3 Strategies for Gathering Deposits in a New Era

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With interest rates at their highest point in 16 years, financial institutions must revisit their deposit gathering strategies.

The conventional tactics like using rate specials for certificates of deposits and high yield online savings accounts are more expensive and less effective than they once were. And in a world where every customer can instantly withdraw funds for a better offer via a phone app, it’s not enough to simply attract deposits. Financial institutions must be able to retain those deposits with something beyond the best rates. Here are three strategies for banks to attract and retain primary deposit accounts in this challenging operating environment.

1. Personalized Approach for Individual Customers
In the age of big data, a personalized approach is not just possible, it’s necessary. Financial institutions should utilize the wealth of information they have on their customers to tailor services and products to individual needs.

  • Understand customers. While this strategy is obvious, its successful execution has been elusive. Too often, these data points are scattered between disparate systems; banks are challenged in reconciling them effectively and in a manner where they can be deployed where and when they’re needed. Financial institutions should be demanding this type of reconciliation from their digital banking vendors, which sit at the intersection of many internal systems, various fintech partners and the bank customer’s primary interaction point with their accounts.
  • Offer tailored products. Use the insights gathered to offer personalized savings plans, customized investment advice or bespoke financial products that encourage customers to maintain and increase deposits. Again, the idea is not original, but the execution is tricky. Making tailored offers at scale should be considered table stakes in modern banking but requires investments in both technology and talent. Simply enabling account holders to view balances on their phone is not enough to build loyalty. Financial institutions should think about how they can replicate the old school relationship banking approach, where a customer feels understood and doesn’t have to navigate bureaucracy and poor technology to get to the products and services they need.

2. Sophisticated Treasury Tools for Businesses
Today’s businesses need more than a simple deposit account. They require comprehensive financial solutions that support their operations, manage risks and foster growth. A growing number of these businesses are using these sophisticated services — often from third parties. Integrating sophisticated treasury tools into business accounts can make these accounts stickier and more attractive for current and prospective customers.

  • Cash management tools. Advanced cash management tools can provide businesses with real-time visibility into their cash flow, enabling them to optimize liquidity. This includes tools for automated receivables, payables and sweep accounts to manage balances across multiple accounts, along with optimizing interest rate options.
  • Risk management tools. Effective risk management tools are essential in helping businesses navigate today’s myriad financial risks. This can include foreign exchange tools to manage currency exposure, interest rate derivatives to handle interest rate fluctuations and fraud detection tools to safeguard against malicious activities.
  • Digital payment solutions. Digital payment solutions can streamline transactions, making daily operations smoother and more efficient. From Automated Clearing House payments to wire transfers, mobile payments and integrated payables, these tools provide flexibility, speed and convenience in handling transactions.

3. Investment in Technology and Innovation
Adopting the above strategies requires banks to make a significant investment in technology and innovation. However, this is a crucial step to stay competitive in the evolving financial landscape.

  • Robust data infrastructure. Invest in a robust data infrastructure to support the implementation of a data-driven personalized approach. This includes advanced data analytics tools and machine learning algorithms that can extract valuable insights from customer data.
  • Advanced treasury tools. Develop and integrate these sophisticated tools into business accounts. This may require investing in fintech partnerships or in-house innovation and offering value-added services beyond traditional banking.
  • Digital platforms. Enhance the user experience, making it easy for individuals to manage their accounts and for businesses to use their treasury tools. This includes intuitive interfaces, real-time updates and seamless integration with other financial systems.

In this era of high interest rates and less sticky deposits, traditional strategies are losing their charm. In order to stay competitive, financial institutions must innovate and personalize their approach to gathering primary deposit accounts. Understanding and catering to the needs of individual customers and businesses will allow financial institutions to attract and retain more deposits and successfully navigate the challenges of this high-rate environment.

Leveraging Technology for Growth

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Technology is playing an increasingly central role in banks’ strategic plans. Now more than ever, banks rely on technology to deliver products and services, improve processes and the customer experience, acquire new customers and grow.

When it comes to new technology, banks essentially have four options: build it, license it, partner with a third party or buy it. Traditionally, only the largest banks had the resources and inclination to build technology in house; however, some smaller banks are now dedicating resources to developing technology themselves.

