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.

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

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

Does 2019 Become the Year of BigTech?

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

Has the window to sell your bank already closed?

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

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

Wither the bond market?

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

The Single Greatest Constraint on Growth

With the revenue pressures facing the banking industry being some of the most intense in decades, banks need to think more constructively about their businesses. At the same time, changing consumer behavior could drive the industry to reallocate its resources to less traditional growth channels in order to stay ahead.  In my view, the words of an English naturalist reflect the single greatest constraint on growth today.

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Powerful Forces

One of our long-term corporate sponsors, PwC, recently shared their thoughts on the future of the retail banking industry.  In their view, “powerful forces are reshaping the banking industry, creating an imperative for change. Banks need to choose what posture they want to adopt – to lead the change, to follow fast, or to manage for the present. Whatever their chosen strategy, leading banks will need to balance execution against… critical priorities and have a clear sense of the posture they wish to adopt.”  If you, like our friends from PwC, are joining us in New Orleans later this week to dive into this very topic, their compelling “Retail Banking 2020” report might make for good airplane company.

Looking Back in Order to Look Ahead

Last year, John Eggemeyer, a Founder and Managing Principal of Castle Creek Capital LLC, helped me to kick off our inaugural Growth Conference.  As a lead investor in the banking industry since 1990, he shared his views on our “mature industry,” That is, banking follows a historic pattern of other mature industries: excess capacity creates fierce competition for business which in turn makes price, not customer service, the key differentiator.  While offering myriad thoughts on what makes for a great bank,  John did share some hard-to-swallow statistics and opinions for a crowd of nearly 200 bankers and industry executives:

  • Publicly traded banks from $1 billion to $5 billion in assets saw their stock values rise at about half the rate of the broader market as a whole since early 2009.
  • Of the 300 or so publicly traded banks in that size range, only about 60 of them traded at their pre-recession price multiples.
  • In the last 40 years, bank stocks always followed the same pattern in a recession: falling in value quicker than the rest of the market and recovering quicker.

I share these three points to provide context for certain presentations later this week.  Some build on his perspectives while others update market trends and behavior.  Still, an interesting reminder of where we were at this time last year.

Getting Social-er

Yesterday, I shared the hashtag for The Growth Conference (#BDGrow14).  Thanks to our Director of Research — @ehmccormick — and Director of Marketing — @Michelle_M_King — I can tell you that nearly 30% of the attending banks have an active twitter account; 78% of sponsors do.  On the banking side, these include the oldest and largest institution headquartered in Louisiana — @IBERIABANK, a Connecticut bank first chartered in 1825 with over $3.5 billion in assets — @LibertyBank_CT and a Durham, NC-based bank that just went public last month — @Square1Bank.  On the corporate side of things, one of the top marketing and communications firms for financial companies —@wmagency, a tech company that shares Bank Director’s love of orange — @Fiserv and a leading provider of personal financial management — @MoneyDesktop join us.  Just six of many institutions and service providers I’m looking forward to saying hello to.

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More to come — from New Orleans, not D.C. — tomorrow afternoon.

Since You Can’t Own a Car Dealership

As my colleague Jack Milligan writes in our 2nd quarter issue of Bank Director magazine, just because a bank can’t own a car dealership doesn’t mean there isn’t “enormous flexibility in determining a bank’s strategy.” Curious what this means? Read on.

2Q14

A Sneak Peek at the Core Revenue Champs

Each year, Bank Director magazine looks at all U.S. banks and thrifts to identify the strongest growth banks. We rank the top performers across four separate categories: core deposits, core noninterest income, net loans and leases and the most important, core revenue. Since the magazine mails today, I thought to offer a sneak peek of the results:

Screen Shot 2014-04-24 at 6.06.07 AM

What I find interesting about the top two banks on this very strong list: both Customers Bank and EverBank Financial designed their business models around technology from their very beginnings.

Find Your Balance

As I read through an advance copy of the issue, it strikes me that many business areas that historically provided revenue growth are simply not growing fast enough to overcome new capital and regulatory requirements.  In this light, you can understand why many say times couldn’t be more challenging for growth in community or regional banking. The corollary to this? Balancing organic and external growth is a key focus area for bank management and boards.

Increasingly, I hear that growth-focused banks are considering (or implementing) strategies that create revenue growth from both net interest income and fee based revenue business lines — think government guaranteed lending, asset based lending, leasing, trust and wealth management services. Clearly, as interest margins and loan volumes remain subject to compression and intense competition, the “optimization” of fee-based revenue is becoming pivotal in enhancing shareholder value.

