The Intersection of Leadership and Profitability

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

Quickly

  • Key takeaways from one of my favorite summer banking events, Crowe Horwath’s Bank Leadership and Profitability Improvement Conference.

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This morning, on the first of my two flights from Washington National to Monterey, California, I learned that Walmart customers might soon be able to get installment loans for big-ticket items through Affirm, a San Francisco-based FinTech I first wrote about in 2014 (For Banks, the Sky IS Falling).  Per the Wall Street Journal, the companies reportedly are nearing an agreement on a pilot program.  This potential partnership caught my eye as I prepared for today and tomorrow’s conference.  Indeed, relationships like these make clear that when it comes to growth and efficiency, the digital distribution of financial goods and services is a significant issue for the banking industry.

This idea took further shape when I walked into the conference center at the Inn at Spanish Bay.  Immediately upon entering the room, I found John Epperson, a partner at Crowe and Jay Tuli, senior vice president retail banking and residential lending at Leader Bank, sharing their opinions on partnership strategies involving banks and FinTechs.  From the stage, they touched on increasing net interest margins via improved pricing strategies on commercial loans, approaches to streamline mortgage application processes, ideas to reduce staff counts for loan administration processes and how to improve customer experiences through online rent payment solutions.

Their perspectives lined up with those we recently shared on BankDirector.com.  To wit, “many banks have realized advantages of bank-FinTech partnerships, including access to assets and customers.  Since most community banks serve discreet markets, even a relatively simple loan purchase arrangement can unlock new customer relationships and diversify geographic concentrations of credit.  Further, a FinTech partnership can help a bank serve its legacy customers; for instance, by enabling the bank to offer small dollar loans to commercial customers that the bank might not otherwise be able to efficiently originate on its own.”

Of all the difficult issues that bank leadership must deal with, I am inclined to place technology at the top of the list.  Banks have long been reliant on technology to run their operations, but in recent years, technology has become a primary driver of retail and small business banking strategy.  John and Jay simply reinforced this belief.

In addition to their thoughts on collaboration, this afternoon’s sessions focused on ‘Liquidity and Balance Sheet Management,’ ‘Fiscal Policy During Regulatory Uncertainty’ and ‘Managing Your Brand in a Digital World.’  While I took note of a number of issues, three points really stood out:

  • Yes, banks can make money while managing decreasing margins and a flat yield curve.
  • Asset growth without earnings growth is a concern for many because of loan pricing.
  • How a CFO sets a target(s) for interest rate risk may start with an “it depends” type response — but gets nuanced quickly thereafter.

Finally, I’m not holding my breath on the industry receiving regulatory relief any time soon.  I get the sense many here aren’t either.  But it would be nice to see some business people brought in to run various agencies and I’m looking forward to the perspectives of tomorrow’s first guest speaker, Congressman John Ratcliffe.

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My thanks to Crowe Horwath, Stifel, Keefe Bruyette & Woods + Luse Gorman for putting together this year’s Bank Leadership and Profitability Improvement Conference at The Inn at Spanish Bay in Pebble Beach, California.  I’ll check in with additional takeaways based on tomorrow’s presentations.

FinTech Day is September 8

A sneak peek at Monday’s “FinTech Day” at the NASDAQ’s MarketSite in New York City — a collaboration between the exchange and Bank Director that celebrates the contributions of financial technology companies to banks in the U.S.

Well, it was bound to happen.  According to an August 31 column on Re/code, Apple reached an agreement with American Express to work together on its new iPhone payments system.  For Apple, “the introduction of its own iPhone payments product will end years of speculation about when it will take advantage of its massive file of hundreds of millions of credit cards from iTunes and App Store customers to create its own mobile wallet.”  

This new payment system is just one of many very real threats to financial institutions’ business models posed by non-bank competition like Apple, PayPal and Walmart.  Admittedly, I’ve spilled my fair share of digital ink on myriad fintech companies purporting to transform the banking universe.  While some compete with established institutions, I find I am more inclined to focus on those supporting banks’ growth initiatives.  After all, the barriers for new players to enter our industry are significant.  Coupled with the snarling complexities of regulation and compliance already beating down most established institutions, it strikes me that collaboration rather than competition should be the buzz word at technology companies thinking about banking business today.

