Technology Survey

Tech Survey.pngCommunity banks face numerous competitive threats in their pursuit to attract new customers and retain existing clients. These threats have traditionally hailed from big banks like Bank of America Corp., regional financial institutions and smaller, local competitors such as credit unions and nearby community banks. But more recently the list has expanded to include digital banks as well as nonbank, technology-oriented companies like PayPal, SoFi and even Amazon. Yet, while the competitive universe is expanding, the 2018 Technology Survey, sponsored by CDW, finds that many banks haven’t reoriented their strategies to face these newfound marketplace hazards.

When asked to identify their bank’s primary competitive threat, many of the executives and board members responding to the survey-the majority of whom represent community banks-don’t seem to be pointing their fingers in the right direction, at least not when it comes to technology. Forty-three percent identify credit unions or local community banks as their top competitive threat; just 10 percent point to big banks.

But the biggest banks are, in many ways, leading the way on technology. “They have the capacity to create opportunities for themselves to attract a younger client base, which is stealing [market share] from these smaller, mid-tier banks,” says CDW Sales Director Scott Hiemstra.

“Every single bank that’s not a giant bank-the giant banks are their competition,” adds Dan Hansen, a business development manager for CDW’s financial services team and former community bank chief information officer.

Twenty percent identify nonbanks as their greatest competitive threat, and 7 percent point to digital banks-many of which are themselves offshoots of big banks or smaller traditional entities.

Community banks and credit unions might be the threat in your backyard, but digitally-savvy financial providers are the more likely long-term threat for the industry as the battle for deposits heats up. Digital banks can offer more attractive interest rates on deposit accounts because of their leaner expense bases. Nonbanks may not be depository institutions, but they can still siphon away your customers’ deposit dollars. Payments platforms like PayPal allow consumers and businesses to maintain a balance in their accounts, which is nothing to sneeze at when one considers that more than 17 million businesses use PayPal.

Companies that aren’t necessarily interested in being a bank are expanding into the lending space, too. The digital real estate platform Zillow announced its acquisition of Mortgage Lenders of America in August, and last year, Amazon announced it had made $3 billion in small business loans to its merchants. “Our client today isn’t coming to gain access to our banking services in a vacuum. They’re ordering products online, [using] Uber and [online retailer] Gilt, and AirBnB when they go on vacation,” says Frank Sorrentino, chief executive officer of ConnectOne Bancorp, based in Englewood Cliffs, New Jersey, with $5.3 billion in assets. These experiences shape their expectations.

Compared to smaller community banks, the larger banks responding to the survey-above $10 billion in assets-are more likely to identify nonbanks, digital banks and big banks as their greatest threat. Respondents from these banks seem to see the writing on the wall for the industry, and have identified a need to compete with these more tech-savvy financial providers. They are more likely to see a need to improve the technology they use, including their retail mobile app, core banking technology and their use of business process automation, which can make it easier for a customer to apply for an account or a loan. And they see greater potential in the near-term use of technologies such as peer-to-peer (P2P) payments-think Zelle, which is used by big retail banks and is gradually being adopted by the industry more broadly-and artificial intelligence and machine learning, as seen in Bank of America Corp.’s digital assistant, Erica.

“I’m personally worried about losing or not attracting customers [who] want to go to a big bank because they have a perception that they’re going to offer the better technology [or] more technology than we do,” says Sara Rountree, senior vice president, digital strategy at $13 billion asset Union Bankshares Corp., headquartered in Richmond, Virginia. “But at the same time, we’re paying attention to what’s going on outside of financial services as well, [and] what’s driving changes in customer behavior and how they manage their money. We have to keep an open mind that, in this day and age, the competitive landscape can change.”

A strategy focused on improving customers’ digital experience is essential nowadays, as the digital experience has largely become synonymous with the customer experience. Amazon sets the standard in this regard. Its corporate culture is described by CEO Jeff Bezos as “customer-obsessed,” which he says differs from centering a business on a product, business model or technology platform. He’s credited that obsession with driving the company’s success.

Eighty-three percent of respondents indicate the top goal for their bank relative to technology and retail strategy is improving the digital experience. But a majority also indicate other goals that feed into the digital experience. Seventy-three percent seek to improve account onboarding, which will be important for banks seeking to grow deposits.

