What Drives Success in Banking?

Written by

As a founder and managing principal at Castle Creek Capital, a private equity firm that invests in community banks, John Eggemeyer has a unique perch from which to observe what’s going on in banking.

The San Diego-based firm has approximately $900 million under management, and usually has between 20 to 25 banks in its investment portfolio at any given time, according to Eggemeyer.

“We have the opportunity to look at a lot of different ideas,” he says. “I don’t consider myself to be an originator of any particularly interesting ideas, but I am an observer of a lot of interesting ideas that other people have worked with and made success of — or not made success of.”

Eggemeyer may be selling himself a little short. Prior to starting Castle Creek in 1990, he spent nearly two decades as a senior executive for several large U.S. banks. He also sits on the boards of many of those portfolio companies, and that combined experience gives him a very strong sense of what drives success in banking.

Eggemeyer will moderate a panel discussion at Bank Director’s upcoming Acquire or Be Acquired Conference focusing on subtle trends that bankers need to be talking about. The conference runs Jan. 30-Feb. 1, 2022, at the JW Marriott Desert Ridge Resort and Spa in Phoenix.

In today’s banking market, Eggemeyer believes that success begins with the customer. Period. End of sentence.

“It’s critical that you understand who your customer is and what your customer wants,” he says. “I think we’ve learned from the fintech community that they have segmented the customer [base] and identified very clearly the customer that they’re going after. And they have built their service model around the needs and wants of their customer group. And I think that has been harder for banks to actually do from an intellectual standpoint.”

Increasingly, success in banking is also a matter of scale. Not necessarily scale in the size of the organization, but scale in product lines or customers. “The businesses that have the greatest value, and the customer segments that offer the greatest value, are those that are the most scalable,” Eggemeyer says. “And again, I think in the fintech world, they have figured out how to apply technology to the needs and wants of the segment that they’ve gone after, and that has allowed their businesses greater scalability. … Businesses that are the most scalable offer the greatest opportunities for generating incremental returns.”

A cynic might argue that applying technology to scalable customer segments is fintech’s game, not banking’s. But Eggemeyer disagrees. “I’m not sure that fintechs are better positioned to apply technology to financial services than our banks,” he says. “So much of the technology that one would apply either operationally or in serving the customer is available off the shelf. You just have to be committed to making that transition.”

A third driver of success is talent; Eggemeyer says there is “an acute shortage of highly skilled trained executives” in the banking industry today. Talent and institutional knowledge has left as the bank space as the industry has gone through a number of difficult economic periods, he says, and banks managed their expense base in part by shortchanging the training and development of younger employees.

“I’ve watched this over a lot of cycles having spent over 50 years in the business. The great era of training in the bank industry was pre-1986,” he says. “And [since] that period of time, we have successfully downsized our investment in the development of people. And I think now we’re facing that challenge.”

In 1968, Eggemeyer was hired by the First National Bank of Chicago while still pursuing his undergraduate degree at Northwestern University. The bank had a program that hired up to 10 undergraduates a year for an extensive training program, then put them through an MBA program — in Eggemeyer’s case, at the University of Chicago. He spent 10 years working for the bank and was never in the same position for more than two years. That experience provided him with a very broad introduction to the industry.

The U.S. economy has changed greatly since the late 1960s. Graduates from top MBA programs today have many more options to choose from if they’re interested in a career in finance, including investment banking and private equity.

“It’s much harder for banks to compete for that level of talent,” Eggemeyer says. “And I don’t think there’s anything that you can do about that, other than look harder for the talented people who are not necessarily aspiring to [work in] private equity. And they may come from less traditional backgrounds, unlike the program that I went through at the First National Bank of Chicago. I just don’t see that happening very much in banking today.”

What 2022 Holds for Community Banks

Written by

All banks need to prepare now for inevitably more change. As the year draws to a close, a quick look back provides some insightful clues about the road ahead. There are some trends that are well worth watching.

Changing Customer Habits
The coronavirus pandemic accelerated digitalization efforts and adoption. A recent PACE survey reveals that 46% of respondents changed how they interact with their bank in the last year. It is no surprise that consumers across generations continue to use new channels over in-branch banking.

  • The demand for drive-through banking doubled for young millennials.
  • The demand for phone banking tripled for Generation Z.
  • The percentage of young millennials communicating with their banks via email and social media rose by four times over the previous ten months.

Customers are more likely to visit a branch to receive advice, review their financial situation or to purchase a financial product. Many bank branches are being repurposed to reflect this new dynamic, with less emphasis on traditional over-the-counter services.

