takeaway to community bankers since those individuals most frequently cited cyber attacks as a top concern.
Interestingly, individual concern hasn’t yet translated into more focus by bank boards. Indeed, less than 20% say cybersecurity is reviewed at every board meeting — and 51% of risk committees do not review the bank’s cybersecurity plan. As I read through our report, this has to be a wakeup call for bank boards. While a number of retailers have made the news because of hacks and data thefts, this remains an emerging, nuanced and constantly evolving issue.
It would not surprise me if bank boards start spending more time on this topic as they are more concerned than they were last year. But I do see the need to start requiring management to brief them regularly on this issue, and start educating themselves on the topic. In terms of where to focus early conversations if you’re not already, let me suggest bank boards focus on:
The detection of cyber breaches and penetration testing;
Corporate governance related to cyber security;
The bank’s current (not planned) defenses against breaches; and
The security of third-party vendors.
Personally, I don’t doubt that boards will spend considerably more time on this issue — but things have changed a lot in the last year in terms of news on data breaches. If bankers want to start assessing the cybersecurity plan in the same way they look at the bank’s credit policies and business plan, well, I’d sleep a lot sounder.
Bank Director’s research team surveyed 149 independent directors and senior executives of U.S. banks with more than $500 million in assets to examine risk management practices and governance trends, as well as how banks govern and manage cybersecurity risk. 43% of participants serve as an independent director or chairmen at their bank. 21% are CEOs, and 17% serve as the bank’s chief risk officer.
Banks are increasingly interested in the topic of mergers and acquisitions, which must have something to do with our record attendance at this year’s Acquire or Be Acquired Conference in Scottsdale, Arizona.
The fun begins at The Phoenician (pictured above) this weekend with Bank Director’s 21st annual “AOBA.” Last year, we welcomed 435 officers & directors from 271 financial institutions to the Arizona Biltmore. This year, we have 522 bankers and bank board members from more than 300 banks in attendance. Merger activity is clearly gaining steam, and this is bringing more interested parties to the table.
Three Days in the Desert
Why banks are bought (or sold) involves much more than just the numbers making sense. Moreover, to successfully negotiate a merger transaction, buyers and sellers must bridge the gap between a number of financial, legal, accounting and social challenges. So allow me to sketch out what’s on tap for this massive three-day event.
To kick things off, we take a macro-level look at capital markets and operating conditions for banks nationwide. Additionally, we look at how M&A fits within a broad range of strategic options for a bank’s board and how some successful acquirers have aligned transactions to achieve strategic goals. Of note, we welcome the perspectives of CEOs from high performing banks like Pinnacle National Bank, Banner Corp., First Interstate BancSystem, IBERIABANK and CVB Corp. as part of several presentations. On stage, these men will share their thoughts on what it takes to build and lead successful institutions.
Building on the first day of the conference, we turn our attention to the long-term preparation required by both a buyer and seller. For instance, regulatory planning remains critical to getting deals done for both sides — especially on compliance issues. Thematically, Monday builds on Sunday’s presentations, with sessions dedicated to helping a bank’s board make a rational buy, sell or hold decision.
To put a bow on this year’s event, we start with a look at what the biggest banks are doing today followed by a series of breakout sessions on more in-depth topics. To conclude, we welcome the perspectives of our friends from NASDAQ who will look at trends, issues and the “movers and shakers” in the technology world that may impact growth and innovation within the financial community. As much as AOBA explores one’s financial growth opportunities, this final session examines what’s happening outside of our industry that may precipitate new changes or challenges to a bank’s growth aspirations. Oh and in the afternoon… we swap suits for cleats, wrapping up AOBA with our annual golf tournament.
Can’t Make it?
For those not able to join us — but interested in following the conversations — I invite you to follow me on Twitter via @AlDominick, the host company, @BankDirector, and search & follow #AOBA15 to see what is being shared with our attendees.
On Sunday, January 25, we kick off Bank Director’s 21st annual “Acquire or Be Acquired” Conference (@bankdirector and #AOBA15) at the luxurious Phoenician resort in Scottsdale, Arizona. I am so very excited to be a part of this three day event — and am supremely proud of our team that is gearing up to host more than 800 men and women. With so many smart, talented and experienced speakers on the agenda, let me share a primer on a few terms and topics that will come up. In addition, you will find several links to recent research studies that will be cited before I share one example of the type of issues being both presented and addressed at “AOBA.”
Just as M&A is a colorful — and complex — issue, so too are the words, terms and considerations used by attorneys, investment bankers and consultants in management meetings, in the boardroom or at the negotiating table. Here are three terms I thought to both share and define in advance of AOBA (ay-o-bah):
Triangular merger: This happens when the acquirer creates a holding company to acquire the target and both the acquirer and the target become subsidiaries of the holding company.
Cost of capital: You could say this is the cost to a company of its capital, but another way to look at it simply is this: the minimum return you need to generate for your investors, both shareholders and debt holders. This is what it costs you to operate and pay them back for their investment.
Fixed exchange ratio: This is the fixed amount for which the seller exchanges its shares for the acquirer’s shares. If the buyer’s stock price falls significantly post-announcement, that could mean the seller is getting significantly less value.
Again, these are but three of the many terms one can expect to hear when it comes to structuring, pricing and negotiating a bank merger or acquisition.
Throughout the year, our team asks officers and directors of financial institutions to share their thoughts on board-specific issues — like growth and more specifically, mergers & acquisitions. Allow me to share an overview on these two research reports along with links to the full results:
Of note: 84% of the officers and board members who responded to this Growth Strategy Survey, sponsored by the technology firm CDW, say that today’s highly competitive environment is their institutions’ greatest challenge when it comes to organic growth — a challenge further exacerbated by the increasing number of challengers from outside the industry primed to steal business from traditional banks.
Of note: There’s no shortage of financial institutions seeking an acquisition in 2015, but fewer banks plan to sell than last year, according to the bank CEOs, senior officers and board members who completed Bank Director’s 2015 Bank M&A Survey, sponsored by Crowe Horwath LLP.
Valuing a Bank
Understanding what one’s bank is really worth today is hugely important. Whether buying, selling or simply growing organically, a bank needs metrics in place to know and grow its valuation. On BankDirector.com this past October, I shared why earnings are becoming more important than tangible book value (Why Book Value Isn’t the Only Way to Measure a Bank). Clearly, a bank that generates greater returns to shareholders is more valuable; thus, the emphasis on earnings and returns rather than book value. Yes, investors and buyers will always use book value as a way to measure the worth of banks. Still, I anticipate conversations at the conference that builds on the idea that as the market improves and more acquisitions are announced, we should expect to see more attention to earnings and price-to-earnings as a way to value banks.
Please feel free to comment on today’s piece below or share a thought via Twitter (I’m @aldominick). More to come from the “much-warmer-than-Washingon DC” Arizona desert and Acquire or Be Acquired in the days to come.