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 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.

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.

Expect the Unexpected

“If past history was all that is needed to play the game of money, the richest people would be librarians.” – Warren Buffett

#AOBA17 pre-conference intel
By Al Dominick, CEO of Bank Director | @aldominick

This may be a phenomenal—or scary year—for banks. Banks have benefited from rising stock prices and rising interest rates, which are expected to boost low net interest margins. Indeed, the change in the U.S. presidency has resulted in a steepened yield curve, as investors predict improved economic growth. Currently, many anticipate regulatory relief for banks and the prospect of major corporate tax cuts. Such change could have a significant impact on banks; however, those running financial institutions also need to keep an eye on potential challenges ahead.

As we head to our 23rd Acquire or Be Acquired Conference in Phoenix, Arizona, with a record breaking 1,058 attendees Jan. 29-Jan. 31, I am expecting the mood to be good. Why wouldn’t it be? But what is on the horizon are also fundamental changes in technology that will change the landscape for banking. What will your competitors be doing that you won’t be? Our conference has always been a meeting ground for the banking industry’s key leaders to meet, engage with each other and learn what they need to do deals. It is still that. Indeed, most of the sessions and speakers will be talking about M&A and growth.
But this year, more than 100 executives from fintech companies that provide products and services to banks join us in the desert, on our invitation. We want to help banks start thinking about the challenges ahead and how they might solve them.

Here are some things to consider:

  • How will the Office of the Comptroller of the Currency’s limited-purpose fintech charter enable more established fintech companies to compete with some of the incumbents in the room?
  • If smaller banks are indeed relieved of many of the burdens of big bank regulation, will they use the savings to invest in technology and improvements in customer service?
  • How will customer expectations change, and from whom will customers get their financial services?

To this last point, I intend to spotlight three companies that are changing the way their industries operate to inspire conversations about both the risks and rewards of pursuing a path of change. Yes, it’s OK to think a little bit beyond the banking industry.

Spotify
Rather than buying a CD to get their favorite songs, music-lovers today favor curated playlists where people pick, click and choose whom they listen to and in what order. There is a natural parallel to how people might bank in the future. Just as analytics enable media companies to deliver individually tailored and curated content, so too is technology available to banks that might create a more personalized experience. Much like Spotify gives consumers their choice of music when and where they want it, so too are forward-looking banks developing plans to provide consumer-tailored information “on-demand.”

Airbnb
The popular home-rental site Airbnb is reportedly developing a new service for booking airline flights. Adding an entirely new tool and potential revenue stream could boost the company’s outlook. For banks, I believe Airbnb is the “uber-type” company they need to pay attention to, as their expansion into competitive and mature adjacent markets parallels what some fear Facebook and Amazon might offer in terms of financial services.

WeChat
One of China’s most popular apps, the company counts 768 million daily active users (for context, that’s 55 percent of China’s total population). Of those users, roughly 300 million have added payment information to the wallet. So, WeChat Pay’s dominance in the person-to-person payments space is a model others can emulate. PayPal already is attempting such dominance, which Bank Director magazine describes in our most recent issue.

Many of those attending our conference also have done amazing things in banking. I can’t name all of them, but I’d be remiss to not mention CEO Richard Davis of U.S. Bank, our keynote speaker. After a decade leading one of the most phenomenal and profitable banks in the country, he is stepping down in April. We all have something to learn from him, I’m sure.  Let us think about the lessons the past has taught us, but keep an eye on the future. Let’s expect the unexpected.

*note – this piece first ran on BankDirector.com on January 26, 2017

Bank Director’s new Tech Issue

Earlier this week, we published the December issue of Bank Director Magazine, our annual Tech Issue.  Stories range from the changing nature of mobile banking to institutions moving into the cloud to a venture capitalist’s perspective on the future of banking.  I invite you to take a look.

