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.
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. They hire thousands of programmers to conceptualize digital solutions for customers.
The results are impressive.
As many as three-quarters of deposit transactions are completed digitally at these banks. 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.
The next step in their evolution is to combine digital delivery channels with insights gleaned from data. It’s by marrying the two, we believe, that banks can gain a competitive advantage by improving the financial lives of their customers.
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.
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.
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.
Banks are still banks, after all. 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.
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. That is why our team at Bank Director is thrilled to host bank executives and board members at the JW Marriott Nashville on May 9 and 10 for our annual Bank Board Training Forum, where we will talk about how to tackle these challenges and remain relevant in the years ahead.