Much more commonly, banks obtain technology solutions from their core processors or other vendors. Over the last several years, there has been a proliferation of banks partnering with fintech companies to deploy their technology, or for banks to provide banking services to a customer-facing fintech company. As banks become more tech-centric, more are likely to explore acquiring fintech companies or fintech business lines. Each approach carries with it unique advantages, disadvantages, risks and legal and regulatory considerations.

The federal bank regulatory agencies have been especially active in recent years in the bank/fintech partnership space. In July 2021, the agencies published proposed updated interagency guidance on managing risks associated with third-party relationships, which includes guidance on relationships with fintech companies. Later in 2021, they released a guide intended to help community banks conduct appropriate due diligence and assess risks when considering relationships with fintech companies, and the Federal Reserve Board published a white paper on how community banks can access innovation by partnering with third-party fintech companies. Prior to that, the Federal Deposit Insurance Corp. published a guide intended for fintech companies interested in partnering with banks. These pronouncements indicate that while the agencies are generally supportive of banks innovating via fintech partnerships, their expectations for how banks conduct those relationships are increasing.

As technology and the business of banking become more intertwined, banks need to remain mindful not only of regulatory guidance on these partnerships specifically, but on the full spectrum of laws and regulations that are implicated — sometimes unintentionally — by these relationships. For example, partnership models that involve banks receiving deposits through a relationship with a fintech company could implicate the brokered deposit rules, which the FDIC updated in 2020 to account for how banks use technology to gather deposits.

As another example, partnership models that involve a fintech company offering new lending products funded by the bank, or the bank lending outside of its traditional market area, can raise fair lending and Community Reinvestment Act considerations, and potentially expose the bank to a heightened risk of regulatory enforcement action. Banks must keep in mind that when offering a banking product through a fintech partnership, regulators view that product as a product of the bank, which the bank must offer and oversee in accordance with applicable law and bank regulatory guidance.

What’s Next
Although bank/fintech partnerships have been around for some time, the amount of recent regulatory activity in this area suggests the agencies believe that many more of these partnerships, involving many more banks, will develop.

As the partnership model matures, more banks may become interested in developing closer ties with their fintech partner, including by investing cash in their fintech partner. Banks may be motivated to explore an investment to make its relationship with a fintech partner stickier, allow the bank to financially share in the fintech partner’s growth or enhance the bank’s attractiveness as a prospective partner to other fintech companies.

Banks considering investing in a fintech company or a venture capital fintech fund must understand not only the regulatory expectations associated with fintech partnerships generally, but also the legal authority under which the bank or its holding company would make and hold the investment.

As some banks start to look and operate more like technology companies, more may explore acquisitions of entire fintech companies or fintech business lines or assets. In addition to the many business and legal issues associated with any M&A transaction, banks considering such an acquisition have to be especially focused on due diligence of the target fintech company, integration of the target into the bank’s regulatory environment and ensuring that the target’s activities are permissible for the bank to engage in following the transaction.

Banks need innovative technology to succeed in today’s fiercely competitive financial services marketplace. Some will build it themselves, others will hire technology vendors or partner with fintech companies to deploy it and some will obtain it through acquisition. As banking and fintech evolve together, banks must understand and pay careful attention to the advantages and disadvantages, and legal and regulatory aspects, of each of these approaches.

How Banks Can Win the Small Business Customer Experience

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In the first stages of the pandemic, it became apparent that many banks were unable to effectively meet the needs of their small business customers in terms of convenience, response time, fast access to capital and overall customer experience. Innovative financial technology companies, on the other hand, recognized this market opportunity and capitalized on it.

Bankers recognize the importance of providing their business banking customers with the same fast and frictionless digital experience that their consumer retail banking customers enjoy. So, how can banks ensure that they are competitive and continue to be relevant partners for their small business customers?

The reality of applying for most business loans below $250,000 is a difficult experience for the applicant and a marginally profitable credit for the bank. Yet, the demand for such lending exists: the majority of Small Business Administration pandemic relief loans were less than $50,000.

The key to making a smooth, fast and convenient application for the borrower and a profitable credit for the lender lies in addressing the issues that hinder the process: a lack of automation in data gathering and validation, a lack of automated implementation of underwriting rules and lack of standardized workflows tailored to the size and risk of the loan. Improving this means small business applicants experience a faster and smoother process — even if their application is declined. But a quick answer is preferable to days or weeks of document gathering and waiting, especially if the ultimate response is that the applicant doesn’t qualify.