The way people pay has also changed, probably forever. Businesses encouraged digital and contactless payments, particularly for micropayments such as bus fares or paying for a coffee. In contrast, check use declined by about 44%. Forty-seven percent of community bank customers surveyed say they have mobile payments wallets, according to FIS’ PACE PULSE Survey for 2021.

Bank as a Partner
In addition to providing traditional services, many community banks elevated their position to financial partner, offering temporary services when and where they were needed. The immediate relief including increased spending limits on credit cards, payment deferral options on mortgages, personal loans based on need and penalty fee waivers for dipping below account minimums.

Since then, community banks have continued taking steps to boost financial inclusion. The unbanked and underbanked are prime candidates for new, low-cost financial services delivered through mobile channels and apps. Providing such services is likely to be well rewarded by enduring customer loyalty, but the banks need the right technologies to deliver them.

The State of the Industry
The last year has seen a flurry of M&A deals. Many recent mergers involved banks with mature brands, loyal customers and strong balance sheets. These institutions’ interest in deals reflects a need to reduce the cost of doing business and the universal need to keep pace with technology innovation.

Digital technologies and data are increasingly the baseline of success in banks of all sizes. Merging with a peer can jump-start innovation and provide a bigger footprint for new digital services.

Robotics Process Automation and Data
Although much of the discussion around digitalization has focused on customer services, digital technologies can also boost automation and efficiency. With the right approach, robotic process automation, or RPA, can automate high-volume repeatable tasks that previously required employees to perform, allowing them to be redeployed to more valuable tasks. But to maximize value, RPA should not be considered in isolation but as part of a bank’s overall data strategy.

The Road Ahead
Although the road ahead may be paved with uncertainty, these are things FIS expects to see across the industry:

Customers have rising expectations. They want banking services that are intuitive, frictionless and real time. Big Tech, not banks, are continuing to redefined the customer experience.

Crypto will become mainstream. Many consumers already hold and support cryptocurrencies as investments. Banks must prepare for digital currencies and the distributed ledger technology that supports them.

The branch must evolve. Banks need to reinvent the branch to offer a consistent smooth experience. Human services can be augmented by technologies that automate routine retail banking tasks. For example, video tellers can conduct transactions and banking services with customers, using a centrally based teller in a highly engaging real-time video/audio interaction. Banks must persevere to draw people back into their branches.

Investing in data and technology is essential. Banks must eliminate guesswork and harness data to drive better decisions, increasing engagement and building lifetime loyalty. Smart banks can use customer data to gain unique insight and align banking with life events, such as weddings, school and retirement.

The new age of competition is also one of collaboration. At a time when community banks and their customers are getting more involved with technology, every bank needs to adopt a fintech approach to banking. Few banks can achieve this alone; the right partner can help an institution keep up the latest developments in technology and focus on its core mission to attract and retain customers.

The Risk of Jaded Consumer Attitudes Toward Cybersecurity

Written by

The financial industry has increasingly been a target for cyberattacks as banks accelerated their digital transformation initiatives to maintain operations during the pandemic. While protecting against cybercrime has always been a top priority, the complexity and volume of attacks indicate that cybersecurity will remain one of the most important tasks banks face.

Consumers are feeling the impact, too. A recent CSI survey found that 85% of Americans reported cybersecurity concerns when it came to their personal confidential data. But that figure is down from 92% of Americans expressing cybersecurity concerns in a 2019 survey from CSI. The number of respondents not concerned about cybersecurity increased 7 percentage points compared to 2019, which could indicate that many consumers are becoming desensitized to cybersecurity risks.

It’s possible the size, scope and frequency of cybersecurity attacks makes these breaches appear abstract and distant to the average American. The constant media coverage could also contribute to a broader jaded attitude toward the seriousness of cybercrime risk that some consumers now hold.

When taking these factors into consideration, it is likely that a growing percentage of bank customers have fatalistic acceptance of cybersecurity breaches. As evidenced in CSI’s survey, this acceptance has resulted in lower security standards and more lenient practices in customers’ personal lives, which could ultimately increase the likelihood of their becoming victims of cyberattacks. And broader adoption of this mindset among consumers could have further adverse effects for financial institutions, making cybersecurity education a top priority for banks.

While cyberattacks may seem inevitable, there are consequences for financial institutions and consumers alike. There’s no doubt cyberattacks can cost banks money to resolve, but there are also reputational implications that can be harder to overcome. Banks that experience a cyberattack may face lower customer retention and adoption rates due to their tarnished reputation post-breach. According to CSI’s survey, nearly half of respondents (48%) strongly or somewhat agree they would leave their institution if it suffered a breach.