‘Sup Big Easy

True, a number of banks seek to extend their footprint and franchise value through acquisition. Yet, many more aspire to build the bank internally.  Some show organic growth as they build their base of core deposits and expand their customer relationships; others leverage product innovation or focus on their branch network. I bring these approaches up in advance of next week’s Growth Conference at the Ritz-Carlton, New Orleans. We designed this event to showcase strategies, structures, processes and technologies that a bank’s CEO and board might consider to fuel their own growth.

Unlike trade shows and other events, we limit participation to a financial institution’s key officers and directors to ensure those joining us are not just committed to distinguishing their performance and reputation, but also are appropriate peers to share time and ideas with. From companies like StrategyCorps, Ignite Sales and VerifyValid to PwC, Fiserv and IBM, we have a tremendous roster of companies joining us in Louisiana to share “what’s working” at the myriad banks they support. As I’ve done for our other events (e.g. the sister conference to Growth, Acquire or Be Acquired), I’ll be posting a number of pieces next week from the Crescent City and invite you to follow along on Twitter via @aldominick, @bankdirector and using #BDGrow14.

Aloha Friday!

Giving Thanks

Winston Churchill once said, “a pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”  I believe we all aspire to see the proverbial glass as half full — so this quote is one I thought to share as we wrap up this Thanksgiving week.  As I do each Friday, what follows are three things I’m thinking about; in this case, what I’m grateful for — in a professional sense — that reflects Churchill’s sentiment.

(1) The Harvard Business Review ran a piece this April entitled Three Rules for Making a Company Truly Great.  It began “much of the strategy and management advice that business leaders turn to is unreliable or impractical. That’s because those who would guide us underestimate the power of chance.”  Here, I want to pause and give thanks to my tremendous colleagues at Bank Director — dreamers and implementors alike — who prove that fortune really does favor the prepared mind (and team).

(2) I believe that leadership is a choice and not a position.  As a small company with big ambitions, I find that setting specific directions — but not methods — motivates our team to perform at a high level and provide outstanding support and service to our clients.  This parallels the principle value of McKinsey & Co., one eloquent in its simplicity: “we believe we will be successful if our clients are successful.”  I read this statement a number of years ago, and its stuck with me ever since.  As proud as I am for our company’s growth, we owe so much to the trust placed in us by nearly 100 companies and countless banks.  Personally, I am in debt to many executives for accelerating my understanding of issues and ideas that would take years to accumulate in isolation.  Since returning to Bank Director three years ago, I have been privileged to share time with executives from standout professional services firms like KBW, Sandler O’Neill, Raymond James, PwC, KPMG, Crowe, Grant Thornton, Davis Polk, Covington, Fiserv… and the list goes on and on.  These are all great companies that support financial institutions in significant ways.  Spending time with executives within these firms affords me a great chance to hear what’s trending, where challenges may arise and opportunities they anticipate for their clients.  As such, I am thankful to be in a position where no two days are the same — and my chance to learn never expires.

(3) Finally, I so appreciate the support that I receive from my constituents throughout our industry.  It might be an unexpected compliment from a conference attendee, a handwritten thank you note from a speaker or the invitation to share my perspectives with another media outlet.  Regardless of how it takes shape, let me pay forward this feeling by thanking our newest hires, Emily Korab, Taylor Spruell and Dawn Walker, for expressing an interest in the team we’ve assembled and goals we’ve set.  Taking the leap to join a company of 17 strong might scare some towards larger organizations, but I’m really excited to work with all three and expect great things from each.

A late Happy Thanksgiving and of course, Aloha Friday!

Building for the Future

Typically, my Friday columns on About That Ratio highlights three thoughts from the previous week; case-in-point, “On Fee Income + Staying Relevant.”  To vary things up, I’m expanding today’s piece by looking to five of the leading financial technology companies for inspiration.  In no particular order, something I learned from each specific to financial institutions’ efforts or opportunities to build for the future.