Sixty-nine percent want to streamline their bank’s online lending platform, and more than half see a need for at least some improvement in their bank’s retail lending and commercial lending platforms. With Amazon’s loan program, the process is easy-just three clicks-because it leverages data the retailer already has on the business owner. Bank customers expect a similar experience.

“Amazon taught us that it’s more about convenience,” says Anne Tangen, the chief information officer and chief operating officer at The Cooperative Bank of Cape Cod, with $925 million in assets. “How do we make [the experience] frictionless? How do we make the things we’re offering easy to use, easy to buy?”

Seventy-one percent say automation, a technology critical to improving the lending process, will directly impact their bank over the next two years. “Automation is going to allow you to increase your footprint,” says Hiemstra. “It’s going to give employees-whether that’s in sales or marketing or development-the ability to be much more agile, a lot faster and ultimately, for the CFO, control costs.”

Thirty-five percent identify a need for significant improvement-and 34 percent a need for some improvement-in their bank’s use of business process automation. Banks should be working to reduce the time it takes the customer to apply for a loan-a mortgage, for example-from days to hours, and eventually minutes, says Hansen. And that’s just one area of the bank where processes can benefit from automation.

Almost three-quarters of respondents say their bank could better use data analytics, which not only helps a bank identify what financial products and services their customers want-which should, in turn, result in opportunities for the bank to provide those products and services-but also fuels business process automation.

Sixty-five percent say P2P payments will have a direct impact on their financial institution over the next two years. More than half see a need for at least some improvement in this area, and almost 20 percent say their bank doesn’t offer P2P payments to customers. Lebanon, Tennessee-based Wilson Bank Holding Co., with $2.4 billion in assets, offers a P2P option to its customers, but President John McDearman says if a better option-like Zelle-is available, then it needs to be explored, as offering a payments solution on par with Venmo, a competing service offered by PayPal, is important in attracting younger customers to the bank.

Even though smaller banks don’t benefit as much from scale, there’s no reason they can’t compete in this arena. “The larger banks do have the people and the expertise,” says Hiemstra. “But I think what we’re seeing is that some of the smaller banks have more agility, or the ability to try different things, so I think that’s starting to come into this equation.”

Many of the executives and directors surveyed indicate their bank is dedicating more staff to technology and innovation, and more than half have a high-level executive focused on the issue. “All banks of our size are like small tech companies” because technology is so central to the business, says McDearman. Hiring individuals who can think about how to make the bank better by putting themselves in the seat of the customer improves the organization, he says.

But most financial institutions can’t innovate on their own-making them highly reliant on the growing number of technology providers serving the financial industry. “A lot of them are just keeping up with the bank down the street,” says Hansen. “The ones that operate the best are looking at what customers expect, demand or desire, and see what they can do to provide that, and how quickly they can provide it,” as well as what company-the core processor or another technology firm-will provide the solution.

The core provider is no longer a bank’s one-stop shop for its technology needs. Sixty percent indicate their board and management team is open to working with newer technology startups-an increase of 15 points from last year’s survey. The typical bank now works with a median of seven technology vendors, according to the survey. That number includes the core.

With a multitude of vendors offering a myriad of solutions, how can banks pick a winner?

“We look for vendors who are more nimble [and] move quickly, so when we see things coming down the pike from the larger banks or other nonbank groups out there, we can get ahead of that,” says Jonathan Krieps, the chief operating officer at Raleigh, North Carolina-based North State Bancorp, with $878 million in assets. He adds that the core providers are not spending as much as they should on innovation, and move more slowly to adapt than smaller players. “We can’t tolerate that lack of innovation and timeline,” he says.

Rountree recommends that banks have a clear understanding of which vendors are critical, compared to the smaller firms that may provide one or two services to the bank. These smaller vendors are no less important, however. “That’s the way you start to differentiate, is by leveraging them in a different way,” she says.

Union brought on an experienced banker from Capital One Financial Corp. to reinvent its vendor management process, including vendor selection.

