Looking for Great FinTech Ideas

A fundamental truth about banking today: individuals along with business owners have more choices than ever before in terms of where, when and how they bank. So a big challenge — and dare I suggest, opportunity — for leadership teams at financial institutions of all sizes equates to aligning services and product mixes to suit core customers’ interests and expectations.

By Al Dominick // @aldominick

Sometimes, the temptation to simply copy, paste and quote Bank Director’s editor, Jack Milligan, is too much for me to resist. Recently, Jack made the case that the distinction between a bank and a non-bank has become increasingly meaningless.  In his convincing words:

“The financial service marketplace in the United States has been has crowded with nonbank companies that have competed fiercely with traditional banks for decades. But we seem to be in a particularly fecund period now. Empowered by advances in technology and data analysis, and funded by institutional investors who think they might offer a better play on growth in the U.S. economy than traditional banks, we’re seeing the emergence of a new class of financial technology – or fintech – companies that are taking dead aim at the consumer and small business lending markets that have been banking industry staples for decades.”

Truth-be-told, the fact he successfully employed a word like ‘fecund’ had me hunting down the meaning (*it means fertile).  As a result, that particular paragraph stuck in my mind… a fact worth sharing as it ties into a recent Capgemini World Retail Banking Report that I devoured on a tremendously turbulent, white-knuckling flight from Washington, D.C. to New Orleans this morning (one with a “minor” delay in Montgomery, AL thanks to this morning’s wild weather).

Detailing a stagnating customer experience, the consultancy’s comprehensive study draws attention “to the pressing problem of the middle- and back-office — two areas of the bank that have not kept pace with the digital transformation occurring in the front-office. Plagued by under-investment, the middle- and back-offices are falling short of the high level of support found in the more advanced front-offices, creating a disjointed customer experience and impeding the industry’s ability to attract, retain, and delight customers.”

Per Evan Bakker for Business Insider, the entirety of the 35-page report suggests “banks are facing two significant business threats. First, customer acquisition costs will increase as existing customers are less likely to refer their bank to others. Second, banks will lose revenue as customers leave for competitors and existing customers buy fewer products. The fact that negative sentiment is global and isn’t limited to a particular type of customer activity points to an industry wide problem. Global dissatisfaction with banks is likely a result of internal problems with products and services as well as the growing number of non-bank providers of competing products and services.”

While dealing with attacks from aggressive, non-bank competitors is certainly not a new phenomenon for traditional banks, I have taken a personal interest in those FinTech companies looking to support (and not compete with) financial institutions.  So as I set up shop at the Ritz-Carlton New Orleans through Wednesday for our annual Bank Board Growth & Innovation conference, let me shine the spotlight on eight companies that may help address some of the challenges I just mentioned. While certainly just the tip of the FinTech iceberg, each company brings something interesting to the table:

As unregulated competition heats up, bank CEOs and their teams need to continue to seek ways to not just stay relevant but to stand out.  While a number of banks seek to extend their footprint and franchise value through acquisition, 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 see the value of collaborating with FinTech companies.  To see what’s being written and said here in New Orleans, I invite you to follow @bankdirector, @aldominick + #BDGrow15.

A Pop Quiz on the Future of Banking

I was not planning on a sixth consecutive column focused on non-bank competition; however, as I prepare to present at Moss Adams’ 14th Annual Community Banking conference in Huntington Beach, California on August 26, a “bonus” post on this topic.  As you will see, today’s piece builds on the premise that many community bank leaders have real opportunities to expand what banking means to individual and business customers by offering services that go beyond a traditional business model. So to wrap up this week, sharpen your pencils for this pop quiz.

