On the Horizon for Bank CEOs, Their Leadership Teams and Boards

WASHINGTON, DC — Can community banks out-compete JP Morgan, BofA and Wells Fargo?  This is the elephant in the room awaiting 853 bank executives and board members — representing 432 Banks — at our upcoming Acquire or Be Acquired Conference.  The lights don’t officially come up on our 25th annual event at the JW Marriott Phoenix Desert Ridge until Sunday, January 27.  So in advance, three big questions I anticipate fielding in the desert.

Does 2019 Become the Year of BigTech?

As noted by H2 Ventures and KPMG, Amazon is providing payment services and loans to merchants on its platform, while Facebook recently secured an electronic money licence in Ireland.  Alibaba, Baidu and Tencent have become dominant operators in China’s $5.5 trillion payments industry.  Add in Fiserv’s recent $22B acquisition of First Data and Plaid’s of Quovo and we might be seeing the start of a consolidation trend in the financial technology sector.  Will such investments and tie-ups draw the attention of big technology companies to the financial services industry?

Has the window to sell your bank already closed?

When I heard the rumor that BBVA might be buying UK-based Atom Bank — one of the proverbial European challenger banks — I started to look at acquisition trends here in the U.S.  Case-in-point, we put together the following graphic in December for BankDirector.com

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We know that some community banks have been holding out hopes of higher pricing multiples or for a strategic partner.  These institutions might find the window of opportunity to stage an exit isn’t as open as it was just a few years ago. This doesn’t mean the window has shut — but I do think an honest assessment of what’s realistic, at the board level, is appropriate.

Wither the bond market?

A NY Times op-ed piece  posits that the bond market reveals growing cracks in the financial system.  Authored by Sheila Bair, the former chairwoman of the FDIC, and Gaurav Vasisht, director of financial regulation at the Volcker Alliance, it warns that “regulators are not doing enough to make sure that banks are prepared.”  While the duo calls for thicker capital cushions for big banks and tighter leveraged loan underwriting standards, I wonder how executives joining us in Arizona feel about this potential threat to our economy?
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As the premier bank M&A event for bank CEOs, senior management and board members, Bank Director’s 25th annual Acquire or Be Acquired Conference brings together key bank leaders from across the country to explore merger & acquisition strategies and financial growth opportunities. If you’re joining us in the desert, I’ll share a few FYIs later this week. If you’re unable to join us in Phoenix, AZ, I’ll be tweeting from @aldominick and using #AOBA19 when sharing on social platforms like LinkedIn.

3 Trends (and 3 Issues) Every Bank’s Board Needs To Consider

Quickly:

  • The challenges faced by financial institutions today are as numerous as they are nuanced. Be it data security, emerging technology, fraud, crisis management and/or the effectiveness of internal controls, I opened the 12th annual Bank Audit & Risk Committees Conference by laying out a number of key governance, risk and compliance issues and trends.

CHICAGO — While a sophomore at Washington & Lee University, a professor loudly (and unexpectedly) chastised a close friend of mine for stating the obvious. With a wry laugh, he thanked my classmate “for crashing through an open door.” Snark aside, his criticism became a rallying cry for me to pause and dive deeper into apparently simple questions or issues.

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I shared this anecdote with some 400 attendees earlier today; indeed, I teed up Bank Director’s annual program by reminding everyone from the main stage that:

  1. We’re late in the economic cycle;
  2. Rates are rising; and
  3. Pressure on lending spreads remains intense.

Given the composition of this year’s audience, I acknowledged the obvious nature of these three points. I did so, however, in order to surface three trends we felt all here should have on their radar.  I followed that up with three emerging issues to make note of.

TREND #1:
Big banks continue to roll-out exceptional customer-facing technology.

Wells Fargo has been kicked around a lot in the press this year, but to see how big banks continue to pile up retail banking wins, take a look at Greenhouse by Wells Fargo, their app designed to attract younger customers to banking.

TREND #2:
Traditional core IT providers — Fiserv, Jack Henry & FIS — are under fire.