Since starting this blog in 2012, I’ve shared my optimism that the intersection of technological innovation with strong depository franchises may lead to more efficient banking processes, reductions in fraud and a win/win/win for banks, FinTechs and consumers.  So as I read through this current digital issue, a few key takeaways:

  • When San Francisco-based Bank of the West, an $80.7 billion asset subsidiary of BNP Paribas Group, analyzed last year the bottom line impact of customers who are engaged in online banking and mobile banking, it found some surprising results. Digital customers, or those who were active online or on their mobile phones during the previous 90 days, had lower attrition rates than nondigital customers, and they contributed higher levels of revenue and products sold, said Jamie Armistead, head of digital channels at Bank of the West.
  • Automating the small-business lending process requires some deep thinking from boards and management about how much faith they’re willing to place in technology, and their ability to embrace the cultural change implicit in basing lending decisions more on data than judgment. “The marketplace is demanding quicker decisions through technology,” says Pierre Naude, CEO of nCino, a maker of bank operating systems. Bank customers, he says, are clamoring for special products and specialized coding that enable greater automation of the small-business lending process. “Bankers are waking up to the fact that speed and convenience will trump price. You can lose a customer to an alternative lender if you don’t have it.”
  • As our Editor, Naomi Snyder, shares in her welcoming letter, banks tend to have the usual board committees (think audit, compensation and risk).  But we know that few have a board-level technology committee.  So I wonder if 2017 is the year that more institutions decide to create such a group to become better informed and better prepared as the digitization of the banking industry continues?

Concomitant to this issue’s release, Chris Skinner shared his perspectives on the state of FinTech our FinXTech platform.  In his words, “it is apparent that the fintech industry has become mainstream just as fintech investing cools. What I mean by this is that fintech has matured in the last five years, going from something that was embryonic and disruptive to something that is now mainstream and real. You only have to look at firms like Venmo and Stripe to see the change. Or you only have to consider the fact that regulators are now fully awake to the change and have deployed sandboxes and innovation programs. Or that banks are actively discussing their fintech innovation and investment programs… Fintech and innovation is here to stay.”

Clearly, the pace of change in the banking space continues to accelerate.  Accordingly, I encourage you to check out what we’re doing with both Bank Director and FinXTech to help companies who view banks as potentially valuable channels or distribution partners, banks looking to grow and/or innovate with tech companies’ help and support; and institutional investors, venture capitalists, state & federal regulators, government officials and academicians helping to shape the future of banking.

The #1 Reason That Potential Buyers and Sellers Walk Away From a Bank M&A Deal

According to Bank Director’s 2017 M&A Survey, price is the top reason that potential buyers and sellers have walked away from a deal in the past three years.

With the final days of November upon us, we are a mere 61 days away from hosting Bank Director’s annual Acquire or Be Acquired Conference.  This three-day event explores the various financial growth options available to a bank’s CEO, executives and board members; accordingly, I thought to share some highlights from our just-released Bank M&A Survey that resonate with this audience.

This research project — sponsored by Crowe Horwath LLP and led by our talented Emily McCormick — reflects the opinions of 200+ CEOs, CFOs, Chairmen and directors of U.S. banks.  As Rick Childs, a partner at Crowe, and someone I respect for his opinions and experiences shares, “good markets and good lending teams are the keys for many acquirers, and are the starting point for their analysis of potential bank partners.”  While we cover a lot of ground with this survey, below are five points that stood out to me:

  • An increasing number of respondents feel that the current environment for bank M&A is stagnant or less active: 45% indicate that the environment is more favorable for deals, down 17 points from last year’s survey.
  • 46% indicate that their institution is likely or very likely to purchase another bank by the end of 2017.
  • 25% report that they’re open to selling the bank, considering a sale or actively seeking an acquirer. Of these potential sellers, 54% cite regulatory costs as the reason they would sell the bank, followed by shareholder demand for liquidity (48%) and limited growth opportunities (39%).
  • Price, at 38%, followed by cultural compatibility, at 26%, remain the two greatest challenges faced by boards as they consider potential acquisitions. Price is identified as the top reason that potential buyers and sellers have walked away from a deal in the past three years.
  • 45% report that they are seeing a deterioration in loan underwriting standards within the industry, leading to possible credit quality issues in the future.

Driven by shareholder pressures in a low-growth and highly regulated environment, some community banks could be seeking an exit in the near future. But which banks are positioned to get the best price in today’s market?  This survey provides potential answers to that question — foreshadowing certain conversations I’m sure will occur in January during our 23rd annual Acquire or Be Acquired conference.

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My thanks to Rick and his colleagues at Crowe for their continued support of this research project.  To see past year’s results — and other board-level research reports we’ve shared — I invite you to take a look at the free-to-access research section on BankDirector.com

FinXTech’s Advisory Group

I’m checking in from the edge of the Rocky Mountains — from the iconic Broadmoor in Colorado Springs — where I’m joined by FinXTech’s President, Kelsey Weaver and Bank Director’s Director of Client Relations, Laura Proffitt.  The three of us are here to participate in the Association for Financial Technology’s (AFT) Fall Summit where later today, I will have the opportunity to introduce a new partnership between AFT and FinXTech.  In advance of those comments, I thought to pull the curtains back on a special  Advisory Group that we are building to develop FinXTech in the “best” possible manner. 

