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.

Banks Vs. Fintechs

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

Quickly:

  • I’m in from Dallas at the Consumer Bankers’ Association “CBA Live!”
  • Thanks to Richard Hunt, the CEO of the CBA, for inviting me to participate.  Richard spoke at our Acquire or Be Acquired conference in January + I hope to live up to his great speaking standards when I’m given a mic tomorrow.
  • The rapid pace of change in the financial sector took center stage during yesterday’s opening session.

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Since arriving in Big D on Sunday evening, I’ve met quite a few interesting men & women from great financial institutions at this annual event for the retail banking industry.  This year, more than 1,300 are at the Gaylord Texan (with some 550 being senior-level bankers) to talk shop.  Personally, I’m looking forward to presenting on “Economic States of America” with Amy Crews Cutts (Chief Economist, Equifax), Robert Dye (Chief Economist) of Comerica Bank and Cathy Nash, the CEO of Woodforest National Bank tomorrow morning.  From credit trends to banking consolidation, if you’re in Dallas, I invite you to join us for this Super Session as we explore the economic state of our union.

Before then, I thought to share a few interesting takeaways from a “FinTech vs. Bank” general session that pit SoFi and Kabbage “against” PNC and BBVA.  As part of the panel discussion, CBA posed a number of interesting questions to the audience; most notably, “do you believe fintechs are built to last.”  Given our upcoming FinXTech Summit in NYC, I thought the answer (which reflects the thoughts of many of the biggest banks in the U.S.) was interesting, but not surprising.

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Further, I found the results of this question pretty telling (given we asked a similar question at this year’s Acquire or Be Acquired conference and received a similar response from an audience of CEOs, CFOs, and members of a bank’s board).

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Finally, I think the results of this question best represent the types of conversations I’ve found myself in when I explain what I do + who I meet with.

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As I’ve shared in recent posts, an increasing number of financial institutions are using partnerships with technology companies to improve operations and better meet customer needs.  Given the input on these questions from various heads of retail, product lines and product development + compliance, risk and internal audit, I feel these three pictures are worth noting — and sharing.  Agree or disagree?  Feel free to leave a comment…

 

FI Tip Sheet: The Size of the Sandbox

Just as an Apple store conveys a community and market presence, so too does a bank’s branch.  While younger customers may no longer visit more than a front-of-the-house ATM, I do think many of us choose our bank based on their proximity to where we live and work.  Today’s tip sheet builds on this thought — beginning with a look at the economics of deposit taking, followed by a visual reminder of our industry’s size before ending with an acquisition by a a big-bank based in Madrid.

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Face-to-Face Trumps Technology?

To borrow a few lines from a recent CDW white paper, as the U.S. financial industry emerges from the recent financial crisis, “the surviving institutions are leaner and more focused than ever before. In some cases, this means lowering overhead — doing more with less — to effectively maintain operations.” While the future of banks proved a popular conversation starter during my travels around Washington D.C. and New York City this week, it is a report shared by Fred Cannon — the Director of Research at Keefe, Bruyette and Woods — that caught my eye. I am a big fan of Fred’s prose and the perspectives he offered in “Branch Banking in Retreat” demonstrates that real branch transformation continues to elude many financial institutions. To wit:

“The economics of bank deposit taking is poor in the age of Bernanke and Yellen (low rates) and Durbin (reduced fees). But beyond rates and politics, technology is also undermining the role of traditional branches as the payment system has moved sharply towards electronics in the last decade… Yet, overall banks are responding slowly to the changes in economics and technology of branching. While the number of bank branches has fallen since 2009, the population per branch in the U.S. is still at the same level as the mid-1990s.”

Most branch transformation initiatives I have seen seek to simultaneously reduce costs while improving sales. Here, size matters. Smaller banks can re-invent themselves faster than the big guys; however, its the biggest banks that can financially absorb the most risk in terms of rolling out something new (and expensive).

A Visual Reminder That Financial Size Matters

Fred’s research piece, focused on small and mid-sized banks along with the BofA’s and Wells Fargo’s of the country, inspired me to create the following infographic.  I’ve shared variations of these statistics in prior posts — and thought to illustrate how our industry breaks down in terms of asset size.

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(*note: while I hoped to serve this infographic up in a dynamic way, the image I created from Infogr.am isn’t embedding in WordPress.  Still, you get an idea of the market with this screenshot)

Old School Acquires New School

For smaller institutions, the size (and ability to scale) of their larger counterparts can be cause for alarm.  Indeed, Accenture shared “becoming a truly digital business is key to how we innovate and differentiate ourselves from our competitors. And if the last decade has been the playground of the digital start-ups, the coming decade will see the emergence of the traditional companies as the digital giants.”  I was thinking about this as I read the New York Times’ Dealbook story “BBVA Buys Banking Start-Up Simple for $117 Million.

This acquisition is notable as the buyer of this upstart is a 150-year old financial services corporation that operates in a number of markets, is a leading player in the Spanish market, as well as one of the top 15 banks in the U.S. and a strategic investor in banks in Turkey and China.  As noted by TechCrunch, “while not itself a bank, Simple operates as an intermediary between users and FDIC-insured institutions to provide users with access to data around their financial history, as well as tracking of expenditures and savings goals, with automated purchase data collected when its customers use their Simple Visa debit card.”  I wonder if this acquisition starts a consolidation trend of bigger banks buying newer fintech players to accelerate — while differentiating — their offerings…

Aloha Friday!