3 Approaches to Shaping a Bank’s Digital Future

  • To compete in this new era of heightened digital competition, it is more important than ever for banks of all sizes to stay committed to the quest of constant improvement.

WASHINGTON, DC — How should you position your bank for the future — or, for that matter, the present?  This is one of the most perplexing questions challenging leadership teams right now.  It is not a new consideration; indeed, the industry has been in a constant state of evolution for as long as anyone on our team can remember. Yet lately, it has taken on a new, possibly more existential sense of urgency.

Fortunately, there are examples of banks, of different sizes and a variety of business models, keeping pace with changing consumer expectations and commercial clients’ needs. The industry seems to be responding to the ongoing digital revolution in banking in three ways.

#1: Forge Your Own Digital Frontier

The biggest banks—those like JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co.—have the resources to forge their own paths on the digital frontier. These banks spend as much as $11 billion a year each on technology. Each hires thousands of programmers to conceptualize digital solutions for customers. And you know what? Their results are impressive.

As many as three-quarters of deposit transactions are completed digitally at these banks (take a minute and let that number sink in).  A growing share of sales, account openings and money transfers take place over these banks’ digital channels as well. This allows these banks to winnow down their branch networks meaningfully while still gaining retail deposit market share.

*IMO, the next step in their evolution is to combine digital delivery channels with insights gleaned from data. It’s by marrying the two, I believe, that banks can gain a competitive advantage by improving the financial lives of their customers.

#2: Look Outside For Tailored Solutions

Just below the biggest banks are super-regional and regional banks.  They too are fully embracing technology, although they tend to look outside their organizations for tailored solutions that will help them compete in this new era (rather than develop the solutions themselves).

These banks talk about integration as a competitive advantage. They argue that they can quickly and nimbly integrate digital solutions developed elsewhere—growing without a burdensome branch network while also benefiting from the latest technologies without bearing the risk and cost of developing many of those solutions themselves. It is a way, in other words, for them to have their cake and eat it too.

U.S. Bancorp and PNC Financial Services Group fall into this category. Both are reconfiguring their delivery channels, reallocating funds that would be spent on expanding and updating their branch networks to digital investments.

In theory, this makes it possible for these banks to expand into new geographic markets with far fewer branches. Indeed, U.S. Bancorp announced recently that it will use a combination of digital channels and new branches to establish a physical retail beachhead in Charlotte, North Carolina. PNC Financial is doing the same in Dallas, Texas, among other markets.

#3: Go Off-the-Shelf

Finally, smaller community banks are adopting off-the-shelf solutions offered by their core providers—Fidelity National Information Services (FIS), Fiserv and Jack Henry & Associates.

This approach can be both a blessing and a curse. It is a blessing because these solutions have enabled upwards of 90 percent of community banks to offer mobile banking applications—table stakes nowadays in the industry. It is a curse because it further concentrates the reliance of community banks on a triumvirate of service providers.

In the final analysis, however, it is important to appreciate that smaller banks based outside of major metropolitan areas still have a leg up when it comes to tried-and-true relationship banking. Their share of loans and deposits in their local markets could even grow if the major money-center banks continue fleeing smaller markets in favor of big cities.

Smaller regional and community banks dominate small business loans in their markets—a fact that was recently underscored by LendingClub Corp.’s decision to close its small business lending unit. These loans still require local expertise—the type of expertise that resides in their hometown banks. The same is true of agriculture loans.

Let’s Not Forget: Banks Are Still Banks

Trust is still the top factor cited by customers in the selection process. And loans must still be underwritten in a responsible way if a bank wants to survive the irregular, but not infrequent, cycles that define our economy. The net result is that some community banks are not only surviving in this new digital era, they are thriving.

But this isn’t a call to complacency—far from it.

Can Banking Be Right-Sized?

Size matters?
Size matters?

Although its been said many times, many ways, I can’t tell you what size really matters in banking today. Pick a number…  $500M in asset size?  $1Bn?  $9.9Bn?  Over $50Bn?  7,000 institutions?  6,000?  3,000? Less?  As a follow-up to last week’s guest post by Bank Director magazine’s editor, I spent some extra time thinking about where we are heading as an industry — and the size and types of banks + bankers leading the way.  What follows are three things I’m thinking about to wrap up the week that shows that size matters; albeit, in different ways.

(1) Not a single de novo institution has been approved in more than two years (astonishing considering 144 were chartered in 2007 alone) and the banking industry is consolidating.  Indeed, the number of federally insured institutions nationwide shrank to 6,891 in the third quarter after this summer — falling below 7,000 for the first time since federal regulators began keeping track in 1934, according to the FDIC.  Per the Wall Street Journal, the decline in bank numbers, from a peak of more than 18,000, has come almost entirely in the form of exits by banks with less than $100 million in assets, with the bulk occurring between 1984 and 2011.   I’ve written about how we are “over-capacity;” however, an article on Slate.com takes things to an entirely different level.  In America’s Microbank Problem, Matthew Yglesias posits America has “far far far too many banks…. (that) are poorly managed… can’t be regulated… can’t compete.”  He says we should want the US Bankcorps and PNCs and Fifth Thirds and BancWests of America to swallow up local franchises and expand their geographical footprints.  He sees the ideal being “effective competition in which dozens rather than thousands of banks exist, and they all actually compete with each other on a national or regional basis rather than carving up turf.”  While I have no problem with fewer banks, limiting competition to just the super regional and megabanks is a terrible thought.  Heck, the CEO of Wells Fargo & Co. wrote in the American Banker this August how vital community banks are to the economy.  So let me cite a rebuttal to Slate’s piece by American Banker’s Washington bureau chief Rob Blackwell.  Rob, I’m 100% with you when you write “small banks’ alleged demise is something to resist, not cheer on” and feel compelled to re-share Mr. Stumpf’s opinion:

…we need well-managed, well-regulated banks of all sizes—large and small—to meet our nation’s diverse financial needs, and we need public policies that don’t unintentionally damage the very financial ecosystem they should keep healthy.