As new approaches to delivering financial services emerge, nearly every technology company here in Colorado has practical tools, techniques and talent to help financial institutions prepare for the future.  It is an exciting time to be part of a community like the one AFT draws, as I believe new players will continue to emerge while traditional participants transform their underlying business models to better participate and compete in the coming years.

As the financial industry continues to evolve, so too does the community that my team supports.  As a peer-to-peer based platform powered by Bank Director, FinXTech connects a hugely influential audience around shared areas of interest and innovation; specifically:

  • FinTech companies who view banks as potentially valuable channels or distribution partners;
  • Banks looking to grow and/or innovate with FinTech companies’ help and support; and
  • Institutional investors, venture capitalists, state & federal regulators, government officials and academicians helping to shape the future of banking.

Rather then create this community in isolation, we are doing so with the help and support of industry leaders with various backgrounds.  Case-in-point, we are recruiting highly opinionated, ridiculously informed thought leaders to “think around the corner” with us as part of FinXTech’s Advisory Group.

So as we get ready to spend a few days with our peers at this week’s conference, Kelsey, Laura and I are proud that the following men and women have accepted our invitation to share their time and intelligence with us as part of FinXTech’s council:

  • Thomas P. Brown, Partner, Paul Hastings LLP
  • Michael Butler, President & CEO, Radius Bank
  • Michael M. Carter, Founder & CEO, BizEquity
  • Ryan Gilbert, General Partner, Propel Venture Partners
  • John C. Gill, Chief Operating Officer & Chief Risk Officer, Somerset Trust Company
  • Joe Guastella, Global & U.S. Managing Principal, Financial Principal, Deloitte Consulting LLP
  • James C. Hale, III, Founding Partner, FTV Capital
  • Aditya Khujekar, CEO & Co-Founder, Let’s Talk Payments
  • Jimmie Lenz, Director of Technology Risk, Wells Fargo, Wealth and Investment Management
  • Vivian Maese, Partner, Latham & Watkins
  • Bill McNulty, Entrepreneur in Residence, Capital One
  • John E. Pizzi, CEO, BaseVenture
  • Gregg M. Schoenberg, Founder, Westcott Capital
  • Chris Skinner, CEO, The Finanser Ltd
  • Christa Steele, Former President, CEO & Board Member, Mechanics Bank; Founder, Boardroom Consulting LLC
  • John Thompson, SVP & Leader, Program Team, CFSI
  • Andres Wolberg-Stok, Director, Citi Fintech
  • Jon Zanoff, Founder, Empire Startups

In addition to this awesome group, we have some pretty powerful folks that we recently invited (so this list can and will expand in the coming weeks).  But for those of you here at AFT, you will hear Kelsey, Laura and me talk about our enthusiasm for this group & the efforts being made to establish FinXTech as a catalyst that (1) connects a highly influential group of people who care about the future of financial services, (2) are committed to meaningful transformation and are (3) empowered to make change happen.

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To learn more about what we’re doing, I invite you to visit FinXTech.com, a site we designed to deliver authoritative, relevant and trusted content for banks, Fintech companies, investors and services firms.

3 Key Takeaways from Bank Director’s Audit & Risk Conference

A quick check-in from the Swissotel in Chicago, where we just wrapped up the main day of Bank Director’s 10th annual Bank Audit & Risk Committees Conference.  This is a fascinating event, one focused on key accounting, risk and regulatory issues aligned with the information needs of a bank’s Chairman, CEO, Bank Audit Committee, Bank Risk Committee, CFO, CRO and internal auditor.  Risk + strategy go hand in hand; today, we spent considerable time debating risk in the context of growing the bank.

By Al Dominick, President & CEO of Bank Director

Earlier today, while moderating a panel discussion, I referenced a KPMG report that suggests “good risk management and governance can be compared to the brakes of a car. The better the brakes, the faster the car can drive.”  With anecdotes like this ringing in my head, allow me to share three key takeaways:

  1. A company’s culture & code of conduct are critical factors in creating an environment that encourages compliance with laws and regulations.
  2. Risk appetite is a widely accepted concept that remains difficult, in practice, to apply.
  3. As a member of the board, do not lose sight of the need to maintain your skepticism.