As traditional players move towards digital businesses, new players continue to emerge to help traditional banks become more nimble, flexible and competitive.  Here, FinXact and Nymbus provide two good examples of legitimate challengers to legacy cores.

TREND #3:
Amazon lurks as the game changer.

Community banker’s fear Amazon’s potential entry into this market; according to Promontory Interfinancial Network’s recent business outlook, it is their greatest threat.

In addition to these trends, I surfaced three immediate issues that banks must tackle

ISSUE #1:
Big banks attract new deposits at a much faster pace than banks with less than $1 billion assets.

If small banks can’t easily and efficiently attract deposits, they basically have no future. ‘Nuf said.

ISSUE #2: 
Bank boards need to know if they want to buy, sell or grow independently.

In a recent newsletter, Tom Brown of Second Curve Capital opined that “if you have less than $5 billion in assets, an efficiency ratio north of 65%, deposit costs above 60 basis points, and earn a return on equity in the single digits, this really is time to give some thought to selling.”  As I shared on LinkedIn yesterday, the 3 biggest bank M&A deals of the year took place in May: Fifth Third Bancorp’s $4.6 billion purchase of MB Financial, Cadence Bancorp’s $1.3 billion acquisition of State Bank Financial and Independent Bank Group’s $1 billion agreement to buy Guaranty Bancorp. 
 I don’t see the pace of consolidation slowing any time soon — and know that banks need to ask if they want (and can) be buyers or sellers.

ISSUE #3:
The risk of data breaches across industries continues to increase.

Be it risk management, internal control or third-party security considerations, every aspect of an institution is susceptible to a data breach — and managing these threats and identifying appropriate solutions takes a village that includes the most senior leaders of an organization.

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Just as banks need to develop their audit and risk capabilities, skills and talents, so too do officers and directors have both an opportunity and the responsibility to stay abreast of various trends and topics.  Bank Director’s event continues tomorrow with some fascinating presentations. To see what’s been shared already, take a look at Twitter, where I’m tweeting using @aldominick and #BDAudit18.

Shh, Disruption in Banking Continues

Quickly:

  • I spent yesterday afternoon at Capital One Growth Ventures’ inaugural VC & Startup Summit, an event that inspired today’s post.

WASHINGTON, DC — I’m hard pressed to find anyone willing to contest the notion that technology continues to disrupt traditional banking models. Now, I realize the “D” word jumped the shark years ago. Personally, I try my best to keep my distance from employing the adjective to describe what’s taking place in the financial world vis-a-vis technology. However, banks of all sizes continue to reassess, and re-imagine, how financial services might be structured, offered and embraced given the proliferation of new digital offerings and strategies.

As I reflect on the first quarter of 2018, it strikes me that we’re living in an industry marked by both consolidation and displacement. Yes, many bank executives have fully embraced the idea that technology — and technological innovation — is a key strategic imperative. However, few banks have a clear strategy to acquire the necessary talent to fully leverage new technologies. On the flip side, I get the sense that a number of once-prominent FinTech companies are struggling to scale and gain customer adoption at a level needed to stay in business. Nonetheless, the divide between both parties remains problematic given the potential to help both sides grow and remain relevant.

While banks explore new ways to generate top-line growth and bottom-line profits through partnerships, collaboration and technology investments, I have some concerns. For instance, the digital expectations of consumers and small & mid-sized businesses may become cost-prohibitive for banks under $1Bn in assets. So allow me to share what’s on my mind given recent conversations, presentations and observations about the intersection of fin and tech.

FIVE ON MY MIND

  1. With all the data issues coming to light courtesy of Facebook, how can banks extract the most revenue from the data available to them (*and how much will it cost)?
  2. As banks become more dependent on technology partners, what level of control —over both costs and data — should a bank be willing to trust to third parties?
  3. What does the arrival of new technologies, such as artificial intelligence, mean for a financial institutions’ current workforces?
  4. Amazon’s announced checking account partnership with JPMorgan Chase begs the question: how dependent should banks become on big technology companies?
  5. How many larger banks will acquire smaller institutions that cannot keep up with the cost and pace of technology in Q2?