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Not so coincidentally, I will explore the issue of competition — along with innovation — with the Managing Director of Strategic Growth Initiatives at BNY Mellon, Declan Denehan, on Monday afternoon.  The two of us will share the stage — and concurrently, the video camera — for an hour-long session that looks at how bank executives can encourage new, innovative business efforts.  BNY Mellon is not just one of the oldest banks in the U.S. — its origins stretch back to the establishment of the Bank of New York in 1784 by Alexander Hamilton — it is also the largest deposit bank in the world.  So as the organization invests and/or partners in companies with strategically important business models or technologies, I’m eager to get Declan’s take on:

  • Innovation frameworks (think cost saves, incrementalism, etc) that may benefit institutions of all sizes;
  • The emerging technologies every bank’s CEO and board should have on their radar; and
  • How banks successfully work within the startup ecosystem.

Thanks to our friends at the NASDAQ, our Q&A will be live-streamed at 2 PM ET (click here to register for free).  I invite you to log on and watch on their site or bookmark BankDirector.com (once the video posts to our homepage, I’ll update this site and share via Twitter).  Additionally, a webcast of the NASDAQ Closing Bell will be available at 
https://new.livestream.com/nasdaq/live or http://www.nasdaq.com/about/marketsitetowervideo.asx if you are keen to see how we wrap up FinTech Day.

Aloha Friday!

Is Walmart the Next Big Bank

Part four of a five piece series on emerging threats to banks from non-financial companies. To read parts one through three, click on “For Banks, the Sky IS Falling,” “PayPal is Eating Your Bank’s Lunch” and “The Bank of Facebook.”

At the risk of crashing through an open door, did you know that the retail juggernaut Wal-Mart Stores Inc. 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?  Yes, customers also have access to mobile banking, which includes features like remote deposit capture and person-to-person (P2P) payments.  So does this position Wal-Mart as the next SIFI (*no disrespect to CIT following their announced acquisition of OneWest in a $3.4Bn stock & cash deal earlier this week)?

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Cue Robin Thicke

According to Wal-Mart, 95% of Americans live within 15 miles of one of its stores.  So I think its fair to say that Wal-Mart continues to blur lines between banking and shopping as it added yet another financial service to its stores across the country.  Indeed, the retailer announced this spring that customers can transfer money to and from any of its 4,000 stores in the U.S. and Puerto Rico.  As this article in Forbes highlighted, low income workers who don’t have traditional bank accounts are turning to prepaid cards and alternatives to checking accounts.  Banks like JPMorgan Chase and Wells Fargo are trying to fill that gap with prepaid and reload able cards — something Wal-Mart has been offering for years.

Where Is That Achilles Heel?

Unlike online competitors to a bank, Wal-Mart enjoys huge brand recognition and an established customer base that feels comfortable walking into their local “branch.”  In fact, banks that already operate inside Walmarts reap among the highest fees from customers of any banks in the nation, according to a WSJ analysis.  But the very demographic the retail company serves — one that expects and demands rock-bottom pricing — may not favor a “B of W.”

Indeed, banking at Wal-Mart is a lot more expensive than shopping there.  As noted by in the WSJ, most U.S. banks earn the bulk of income through lending.  Among the 6,766 banks in the Journal’s examination, “just 15 had fee income higher than loan income — including the five top banks operating at Wal-Mart.”  Would the company really want to race to the bottom in terms of pricing its financial products (ones that would not be federally insured) and compete with its own tenants?

If At First You Don’t Succeed…

It is worth noting that Wal-Mart has tried to get into banking since the late 1990s.  It was thwarted in attempts to buy a savings-and-loan in Oklahoma and a bank in California — and later dropped a bid for its own banking charter in 2007.  While I’m not suggesting the new logo depicted above is anything more than a simple rendering by yours truly, it wouldn’t surprise me if the company explored even more creative ways to compete with financial institutions in the future.

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To comment on this piece, please click the white plus sign in the bottom right gray circle on this page or share your thoughts with me via Twitter (I’m @aldominick).  Next up, how crowdsourcing sites like Kiva and Kickstarter allow customers to bypass their bank to get funding for a business idea.

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.

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!