But many banks have hesitated to originate business loans below $100,000, despite the market need for such products. Small business loans, as a category, are often viewed as high risk, due to business owners’ credit scores, low revenues or lack of collateral, which keeps potential borrowers from meeting banks’ qualifications for funding.

Innovative fintechs gained the inside track on small business lending by finding ways to cost-effectively evaluate applicants on the front-end by leveraging automated access to real-time credit and firmographic and alternative data to understand the business’ financial health and its ability to support the repayment requirements of the loan. Here, much of the value comes from the operational savings derived from screening out unqualified applicants, rerouting resources to process those loan applications and reducing underwriting costs by automating tasks that can be performed by systems rather than people.

To make the economics of scale for small dollar business lending work, fintechs have automated data and document gathering tasks, as well as the application of underwriting rules, so their loan officers only need to do a limited number of validation checks. Adopting a similar approach allows banks to better position themselves to more cost effectively and profitably serve the borrowing needs of small business customers.

Although some fintechs have the technology in place to provide a faster, more seamless borrowing experience, many lack the meaningful, personal relationship with business owners that banks possess. They typically must start from scratch when onboarding a new loan customer, as opposed to banks that already own the valuable customer relationship and the existing customer data. This gives banks an edge in customizing offers based on their existing knowledge of the business client.

While consumer spending remains strong, persisting inflationary pressures and the specter of a recession continue to impact small businesses’ bottom lines. Small business owners need financial partners that understand their business and are nimble enough to help them react to changing market dynamics in real time; many would prefer to manage these challenges with the assistance of their personal banker.

The challenge for bankers is crafting and executing their small business lending strategy: whether to develop better business banking technology and capabilities in-house, buy and interface with a third-party platform or partner with an existing fintech.

Better serving business customers by integrating a digital, seamless experience to compliment the personal touch of traditional banking positions financial institutions to compete with anyone in the small business lending marketplace. With the right strategy in place, banks can begin to win the small business customer experience battle and more profitably grow their small business lending portfolios.

Digital Transformation Defined

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Many banks know they need to undergo a digital transformation to set their institution up for future success. But what do most bankers mean when they talk about digital transformation?

“If you look at the technical definition of digital, it means using a computer. Congratulations, we can all go home because we all use computers to do everything in banking today,” jokes Nathan Snell, chief innovation officer at nCino during a presentation at Bank Director’s BankBEYOND 2020 experience.

Of course, a digital transformation requires technology, Snell says, but he argues that the integration or adoption of this technology should change how a bank operates and delivers value. Going beyond that, it should be accompanied by a cultural shift to continually challenge the status quo — otherwise this attempt at change may fall short of innovation and transformation.

You can access Snell’s complete presentation and all of the BankBEYOND 2020 sessions by registering here.

Driving Innovation Through Cultural Clarity

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New York-based Quontic Bank bills itself as an adaptive digital bank; it’s also a $1 billion community development financial institution (CDFI), lending to immigrants, low-income populations, gig-economy workers and borrowers who struggle to get a traditional mortgage. That mission means that the bank’s executives — including chief innovation officer Patrick Sells — tend to think about banking a little differently.

Its culture is a true competitive advantage of the bank — and that goes beyond having good, talented people on staff who get along with one another. It requires a mission, he says, and “strategic anchors” that can guide decision-making and empower employees.

Banks were already facing an “existential crisis” around digital and technology, Sells continues. “The pandemic that we found ourselves in has only exacerbated that tension,” he says. “[W]hen there is anxiety, we tend to act irrationally, we can tend to act scattered, we go back and forth. And what’s really critical is a steady hand as to who we are and what we need to do, and how we navigate through this, so we don’t get sucked into all of that. The culture, the clarity that we have, has definitely helped us navigate this storm.” Quontic has hired almost 90 new employees during the pandemic, he adds.

Sells discusses this further in this interview with Emily McCormick, Bank Director’s vice president of research. It has been edited for brevity, clarity and flow.

BD: It’s very easy to think about innovation, and focus on the nuts and bolts of the technology, but the culture and the mindset are so critical. How do you think through culture as it applies to innovation?
PS: There’s a tragedy in that innovation is often synonymous with technology, especially in this industry, and it really shouldn’t be. Innovation as much more than that. The thing that perhaps needed the most innovation, and would yield the greatest results, was culture that I think many banks don’t have. I think culture is an area where they’ve struggled. When you compare it to what’s gone on in the world around us — there’s so many things happening, and banks haven’t kept up with that.