(1) Let me open with this visual representation about “engaging with digital consumers.”  Infograhphically speaking (their words, not mine), Infosys took a look at the complex behaviors consumers display when sharing their personal data.  Specifically, the technology company polled 5,000 “digitally savvy consumers” in five countries about how they trade personal data in the retail, banking and healthcare sectors. Their resulting study shows the key challenge facing business is to navigate the complex behaviors consumers display when sharing their personal data.

digital-consumer-circle

(2) Given these digital consumers’ growing use of smartphones — and comfort with their built-in cameras — image capture is a logical next step for bill enrollment and payments via mobile devices.  So it makes sense that Fiserv recently launched “Snap-to-Pay” — a feature that enables consumers to pay bills with a snap of their smartphone cameras.  Essential bill information, such as the company to be paid and the amount due, is captured by taking a picture of a paper bill and then used to automatically populate the appropriate fields on the smartphone screen.  Yup, another cool addition to the payments space.

(3) Competing with Infosys and Fiserv for financial institutions’ business and loyalty is FIS, the world’s largest provider of banking and payments technology.  For the third year in a row, the company achieved the No. 1 ranking on the FinTech 100, an annual listing of the top technology providers to the financial services industry compiled by American Banker, Bank Technology News and research firm IDC Financial Insights.  As I perused their site, I paused on their mobile prepaid solutions to see what they offer for the un-banked and under-banked consumers.  These potential customers represent a significant opportunity to financial institutions, and the suite of mobile offerings offered by FIS looks to robust and user-friendly.

(4) I’m a loyal American Airlines frequent flier (1,417,248 program miles to-date and going strong) and frequent user of their mobile app.  So when I saw that American Airlines Federal Credit Union completed its conversion to a new core processing system offered by Jack Henry & Associates earlier this week, I took note.  While I’m not a customer, I knew about the credit union thanks to in-flight magazines and connections through DFW.  What I didn’t realize is the size of the Texas-based credit union. It has more than $5.6 billion in assets and operates as the thirteenth largest in the United States.  Likewise, I didn’t realize that Jack Henry & Associates’ products and services are delivered through just three business units, with one supporting more than 750 credit unions of all asset sizes.

(5) Thinking about the airlines makes me think of government control and oversight (hello FAA, TSA, etc).  Just as some try to treat the airline industry as a public utility (it is not), so do some look at the banking space (again, it is not).  Still, increased regulatory involvement and tighter credit markets require greater emphasis on IT governance and risk compliance.  For this reason, numerous North American and European banks rely on Cognizant for risk management solutions across their operations in credit risk, operational risk and market risk.  As they share in Tackling Financial Crime, financial institutions seeking new revenue streams have “taken refuge in technologically advanced IT-enabled solutions… to stay ahead of the competition.”  However, the increasing use of plastic money, e-commerce, online banking and high-tech payment processing infrastructure has opened up new opportunities for financial criminals.  Hm, how to end on a positive.  Perhaps a link to the governance, risk and compliance solutions bank officers & directors might want to learn more about to defend against such cyber crime…

Aloha Friday!

Evidently, bigger isn’t always better

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I can’t improve upon the FT’s Lex Column tweet for this week’s post; since it’s behind a paywall, I can’t share any more than the shortened URL either.  Still, it does foreshadow one of three points I’m sharing as we wrap up another summer week.

(1) When it comes to bank M&A, investment bankers “expect slow and steady consolidation.” Analysts point out that in today’s environment of slowed economic growth and regulatory change, bankers and investors continue to eye M&A as a possible opportunity for increasing profits and building strategic franchises.   So I paid close attention to news that Texas-based Cullen/Frost will, for the first time in nearly seven years, acquire another bank. On Tuesday, the NYSE-listed institution announced it will pick up Odessa-based WNB Bancshares, which operates in the heart of the oil-and-gas producing, Friday Night Light’sinspiring Permian Basin in West Texas.  If you’re not familiar with shoppingCullen/Frost, it has $22+ billion in assets and consistently ranks among the top banks in the country (at least, if you pay attention to rankings like the “Nifty Fifty,” which annually identifies the best users of capital).  As I looked for background on the deal, I found this article that ran in the bank’s hometown of San Antonio an interesting summary.  According to the news outlet, Cullen/Frost’s Chairman and CEO, Dick Evans, is fond of saying he is an “aggressive looker and a conservative buyer” when it comes to making acquisitions. So you have to figure this cash and stock deal (valued at $220 million) makes too much strategic sense for both institutions to ignore, especially with the Lone Star state’s surging oil and gas business.

