What Is Your Bank Worth

I’m at a 1909 Neoclassical landmark in San Francisco for Bank Director’s “Valuing the Bank” program.  Setting up shop in the beautiful Ritz-Carlton on Nob Hill is a real treat, as is welcoming a number of bank CEOs, chairmen, CFOs and outside directors to the Bay Area.  Let me share a few of my takeaways from yesterday’s conversations and tee up what’s ahead this morning.

The Ritz-Carlton San Francisco
The Ritz-Carlton San Francisco

What Drives Value Creation

To open the day, we reviewed the operating environment in terms of “what drives value creation.”  Beginning with a presentations made by the Hovde Group and Moss Adams, we touched on issues like margin compression, deposit funding, efficiency improvements and business model expansion in the context of the current environment.  One interesting, M&A-specific fact from this session: the market for high-performing banks is at a 5-year high.  Consider the number of deals greater than $25 million in deal value that were priced above 150% of tangible book value: in the last 4 quarters: 44… for the prior 18 quarters: 45.

Understanding Risk in the Context of Determining a Bank’s Worth

I made note that credit unions have seen loans grow 9.8% this past year; far quicker than the 4.9% growth at banks (h/t Hovde Group).  So as much as I’ve recently harped on non-bank competition from players like Apple and PayPal, a stark reminder that banks also need to find a way to compete with lower rates offered by credit unions to reverse this trend of losing loans.  Back to the M&A side of things, it was suggested that to maximize value, potential sellers should consider selling less profitable/smaller/rural branches.

Today’s Agenda

This morning, we will look at corporate governance and talent-specific opportunities to strengthen one’s institution.  After a series of peer exchanges, I am excited to tackle the idea that banks are sold more than they are bought.  Indeed, our final session of this program pairs David Brooks, the Chairman & CEO of  the NASDAQ-listed Independent Bank Group and Jim Stein, Vice Chairman & Houston Region CEO, Independent Bank.  Jim was the CEO at Bank of Houston and sold that bank to David’s, and together, will talk with me about how that deal was struck.

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.

For Banks, the Sky IS Falling

The first in a five part series on emerging threats to banks from non-financial companies.

For bank executives and board members, competition takes many forms.  Not only are banks burdened with regulation, capital requirements and stress testing, they now have the added pressure of competition from non-financial institutions.  In case you haven’t been paying attention, companies such as Paypal, as well as traditional consumer brands such as Walmart, are aggressively chipping away at banks’ customer base and threatening many financial institutions’ core businesses.  So today’s piece tees up my next four columns by acknowledging the changes taking place within — and immediately outside — our $14 trillion industry.

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The race is on…

A few months ago, at Bank Director’s annual Growth Conference in New Orleans, I polled an audience of CEOs, Chairmen and board members and found the vast majority (a whopping 91%) have real concerns about non-banks entering financial services.  These bankers aren’t alone in their concerns about competition from unregulated entities.  Just days after polling this audience, Jamie Dimon, the CEO of JPMorgan Chase, warned an audience of investors that he sees Google and Facebook specifically as potential competition for the banking giant.  As he notes, both offer services, such as P2P, that could chip away at income sources for banks.

…and its not pride coming up the backstretch

As Emily McCormick wrote, Facebook is already a licensed money transmitter, enabling the social media giant to process payments to application developers for virtual products. Likewise, the retail behemoth Wal-Mart launched Bluebird in partnership with American Express late in 2012 so users can direct deposit their paychecks, make bill payments, withdraw cash from ATMs and write checks.  This makes the results of a recent TD Bank survey about millennials banking online and on their mobile devices more frequently than in a branch so relevant.  Specifically, 90% of survey respondents said they use online or mobile tools for their everyday banking activities, such as checking balances or paying bills, and 57% said they are using mobile banking more frequently than they were last year.

Along the lines of “what is the industry losing”: eventually you’re going to have a generation that has learned how to live without a bank.  That’s a very sky-is-falling, long-term consequence of not adapting.  But there’s also an opportunity for retail banks to do more than simply allow the same types of services digitally that were once only available in-person.  Banks could actually expand what banking means to consumers by offering online services that go beyond their legacy business model.

