We are in the midst of a digital revolution that is changing how the business of banking gets done. The changes are occurring throughout the industry-from retail to mortgages (the largest mortgage originator in the U.S. is now Quicken Loans) to commercial lending to compliance to M&A. Executive Editor John J. Maxfield has written a story in this issue (see “Growth Through Digital Banking, Not M&A“) that details how large regional banks such as U.S. Bancorp, Fifth Third Bancorp and PNC Financial Services Group now see digital banking as an alternative customer acquisition strategy to traditional M&A. It’s not that these companies will never buy another brick-and-mortar bank, but they may now be reluctant to pay an outsized premium for one. As Tim Spence, head of consumer banking, payments and strategy at Fifth Third, told Maxfield, digital banking has eroded the franchise value of community banks.
A thriving fintech sector has also raised up a significant and growing number of digital-only competitors that are attacking niche markets like small business lending, mortgages, unsecured personal loans and personal financial management. Some of these entities-most of which are backed by institutional money like private equity funds and corporate investors-may not survive the next recession, since they lack the stable funding that insured deposits provide to banks, but their technological innovation will live on. Indeed, the most forward-leaning banks are adopting it as fast as they can.
We write often about fintech and how the banking industry is being disrupted by the digitalization of the U.S. economy. Consider that the four largest U.S. companies based on market capitalization-Apple, Alphabet (which owns Google), Microsoft and Amazon-are all dominant players in the digital space. And all of them have aspirations in the fintech space, as well. The traditional banking business model is being dramatically changed by technology, and I believe we’re still in the second inning of that revolutionary process. We write about fintech because it’s important-it’s a game changer for the banking industry.
But not everything about banking should change. Technology is changing banking, but it’s not changing the essential role of a bank. Technology is a tool that can improve efficiency and profitability when used effectively, but it doesn’t come with its own unique value system. The virtues that I believe define a good bank are the same for internet-only players as they are for a traditional community bank that is just now dipping its toe into the fintech pool.
Let’s consider what some of those virtues are, beginning with customer service. Technology is changing the context in which a customer experiences their desired service. There has been an explosion in mobile deposits in recent years, and branch traffic has declined as a result. Good customer service is now much more likely to be defined by the experience a customer has with a bank’s mobile app than with a friendly (or unfriendly) teller. But the importance of good customer service in the fintech age hasn’t changed at all. It’s still vitally important. And a bank that values customer service will make sure that the service a customer receives when making a mobile deposit is just as good as if they were making that deposit in a branch while they visit with their favorite teller.
Consumers have a great appreciation for technology nowadays, but only when it works.
Another core virtue is integrity. The Wells Fargo & Co. scandal in which customers were deceived about their relationship with the bank (thousands of customers had accounts opened in their names and were charged fees without their knowledge) did terrible damage to the industry’s reputation. The industry isn’t much liked by the public to begin with, and the Wells scandal only served to strengthen the perception that banks care more about themselves than their customers. I think integrity will become even more important as we move further into the digital age. It’s easier to trust a process like managing one’s finances when there is a person involved-when you can speak to them and look them in the eye. How banks project a sense of integrity and trustworthiness in the digital age, when humans aren’t necessarily involved in the process, will be crucial going forward.
A third virtue of our modern banking system is security. Until the creation of the Federal Deposit Insurance Corp. in 1933, depositors had no guarantee their money would be safe. There is a story that has often been told in my family. In the early years of the Great Depression, before there was FDIC insurance, my maternal grandmother happened to run into an executive at the bank where she and my grandfather kept their money. Without telling her why, this man suggested strongly that she withdraw all their money, which she did promptly. The bank was closed soon thereafter and never reopened. While the deposit insurance system has made banking safer from the customer’s perspective, a strong balance sheet lessens the chance that they will ever have to rely on it. People want to do business with a strong bank-a bank they can rely on in good times and bad. In that sense, the extent to which a bank has integrated technology into its business model matters not one iota.
Technology changes how your bank does what it does, but it shouldn’t change the values that define it. To quote Shakespeare, “To thine own self be true.”