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Are WE the generation that has learned how to live without a bank?
So much has been written about millenials learning to live without a bank… but ask yourself: have you learned how to live without your bank?  If you could not direct deposit your paycheck, do you have ready alternatives?  I thought so.  Financing for your house? Your business?  I am simply pointing out the inconvenient truth that it is not just the wet-behind-the-ears customers that might already know how to live without a bank.  That said, just because many have learned to live “without” a traditional banking relationship doesn’t mean most want to.  I will let a thought from Diebold support this thought, but before I do, have to ask:

Who’s getting that Kabbage?

As a platform for online merchants to borrow working capital, Kabbage fills a small business lending gap that I have to imagine many community banks should desire (h/t Mitchell Orlowsky @ Ignite Sales).  As I learned this week, Kabbage works with small businesses that are unable to obtain credit from traditional sources. According to TechCrunch, “the startup has closed a $270 million credit facility from Guggenheim Securities, the investment banking and capital markets division of Guggenheim Partners. Atlanta, Georgia-based Kabbage will use the funds to build out its financing business both in the U.S. and beyond. This is one of the largest credit facilities ever issued to a small business lender, and possibly the biggest in the online lending space.” Since opening for business almost three years ago, Kabbage has advanced more than $250 million to small businesses, the company says   Just another example of competition facing many business-oriented banks today.

If Diebold can change, why can’t you?
From the outside looking in, one can make the case that the last truly disruptive technology for banks was the ATM. And when you think ATMs, Diebold has to be top-of-mind.  So when the technology company acknowledges the following, why can’t more banks course correct and be where people are going (and not where they might appear to be)?

The retail financial services industry is in the midst of an epic change and will soon look very different than it did just a few years ago. Consumers are changing what they want out of their banks. Our research proves that consumers want additional convenience to access their bank anytime, anywhere, anyhow, all while maintaining a personal connection with their bank.

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Regardless of how you did on this pop quiz, please feel free to leave a comment below by clicking on the white plus sign (within the grey circle at the bottom of this page).  I invite you to follow me on Twitter (@aldominick) where you can publicly or privately share your thoughts with me.

Aloha Friday!

PayPal is Eating Your Bank’s Lunch

Part two of a five piece series on emerging threats to banks from non-financial companies.  To read part one, “For Banks, the Sky IS Falling,” click the hyperlinked title.

I am not big on scare tactics, so apologies in advance of my next sentence.  But when HP’s chief technologist for financial services, Ross Feldman calls PayPal “the poster child of new technology,” adding, “they are the No. 1 scary emerging player in the eyes of bankers” how can you not be concerned?  PayPal, a subsidiary of eBay, is already a major player in the person-to-person payment business (P2P) and is poised to take a massive bite out of traditional banking revenue.

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What is PayPal Up To?

To preface this part of today’s post, keep in mind that as an unregulated entity, PayPal is not subject to the same regulations and compliance expenses as banks.  I share this oh-so-salient point as the company moves towards mobile payments with its apps and one-touch payment services.  The fact that PayPal embraces these offerings isn’t surprising, as so many bank users — myself included — prize 24/7 convenience.  Certainly,  companies that don’t meet user demands will not survive.

Moving away from individual expectations to small business demands, I am seeing more small businesses switch from traditional merchant accounts offered by the banks to those like PayPal’s.  As Nathalie Reinelt of Aite Group’s Retail Banking group shared, “ubiquitous smartphones and inefficiencies in legacy payments have propelled the digital wallet into the payments ecosystem—consumers are interested in it, merchants are willing to adopt it, and financial services companies cannot ignore it.”

So What’s A Banker to Do?

Where I see PayPal falling short — admittedly, most banks too — is an inability to help customers make decisions on what to buy, and where and when to buy it.  So let me shout it as loud as I can: exploit this achilles heel while you still can!  There are companies like MoneyDesktop (a leading provider of online and mobile money management solutions), Ignite Sales (a company whose “recommendation solutions” helps increase customer acquisition & retention while optimizing profitability), etc. that have been stood up to keep banks relevant.  There is a real opportunity for banks to do more than simply allow the same types of services digitally that were once only available in-person.