What I am hearing

Of course, non-banks can, conceptually, expand what banking means to consumers by offering online services that go beyond legacy business models too.  However, the sheer complexity of entering this market is one reason why we have yet to see a startup that truly rebuilds the banking industry brick by brick.  At least, that is the perspective shared by Max Levchin, founder and CEO of online payments startup Affirm, a company with the goal of bringing simplicity, transparency, and fair pricing to consumer credit.  As the co-founder and former CTO of PayPal, Levchin is one of the pioneers within the payments industry.   In a recent piece in Wired magazine (The Next Big Thing You Missed: Startup’s Plan to Remake Banks and Replace Credit Cards Just Might Work), he notes

I don’t know if I want to own a bank. But I do want to lend money in a transparent way, and I want to create an institution people love… I want to be the community bank equivalent for the 21st century, where people say: ‘I trust my banker. He’s a good guy who’s looking out for me.’

Coopetition anyone?

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To comment on this piece, click on the grey circle with the white plus sign on the bottom right.  Next up, a look at PayPal, a the e-commerce business that is “eating the banking industry’s lunch.”

In the Face of Intense Competition

Financial institutions face intense competition from non-banks like PayPal, American Express, Walmart and Quicken Loans…  and a rapidly changing demographic that demands new approaches to attract and retain customers (be it individual or business).  Today’s post takes a look at two financial technology companies working to keep banks relevant as customers increasingly expect a“one stop shop” in all areas of their lives.

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Over on FiveThirtyEight.com

On FiveThirtyEight, Nate Silver’s newly launched website at ESPN, the editorial team leverages statistical analysis to tell compelling stories about politics, science and yes, sports.  While much digital ink has been spilled on this week’s NFL draft,  the site’s chief economics writer, Ben Casselman, authored a piece that caught my eye.  Thanks to a keynote presentation by Fox News’ Juan Williams at this January’s Acquire or Be Acquired conference, I’m far more aware of the changing demographics of the United States — and what that means for financial institutions.

 

Based on my conversations with Juan in the desert, I found early inspiration for today’s piece while pouring over Ben’s What Baby Boomers’ Retirement Means For the U.S. Economy.  In combination with economic shifts — both domestically and globally — it is clear that changing demographics are transforming businesses.  As we trend towards a younger populace, Ben writes “all else equal, fewer workers means less economic growth… If more of the population is young or old that leaves fewer working-age people to support them and contribute to the economy.”  Clearly, banks need to be prepared to serve a population that will live longer.  Maybe more importantly, they need to court their most valuable customers — Gen X&Y and Millennials (relationships built, “gulp” through online & mobile experiences).

Putting Checks into the Cloud

In the world of checks, VerifyValid acknowledges that “paper is simply a vessel for holding information. The real check is the data fields it contains: the check number, the amount, the routing number, the recipient, and most important of all, the authorizing action which says that the account holder agrees to pay the stated amount to the payee.”  I had a chance to see Paul Doyle, the company’s Founder & CEO, inspire a crowd of CEOs and board members at The Growth Conference last week.  Flying home from New Orleans, I spent some time learning how the company overcame the challenge in providing this information electronically in such a way that prevents fraud.  As I see it, VerifyValid lowers an organization’s costs while increasing efficiency and financial security with every payment.  IMHO, their 2 minute, 25 second video is worth a watch.

Making Money Simple, Attractive and Intelligent

Located “in the heart of Utah’s Silicon Slopes,” MoneyDesktop is redefining the way millions of people interact with their finances.  As one of the fastest-growing financial technology providers, MoneyDesktop positions banks and credit unions as the financial hub of their account holders — think Mint on steroids — with its personal financial management, data-driven analytics and marketing technologies.  Some 450 financial institutions rely on this software-as-a-service vendor… and I saw last night they have plans to grow significantly in the months to come.  They write, and I agree, that account holders are changing.  “There is an ongoing shift away from traditional brick & mortar banking (and) technology is providing better ways for account holders to interact with their money, and with financial institutions.”  An interesting company delivering a very clean and user-friendly experience.

Aloha Friday!