These issues all interplay with each other. I think the greatest existential threat to the industry of community banking is culture. We have lost the war on talent. As the first digitally-native generation grew up and came out of college, they didn’t want to go work at a community bank. So today, we’re so behind from a technology standpoint, and we’re frantically, as an industry, trying to say, “We need this, we need that.” And that’s really a Band-Aid.

If we don’t figure out how to change this and lose the next decade of talent, we don’t stand a chance. The technology that’s new and cool today, we know the pace it’s accelerating at will be nothing compared to two, three years from now. … We also know in the data that’s coming out around millennials and the generations that follow, is that the sense of purpose matters immensely. And so for us, where we really focused on innovating, or what to do differently, is all in and around culture: How do we do that, and how do we bring that to life at Quontic? That will drive us into the future and where we want to go.

BD: You’re active on Twitter; one of your recent tweets focused on the fact that culture doesn’t end at the bank, it extends to the customer. Could you expand on that concept and how that informs how Quontic meets customer needs?
PS: There’s three components to Quontic’s culture: the mission, the de-centralized decision [making], and the shared language. Core values became that shared language, but one of our core values is try it on. For example, we want to be quick to try something new, even if we don’t know if it’s the right thing or not.

The other one is saying, “Cheese.” The next time someone asks to take a picture of you and they say, “Cheese,” what happens? Both of you smile, and usually the photographer is also smiling. How do we create that interaction? I think most customers expect, when you call your bank, you’re going to get very black-and-white answers as to what can and can’t be done. And there isn’t so much a focus on making it a pleasant experience.

An example of that, when Covid[-19] first happened at the end of March or early April, as an online bank, we picked up a lot of CD customers. For the consumer, one of the great things about CDs is you commit to putting your money in for a period of time, and you typically get the highest interest rate. If you break the CD, you lose all that interest. We knew a lot of customers would be nervous about what that meant for their financials, so we quickly reached out to say, “If you need to break your CD, you can do that penalty free.”

The majority of people said, “Thank you for offering this. As of now, I don’t want to do that.” But there was another group of people who said, “Yes, I want to do that.” Those same people called us back later and said, “I ended up being OK. I want to re-establish my account with you, and I’m going to tell everyone I know about what you’ve done for me, because it was so above and beyond.”

We want to be a spot, even though there’s a lot of anxiety going on, where we can bring smiles to people’s faces. I don’t know the data, but I doubt many banks emailed their CD customers to say, “You can break penalty-free if you need to.” We’re trying something on, and what happened from it? It deepened relationships and brought new relationships because it resonates the culture of who we are with the customer that we serve.

BD: We know that small businesses continue to be devastated by this pandemic. How is Quontic thinking through meeting the needs of small businesses, as this crisis continues and past it?
PS: This gives us the opportunity, in any crisis, to reframe, which is something I talk about in terms of innovation. What is innovation? Can you reframe what’s going on? Can we become aware of these underlying assumptions that haven’t changed in a while? If we change nothing but that, everything changes — that’s where you can find your most effective innovation.

For example, there’s a lot of small business owners who are behind the ball in terms of e-commerce. There [are] two ladies that own a [boutique] that I’ve gotten to know, and they wanted to open up a Shopify account to sell products online. I helped them do that. In one lens, helping [our small business customers] establish Shopify and e-commerce doesn’t result in any new revenue for the bank; but it strengthens the relationship and the [role] that banks historically played as a resource for small business owners.

There’s an opportunity to rethink branches. … While there’s great technology out there, like Shopify and Square, they don’t have people who can help you. What if the branch became a place where small business owners could get help [digitalizing themselves?] Now you’re utilizing the space that so many banks already have, and you’re beginning to play that meaningful role again in society. I think there’s a tremendous opportunity for banks to think differently, and say, “How do we help our customers also embrace technology that will ultimately help their businesses thrive?” That’s an example of a way banks can reframe what those relationships look like and deepen those relationships that’s outside of the norm as to what we think banks should be doing.

BD: So essentially, it’s about having that talent and expertise within the branch that can help the customer, and empowering employees to do that.
PS: This goes back to the mission [of] financial empowerment. It’s both that the products banks offer [are] one size fits all, and that the culture or the skills are largely the same. What if banks said, “We’re going to hire kids out of college who understand social media and e-commerce natively to help our small business customers.” Now you have talent that can help your bank figure out how to evolve. You solve two problems with one stone, and begin to change the reputation and everything. Not only does that have an impact for today, [but] my suspicion is the ROI on that over a decade is tremendous.