This year’s program brings together 150+ financial institutions and more then 300 attendees. The demographics reflect the audience we serve, so I thought to share three additional trends.  Clearly, boards of directors are under pressure to evolve.  Financial institutions need the right expertise and experience and benefit greatly when their directors have diverse backgrounds.

Further, as more regulatory rules are written, board members need to understand what they mean and how they can affect their bank’s business.  Finally, technology strategies and risks are inextricably linked to corporate strategy; as such, the level of board engagement needs to increase.

Given the many issues — both known and unknown — a bank faces as our industry evolves, today made clear how challenging it can be for an audit or risk committee member to get comfortable addressing risk and issues.  Staying compliant requires a solid defense and appreciation for what’s now.  Staying competitive?  This requires a sharper focus given near constant pressures to reduce costs while dealing with increasing competition and regulation.

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To see what we’re sharing on our social networks, I encourage you to follow @bankdirector @fin_x_tech and @aldominick.  Questions or comment?  Feel free to leave me a note below.

The FinTech Ecosystem

Last Friday, I had the pleasure to be invited to the White House’s FinTech Summit, where, as the Wall Street Journal reported, the half-day event “largely focused on how government agencies can tap into the innovation, in which new firms are offering small-business owners and consumers faster forms of loans and digital payments.”  Certainly, collaboration between technology companies and traditional financial institutions has increased — think proofs of concept, partnerships and strategic investments — but much still needs to be done.  As I took notes during the event, I did so with an eye towards the platform we built — and the ecosystem beginning to develop — with FinXTech.

FinXTech is a platform that promotes collaboration between the most forward thinkers in the industry – in order to create real innovation, change and a better future for all.

As new technology players emerge and traditional participants begin to transform their business models, there is growing sentiment that successful institutions need to enable financial services for life’s needs through collaboration and partnerships with the very fintech companies that once threatened to displace them.  I tackled this issue in a piece I wrote (A Fear of Missing Out).  A few things didn’t make the final cut that I thought to share here.  Of note:

  • I asked Michael Tang, partner and head of global digital transformation and innovation at Deloitte, how might bank executives determine the amount of money they should allocate to innovation.  He shared that industry metrics range from 2-7% of revenues (and also depend on incremental or moonshots-type initiatives).
  • Even as technology will force narrowing margins, there may be opportunities to develop new profit pools and forcing some incumbents to “move upstream” to serve more sophisticated and profitable cohorts (source: Disaggregating the impact of fintech).
  • The playing field will level as firms of all sizes will be able to take advantage of emerging networks and platform-based services. Ultimately lowering cost, improving compliance, and focusing on markets where they have a true competitive advantage (source: Disaggregating the impact of fintech).

The rapid transformation of the financial services industry — due to technological innovations and shifting customer expectations — is quite remarkable.  If you missed what Adrienne Harris, special assistant to the president for economic policy, wrote in a blog post following the White House FinTech Summit, it is worth your time to read.

Banks Have to Grow to be Competitive

As I reflect on my time at Bank Director’s Growing the Bank conference, I can’t shake the fact that many banks across the United States continue to struggle to grow their deposits and/or expand asset bases.  What follows is a piece authored by Tim Melvin, a gifted writer who joined us at the Four Seasons outside of Dallas.  Tim specializes in value investing and has written numerous articles in various publications on the subject of value investing, the stock market and the world around us.  With his permission, I’m sharing his perspectives on our event.

I just returned from the Bank Director 2016 Growing The Bank Conference in Dallas and I have to say it was one of the more interesting meetings I’ve attended this year. This conference covered everything from the 30,000 foot view of the rapidly changing banking industry to the nuts and bolts of day-to-day stuff and I came away with an even deeper appreciation of the industry and the opportunity.

The threats and potential posed by what are commonly known as Fintech companies was heavily featured during the two-day event. Nobody is quite sure if they’re friend or foe yet and there was a lot of wary circling like a road weary cowboy and an unsure Indian trying to decide to break bread together or lock hands on throats. Mobile and cybersecurity were also topics on everyone’s minds, as both are going to play an enormous role in deciding if a bank grows or withers away to obscurity.