Additionally, consumers who are lax with cybersecurity awareness increase the risk they’ll fall victim to cyberattacks, including, but not limited to, identity theft and stolen card information. Due to the vast amount of time and resources often needed to resolve these threats, banking customers should take precautions to protect themselves. And to mitigate this risk and prevent attacks, institutions should, in turn, provide education and promote good cyber hygiene to their customers.

According to CSI’s survey, 69% of respondents claim they know what to do if their personal information is compromised. However, additional research suggests that consumers may be overconfident in this assessment. The Norton Cyber Safety Insights Report revealed that 46% of Americans don’t know what to do if their identity gets stolen, and 40% admit they don’t know how to protect themselves from cybercrime.

This data suggests an opportunity for banks to educate their customers about how to react when they notice suspicious activity and ensure that customers can easily obtain assistance if they suspect a breach. Banks that prioritize customer education have the potential to become experts in cybersecurity advice and resolution, which could expand their market reach.

As the frequency of cyberattacks continues to increase, it is vital that bank customers recognize the signs of cyber threats and react appropriately to suspicious activity. Their awareness is an important first step in the fight against cybercrime; as evidenced in the survey, awareness among consumers on the importance of cybersecurity needs to be higher than its current level. Banks should create tailored campaigns to educate their customers and provide actionable tips and insight on how to best protect themselves from attacks.

Looking ahead, banks should also embrace a layered approach to cybersecurity to strengthen their defenses, including continued customer education that reinforces the importance of cybersecurity awareness and best practices for staying secure. Banks that provide valuable education and promote cybersecurity awareness have the opportunity to increase new business through knowledge sharing while retaining current customers by building trust and maintaining strong brand reputation.

Banks Are Missing Out on America’s Most Financially Active Demographic

Written by

Despite continuous setbacks, women are more economically powerful in America than ever before. This is a prime opportunity for banks to capitalize on women’s unique banking demands, both as customers and in terms of employment.

Women were disproportionately impacted by the coronavirus pandemic, causing a further growth in gender financial disparities. Unemployment among women increased compared to men, according to a study by the UN Capital Development Fund; additionally, millions of women left the workforce to prioritize caregiving responsibilities.

The pandemic comes in the midst of what is expected to be the greatest wealth transfer in history that is expected to occur in the next decade. More than $30 trillion of wealth could be passed from baby boomers to their children and heirs. Women’s share of private wealth is expected to grow dramatically.

Additionally, women own and operate two-fifths of small to mid-sized businesses — yet 70% of them still have unserved or underserved credit needs, according to a recent IDB Group study. And more than two-thirds of female entrepreneurs are opening businesses because they see clear business opportunities, not just out of necessity.

The economic tables are turning. Women are now the primary breadwinners in the United States and now earn the lion’s share of household income overall compared to any other banking demographic. Nearly two-thirds of mothers last year were either breadwinners or for their families. More that 40% of women are working mothers whose income makes up at least half of their family’s total income.

For women in America, one size does not fit all. Financial inclusion — which extends far beyond a bank account — leads to economic empowerment. But “bank accounts can be powerful tools in the hands of women who are determined to take more control over their lives,” says Greta Bull, former CEO of the Consultative Group to Assist the Poor. So, let’s start there.

How Banks Can Capitalize
How well do the current banking conditions look, given that women control of more dollars than ever before? As the new default users of financial products and services, women are making spending decisions — lots of them.

It’s not enough for banks to use targeted marketing that features bright-colored content and fancy font types. Those and other stereotypically feminine marketing strategies are never going to work, especially when it comes to banking.

The problem isn’t that women aren’t being exposed to attempts from banks to acquire new customers. From my personal experience navigating the banking industry as a female customer, I can say it’s actually very much the opposite. I am constantly bombarded by the same cookie-cutter attempts to draw my attention to the same untailored banking products or services over and over again.

The problem is that banks aren’t offering anything that meets the needs and preferences of the female demographic. They need to systematically rethink their banking practices and how they address the users of their banking services.

It’s estimated that more than 3 million women are seeking restart opportunities. Several consultancies focused on restarts — such as Après, iRelaunch, and reacHIRE — have launched in the last few years. These companies, and others, help financial institutions and other organizations develop restart channels within their inclusion programs and help identify candidates. Banks are also launching financial products and services tailored to the specific needs of women entrepreneurs, as they increase the quality of their portfolio while having a social impact.

