The Opposite of Blissfully Unaware

There’s been an increasingly common refrain from bank executives as the United States moves into the second half of 2022: Risk and uncertainty are increasing.

For now, things are good: Credit quality is strong, consumer spending is robust and loan pipelines are healthy. But all that could change.

The president and chief operating officer of The Goldman Sachs Group, John Waldron, called it “among — if not the most —complex, dynamic environments” he’s seen in his career. And Jamie Dimon, chair and CEO of JPMorgan Chase & Co., changed his economic forecast from “big storm clouds” on the horizon to “a hurricane” in remarks he gave on June 1. While he doesn’t know if the impact will be a “minor one or Superstorm Sandy,” the bank is “bracing” itself and planning to be “very conservative” with its balance sheet.

Bankers are also pulling forward their expectations of when the next recession will come, according to a sentiment survey conducted at the end of May by the investment bank Hovde Group. In the first survey, conducted at the end of March, about 9% of executives expected a recession by the end of 2022 and 26.6% expected a recession by the end of June 2023. Sixty days later, nearly 23% of expect a recession by the end of 2022 and almost 51% expect one by the end of June 2023.

“More than 75% of the [regional and community bank management teams] we surveyed [believe] we will be in a recession in the next 12 months,” wrote lead analyst Brett Rabatin.

“[B]anks face downside risks from inflation or slower-than-expected economic growth,” the Federal Deposit Insurance Corp. wrote in its 2022 Risk Review. Higher inflation could squeeze borrowers and compromise credit quality; it could also increase interest rate risk in bank security portfolios.

Risk is everywhere, and it is rising. This only adds to the urgency surrounding the topics that we’ll discuss at Bank Director’s Bank Audit & Risk Committees Conference, taking place June 13 through 15 at the Marriott Magnificent Mile in Chicago. We’ll explore issues such as the top risks facing banks over the next 18 months, how institutions can take advantage of opportunities while leveraging an environmental, social and governance framework, and how executives can balance loan growth and credit quality. We’ll also look at strategic and operational risk and opportunities for boards.

In that way, the uncertainty we are experiencing now is really a gift of foresight. Already, there are signs that executives are responding to the darkening outlook. Despite improved credit quality across the industry, provision expenses in the first quarter of 2022 swung more than $19.7 billion year over year, from a negative $14.5 billion during last year’s first quarter to a positive $5.2 billion this quarter, according to the Federal Deposit Insurance Corp.’s quarterly banking profile. It is impossible to know if, and when, the economy will tip into a recession, but it is possible to prepare for a bad outcome by increasing provisions and allowances.

“It’s the opposite of ‘blissfully unaware,’” writes Morgan Housel, a partner at the investment firm The Collaborative Fund, in a May 25 essay. “Uncertainty hasn’t gone up this year; complacency has come down. People are more aware that the future could go [in any direction], that what’s prosperous today can evaporate tomorrow, and that predictions that seemed assured a few months ago can look crazy today. That’s always been the case. But now we’re keenly aware of it.”

3 Reasons to Add SBA Lending

There were nearly 32 million small businesses in the United States at the end of the third quarter in 2020, according to the Small Business Administration.

That means 99% of all businesses in this country are small businesses, which is defined by the agency as 500 employees or fewer. They employ nearly 50% of all private sector employees and account for 65% of net new jobs between 2000 and 2019.

Many of the nation’s newest businesses are concentrated in industries like food and restaurant, retail, business services, healthy, beauty and fitness, and resident and commercial services. This is a potentially huge opportunity for your bank, if it’s ready and equipped for when these entrepreneurs come to you for financing. But if your bank is not prepared, it may be leaving serious money on the table that could otherwise provide a steady stream of valuable loan income.

That’s because these are the ideal customers for a SBA loan. If that’s not something your bank offers yet, here are three reasons to consider adding SBA lending to the loan portfolio this year.

1. New Avenue for Long-Term Customers
Small business customers often provide the longest-term value to their banks, both in terms of fee income generated and in dollars deposited. But not having the right loan solution to help new businesses launch or scale means missing out on a significant and lucrative wave of entrepreneurial activity. That’s where SBA lending comes in.