Closer Look At Fintech

The Fintech discussion was perhaps one of the most interesting of the meeting. While banks may see some of the Fintech lenders like LendingClub (NYSE: LC), Sindeo and On Deck Capital (NYSE:ODNK) are seen as a real threat to traditional lenders, I think we will find that it’s not as big a threat as we might currently think.

The first time we have a credit hiccup or recession, these lenders will find out just how important to success a core deposit-based funding source can be. When markets dry up in the bad times, investors aren’t going to as easy a source of funds as they are in the current benign and yield starved markets. I think what’s far more likely to happen is the technology that allows for high-speed decision making, easier underwriting and razor focused marketing will end up being sold to the banks to improve their offering.

As Steven Hovde of the Hovde Group warned the crowd in Dallas, “Fintech and banks are going to end up marrying up. It’s the only way you are both going to survive. If you think you can do it on your own, you are sadly, sadly mistaken.”

Naomi Snyder, the editor at Bank Director, put a little differently when she wrote an article for the magazines website following the conference: “The tech companies have something many banks lack: innovative products and simple, customer-friendly digital solutions for a changing world. Meanwhile, the banks have some things many of the tech companies lack: actual customers and a more stable funding base.”

Although the fast-moving high tech kids of Fintech and the stuffy old bankers may at first appear to be as mismatched, as James Carville and Mary Matalin may need to find a partnership that has worked out as well as theirs has. They may not initially like each other but they need each other.

Mobile Banking

I think Dave Defazio of Strategycorps scared a lot of community bankers when he talked about the future of mobile banking in his session. He pointed out the tremendous lead that the bigger banks have in this space and the competition from apps like Apple Pay, Venmo and other apps that, to be honest, I’ve never even heard of before but are increasingly popular for managing finances and making payments among the millennial set. For folks who think the ATM and drive-up window are newfangled innovations the world of mobile banking is a bit frightening. What makes it even more frightening is that if you don’t compete well in the mobile space, you won’t retain the next generation of customer. They expect everything to be done on the fly and right now using mobile devices.

The millennial customer is just different. The use their mobile device to pay for their Starbucks (NASDAQ: SBUX), pay their share of the bar tab, watch movies, read books, pay bills and manage their finances. Apparently you can even use an app to collect your boarding pass, as I found out after running out of the bar after the first day to get to the business center and print out my boarding pass exactly 24 hours before takeoff. When I returned and expressed my disappointment at getting a B slotting on Southwest (NYSE: LUV) I was told that I should just get the app to avoid this in the future.

I didn’t even know there was an airplane app, but now I can count myself among the airplane app aristocracy thank to my slightly younger and far more tech savvy friends at Bank Director.

I caught up with Defazio on Tuesday morning and we chatted a bit more about the challenges and opportunities of mobile banking. He told me over coffee, “Banks are not just competing against other banks’ mobile apps, but instead against the very best apps on the planet, apps like Uber to Amazon (NASDAQ: AMZN) to Waze. Customer expectations are very high, and banks must make it their mission to have an app that people can’t live without. Community banks must do a better job of responding to changes in customer behaviors and expectations. The big banks have raced out to a big lead. The time is now for banks to go beyond transactions and do a better job of connecting with their customers’ mobile lifestyles. In particular, I’m seeing the big banks add mobile tools that assist people with their shopping tasks. They know that helping people save a dollar is just as good as helping them make a dollar of interest.”

I chatted with several bankers and the discussion of mobile frankly scares many of them. One banker said if this is the future of banking, then community banking is just dead. I think he overstated the case, but community banks are going to have to aggressively look for partners like Strategycorps to build and offer a much better mobile experience. Those that can’t, or don’t want to, should consider hanging out the for sale sign right away as they simply won’t be competitive in the future. They can probably get a better multiple in a deal now than in a few years when deposits are bleeding out to more mobile sensitive banks at a rapid rate.

Steven Hovde gave a talk on the search for efficiency in the industry. Hovde is an investment banker serving community banks, a majority owner of several smaller banks and is part owner of a real estate development company that borrows from banks so he sees all sides of the industry. He pointed out that the more efficient a bank is the higher then returns on assets and the higher valuation of the institutions stock. Both of these make for happier shareholders. He said the best way to gain efficiency in the banking industry today is to grow the size of the bank.