“What [these banks] offer ranges from women-targeted loans for working capital and investments to credit cards, housing loans, programmed savings, checking accounts and insurance products. This offering is further complemented by non-financial services including networking events for women entrepreneurs and training programs,” the IDB Invest wrote in a piece about how banks can attract more female customers. “Given women’s comparatively better savings behavior, demonstrated loyalty to banks and lower credit risk, many banks aspire to be the financial institution of choice for women in the region.”

These banks are on the right track. Women won’t enjoy doing business with any financial institution that considers men their default user. It is time to change the dynamic between women and banks. It is urgent that banks act on this as soon as possible if they desire the greatest return from investing in diversity and inclusion programs. They need to embed actionable plans that create more financial inclusion for women as part of their long-term business strategies.

A ‘Call to Action’ mindset will drive diversity within firms to showcase more tech innovations and increase productivity. The more that women work, the more economies grow. Simply put, women’s economic equality is not only right — it’s good for business.

Four Ways Banks Can Cater to Generational Trends

Written by

As earning power among millennials and Generation Z is expected to grow, banks need to develop strategies for drawing customers from these younger cohorts while also continuing to serve their existing customer base.

But serving these younger groups isn’t just about frictionless, technology-enabled offerings. On a deeper level, banks need to understand the shifting perspective these age groups have around money, debt and investing, as well as the importance of institutional transparency and alignment with the customer’s social values. Millennials, for instance, may feel a sense of disillusionment when it comes to traditional financial institutions, given that many members of this generation — born between 1981 and 1996, according to Pew Research Center — entered the workforce during the Great Recession. Banks need to understand how such experiences influence customer expectations.

This will be especially important for banks; Gen Z — members of which were born between 1997 and 2012 — is on track to surpass millennials in spending power by 2031, according to a report from Bank of America Global Research. Here are four ways banks can cater to newer generational trends and maintain a diverse customer base spanning a variety of age groups.

1. Understand the customer base. In order to provide a range of services that effectively target various demographics, financial institutions first need to understand the different segments of their customer base. Banks should use data to map out a complete picture of the demographics they serve, and then think about how to build products that address the varying needs of those groups.

Some millennials, for instance, prioritize spending on experiences over possessions compared to other generations. Another demographic difference is that 42% of millennials own homes at age 30, versus 48% of Generation X and 51% of baby boomers at the same age, according to Bloomberg. Banks need to factor these distinctions into their offerings so they can continue serving customers who want to go into a branch and engage with a teller, while developing tech-driven solutions that make digital interactions seamless and intuitive. But banks can’t determine which solutions to prioritize until they have a firm grasp on how their customer base breaks down.

2. Understand the shifting approach to money. Younger generations are keeping less cash on hand, opting to keep their funds in platforms such as Venmo and PayPal for peer-to-peer transfers, investing in Bitcoin and other cryptocurrencies and other savings and investment apps. All of these digital options are changing the way people think about the concepts of money and investing.

Legacy institutions are paying attention. Bank of New York Mellon Corp. announced in February a new digital assets unit “that will accelerate the development of solutions and capabilities to help clients address growing and evolving needs related to the growth of digital assets, including cryptocurrencies.”

Financial institutions more broadly will need to evaluate what these changing attitudes toward money will mean for their services, offerings and the way they communicate with customers.

3. Be strategic about customer-facing technology. The way many fintech companies use technology to help customers automatically save money, assess whether they are on track to hit their financial goals or know when their balance is lower than usual has underscored the fact that many traditional banks are behind the curve when it comes to using technology to its full potential. Institutions should be particularly aggressive about exploring ways technology can customize offerings for each customer.

Companies should think strategically about which tech functions will be a competitive asset in the marketplace. Many banks have an artificial intelligence-powered chatbot, for instance, to respond to customer questions without involving a live customer service agent. But that doesn’t mean all those chatbots provide a good customer experience; plenty of banks likely implemented them simply because they saw their competitors doing the same. Leadership teams should think holistically about the best ways to engage with customers when rolling out new technologies.

4. Assess when it makes sense to partner. Banks need to determine whether the current state of their financial stack allows them to partner with fintechs, and should assess scenarios where it might make sense — financially and strategically — to enter into such partnerships. The specialization of fintech companies means they can often put greater resources into streamlining and perfecting a specific function, which can greatly enhance the customer experience if a bank can adopt that function.

The relationship between a bank and fintech can also be symbiotic: fintech companies can benefit from having a trusted bank partner use its expertise to navigate a highly regulated environment.

Offering financial products and services that meet the needs of today’s younger generations is an ever-evolving effort, especially as companies in other sectors outside of banking raise the bar for expectations around tailored products and services. A focus on the key areas outlined above can help banks in their efforts to win these customers over.