Kicking off FinXTech’s Summit

Quickly:

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

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

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

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

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

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.

Ranking the 10 Biggest Banks

Quickly:

  • Bank Director’s year-long Ranking Banking study focuses less on current profitability and market capitalization & more on how the top 10 banks in the U.S. are strategically positioned for success.

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

WASHINGTON, DC — It is with tremendous pride that I share the results of Bank Director’s year-long study on America’s 10 largest banks.
  As my colleague, Bill King, wrote to open our inaugural Ranking Banking, we felt that a truly comprehensive analysis of the largest banks was missing, one that includes not just profitability or customer satisfaction ratings, but also compiles numerous measures of strength and financial health — a project to rank each of the largest banks for each major line of business based on qualities that all big banks need.

For instance, we decided to rank banks for branch networks, mobile banking, innovation and wealth management. We analyzed corporate banking and small business lending. We interviewed experts in the field and did secret shopper visits to the biggest banks to find out what the customer experience was like.  Unlike other rankings, we even included complaints lodged with the Consumer Financial Protection Bureau as one of many customer satisfaction metrics that we analyzed.  In other words, there is little about the biggest banks in the nation that we left out.

So who came out on top?

JPMorgan Chase & Co. topped Bank Director’s 2018 Ranking Banking study.

In fact, Chase won five of the ten individual categories and ranked near the top in three more, and was judged by Bank Director to be the most worthy claimant of the title Best of the Biggest Banks.  The individual category winners are:

Best Branch Network: Wells Fargo & Co.

Despite its well-publicized unauthorized account opening scandal, Wells Fargo topped the branch category by showing the best balance of deposit growth and efficiency, and scored well on customer experience reports from Bank Director’s on-site visits.

Best Board: Citigroup

In ranking the boards of directors of the big banks, Bank Director analyzed board composition by factors such as critical skill sets, diversity, median compensation relative to profitability and independence. Citigroup’s board best balanced all components.

Best Brand: JPMorgan Chase & Co.

Chase and runner-up Capital One Financial Corp. stood out for their media spend as a percentage of revenue, and both exhibited strong customer perception metrics.

Best Mobile Strategy: JPMorgan Chase & Co.

Chase has been successful in driving new and existing customers to its mobile products, leading to an impressive digital footprint, measured through mobile app downloads. The bank’s app also scored well with consumers.

Best Core Deposit Growth Strategy: BB&T Corp.

BB&T had a low cost of funds compared to the other ranked banks, and its acquisitions played a strong role in its core deposit growth, which far surpassed the other banks in the ranking.

Most Innovative: JPMorgan Chase & Co.

Chase most successfully balanced actual results with sizeable investments in technological innovation. These initiatives include an in-residence program and a financial commitment to the CFSI Financial Solutions Lab. Chase has also been an active investor in fintech companies.

Best Credit Card Program: JPMorgan Chase & Co.

Chase barely edged out fast-growing Capital One to take the credit card category, outpacing most of its competitors in terms of credit card loan volume and the breadth of its product offering. Chase also scored well with outside brand and market perception studies.

Best Small Business Program: Wells Fargo & Co.

Wells Fargo has long been recognized as a national leader in banking to small businesses, largely because of its extensive branch structure, and showed strong loan growth, which is difficult to manage from a large base. Wells Fargo is also the nation’s most active SBA lender and had the highest volume of small business loans.

Best Bank for Big Business: JPMorgan Chase & Co.

Big banks serve big businesses well, and finding qualitative differences among the biggest players in this category—Chase, Bank of America and Citigroup—is difficult. But Chase takes the category due to its high level of deposit share, loan volume and market penetration.

Best Wealth Management Program: Bank of America Corp.

With Merrill Lynch fueling its wealth management division, Bank of America topped the category by scoring highly in a variety of metrics, including number of advisors (more than 18,000 at last count) and net revenue for wealth and asset management, as well as earning high marks for market perception and from Bank Director’s panel of experts.

FWIW…

The 10 largest U.S. retail banks play an enormously important role in the nation’s economy and the lives of everyday Americans. For example, at the end of 2016, the top 10 banks accounted for over 53 percent of total industry assets, and 57 percent of total domestic deposits, according to the Federal Deposit Insurance Corp. The top four credit card issuers in 2016—JPMorgan Chase & Co., Bank of America Corp., Citigroup and Capital One Financial Corp.—put more than 303 million pieces of plastic in the hands of eager U.S. consumers, according to The Nilson Report.

How Fintech Mergers Are Reshaping Banking

I am in Seattle to host a peer exchange at the Four Seasons — one focused on emerging legal, regulatory and risk issues facing members of the board of financial institutions.  As eager as I am to welcome participants to this beautiful property and city, I have to admit that my attention this morning centers on M&A in the fintech space (thanks to this piece I authored for BankDirector.com).  So before the day ramps up, I thought to re-post my perspectives on interesting deals that are reshaping banking.