(2) From size to age, you may hear me refer to my company as a 23-year old start up.  But this description cannot hold a candle to “a 110-year-old NorCal startup:” Mechanics Bank.  While I haven’t visited with them, every time I go to San Francisco I hear good things about the team leading the bank (and yes, we have written about their work; for example, “Talking Tech to Directors“).  Within the bank is the author of “Discerning Technologist,” Bradley Leimer.  As the VP of Online and Mobile Strategy at Mechanics Bank, I certainly appreciate his perspectives on change.  In fact, as I work on a growth-focused program for CEOs, executives and a bank’s boards, his “What Inspires Financial Services Innovation?” piece became a must read.  Totally up my tech and design alley and a blog worth following.

(3) Finishing on a technology kick, Fiserv shares a white paper that explores mobile strategies (“Mobile Banking Adoption: Your Frontline Staff Holds the Key to Growth“). Ubiquitous as this conversation feels, they show that for most financial institutions, mobile banking adoption typically hits a glass ceiling of 15% to 20% of online banking customers.  This surprised me, as adoption rates of mobile devices continues to grow.  I am a big fan of what the tech giant does to support the community, but I’ve talked with CEOs like Umpqua’s Ray Davis in the past about their retail concept that includes a big mobile push.  No matter what tone at the top is struck, tactical challenges remain for almost everyone.  So I’m curious to hear how banks account for this plateau as they devise their plans.  Many bank leaders I meet with express an interest in getting more mobile and social.  Fewer, however, have a comfort that their teams are measuring, and subsequently managing, such plans for the future.  Fiserv’s piece, for banks and credit unions alike, provides some interesting context for such strategic conversations.

Aloha Friday!

Financially Focused on Aloha Friday

From Kona, a reminder about Aloha Fridays...
Hula dancers in Kona

Each Friday morning, I do my best to share three things I heard, watched, discussed or read.  If you’re game to share in the comment section below, I’d be really interested to read what you consider noteworthy from the week-that-was.  And before I forget, the tradition continues: Aloha Friday!

(1) Who says there’s no growth in banking? Certainly not our editor, Jack Milligan, although the lead in to his cover story in the current issue of Bank Director magazine might suggest otherwise:

If you’re not growing, you’re dying. It’s an often-used aphorism that has been attributed to such disparate sources as former college football coach Lou Holtz, the legendary Bob Dylan and a character played by the actor Morgan Freeman in “The Shawshank Redemption.” Unfortunately, it’s also a painful truth that a lot of bankers are living with nowadays as they search for growth in an environment that seems specifically designed to strangle it.

If you’re not familiar with Bank Director, the 23-year old publication reaches over 24,000 officers and directors — a community of virtually every leader in banking.  Published on a quarterly basis, the articles focus on issues fundamental to a bank’s CEO, senior leadership team, chairman and independent directors.  Think big, risky and expensive.  For the last three years, many in this audience struggled to grow their bank’s revenue and sustain a level of profitability.  However, not all are struggling to produce top line growth.  Take a read if you’re interested to learn how some banks today are building their businesses.

(2) Bank Director magazineWhile Jack’s cover article looks at four categories of non-M&A growth*, I’m afraid that our low growth economy looks like it will persist for a while longer.  Not surprisingly, some wonder if its possible to develop a sustainable, differentiable business strategy that has strong organic growth.  This is will be just one of many topics and trends addressed in New Orleans next week during our inaugural Growth Conference at the Ritz-Carlton.  I’ll be sharing my thoughts on the strategies and tactics banks might consider to expand their franchises’ value via twitter (@aldominick) — and know most of our team will as well. If you’re interested, let me suggest a follow of @BankDirectorAP, @BankDirectorEd, @NaomiSnyder and of course, @bankdirector.

(3) While tempted to complete the hat trick with a final point from Bank Director, I defer to Fiserv’s President and CEO Jeff Yabuki remarks as he opened their client conference last week.  In his kickoff, he asked their attendees to “re-imagine the financial experience of the future.”  While the short video is unfortunately more sales speak than suggestion, the firm does post several good related reads.  In particular, one entitled To Better Serve Small Business, Define Their Needs.  The gist?  With “profitability from retail lines of businesses under pressure, many institutions are reviewing their strategies for addressing the small business market. For regional and community institutions, which often serve communities where small businesses play an outsized role in economic development, effectively reaching small business is an imperative.”  Being that I work in a small business that interacts with numerous community banks, two thumbs up to the author and company for this perspective.

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*The four categories in Bank Director’s inaugural Growth Leaders Ranking are core income (defined as net-interest income plus non-interest income, excluding available-for-sale gains and losses and other-real-estate-owned gains and losses), core deposits, net loans and leases and core non-interest income. Of the four categories, the most important is core income since it is inclusive of the other three revenue sources.