Significant technological changes continue to impact the financial community. In the weeks to come, I’ll relay what I learn about these five issues in subsequent posts. If you’re interested, I tweet @AlDominick and encourage you to check out @BankDirector and @FinXTech for more.

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.

3 Disruptive Forces Confronting Banks – and How Zelle Might Help

By Al Dominick, CEO of DirectorCorps (parent co. to Bank Director & FinXTech) | @aldominick

“The volume and pace of what’s emerging is amazing. I’ve never seen it before in our industry.”

These words, spoken about technology driving an unprecedented pace of change across our financial landscape, came from Greg Carmichael, today’s keynote speaker at Bank Director’s annual Bank Audit & Risk Committees Conference.  Greg serves as president and CEO of Fifth Third Bancorp, a diversified financial services company headquartered in Cincinnati, Ohio.  The company has $142 billion in assets, approximately 18,000 employees, operates 1,191 retail-banking centers in 10 states and has a commercial and consumer lending presence throughout the U.S.

Fifth Third Bancorp’s four main businesses are commercial banking, branch banking, consumer lending and wealth and asset management.  Given this focus, Greg’s remarks addressed how, where and why technology continues to impact the way banks like his operate.  Thinking about his perspective on the digitization of the customer experience, I teed up his presentation with my observations on three risks facing bank leadership today.

Risk #1: Earlier this year, the online lending firm SoFi announced that it had acquired Zenbanx, a startup offering banking, debit, payments and money transfer services to users online and through its mobile app.  As TechCrunch shared, “the combination of the two will allow SoFi to move deeper into the financial lives of its customers. While today it focuses on student-loan refinancing, mortgages and personal loans, integrating Zenbanx will allow it to provide an alternative to the traditional checking and deposit services most of SoFi’s customers today get from banks like Bank of America, Citi or Chase.”  Given that many banks are just beginning their digital transformation, combinations like this create new competition for traditional banks to address.  Cause for further concern?  It came to light that SoFi just applied for an industrial loan bank charter in Utah under the name SoFi Bank.

Risk #2: With so much talk of the need for legacy institutions to pair up fintech companies, I made note of a recent MoneyConf event in Madrid, Spain.  There, BBVA chairman Francisco González said that banks need to shed their past and image as ‘incumbents’ and transform into new digital technology companies if they are to prosper in a banking environment dominated by technologically astute competitors. Transforming the bank “is not just a matter of platforms. The big challenge is changing an incumbent into a new digital company.”  Clearly, transforming one’s underlying business model is not for the faint of heart, and the leadership acumen required is quite substantial.

Risk #3: Finally, when it comes to digital companies doing it right, take a look at TheStreet’s recent post about how “Amazon Has Secretly Become a Giant Bank.”  I had no idea that its Amazon Lending service surpassed $3 billion in loans to small businesses since it was launched in 2011.  Indeed, “the eCommerce giant has loaned over $1 billion to small businesses in the past twelve months… Hiking up the sales for third party merchants is a plus for Amazon, as the company gets a piece of the transaction.” What I found particularly note-worthy is the fact that 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.

A Potential Solution

Jack Milligan, our Editor-in-Chief, recently wrote, “disruptive forces confronting banks today are systemic and in some cases accelerating.” In his words, the greatest risk facing bank leadership today is “the epochal change occurring in retail distribution as consumers and businesses embrace digital commerce in ever increasing numbers, while aggressive financial technology companies muscle into the financial services market to meet that demand.”

Against this backdrop, Fifth Third Bank just announced it will be one of more than 30 major financial institutions to roll out Zelle, a new peer-to-peer (P2P) payments service operated by Early Warning.  As Greg shared during his remarks, this will initially be offered through the banks’ mobile banking apps, and positions the bank to better compete with PayPal’s Venmo.