By Al Dominick // @aldominick

It’s no secret that what has been happening in the fintech space is attracting more attention from the world of banking. It’s hard to ignore the fact that venture capital invested $10 billion in fintech startups in 2014, compared to just $3 billion in 2013, according to an Accenture analysis of CB Insights data.  But watching M&A in the fintech space shows that these startups are much more likely to pair with others or get acquired by incumbents than they are to go public with an initial public offering, as noted by bank analyst Tai DiMaio in a KBW podcast recently.  “Together, through partnerships, acquisitions or direct investments, you can really have a situation where both parties benefit [the fintech company and the established player],’’ he says.  That may lend credence to my initial suspicions that there are more opportunities in fintech for banks than threats to established players and that these startups really need to pair up to be successful.

Take BlackRock’s announcement in August that it will acquire FutureAdvisor, a leading digital wealth management platform with technology-enabled investment advice capabilities (a so-called “robo advisor.”) With some $4.7 trillion in assets under management, BlackRock offers investment management, risk management and advisory services to institutional and retail clients worldwide—so this deal certainly caught my attention.

According to FT Partners, the investment bank that served as exclusive advisor to BlackRock, the combination of FutureAdvisor’s tech-enabled advice capabilities with Blackrock’s investment and risk management solutions “empowers partners to meet the growing demand among consumers to engage with technology to gain insights on their investment portfolios.” This should be seen as a competitive move to traditional institutions, as demand for such information “is particularly strong among the mass-affluent, who account for ~30 percent of investable assets in the U.S.”

Likewise, I am constantly impressed with Capital One Financial Corp., an institution that has very publicly shared its goal of being more of a technology company than a bank. To leapfrog the competition, Capital One is quite upfront in their desire to to deliver new tech-based features faster then any other bank. As our industry changes, the chief financial officer, Rob Alexander, opines that the winners will be the ones that become technology-focused businesses—and not remain old school banking companies. This attitude explains why Capital One was the top performing bank in Bank Director’s Bank Performance Scorecard this year.

Case-in-point, Capital One acquired money management app Level Money earlier this year to help consumers keep track of their spendable cash and savings. Prior to that, it acquired San Francisco-based design firm Adaptive Path “to further improve its user experience with digital.” Over the past three years, the company has also added e-commerce platform AmeriCommerce, digital marketing agency PushPoint, spending tracker Bundle and mobile startup BankOns.

When they aren’t being bought by banks, some tech companies are combining forces instead. Envestnet, a Chicago-based provider of online investment tools, acquired a provider of personal finance tools to banks, Yodlee, in a cash-and-stock transaction that valued Yodlee at about $590 million. By combining wealth management products with personal financial management tools, you see how non-banks are taking steps to stay competitive and gain scale.

Against this backdrop, Prosper Marketplace’s tie up with BillGuard really struck me as compelling. As a leading online marketplace for consumer credit that connects borrowers with investors, Prosper’s acquisition of BillGuard marked the first time an alternative lender is merging with a personal financial management service provider. While the combination of strong lending and financial management services by a non-bank institution is rare, I suspect we will see more deals like this one struck between non-traditional financial players.

There is a pattern I’m seeing when it comes to M&A in the financial space. Banks may get bought for potential earnings and cost savings, in addition to their contributions to the scale of a business. Fintech companies also are bought for scale, but they are mostly bringing in new and innovative ways to meet customers’ needs, as well as top-notch technology platforms. They often offer a more simple and intuitive approach to customer problems. And that is why it’s important to keep an eye on M&A in the fintech space. There may be more opportunity there than threat.

How Capital One Can Inspire Your Digital Efforts

While venture-backed fintech firms continue to garner attention for being “ahead of the times,” don’t sleep on the franchise being built by Capital One.

By Al Dominick // @aldominick

Should you look at the term “innovation” and disassociate it with the banking sector, you are forgiven.  But innovative is exactly the description I favor for Capital One Financial Corp. (NYSE: COF), especially as I define the term as an ability to monetize creative ideas, products and processes.  Indeed, the McLean, VA-based bank ranked first among the 20 publicly-traded banks with assets of more than $50 billion in Bank Director magazine’s annual Bank Performance Scorecard and is widely considered at the forefront of taking a technology-based, consumer-centric focus to banking.

As we see in their financial performance, Capital One managed to increase net income and benefited from the high profitability of a substantial credit card operation and the stable funding of a regional banking franchise.  As you can read, the company rated highly on traditional profitability metrics: they posted a return on average assets (ROAA) of 1.53, a return on average equity (ROAE) of 10.33 and a Tangible Common Equity ratio of 9.82.  So while various fintech companies make news for their valuations (*hello Stripe, which received major funding from Visa and other investors, valuing the startup at $5 billion) or loan volume (**hola Lending Club, which originated nearly $2 billion in loans during Q2), I’m paying attention to Capital One’s performance.

Nonetheless, their financial numbers don’t tell the whole story.