But you have to be willing to do something different. That’s where banks struggle, understandably; we’re taught to mitigate risk and to think about risk in everything. That can stand in the way of trying things that aren’t all that risky … it’s not that risky to add another digital bell and whistle that our core provides. It may be new for the bank, but it’s not really risky or innovative. We actually have to challenge ourselves to be bold and do something differently.

Tips for Working With Fintech Companies

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partnership-4-21-17.pngPartnerships with startup fintech companies can be fraught with difficulties. There are the cultural differences between bankers and tech entrepreneurs, the latter sometimes showing up for business meetings in sandals and jeans. Or there are the more practical problems of risk management with a startup that may not have been in business for more than a year or two.

Still, many banks are very much interested in doing business with fintech companies, in part because they fear innovation will lure customers away from the banking industry, or to more technologically savvy competitors. In a recent PwC survey of some 1,308 financial services executives, including banks, asset managers and insurance companies, 80 percent believe their profits are at risk from innovators, and 82 percent expect to increase their partnerships with fintech companies in the next three to five years.

Of course, banks have relied for a long time on financial technology companies in the form of core processors who provide everything from online banking to transaction services. But the sheer number of new financial technology firms has dwarfed the core processors and is quickly changing the landscape for financial services. Globally, some 6,500 fintech companies have received about $100 billion in funding in the last several years, according CB Insights, a research firm that tracks startup investments.

“[Fintech companies] have the innovation, the great user experience and the efficiency the bank doesn’t have,” says Jo Ann Barefoot, a former deputy comptroller of the currency, who is now an advisor and CEO of Barefoot Innovation Group. She is a speaker at the FinXTech Annual Summit Wednesday in New York City, an event for bank executives, fintech companies and venture capitalists. “The banks are hard pressed to build it in-house unless it’s a really big bank, and even the big banks have trouble doing it.”

So what are some tips for banks interested in partnering with fintech companies?

Go Straight to the Investors
There are so many fintech companies out there, it’s hard to get a handle on what the best offerings may be for your bank. Manoj Govindan, a senior vice president in the Office of Innovation and Advanced Tech/Partnerships for Wells Fargo & Co., says the bank reduces the cycle time by building relationships with venture capital firms and angel investors who put their money into fintech companies. That helps the investors know what the bank is looking for and problems it needs to solve. It also helps the bank learn about solutions. Their conversations are “not about shiny objects,” he said. “It’s very focused on the three, or four or five things we know we need to solve for. It’s about educating the venture capitalists [and] that vastly reduces the feedback loop.”

Think Beyond Build or Buy
Govindan also urges banks to think beyond the notion that the bank can either build the technology solution or buy it. APIs, or application programming interfaces, are a great way for innovators to tap into the bank’s customer base and provide what customers need, he says. Wells Fargo and JPMorgan Chase & Co. recently inked a deal with Intuit to develop APIs so the bank’s customers can use Intuit’s products, including Mint and Quicken, in a way the bank can control and secure.

Accept Cultural Differences
One important first step to partnering with fintech companies is to recognize cultural differences. PayPal CEO Dan Schulman, for example, wears sandals or cowboy boots to business meetings. “Banks should recognize that there is a casual culture that is not slacker, or lax or disrespectful,’’ Barefoot says. You need to be open to how young some of these entrepreneurs are, and how great the technology can be, she adds.

Adjust the Vendor Risk Management Process
Traditional aspects of vendor risk management go by the wayside in dealing with fintech companies that haven’t been around for more than a year or two and may not have a source of funding beyond another few years. The $1 billion asset Radius Bank, based in Boston, does physical inspections of vendor sites, interviews the vendors in terms of compliance and risk management and sets up a wall, at least in the early part of the partnership, so that vendors don’t have access to customer data. The bank also has early conversations with regulators to make sure they are comfortable with the partnership and the risk management process, according to president and CEO Mike Butler in this video interview. Barefoot says banks must do serious vetting of fintech companies, especially on cybersecurity and anti-money laundering compliance. Some vendors sell customer data to third parties, so be clear about whether the fintech’s goals and policies match the bank’s. “Most of them are trying to do something good for the customer,” Barefoot says. “But you can’t take that for granted.”