This is big news.  Indeed, Business Insider noted in today’s morning payments brief that the growing crowd of providers will fight over a mobile P2P market set to increase ninefold over the next five years, reaching $336 billion by 2021.  In addition to working directly with financial institutions, let me also note that Early Warning has established strategic partnerships with some of the leading payment processors –– think FIS, Fiserv, and Jack Henry.  These relationships will allow millions more to experience Zelle through community banks and credit unions.

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Here in Chicago, we have 298 bank officers and directors with us today and tomorrow — and our Bank Audit and Risk Committees Conference itself totals 366 in attendance.  In terms of bank representation, we are proud to host audit committee members, audit committee chairs, CEOs, presidents, risk committee members, risk committee chairs, corporate secretaries, internal auditors, CFOs, CROs and other senior manager who works closely with the audit and/or risk committee.  Curious to see what’s being shared socially? I encourage you to follow @bankdirector and @fin_x_tech and check out #BDAudit17.

3 Examples of Next’Gen Partnerships

News & Notes from February 13 – 17
By Al Dominick, CEO of DirectorCorps (parent co. to Bank Director & FinXTech) | @aldominick

A few weeks ago, I made note of an interesting new relationship between a bank and a technology firm.  Specifically, BBVA Compass’s announcement that it has been piloting Amazon Lockers in eleven of its Austin-area branches.  This is the first time Amazon Lockers are available with a bank in the United States — and may provide a creative spark to those thinking about how to increase traffic into an existing branch network.

Since sharing my observation on this partnership, I’ve made note of a number of new relationships that reflect the changing nature of the financial industry.  This week, three things caught my eye:

In addition, I took note of Wells Fargo forming a new innovation team (called Payments, Virtual Solutions, and Innovations) to better build out its digital banking experiences.  The three pillars of this effort revolve around payments, artificial intelligence and APIs. For Wells Fargo — and banks in general:

  • Payments are a critical driver of relationships for consumer, small business, and commercial and corporate banking customers.
  • In terms of artificial intelligence, the bank sees an increasing number of opportunities to better leverage data to provide personalized customer service through its bankers and digital channels.
  • Application Programming Interfaces (APIs) technology enables commercial and corporate banking customers to integrate products, services and information into their own digital environments.

So as financial institutions continue to search for new growth opportunities, I intend to share weekly recaps like this as a way to share what I find compelling.  Let me know what you think — and if there are other news & notes I might share.

Innovating the Capital One Way: Do YOU Think This Is The New Normal?

bd8a817e833e9bb01ddf91949fce917bAs shared in Bank Director’s current issue, peer-to-peer lenders, like San Francisco-based Lending Club, are beginning to gain traction as an alternative to banks in both the commercial and consumer loan space.

In the retail sector, well-funded technology companies like Google, Amazon and a host of others are swimming around like sharks looking to tear off chunks of revenue, particularly in the $300 billion a year payments business. These disruptors, as many consultants call them, are generally more nimble and quicker to bring new products to market.

While being “attacked by aggressive competitors from outside the industry is certainly not a new phenomenon for traditional banks,” it is fair to ask what a bank can do today. For inspiration, take a look at what Richard Fairbank, the Chairman and CEO of Capital One, had to say on a recent earnings call.

Ultimately the winners in banking will have the capabilities of a world-class software company. Most of the leverage and most of our investment is in building the foundational underpinnings and talent model of a great digital company. To succeed in a digital world (you) can’t just bolt digital capabilities onto the side of an analog business.

I thought this was particularly interesting given our editor’s take in this quarter’s issue: “if you’re a traditional banker, it’s time to recognize (if you don’t already) that a growing number of consumers — many of them young, well educated and upwardly mobile—can get along just fine without you.”  Clearly, it would be foolish for any bank CEO or director to operate with a false sense of security that their institution won’t need to adapt.

So is Capital One’s “approach” to business the way of the future for many big banks?  

Drop me a line or send me a tweet (@aldominick) and let me know what you think.  Aloha Friday!