As our editor, Jack Milligan, writes in “How Young and Hungry Fintech Companies are Disrupting the Status Quo,” the digital financial services space “is exploding in activity as new technology companies push their way into markets and product lines that traditionally have been the banking industry’s turf.” To this point, many bank executives should take note of Capital One’s focus on technology and its business model.  Its CEO, Richard Fairbank, is focused on leading the digital transformation of banking and is not shy in stating that “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.”

Cases in point, Capital One acquired money management app Level Money earlier this year to help consumers keep track of their spendable cash and savings.  Prior to that, they acquired San Francisco-based design firm Adaptive Path “to further improve its user experience with digital.”  Over the past three years, the company has also added e-commerce platform AmeriCommerce, digital marketing agency Pushpoint, spending tracker Bundle and mobile startup BankOns.  Heck, just last summer, one of Google’s “Wildest Designers” left the tech giant to join the bank.

More and more banks are realizing that they have to fundamentally change to keep up with the industry’s digital transformation.  But shifting an organizational structure — and culture — to become more focused on what customers want and expect in an increasingly digital age is no simple task.  Not everyone can offer a broad spectrum of financial products and services to consumers, small businesses and commercial clients like Capital One does.  But all can certainly learn from the investments, partnerships and efforts being made by this standout institution.

In case you’re wondering…

Bank Director’s Bank Performance Scorecard uses five key metrics that measure profitability, capitalization and asset quality. ROAA and ROAE are used to gauge each bank’s profitability.  KeyCorp (NYSE: KEY), of Cleveland, ranked second, and rated highest for capital adequacy, with a TCE ratio of 9.87. In third place, U.S. Bancorp (NYSE: USB), of Minneapolis, topped the profitability metrics with a 1.55 ROAA and 13.53 ROAE. Wells Fargo & Co. (NYSE: WFC) and Comerica Inc. (NYSE: CMA) rounded out the top five.

Be Proud Of The Past But Look To The Future

In Charles Dickens’ “Christmas Carol,” Ebenezer Scrooge spends some quality time with the ghosts of Christmases Past, Present and Yet-to-Come.  Inspired by this holiday classic, and these decorative lights adorning Macy’s in New York City, today’s column mirror’s Dickens’ structure with three points on bank M&A, Capital One and Lending Club’s IPO..

Past: Three Bank M&A Deals You May Have Missed

Last week, my monthly M&A column posted on BankDirector.com (A Few Notable Deals You May Have Missed in 2014).  My premise: to successfully negotiate a merger transaction, buyers and sellers normally must bridge the gap between a number of financial, legal, accounting and social challenges. Couple this with significant barriers these days to acquiring another bank—such as gaining regulatory approval— and it’s no wonder that bigger financial deals remained scarce this year.

For as much digital ink as was spilled on BB&T Corp.’s $2.5-billion acquisition of Susquehanna Bancshares a few weeks ago, here are three deals worth noting from 2014: (1) Ford Financial plans to buy up to a 65 percent stake in Mechanics Bank, (2) Sterling Bancorp’s agreement to buy Hudson Valley and (3) United Bankshares completed acquisition of Virginia Commerce Bancorp.

Certainly, banking acquisitions like these three show a commitment to profitability and efficiency—and reflect solid asset quality and sound capital positions. There is more than one way to grow your bank and these banks are proving it.

Present: Catch the Digital Wave While You Can

A few days ago, the Washington Business Journal’s Mark Holan — @WBJHolan — wrote a very timely and relevant piece about Capital One’s Richard Fairbank, who says “the world won’t wait for banks to catch the digital wave.”  As Mark noted, Fairbank recently shared myriad thoughts at the Goldman Sachs U.S. Financial Services Conference in New York, opining:

“Banking is an inherently digital product… Money is digital. Banking is both about money and also about contracts about how money will be moved and managed. There is not a lot of physical inventory. This business is just crying out to be revolutionized and the world won’t wait.”

~Capital One’s CEO

Fairbank also cautioned the banking industry “has had a stunted and slowed evolution relative to the inherent nature of just how digital this product is” due to regulation, massive capital requirements, risk management issues, and other funding constraints.  He also said most banks are too focused on technology’s impact on physical branches or building the coolest app to satisfy customers.

Future: Why Lending Club’s IPO is Important

When it comes to financial innovation, many investors look outside the traditional banking space.  Take Lending Club, which touts itself as “America’s #1 credit marketplace, transforming banking to make it more efficient, transparent and consumer friendly. We operate at a lower cost than traditional bank loans and pass the savings on to borrowers in the form of lower rates and to investors in the form of solid returns.”  So I think their December 11th IPO on the NYSE is very important for bankers to take note of.

Much as Fairbank talks about transforming Capital One to match consumer’s digital demands, the firm stated in a pre-IPO filing that “borrowers are inadequately served by the current banking system.”  By positioning itself as the future of the lending business, it is not surprising to see entire columns dedicated to the the future of the company, as well as the future of the banking industry (see: The Death Of Banking: A LendingClub Story).  Feel free to draw your own conclusions, but certainly pay attention to upstart competitors like these.

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!