SBA loans provide the right solution to small businesses, at the right time. It’s an ideal conversation starter and tool for your bank team to turn to again and again and a way to kick off relationships with businesses that, in the long run, could bring your bank big returns. It’s also a great option to provide to current small business customers who may only have a deposit relationship.

2. Fee Income With Little Hassle
In addition to deeper relationships with your customers, SBA lending is an avenue to grow fee income through the opportunity for businesses to refinance their existing SBA loans with your bank. It broadens your portfolio with very little hassle.

And when banks choose to outsource their SBA lending, they not only get the benefit of fee income, but incur no overhead, start up or staffing costs. The SBA lender service provider acts as the go-between for the bank and the SBA, and they handle closing and servicing.

3. Add Value, Subtract Risk
SBA loans can add value to any bank, both in income and in relationship building. In addition, the SBA guarantees 75% to 85% of each loan, which can then be sold on the secondary market for additional revenue.

As with any product addition, your bank is probably conscientious of the risks. But when you offer the option to refinance SBA loans, your bank quickly reduces exposure to any one borrower. With the government’s guarantee of a significant portion, banks have lots to gain but little to lose.

Unlocking Banking as a Service for Business Customers

Banking as a service, or BaaS, has become one of the most important strategic imperatives for chief executives across all industries, including banking, technology, manufacturing and retail.

Retail and business customers want integrated experiences in their daily lives, including seamlessly embedded financial experiences into everyday experiences. Paying for a rideshare from an app, financing home improvements when accepting a contractor quote, funding supplier invoices via an accounting package and offering cash management services to fintechs — these are just some examples of how BaaS enables any business to develop new and exciting propositions to customers, with the relevant financial services embedded into the process. The market for embedded finance is expected to reach $7 trillion by 2030, according to the Next-Gen Commercial Banking Tracker, a PYMNTS and FISPAN collaboration. Banks that act fast and secure priority customer context will experience the greatest upside.

Both banks and potential BaaS distributors, such as technology companies, should be looking for ways to capitalize on BaaS opportunities for small and medium-sized enterprises and businesses (SMEs). According to research from Accenture, 25% of all SME banking revenue is projected to shift to embedded channels by 2025. SME customers are looking for integrated financial experiences within relevant points of context.

SMEs need a more convenient, transparent method to apply for a loan, given that business owners are often discouraged from exploring financing opportunities. In 2021, 35% of SMEs in the United States needed financing but did not apply for a loan according to the 2022 Report on Employer Firms Based on the Small Business Credit Survey. According to the Fed, SMEs shied away from traditional lending due to the difficult application process, long waits for credit decisions, high interest rates and unfavorable repayment terms, and instead used personal funds, cut staff, reduced hours, and downsized operations.

And while there is unmet demand from SMEs, there is also excess supply. Over the last few years, the loan-to-deposit ratio at U.S. banks fell from 80% to 63%, the Federal Reserve wrote in August 2021. Banks need loan growth to drive profits. Embedding financial services for SME lending is not only important for retaining and growing customer relationships, but also critical to growing and diversifying loan portfolios. The time for banks to act is now, given the current inflection point: BaaS for SMEs is projected to see four-times growth compared to retail and corporate BaaS, according to Finastra’s Banking as a Service: Global Outlook 2022 report.

How to Succeed in Banking as a Service for SMEs
There are three key steps that any institution must take to succeed in BaaS: Understand what use cases will deliver the most value to their customers, select monetization models that deliver capabilities and enable profits and be clear on what is required to take a BaaS solution to market, including partnerships that accelerate delivery.

BaaS providers and distributors should focus on the right use case in their market. Banks and technology companies can drive customer value by embedding loan and credit offers on business management platforms. Customers will benefit from the increased convenience, better terms and shorter application times because the digitized process automates data entry. Banks can acquire customers outside their traditional footprint and reduce both operational costs and risks by accessing financial data. And technology companies can gain a competitive advantage by adding new features valued by their customers.

To enable the right use case, both distributors and providers must also select the right partners — those with the best capabilities that drive value to their customers. For example, a recent collaboration between Finastra and Microsoft allows businesses that use Microsoft Dynamics to access financing offers on the platform.

Banks will also want to focus on white labeling front‑to-back customer journeys and securing access to a marketplace. In BaaS, a marketplace model increases competition and benefits for all providers. Providers should focus on sector‑specific products and services, enhancing data and analytics to enable better risk decisions and specialized digital solutions.

But one thing is clear: Going forward, embedded finance will be a significant opportunity for banks that embrace it.

Why There Is No ‘Back to Normal’ for Banks

In the past few weeks, I’ve started to go back into the office more frequently. Despite any inconveniences, it’s refreshing and invigorating to see colleagues and clients in person again. It’s clear that most of us are ready for things to go back to normal.

Except, they most likely won’t.

Last year was largely favorable for banks, with industry ETFs outperforming the broader market and rebounding from 2020’s contractions. Larger banks with diversified revenue sources — including mortgage lending and banks with active capital markets or wealth management businesses — did particularly well.

Now, with rising inflation and a rapidly shifting geopolitical landscape, there may be different winners and losers. But after two years of the global pandemic, we have learned what the future of work could look like, and how much the environment will continue to evolve. The recent challenges in Eastern Europe remind us that ongoing change is the only certainty.

In PwC’s latest look at the banking environment, Next In Banking and Capital Markets, we see investors being far more interested in growth than in saving a few dollars. And we see potential for that growth across the banking industry — regardless of size, geography or customer segment. In particular, we see five opportunities for institutions that focus on digital transformation, build trust — with a particular emphasis on environmental, social and governance (ESG) issues, win deals, review and respond to regulation, and adopt cloud technology.

Digital Transformation: My colleagues researched how consumer behavior has changed over the past two years. We found that the pandemic significantly accelerated the trend toward digital banking — and many banks weren’t prepared. The implications go far beyond adding a peer-to-peer payment tool to your consumer app. In fact, nearly every bank should be thinking about developing a growth strategy based on a customer focus that is much sharper than “They live near our branches” or “Businesses need access to capital.” Digital transformation is here to stay; aligning to a disciplined growth strategy can help make technology investments successful.

Environmental, Social and Governance (ESG) Frameworks: Community reinvestment, diversity initiatives and strong governance models are not new issues for banks. In fact, the industry has been laser-focused on building stakeholder trust since the 2008 financial crisis. But with a solid baseline of social and governance investments, banks have now shifted their focus to helping define and deliver commitments around the environment, namely climate change. Banking industry leaders are looking for more effective ways to integrate climate risk management throughout their operations. But the data we use to report on ESG issues is very different from typical financial metrics, and most firms struggle to tell their story. Leading firms can help enhance transparency with trustworthy data, while developing strategies to drive their climate agenda.

Deals: The industry experienced historic rates of bank mergers and acquisitions last year — everything from some foreign banks stepping away from the U.S. market, to regional bank consolidation, to banks of all sizes adding specialty businesses. But with valuations at current levels, corporate development teams should get far pickier to make the numbers work. Increasingly, this may require a greater emphasis on creating growth than on finding cost synergies. To do that, banks and their leaders need to have a very clear idea of whom they’re serving, and why.

Regulation: Evolving concerns over the global economy have resulted in a different approach to regulation. While this does not represent a 180° turn from where we had been, it is clear that banks have been attracting new attention from regulators and legislators, especially with respect to consumer protection, cybersecurity, climate risk, taxation and digital assets. Banks should be particularly diligent about control effectiveness, as well as identifying effective ways to collect, analyze and report data. But regulation isn’t just a matter of defense: The more banks understand and manage risk, the more they can take advantage of “new economy” opportunities like mitigating climate change and digital assets.

Cloud: Virtually every bank has moved some of its work to cloud-based systems. But with definitions of “cloud” as imprecise as they are, it is no wonder that many executives have not yet seen the value they had hoped for. If you set out to consolidate data centers by moving some background processing to the cloud, don’t expect major rewards. But emerging cloud capabilities can, for example, help banks improve the customer experience by being more agile when responding to client demands — and this could be a game changer. Today’s cloud technology can help institutions rethink their core business systems to be more efficient. It can even help solve new problems by more efficiently integrating services from a third party. This year, we’re likely to see some banks pull farther ahead of their peers — perhaps, even leapfrogging competitors — by making strategic choices about how to use cloud technology to jump-start digital transformation, rather than just as a way to manage costs.

Last year, I made the case that banks needed to stay agile, given economic uncertainty and the rapid pace of change. This is still the case. But bankers and boards should also keep their eyes on the prize: Whether you are a community bank, a large regional institution or a global powerhouse, you will have plenty of chances to grow this year. The five opportunities described above can offer significant value to banks that adopt them strategically.

How to Capitalize on Sustainability Growth

The automotive sector is a vital part of the US economy, accounting for 3% of the country’s gross domestic product. But the increasing demand for electric vehicles (EVs) and evolving battery and fuel cell technology means it is experiencing incredible disruption. These ripple effects will be felt across the entire automotive value chain.

Three years ago, EVs represented just 2% of all new car sales in the U.S. A year later, it doubled to 4%. In 2021, it doubled again to 8%; this year, it’s forecast to double yet again to 16%. We can only expect this trend to continue. For example, California regulators unveiled a proposal in April to ban the sale of all new vehicles powered by gasoline by 2035, as the state pushes for more EV sales in the next four years.

How will these transition risks — which includes changing consumer demand, policy and technological disruption — impact the creditworthiness of the 18,000 new-car dealerships, 140,000 used-car dealerships and 234,700 auto repair and maintenance centers across the country? What are the implications for the banks that lend to them?

Some of the world’s largest automotive brands have published bold commitments that will hasten their transformation and the industry’s shift. Last year, Ford Motor Co. announced that it expects 40% to 50% of its global vehicle volume to be fully electric by 2030, while General Motors Co. plans to exclusively offer electric vehicles by 2035.

But these commitments won’t just impact the Fortune 500 companies that are making them – businesses of all sizes, across the automotive value chain, will be affected. To stay in business, these firms will need to update their supply chains and distribution models, invest in new technologies, processes, people and products. In some cases, they may even potentially need to build an entirely new brand.

Banks will have an important role to play in funding much of this transition.

The pool of potential borrowers is getting bigger. Opportunities for banks don’t just exist in being a partner for helping automotive businesses transition — there is also a growing number of new automotive businesses and business models designed for the net-zero future that will require funding as they scale. Tesla isn’t even two decades old but last year, it produced more than 75% of U.S. all-electric cars. With growing consumer demand for EVs, the need for more EV charging stations is also rising. The global market for EV charging stations is estimated to grow from $17.6 billion in 2021 to $111.9 billion in 2028, according to Fortune Business Insights.

Electrify America, ChargePoint, and EVgo are brands that didn’t exist 15 years ago because they didn’t need to. How many more businesses will be born in the next five, 10 or 15 years, which will need loans and investments to help them scale? This is an opportunity worth billions a year for banks — if they have the foresight to anticipate what’s coming and take a forward-looking view.

The Smaller the Detail, the Greater the Value
Currently, most climate analyses work at a broad sector level, looking no deeper than the sub-sector level. This provides some indication of a bank’s exposure, but such a broad view lacks the insight needed to really understand the impact and trends at the individual borrower level.

To get a true grasp on this opportunity, banks should look for solutions that include financial forecasts and credit metrics at the borrower level across several climate scenarios and time horizons. Institutions can directly input these outputs into their existing risk rating models to drive a climate-adjusted risk rating and apply them across the full credit lifecycle, from origination and ongoing monitoring to conducting portfolio level scenario analysis.

Throughout the pandemic, banks enjoyed a unique opportunity to rebuild public trust and goodwill that was lost during the financial crisis 12 years earlier. Climate change is another chance, given that sustainability will be the growth story of the 21st century. With the right technological investments, strategic partnerships and data, banks have an opportunity to be one of the protagonists.

OakNorth will be diving deep into the challenges and issues facing the automotive value chain in an upcoming industry webinar on June 16, 2022, at 1 p.m. EST. Register now at https://hubs.li/Q01bPN1v0.

The Cannabis Banking Opportunity

Legalized cannabis continues to gain momentum across the United States, but banks may be left out of the opportunity if they lack a strategy to service the space. As this demand grows, banks can leverage their risk and compliance teams to build new revenue opportunities. In this video, Kevin Hart, the founder and CEO of Green Check Verified, explains how banks can formulate a cannabis banking program that fits into their overall strategy and risk management appetite.

  • Outlook for Future Growth
  • Direct and Indirect Cannabis Banking
  • Crafting a Scalable Program

Lessons From the Best Banks

The strategies and areas of excellence found in the best banks identified by Bank Director in its 2022 RankingBanking report, sponsored by Crowe LLP, vary greatly. But all top performers have a few things in common, including a long-term focus on strategic execution. Crowe Partner Kara Baldwin, who leads the firm’s national financial services audit practice, shares her insights on what the best banks have in common, from technology adoption to culture.

  • The Main Driver of Strong Performance
  • Growth Predictions
  • Setting Technological Priorities
  • Building a Strong Culture

Uncover more about the nation’s best banks in the 2022 RankingBanking study, which identified the top performers by asset size based on financial performance; the ranking also considered innovation, growth, leadership and corporate governance.

How One Midsized Regional Bank Separates Itself From the Competition

When Ira Robbins took over in 2018 as CEO of Valley National Bancorp, one of his highest priorities was to broaden the bank’s strategic focus into new product and customer segments where it could be a meaningful player.

“When we started changing the organization’s direction five years ago, we said we weren’t going to be everything to everyone,” Robbins says. “We were going to be everything to someone and understand who that someone was and what the overall relationship looked like.”

Diversification and differentiation is a two-pronged strategy that should be on the minds of all bank CEOs and their boards of directors today. Continued pressure on the industry’s net interest margin is a threat to the banking industry’s long-term profitability that’s not going to ease anytime soon. Unless banks are able to develop new sources of revenue to counteract that pressure, “We’re left to think about cost reductions as opposed to building things because as the revenue side of the balance sheet comes down, all you’re able to do is focus on contracting expenses,” Robbins says.

And cutting costs is never as much fun as building a new business.

Robbins offered his views on the importance of diversification and differentiation to Bank Director Editor-at-Large Jack Milligan in advance of a panel discussion session Monday at Bank Director’s Acquire or Be Acquired Conference. The conference runs Jan. 30 to Feb. 1, 2022, at the JW Marriott Desert Ridge Resort and Spa in Phoenix.

The core niche at Valley National, a $41 billion asset regional bank headquartered in Wayne, New Jersey, is commercial real estate. “That’s who we are,” says Robbins. “And I think as an organization, most of the balance sheets that we understand are from a relationship perspective. People aren’t coming to us because we’re the cheapest in town. We have an ability to execute unlike any other organization that’s embedded in who we are from a credit perspective.” In other words, borrowers go to Valley National because they know their deals will get done.

Robbins wanted to replicate this approach in other customer segments, and in recent years the bank has diversified into auto lending, as well as banking for homeowners’ associations and cannabis businesses. But moving into a new customer segment or product line isn’t enough. Banks also have to find ways of differentiating themselves from their competitors in that niche. Increasingly, that is through the customer experience — with technology as the point of the spear.

A good example is Valley National’s push into cannabis banking, an initiative that began about three years ago. The bank spent the first year and a half studying the market from a strategic and operational risk perspective before it finally launched a treasury platform solution focused on marijuana-related businesses including dispensaries, cultivators, wholesalers and testing labs. The program is currently available in 13 states, and Valley National worked closely with several regtech companies to understand — from “seed to sale,” as Robbins puts it — the regulatory compliance requirements in each jurisdiction.

“We’ve been in the business for about a year and a half,” Robbins says. “It’s getting to be a decent-sized business for us. And it’s one that we think aligns with our risk appetite. It’s an opportunity in an industry that really isn’t being served today.”

But merely entering an underserved market doesn’t guarantee success if you’re not providing a differentiated customer experience. The cannabis business tends to be cash intensive. Producers and sellers need ways to get that cash to their bank, so Valley National set up a separate armored car service to handle collection. The bank also developed a mobile app called “ValleyPay” that is linked to a Valley National debit card and can be used to make purchases in a dispensary or retail store. “It’s the first ability to have a digital payment come in,” Robbins says. “And we’re the only bank in the country that’s beginning to offer it, so that’s pretty neat.”

Providing a differentiated customer experience is very much at the heart of Valley National’s diversification effort.

“To be honest with you, it’s…understanding what the customer experience looks like,” Robbins says. “What was the customer challenge? And what was the experience that we wanted to create?” While other banks are in the cannabis space as well, “ours is a specific niche [that is] focused on an experience that really isn’t being delivered.”

[You can read more about Valley National Bancorp and cannabis banking in the Q3 2021 issue of Bank Director magazine, available to subscribers.]

Bank Profitability to Rebound from Pandemic

The Covid-19 pandemic has been a defining experience for the U.S. banking industry — one that carries with it justifiable pride.

That’s the view of Thomas Michaud, CEO of investment banking firm Keefe Bruyette & Woods, who believes the banking industry deserves high marks for its performance during the pandemic. This is in sharp contrast to the global financial crisis, when banks were largely seen as part of the problem.

“Here, they were absolutely part of the solution,” Michaud says. “The way in which they offered remote access to their customers; the way that the government chose to use banks to deliver the Paycheck Protection Program funds and then administer them via the Small Business Administration is going to go down as one of the critical public-private partnership successes during a crisis.”

Michaud will provide his outlook for the banking industry in 2022 and beyond during the opening presentation at Bank Director’s Acquire or Be Acquired Conference. The conference runs Jan. 30 to Feb. 1, 2022, at the JW Marriott Desert Ridge Resort and Spa in Phoenix.

Unfortunately, the pandemic did have a negative impact on the industry’s profitability. U.S. gross domestic product plummeted 32.9% in the second quarter of 2020 as most of the nation went into lockdown mode, only to rebound 33.8% in the following quarter. Quarterly GDP has been moderately positive since then, and Michaud says the industry has recaptured a lot of its pre-pandemic profitability — but not all of it. “The industry pre-Covid was already running into a headwind,” he says. “There was a period where there was difficulty growing revenues, and it felt like earnings were stalling out.”

And then the pandemic hit. The combination of a highly accommodative monetary policy by the Federal Reserve Board, which cut interest rates while also pumping vast amounts of liquidity into the financial system, along with the CARES Act, which provided $2.2 trillion in stimulus payments to businesses and individuals, put the banking industry at a disadvantage. Michaud says the excess liquidity and de facto competition from the PPP helped drive down the industry’s net interest margin and brought revenue growth nearly to a halt.

Now for the good news. Michaud is confident that the industry’s profitability will rebound in 2022, and he points to three “inflection points” that should help drive its recovery. For starters, he expects loan demand to grow as government programs run off and the economy continues to expand. “The economy is going to keep growing and the pace of this recovery is a key part of driving loan demand,” he says.

Michaud also looks for industry NIMs to improve as the Federal Reserve tightens its monetary policy. The central bank has already begun to reverse its vast bond buying program, which was intended to inject liquidity into the economy. And most economists expect the Fed to begin raising interest rates this year, which currently hover around zero percent.

A third factor is Michaud’s anticipation that many banks will begin putting the excess deposits sitting on their balance sheets to more productive use. Prior to the pandemic, that excess funding averaged about 2.5%, Michaud says. Now it’s closer to 10%. “And I remember talking to CEOs at the beginning of Covid and they said, ‘Well, we think this cash is probably going to be temporary. We’re not brave enough to invest it yet,’” he says. At the time, many bank management teams felt the most prudent choice from a risk management perspective was to preserve that excess liquidity in case the economy worsened.

“Lo and behold, the growth in liquidity and deposits has kept coming,” Michaud says. “And so the banks are feeling more comfortable investing those proceeds, and it’s happening at a time when we’re likely to get some interest rate improvement.”

Add all of this up and Michaud expects to see an improvement in bank return on assets this year and into 2023. Banks should also see an increase in their returns on tangible common equity — although perhaps not to pre-pandemic levels. “We started the Covid period with a lot of excess capital and now we’ve only built it more,” he says.

Still, Michaud believes the industry will return to positive operating leverage — when revenues are growing at a faster rate than expenses — in 2022. “We also think it’s likely that bank earnings estimates are too low, and usually rising earnings estimates are good for bank stocks,” he says.

In other words, better days are ahead for the banking industry.

What Drives Success in Banking?

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.”