(2) To the consolidation side of things, a recent Bank Director M&A survey found 76% of respondents expect to see more bank deals in 2014.  Within this merger mix exists strategic affiliations.  While the term “merger of equals” is a misnomer, there are real benefits of a strategic partnership when two like-sized banks join forces.  Case-in-point, the recent merger between Rockville Bank and United Bank (which will take the United name).  Once completed, the institution will have about $5 billion in assets and be the 4th largest bank in the Springfield, MA and Hartford, CT metropolitan area.  According to a piece authored by  Jim Kinney in The Republican, United Bank’s $369 million merger with the parent of Connecticut’s Rockville Bank “is a ticket to the big leagues for both banks.”  In my opinion, banks today have a responsibility to invest in their businesses so that they can offer the latest products and services while at the same time keep expenses in check to better weather this low interest rate environment.  United Bank’s president-to-be echoed this sentiment.  He shared their “dual mandate in the banking industry these days is to become more efficient, because it is a tough interest rate environment, and continue to grow… But it is hard to grow and save money because you have to spend money to make money.”   Putting together two banks of similar financial size gives the combined entity a better chance to this end.

(3) In terms of growth — and by extension, innovation — I see new mobile offerings, like those from MoneyDesktop, adding real value to community banks nationwide.  This Utah-based tech firm provides banks and credit unions with a personal financial management solution that integrates directly with online banking platforms.  As they share, “account holders are changing. There is an ongoing shift away from traditional brick & mortar banking. Technology is providing better ways for account holders to interact with their money, and with financial institutions.”  By working directly with online banking, core and payment platforms, MoneyDesktop positions institutions and payment providers as financial hubs and offers marketing tools that dramatically impact loan volume, user acquisition and wallet-share.  As technology levels the playing field upon which institutions compete, banks that leverage account holder banking information to solidify relationships bodes well for bank and customer alike.

Aloha Friday!

The Buying and Selling of Banks

photo
I think I know what’s around the bend…

As we wind down the dog days of summer, I re-read my last eight posts before outlining this week’s piece.  By design, I placed a heavier emphasis on stories that related to building customer relationships and opportunities tied to organic growth rather than multi-national issues and regulatory reform.  To build off these ideas, I thought to share three pieces that address “what’s next” in the United States and Europe.  The first focuses on potential changes overseas; the second, on domestic mergers and acquisitions; to close, I share the thoughts of Wells Fargo’s CEO on the importance of community banks.

(1) “What’s next for the restructuring of Europe’s banks,” a question that parallels many conversations taking place within boardrooms, think tanks, government offices and media rooms across the U.S.  Penned by members of the financial services team at McKinsey, this op-ed shows how Europe’s banks, like their U.S. counterparts, have had to re-evaluate their short and long-term prospects based on stagnant economic conditions.  Many “continue to face pressure from difficult funding conditions, a transition to higher costs of capital, changing regulations and tighter capital requirements.”  The authors make a case that many “need to shed capital-intensive operations and simplify businesses to compete more profitably in fewer market segments.”  All told, this report claims Europe’s banks are “considering the sale of up to 725 business lines across various business segments and geographies.”  If true, this might result in greater numbers of strategic mergers of like-sized banks.  Do you agree that this story sounds eerily familiar to the one playing out here in the States?

(2) Staying closer to home, bankers and advisers alike debate how quickly consolidation will play out in the coming years.  Personally, I see it taking place over a longer period than some might forecast.  To this point, I think I have a friend in Raymond James’ Anthony Polini (their Managing Director of Equity Research).  Anthony shared his perspectives with an audience of CEOs, Chairmen and board members at Bank Director’s Acquire or Be Acquired conference this January.  There, he opined that industry consolidation “is inevitable” as banks come to grips with new regulations, lower growth rates, higher capital/reserve requirements and lower long-term margins/returns.

Earlier this week, he penned a mid-year report that builds on those ideas.  He lays out how “the current slow growth environment fosters M&A as a quicker means for balance sheet growth and to achieve operating efficiencies in this revenue-challenged environment.”  In his team’s estimation, meaningful industry consolidation takes place over the next 5 to 10 years rather than a large wave that occurs over just a few.  This belies his belief that banks are “sold and not bought.”

Using this logic, coupled with an improving (albeit slowly) economy, modestly better asset quality and shades of loan growth, he believes “an M&A target’s view of franchise value will remain above that of potential acquirers. Put another way… expect the disconnect between buyers’ and sellers’ expectations to remain wide but slowly move closer to equilibrium over time.”

(3) Not to be lost amid this consolidation talk is a perspective from John Stumpf, the chairman and chief executive of Wells Fargo, as to why “Community Banks Are Vital to Our Way of Life.”  In his words

“…we need well-managed, well-regulated banks of all sizes—large and small—to meet our nation’s diverse financial needs, and we need public policies that don’t unintentionally damage the very financial ecosystem they should keep healthy. “

He continues that “almost 95% of all U.S. banks are community banks. They provide nearly half of all small loans to U.S. businesses and farms. In one out of five U.S. counties, community banks are the only banking option for local residents and businesses. Many small towns… would have little access to banks, and the services they provide, without our system of community banks.”  Significant words from one of banking’s biggest voices.  Not the first time he’s shared this opinion, and hopefully, not the last.

Aloha Friday!

%d bloggers like this: