Former Bank Disruptor, Turned Ally, Talks Innovation

A career that began with upending traditional banks has given Alexander Sion perspective on what they can do to accelerate growth and innovation.

Sion is the director and co-head of Citibank’s D10X, which is part of Citigroup’s global consumer bank. Prior to that, he oversaw mobile banking and mobile channel governance for the consumer and community banking group as general manager of mobile at JPMorgan Chase & Co.

But before he worked at banks, he attacked them.

Sion co-founded “neobank” Moven in 2011 to focus on the financial wellness of consumers. The mobile bank disruptor has since become a vendor; in March, the company announced it would close retail accounts and pivot completely to enterprise software.

Bank Director recently spoke with Sion about how banks can create new models that generate growth, even as they face disruption and challenges. Below is a transcript that has been edited for clarity and length.

BD: How should banks think about innovation as it relates to their products, services, culture and infrastructure?

AS: Citi Ventures focuses on growth within a dynamic environment of change. It’s very difficult to achieve, and it’s very different from core growth with existing customers. But all innovation, particularly at incumbent firms, has to stem from a desire to grow.

Banks that struggle with growth, or even getting excited about innovation, need to ask themselves two sets of questions. No. 1: Do you have a deep desire to grow? Do you have aggressive ambitions to grow? No. 2: Is that growth going to be coming from new spaces, or spaces that are being disrupted? Or are you considering growth from existing customers?

If a bank is focused on existing customers, retention and efficiencies, it’s going to be hard to get excited about innovation.

BD: What’s the difference for banks between investing in tech and merely consuming it?

AS: They’re very different. If your bank is focused on growing within its core business, then you would lean more towards consuming tech. You’re building off of something that already exists and trying to make it better. You’ve got existing customers on existing platforms and you’re looking for more efficient ways to serve them, retain them or grow share.

If you’re interested in new growth and exploration — new segments, new products, new distribution channels — you might be more inclined to partner in those spaces. You have less to build from, less to leverage, and you’re naturally trying to figure things out, versus trying to optimize things that already exist.

BD: What kind of a talent or skills does a bank need for these types of endeavors? Do people with these skills already work at the bank?

AS: Existing bank employees know the product, they know the customer. At Citi, what we do at D10X and Citi Ventures is to try to expose bank employees to a different way of thinking, expand their mindset to possibilities outside the constraints of what or where the core model leans towards and think from a customer-centric view versus a product-centric view of the world.

The dynamics of customer behaviors are changing so much. There’s so much redefinition of how customers think about money, payments and their financial lives. Creating a more customer-centric view in existing employees that already have the deep knowledge and expertise of not only the product, but how the bank’s customers have evolved — that’s a very powerful combination.

BD: Why should a bank think about new markets or new customers if they found great success with their core?

AS: If most banks in the United States were honest with themselves, I think many would admit that they’re struggling with growth. America is a very banked place. The banking environment hasn’t changed all that much, and most banks are established. Their focus has been on existing customers, efficiency of the model and maybe deepening within that customer base.

But now, fintechs coming in. These commerce, payments and technology players are doing two things. No. 1: They are legitimately opening up new markets of growth and segments that weren’t reachable, or the traditional model wasn’t really addressing. No. 2, and maybe more important, is they are widening and changing the perspective on customer behavior. I don’t think any bank is immune from those two trajectories; your bank can be defensive or offensive to those two angles, but you’ve got to be one or the other.

BD: What are some lessons you or Citi has learned from its testing, refining and launching new solutions?

AS: Venture incubation has to be about learning. There’s a saying that every startup is a product, service or idea in search of a business model. The challenge that every existing incumbent bank will have is that we have existing business models.

Banks need to be able to test ideas very rapidly. It’s easy to test an idea and rapidly iterate when you’re in search of a business model. It’s much more difficult to test new ideas in an already-operating business model. A typical idea is debated internally, watered down significantly and will go through the wringer before the first customer gets to click on anything. In this kind of world, that’s a difficult strategy to win on.

Making Strategic Decisions With The Help of Data Analytics

Banks capture a variety of data about their customers, loans and deposits that they can harness in visually effective ways to support strategic decision-making. But to do this successfully, they must have leadership commit to provide the funding and human resources to improve data collection and management.

Bad data or poor data quality costs U.S. businesses about $3 trillion annually, and breeds bad decisions made from having data that is just incorrect, unclean, and ungoverned,” said Ollie East, consulting director of advanced analytics and data engineering at Baker Tilly.

Companies generally have two types of data: structured and unstructured. Structured data is information that can be organized in tables or a database: customer names, age, loan balances and interest rates. Unstructured data is information that exists in written reports, online customer reviews or notes from sales people. It does not fit into a standard database and is not easily relatable to other data.

If data analytics is the engine, then data is the gasoline that powers it,” East said. “Everything starts with data management: getting and cleaning data and putting it into a format where it can be used, governed, controlled and treated as an asset.”

A maturity model for data analytics progresses from descriptive to prescriptive uses for the information. The descriptive level answers questions like, “What happened?” The diagnostic level answers, “Why did it happen?” The predictive level looks at “What will happen?” Finally, at the prescriptive level, a company can apply artificial intelligence, machine learning or robotics on large sets of structured and unstructured data to answer “How can I make it happen?”

Existing cloud-based computing technology is inexpensive. Companies can import basic data and overlay a Tableau or similar dashboard that creates a compelling visual representation of data easily understood by different management teams. Sean Statz, senior manager of financial services, noted that data visualization tools like Tableau allows banks to create practical visual insights into their loan and deposit portfolios, which in turn will support specific strategic initiatives.

To do a loan portfolio analysis, a simple extraction of a bank’s data at a point in time can generate a variety of visual displays that demonstrate the credit and concentration risks. Repetitive reporting allows the bank to analyze trends like the distribution of credit risk among different time periods and identify new pricing strategies that may be appropriate. Tableau can create a heat map of loans by balance, so bankers can quickly observe the interest rates on different loans. Another view could display loss rates by risk rating, which can help a bank determine the real return or actual yield it is earning on its loans.

Statz said sophisticated analytics of deposit characteristics will help banks understand customer demographics, and adjust their strategies to grow and retain different types of customers. Bank can use this information in their branch opening and closing decisions, or prepare for CD maturities with questions like, “When CDs roll over, what products will we offer? If we retain all or only half of CD customers, but at higher interest rates, how does that affect cost of funds and budget planning?”

Data analytics can help banks undergo more sophisticated key performance indicator comparisons with their peers, not just at an aggregate national or statewide level, but even a more narrow comparison into specific asset sizes.

Banks face many challenges in effective data analytics, including tracking the right data, storing and extracting it, validating it and assigning resources to it correctly. But the biggest challenge banks need to tackle is determining if they have the necessary data to tackle specific problems. For example, the Financial Accounting Standards Board’s new current expected credit loss (CECL) standards require banks to report lifetime credit losses. If banks do not already track the credit quality characteristics they will need for CECL, they need to start capturing that data now.

Banks often store data on different systems: residential real estate loans on one system, commercial loans on another. This makes extracting the data in a way that supports data visualization like Tableau difficult. They must also validate the data for accuracy and identify any gaps in either data collection or inputting through the system. They also need to ensure they have the human resources and tools to extract, scrub and manipulate essential data to build out a meaningful analytic based on each data type.

The key to any successful data analytics undertaking is a leadership team that is committed to developing this data maturity mindset, whether internally or with help from a third party.

The Choice Facing Every Bank

Has your executive team been approached by leaders of another bank interested in an acquisition? It likely means your bank is doing something right. But, now what?

Many CEOs’ visceral response to being asked to consider a deal is to say, “Thanks, but no thanks” and continue running the bank. While this may be the correct response, this overture is a chance for leadership to objectively revisit the bank’s strategic alternatives to determine the best option for its shareholders and other stakeholders.

Stay the Course
Boards must objectively identify where their bank is in its life cycle — be it turn-around, growth or stability — and what will be needed to successfully compete at the next stage. Ultimately, they must determine if the bank can drive more long-term shareholder value staying independent than it could with a partner. They must also weigh the risk of remaining independent against the potential reward.

Directors should prepare five-year projections, ideally with the help of a financial advisor, that assume the bank continues to operate independently. They should forecast growth and profitability that reasonably reflect current marketplace dynamics and company strategy, and are generally consistent with past performance. Consider opportunities to lower funding costs, consolidate or sell unprofitable branches, add lines of business, or achieve economies of scale through acquisitions or organic growth. However, be cognizant of market headwinds: low interest rate environment, slower projected loan growth, increasing cost of technology and cybersecurity, regulatory burden, competition, demographic trends, upcoming presidential election and so on. The board should also consider organizational issues such as succession planning — a major issue for many community banks. How do these factors impact the future performance of your institution? Will your bank be able to meet shareholder expectations?

Merge with Peer
Peer mergers have been a hot topic of late. The bank space has seen several high-profile transactions: the merger between BB&T Corp. and SunTrust Banks to form Truist Financial Corp.; Memphis, Tennessee-based First Horizon National Corp. and Lafayette, Louisiana-based IBERIABANK Corp.; Columbia, South Carolina-based South State Corp. and Winter Haven, Florida-based CenterState Bank Corp.; and McKinney, Texas-based Independent Bank Group and Dallas-based Texas Capital Bancshares.

The opportunity to double assets while achieving economies of scale can drive significant shareholder value. But these transactions can be tough to nail down because both parties must be willing to compromise on key negotiation topics. Which side selects the chairman? The CEO? How will the board be split? Where will the company be headquartered? What will be the name of the future bank?

Peer mergers can be risky propositions for banks, as cultures don’t always match and integration can take several years. However, the transaction can be a windfall for shareholders in the long run.

Sell
A decision to sell almost always generates the greatest immediate value for shareholders. Boards must ascertain if now is the right time, or if the bank can do better on its own.

Whether or not selling creates the highest long-term value for shareholders depends on several factors. One factor is the consideration mix, if any, between stock and cash. Cash gives shareholders the flexibility to invest and diversify the net proceeds as they see fit, but capital gains will be taxed immediately. Stock consideration is generally a tax-free exchange, when structured correctly, but it is paramount to select the right partner. Look for a bank with a strong management team and board, a proven track record of building shareholder value and a plan to continue to do so. That partner may not offer you the highest price today, but will most likely deliver a better return to shareholders in the long run, compared to other potential acquirers. Furthermore, a partner that is likely to sell in the near-term could provide a double-dip — a potential homerun for your shareholders.

It is crucial to consider what impact a sale would have on other stakeholders, like employees and the community. Prepare your bank to sell, well in advance of any conversations with potential acquirers. Avoid signing new IT contracts with material termination costs; it is an opportune time to sell when core processing contracts are nearing expiration. In addition, review existing employment agreements and consider establishing a severance plan to protect employees ahead of time.

Being approached by a potential acquirer gives your bank an opportunity to objectively reflect on its strategy and potentially adjust it. Even if your bank hasn’t been contacted by a potential acquirer, the board should still review the bank’s strategic alternatives annually, at a minimum, and determine the best path forward.

The Powerful Force Driving Bank Consolidation


margins-8-16-19.pngA decades-old trend that has helped drive consolidation in the banking industry can be summarized in a single chart.

In 1995, the industry’s net interest margin, or NIM, was 4.25%, according to the Federal Reserve Bank of St. Louis. (NIM reflects the difference between a bank’s cost of funds and what it earns on its assets, primarily loans.) Twenty years later, the margin dropped to a historic low of 2.98%, before gradually recovering to 3.30% last year.

NIM-chart.png

The vast majority of banks in this county are spread lenders, making most of their money off the difference between what they pay for deposits and what they charge for loans. When this spread narrows, as it has since the mid-1990s, it pinches their profitability.

The decision by the Federal Reserve’s Federal Open Market Committee to reduce the target range for the federal funds rate by 25 basis points in August will likely exacerbate this by reducing the rates that banks can charge on loans.

“For most banks, net interest income [accounts for] the majority of their revenue,” says Allen Tischler, senior vice president at Moody’s Investor Service. “A reduction in [it] obviously undermines their ability to generate incremental earnings.”

There have been two recessions since the mid-1990s: a brief one in 2001 and the Great Recession in 2007 to 2009. The Federal Reserve cut interest rates in both instances. (Over time, lower rates depress margins, although banks may initially benefit if their deposit costs drop faster that their loan pricing.)

Inflation has also remained low since the mid-1990s — particularly since 2012, when it never rose above 2.4%. This is why the Fed has been able to keep rates so low.

Other factors contributing to the sustained decline in NIMs include intermittent periods of intense competition and rate cutting between banks, as well as the emergence of fintech lenders. Changes over time in a bank’s the mix of loans and securities, and among different loan categories, can impact NIMs, too.

The Dodd-Frank Act has exacerbated the downward trend in NIMs by requiring large banks to carry a higher share of low-yielding liquid assets on their balance sheets, which depresses their margins. This is why large banks have contributed disproportionally to the industry’s declining average margin – though, these institutions can more easily offset the compression because upwards of half their net revenue comes from fees.

Community banks haven’t experienced as much compression because they allocate a larger portion of their balance sheets to loans and do most of their lending in less-competitive markets. But smaller institutions are also less equipped to combat the compression, since fees make up only 11% of the net operating revenue at banks with less than $1 billion in assets, according to the Office of the Comptroller of the Currency.

The industry’s profitability has nevertheless held up, in part, because of improvements to operating efficiency, particularly at large banks. The corporate tax cut that went into effect in 2018 plays into this as well.

“If you recall how banking was done in 1995 versus today … there’s just [greater] efficiency across the board, when you think about what computer technology in particular has done in all service industries, not just banking,” says Norm Williams, deputy comptroller for economic and policy analysis at the OCC.

The Fed’s latest rate cut, combined with concerns about additional cuts if the escalating trade war with China weakens the U.S. economy, raises the specter that the industry’s margin could nosedive yet again.

Tischler at Moody’s believes that sustained margin pressure has been a factor in the industry’s consolidation since the mid-1990s. “That downward trend does undermine its profitability, and is part of the reason why the industry has consolidated as much as it has,” he says.

If the industry’s margin takes another plunge, it could drive further consolidation. “The industry has been consolidating for decades … and there’s no reason why that won’t continue,” says Tischler. “This just adds to the pressure.”

There were 11,971 U.S. banks and thrifts in 1995. Today there are 5,362. Given the direction of NIMs, it seems like we may still have too many.

Exclusive: How This Growing Community Bank Focuses on Risk


risk-5-16-19.pngManaging risk and satisfying examiners can be difficult for any bank. It’s particularly hard for community banks that want to manage their limited resources wisely.

One bank that balances these challenges well is Bryn Mawr Bank Corp., a $4.6 billion asset based in Bryn Mawr, Pennsylvania, on the outskirts of Philadelphia.

Bank Director Vice President of Research Emily McCormick recently interviewed Chief Risk Officer Patrick Killeen about the bank’s approach to risk for a feature story in our second quarter 2019 issue. That story, titled “Banks Regain Sovereignty Over Risk Practices,” dives into the results of Bank Director’s 2019 Risk Survey. (You can read that story here.)

In the transcript of the interview—available exclusively to members of our Bank Services program—Killeen goes into detail about how his bank approaches stress testing, cybersecurity and credit risk, and explains how the executive team and board have strengthened the organization for future growth.

He discusses:

  • The top risks facing his community bank
  • Hiring the right talent to balance risk and growth
  • Balancing board and management responsibilities in lending
  • Conducting stress tests as a community bank
  • Managing cyber risk
  • Responding to Bank Secrecy Act and anti-money laundering guidance

The interview has been edited for brevity, clarity and flow.

download.png Download transcript for the full exclusive interview

Avoid the Risk of Complacency


growth-5-10-19.pngBank directors have a golden opportunity to position their banks for future growth and prepare them for change—if they can resist the lull of complacency, according to speakers at the opening day of Bank Director’s 2019 Bank Board Training Forum on May 9.

The current economic environment remains benign, as regulators have paused interest rate increases and credit quality remains pristine, says Joseph Fenech, managing principal and head of research at Hovde Group. Further, he argues that banks today are better equipped to withstand a future economic downturn.

But speakers throughout the day say the risk is that board members may feel lulled by their banks’ current performance and miss their chance to position these institutions for future growth.

“We’re going through the good years in banking. I would argue your biggest competitor is complacency,” says Don MacDonald, chief marketing officer at MX Technologies. He adds that bank boards needs to be asking hard questions about the future despite today’s positive operating environment.

Banks are grappling with the rapid pace of change and technology, shifting customer demographics and skills gaps at the executive and board levels. Speakers during the conference provided a variety of ways that directors can address these concerns with an eye toward future growth.

One way is to redefine how community banks think about their products and their markets, according to Ron Shevlin, director of research at Cornerstone Advisors. Shevlin says many community banks face competition from firms outside of their geographic marketplace. In response, some community banks are moving away from a geographic community and toward affinity, or common bond, groups. These firms have identified products or loans they excel at and have expanded their reach to those affinity customers. He also advises banks to examine how their products stack up to competing products. He uses the example of checking accounts, pointing out that large banks and financial technology firms sometimes offer rewards or personal financial management advice for these accounts.

“Everyone talks about customer experience, but fixing the customer experience of an obsolete product is a complete waste of money,” he says.

Another challenge for boards is the makeup of the board itself. Directors need to have a skill set that is relevant to the challenges and opportunities a bank faces. Today, directors are concerned about how the bank will respond to technology, increase the diversity of their boards and remain relevant to the next generation of bank customers, says J. Scott Petty, managing partner of financial services at Chartwell Partners, an executive search firm.

He challenges directors to consider the skills and experiences they will need in a few years, as well as how confident they are that they have the right board and leadership to run the bank.

“Change doesn’t happen overnight. It has to be planned for,” he says. “Board composition should reflect the goals of the financial institution.”

Banks can resist complacency with their culture, according to Robert Hill, Jr., CEO of South State Corp. Hill says there is never a point in time when “you’ve got it made and your bank is cruising.” Various headwinds come and go, but the overarching theme behind the bank’s challenges is that pace of change, need for customer engagement and competition are all increasing.

In response, Hill says the bank is very selective about who they hire, and looks for passion, values and engagement as well as specific skills. South State prioritizes soundness, profitability and growth—in that order—and wraps its cultural fabric around and throughout the company. A large part of that is accomplished through leadership, and the accountability that goes with it.

“If the culture is not strong and foundation is not strong, it will be much harder for a company to evolve,” he says.

Building a Stronger Bank



Following an acquisition or merger, many banks struggle to build and strengthen their brand. The branch channel is an important part of the franchise for most institutions, so determining which locations to keep, and which to close, is a key strategic decision post-merger. In this video, Anthony Burnett of Level 5 explains how to approach these decisions. He also shares how banks can position themselves for future growth by evaluating opportunities and staffing, and developing a long-term growth plan for the back office.

  • Strategies that Strengthen Your Bank’s Brand
  • Making Decisions About Branch Redundancies
  • Addressing the Back Office
  • Positioning the Bank for Future Growth

Should 1,900 Banks Restructure After Tax Reform?


strategy-2-18-19.pngOne of the big story lines of 2018 was tax reform, which should put more money in the pockets of consumers and businesses to grow, hire, and borrow more from banks.

Shareholders of Subchapter-S banks may ask whether the benefits of Sub-S status are as meaningful in the new tax environment. Roughly 35 percent of the 5,400 banks in the U.S. are Subchapter-S corporations, and given the changes brought by the Tax Cuts and Jobs Act, some choices made under the prior tax regime should be revisited.

Prior to tax reform, the benefits of Sub-S status were apparent given the double taxation of C-Corp earnings with its corporate tax rate of 35 percent, plus the individual dividend tax rate of 20 percent. That’s compared to the S-Corp, which only carried the individual income tax rate up to 39.5 percent.

Tax reform lowered the C-Corp tax rate to 21 percent, lowered the maximum individual rate to 37 percent, and created a potential 20 percent deduction of S-Corp pass-through earnings, all of which make the choice much more complicated.

Add complexities about how to calculate the 20 percent pass-through deduction on S-Corp earnings, the 3.8 percent net investment income tax on C-Corp dividends and some S-Corp pass-through earnings, and it becomes more challenging to decide which is best.

Here are some broad concepts to consider:

  • S-Corp shareholders are taxed on the corporation’s earnings at the individual’s tax rate. If the corporation does not pay dividends to shareholders, the individual tax is being paid before the individual receives the actual distribution. 
  • The individual tax on S-Corp earnings may be mitigated by the 20 percent pass-through deduction allowed by the IRS, but not all the rules have been written yet. 
  • A C-Corp will pay the 21 percent corporate tax, but individual tax liability is deferred until shareholders are paid dividends. The longer the deferral, the more likely a C-Corp structure could be more tax efficient.

The impact of growth, acquisitions, distributions, and capitalization requirements are interrelated and critical in determining which entity makes the most sense.

If a bank is growing quickly and distributing a large percentage of its earnings, its retained earnings may not be sufficient to maintain required capital levels and may require outside capital, especially if the bank is considering growth through acquisition. Because an S-Corp is limited in the type and number of shareholders, its access to outside capital may also be limited, often to investments by management, board, friends, family and community members.

A bank with little or no growth may be able to fully distribute its earnings and still maintain required capital levels. Depending on the impact of Internal Revenue Code Section 199A, state taxes, the 3.8 percent net investment income tax and other factors, Subchapter S status may be more tax efficient.

Section 199A permits the deduction of up to 20 percent of qualifying trade or business income and can be critical to determining whether Subchapter-S makes sense. For shareholders with income below certain thresholds, the deduction is not controversial and can have a big impact.

For shareholders with income above the thresholds, the deduction could be limited or eliminated if the business income includes specified service trade or business income, which includes investment management fees and may include trust and fiduciary fees and other non-interest income items.

S-Corp structures can be terminated at any time. If your bank is a C-Corp and considering a Subchapter S election for the 2019 calendar tax year, the election is due on or before March 15, 2019.

Given the level of complexity and amount of change brought about by the new tax legislation, it is clear that that decisions made under the old rules should be revisited.

Exclusive: An Interview with Brian Moynihan


bank-of-america-2-14-19.pngBank Director’s writers and editors talk with the best bankers in the United States to inform the stories we publish on BankDirector.com and in Bank Director magazine. But these conversations often go deeper and extend beyond the subject matter of those stories, leaving a lot of immensely valuable information on the cutting room floor, so to speak.

With this in mind, we are making available—exclusively to our members—the unabridged transcripts of these conversations. It is our belief that the insights found within them can help bankers gain knowledge and improve their own institutions.

For the cover story in the fourth quarter 2018 issue of Bank Director magazine, Executive Editor John Maxfield interviewed Brian Moynihan, CEO of Bank of America Corp., at the bank’s New York City offices.

While the story focused on how Moynihan, who has led Bank of America since 2010, transformed the bank’s culture and performance, the conversation also delved into his views on growth, risk management and other topics of interest to bank leaders.

In this lengthy interview, which has been lightly edited for clarity and brevity, Moynihan shares:

  • The sources of his philosophy on banking
  • The principles that inform Bank of America’s revamped growth philosophy
  • How history informs his view of the future
  • Lessons learned from the financial crisis
  • How Bank of America deepens relationships with existing customers
  • Why operating leverage helps the bank better manage risk

Larry De Rita, Bank of America’s senior vice president of corporate communications, is also quoted in the transcript.

download.png Download transcript for the full exclusive interview

Fuel for More M&A in 2019



How will economic factors like today’s strong stock market and rising interest rates, along with the banking industry’s demand for core deposits, impact profitability and growth in 2019? Dory Wiley of Commerce Street Capital predicts we’ll see more deals. Find out why in this video.

  • M&A Drivers in 2019
  • What to Know About Valuations
  • Powering Future Growth
  • Headwinds Facing the Industry