The window of opportunity is open for banks to expand what banking means to consumers by offering online services that go beyond their traditional business model.  The question boils down to this: will the board & senior leadership accept the risk to try something new to make sure they aren’t just warding off advances from the B of A’s of the world — but also the PayPal’s and their peers?

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To comment on this piece, click on the grey circle with the white plus sign on the bottom right or send me your thoughts via Twitter (I’m @aldominick).  Next up, pieces on two of the biggest non-bank competitors whose names you may have heard of: Facebook and Walmart.

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.

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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:

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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!

FI Tip Sheet: You Can Hang Your Hat On It

It’s been a while since I last called Dallas home; still, the white shirts & gray shorts of St. Mark’s proved a welcome and familiar site during a trip to the Texas city earlier this week.  A flashback to my freshman year of high school?  Absolutely.  Dare I reminisce before diving into today’s post with a few random fun facts.  Heck yeah.  Did you know Dallas lies in a large prairie running through the center of the United States?  Ok, anyone who has visited know it is fairly flat… but did you know it is one of the largest cities in the world not located on a navigable river?  Yes, this is a city where I learned about Coke floats, Suburbans and sayings like “if I say a hen dips Skoal, you can look under her wing for the can.”  Curious how I’m going to relate my time in Big D to the banking space?  Read on.

Roping it in
Roping it in

What Happened to Citi’s Hutzpah?

Even with wifi-enabled planes, I still find travel by air the best way to work uninterrupted.  The luxury of my iPhone laying silent this week?  A chance to catch up on various blogs and articles like those authored by Jack Milligan.  The editor of Bank Director magazine, he took a look at how large U.S. banks, specifically Citigroup, are being dogged by intense regulatory scrutiny and have the challenge of preparing for much stricter capital standards in coming years. By noting Citigroup was the only bank of the six largest U.S. banks to flunk the latest round of stress tests, he sets up his must-read “Where Has the Go-Go Bank Gone?”  In his view, cutting expenses and selling off non-core business units doesn’t seem like a bold enough plan for the behemoth.  Per Jack, “maybe what this Citi needs is a little of the old Citi’s hutzpah.”

Pay Attention to Your Sales Process

On Wednesday, I made it to Preston Road and St. Mark’s School of Texas for a few minutes in large part because of Ignite Sales (the company’s offices are a few miles away from the all-boy school where my parents enrolled my brother and me when my father took a job with the then-6th largest bank in the country, Bank One).  As I talked with Ignite’s CEO, Mitchell Orlowsky, he made clear that non-bank competitors are eating away at banks’ customer base, in part because banks have paid little attention to the sales process. As he shared earlier this month, “banking has never had to focus on a comprehensive sales process. Because of healthy margins from loans and fees, banks have historically shied away from proven sales methods found in other industries. However, now that the market has become competitive, the lack of sales infrastructure hurts.”

A Silver Lining

Mitchell shared how more progressive banks have begun to hire experienced sales management from other industries that bring the expertise needed to change this culture.  I thought about this approach as I dug into a Raymond James report on the outlook for the spring (“Banking Industry Overview“) on my flight home to D.C.  In their view, first quarter 2014 results are “likely be highlighted by continued improvement in credit quality, a pickup in commercial loan growth, net interest margin (NIM) stabilization, and improved profitability.  However, these positives will likely be mitigated by weak year-over-year comparisons for market-related revenue, sluggish balance sheet growth, and a continued decline in mortgage banking activity.”  Of particular note: they expect the M&A discussion to gain prominence given the pickup in deal activity and “outperformanceof stronger acquirers who have recently announced transactions” along with the following catalysts:

  • The modest pace of economic recovery
  • Increased regulation
  • Protracted low rate environment
  • Higher capital requirements
  • Aging management teams/boards

I continue to hear that M&A activity will remain largely relegated to smaller deals for banks with assets of $1 billion or less — and this report certainly reinforced this view.

Aloha Friday!