Right now, we have historically low net interest margins, growing regulatory costs and a huge need to spend money on technology, especially in mobile and cyber security. GDP growth is slow and there are no real signs that it will improve dramatically anytime soon. The loan markets are increasingly competitive and the regulators are focusing on the one area where community banks had an edge, commercial real estate. It really is a “grow or die” world and the majority of banks need to get to $1 billion in assets to quit operating in survival mode and the $5 billion level to thrive in the current economy.

The best way to grow remain via mergers and acquisitions. Hovde told us, “As the regulatory environment becomes increasingly difficult to maneuver for smaller banks, we expect deal activity for smaller institutions to continue as they search for greater efficiencies.” While this is not necessarily great news for bankers running smaller banks, it’s good news for me as bank stock investor and I continue to seek out and buy smaller publicly traded banks.

That’s A Wrap

The Growing the Bank Conference is more of a nuts and bolts, but I walked away with two overriding insights. First banks must look to partner with or even buy the innovative aggressive fintech companies. They cannot compete with them without disastrous consequences so they must partner with them. For their part, most of the fintech competitors need the banks and their large customer base and deposit funding. It may be a shotgun wedding in some cases, but nuptials will be needed for both to survive and thrive.

My second takeaway is that although it sounds like a slogan, “Grow or Die” is a real thing. To thrive in today’s difficult markets, banks need to grow to at least that $5 billion asset level. With the exception of a few niche small town and rural banks the $1 billion asset level is really needed just to be a viable competitor. The best way to grow in a slow growth economy is to buy smaller banks or engage in a merger of equals that increases returns for the ban, as well as shareholders. All of this is good news for us as small bank investors.

The Trade of the decade in community bank stock rolls on.

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To read more of Tim’s work on Benzinga, click here and to follow Tim on Twitter, his handle is @timmelvin.

Growing the Bank – Photo Recap

Creativity and collaboration took center stage at Bank Director’s Growing The Bank conference this Monday and Tuesday at the Four Seasons Resort & Club at Las Colinas in Irving, Texas.  There, leadership teams from banks, non-banks and financial technology companies alike focused on opportunities to grow revenue, deposits, brands, market size and market share through innovation and collaboration.  Below, a few of the photos taken for us by John Sloan of  Foxtrot Photography.

For more on the issues and ideas surfaced throughout the event, check out BankDirector.com and FinXTech.com.

Early Takeaways from Bank Director’s Growing the Bank Conference

With continuous pressure on bankers to grow earnings, developing clear strategies, repeatable practices and incorporating exceptional user-experience technologies has to be high on almost every executives to-do list.

How do you bank?

By taking a pause before answering this question, you will appreciate how, regardless of age, we all expect greater pricing transparency, ease of use and always-on access to personal information as part of an integrated banking experience.  The challenge for most bankers?  What many consider state-of-the-art today — in terms of features and services — quickly becomes part of the norm that will be expected and insisted upon in the coming years.

At this morning’s Growing the Bank Conference, I jotted down a few thoughts that builds on this “how do you bank” query.

  • When it comes to the classic build or buy technology decision, partnerships are now de rigueur — with 87% of our 240+ person audience indicating they see technology as presenting opportunities to banks (and not threats).
  • Historically, banks organize themselves along a line of products; however, many have suggested re-orienting operations around customer needs and expectations.
  • To retain deposits, banks should ramp up their customer relationship programs, increase cross-selling efforts and invest in product lines that attract stable deposits.

While we haven’t gotten deep into the payments space (yet), I do encourage bank executives to think about the dramatic growth in that area of banking  — which continues to transform how efficiently banks connect with their customers.  Likewise, I wasn’t kidding when I suggested attendees spend some time reading the OCC’s “Supporting Responsible Innovation” white paper.

Finally, a “did-you-know” that I meant to share from the stage during my conversation with Brian Read, Executive Vice President, Retail Banking, Umpqua Holdings Corp. and Umpqua Bank.  According to the Federal Reserve, 85% of mobile banking users — a bank’s “most advanced” clients — still use branches from time to time. So as he shared with us, there really is a place for a physical presence in banking today.

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*FWIW, we’re in Dallas at the Four Seasons Resort and Club Las Colinas in Dallas, Texas where the annual Byron Nelson golf tournament wrapped up yesterday evening.  The picture above is of Jordan Spieth — the former number one player in the Official World Golf Ranking and two-time major winner — a gift to some of my team who were intent on getting a photo of him.  As a former student of St. Marks, I will not hold it against him that he went to Jesuit, a rival high school.