Vendor management isn’t just a regulatory expectation-it ensures your bank’s strategic goals are met, and your customers are happy. The survey indicates that some practices for vetting vendors have become almost universal: reviewing financials (87 percent) and third-party audit reports (86 percent), and getting input from peer banks (94 percent). Sixty-four percent indicate their bank meets with the vendor’s executive team, and 45 percent say they visit the company’s headquarters to meet staff and understand the culture.

The vendor management process at ConnectOne includes trips to see a potential vendor’s operations, as well as discussions with its executives. “There’s a lot more personal touch that’s involved to understand these smaller and growing fintech companies,” says Chief Operations Officer Chris Ewing.

Sixty-one percent conduct a test run on the potential vendor’s technology-something smaller banks often lack the staff to do, according to Hiemstra.

The branch is-at least for now-still relevant in today’s digital world, but its role has been changing for some time, which is reflected in the survey. Forty-five percent say their bank will add branches, but these will be smaller in size. Thirty-seven percent don’t plan any changes to their branch footprint-a nod to the fact that market growth in the digital age is more apt to come via the bank’s digital options rather than the neighborhood branch.

The Cooperative Bank of Cape Cod opened two full-service branches in 2013 that haven’t met the bank’s expectations, according to Tangen. “It’s been hard to gather deposits,” she says. Going forward, the bank will examine how to make branches smaller. But she adds that there’s no one-size-fits-all approach, as the bank still has busy branches that customers frequent.

More than half of survey respondents see a need for at least some improvement in the technology used in the branch. Fifty-two percent plan to upgrade branch technology over the next two years, and 47 percent plan to add more technology in their branches. Tangen’s team created technology bars in some of her bank’s branches so customers can experience its digital offerings.

Banking is still a people business, says Sorrentino, but “people want a high level of accessibility, and the highest form of accessibility is through the digital channel.” Banks without a digital strategy and a focus on mobile delivery will find it tough to compete in the long run.

“The financial institutions that provide the most mobile access and capabilities for the customer will be the ones that will shine,” says Hansen. “Any size bank, if they have enough mobile capability, can compete with the big banks.”

Board support is critical to shepherding the interconnection between technology and strategy, and directors must stay educated on the issue. Half of respondents say directors discuss technology at every board meeting, but 79 percent say their board needs to enhance its level of technology expertise. Tying technology to bank strategy (63 percent), as well as understanding general technology trends (60 percent) and how the bank should invest in technology (60 percent), are key areas where the board needs to improve its knowledge, according to respondents.

Tangen says it’s also important for directors to keep an open mind. Even if customers aren’t asking for a particular service doesn’t mean they won’t accept it with open arms once it’s available. The board should want the bank to be where the puck is going to be, not where it is right now.

Steve Jobs-the man responsible for the smartphone, which has profoundly impacted the banking industry-famously said, “People don’t know what they want until you show it to them.” It’s up to boards and management teams to determine if they’ll be able to show their customers what they want, or if their competitors will.

About the Survey
Bank Director’s 2018 Technology Survey surveyed 161 independent directors, chief executives, high-level technology executives and other senior executives of U.S. banks to understand how banks are strategically using technology today, how they’re vetting vendors and how boards are staying on top of this important issue. The survey was conducted in late June and throughout July 2018. Half the respondents are independent directors or chairmen, 17 percent serve as the bank’s CEO and 15 percent as the bank’s chief information officer or chief technology officer. Forty percent are aged 65 or older, and one-third between 55 and 64 years. Thirty-eight percent represent a bank between $1 billion and $10 billion in assets. The 2018 Technology Survey is sponsored by CDW. The complete results are available in the research section at BankDirector.com.


Emily McCormick

Vice President of Editorial & Research

Emily McCormick is Vice President of Editorial & Research for Bank Director. Emily oversees research projects, from in-depth reports to Bank Director’s annual surveys on M&A, risk, compensation, governance and technology. She also manages content for the Bank Services Program. In addition to regularly speaking and moderating discussions at Bank Director’s in-person and virtual events, Emily regularly writes and edits for Bank Director magazine and BankDirector.com. She started her career in the circulation department at the Knoxville News-Sentinel, and graduated summa cum laude from The University of Tennessee with a bachelor’s degree in Spanish and International Business.

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