2018 Technology Survey: Enhancing Board Know-How


tech-survey-8-27-18.pngTechnology and strategy are inextricably linked in today’s evolving digital economy. Unfortunately, bank boards—tasked with the oversight of the bank, including its long-term performance in a changing competitive environment—continue to struggle to wrap their hands around technological change and its implications. Seventy-nine percent of directors and executives say their board needs to enhance its level of technological expertise, according to the 2018 Technology Survey, sponsored by CDW.

Sixty-three percent indicate the board should better understand how to tie technology to bank strategy, and 60 percent say the board should better understand how the bank should invest in technology—a key concern, given rising budgets and an increasing number of technology vendors working with banks.

But the survey also indicates that directors have made strides in their focus on technology, both personally and as a board. Half say the board focuses on technology at every board meeting, up from 42 percent two years ago.

And the directors and executives participating in the survey indicate that they’re better users of their bank’s technology. More than three-quarters say they personally use their bank’s mobile and online channels, compared to 51 percent three years ago. With the onus on banks to enhance customers’ digital experience in the age of Amazon, a better understanding of digital through personal experience can only serve to improve these banks’ strategic direction.

The 2018 Technology Survey is comprised of the responses of 161 directors, chief executive officers, high-level technology executives and other senior executives at banks above $250 million in assets.

Additional Findings:

  • Sixty-five percent believe their bank has the products, services and delivery methods to meet the needs and demands of today’s customers.
  • Eighty-three percent say improving the user experience on digital channels is a goal for their bank over the next two years, followed by improving account onboarding (73 percent) and adding more features to the bank’s mobile app (71 percent).
  • Despite the buzz around Amazon’s Alexa, just 21 percent say integrating with that or a similar external platform is a near-term goal.
  • Forty-five percent say they plan to add more branches that will be smaller in size. Thirty-seven percent plan no changes to their bank’s branch footprint. More than half plan to update technology used in branches over the next two years, and 47 percent plan to add more technology in the branch. One-third plan to upgrade ATMs.
  • At least half of respondents indicate a need for significant improvement in their bank’s use of data analytics and business process automation.
  • Sixty percent indicate their bank has been increasing the number of staff focused on technology and innovation, and 55 percent have a high-level executive focused on innovation.
  • Sixty percent say their management team and board are open to working with newer technology startups. The typical bank, according to the survey, works with a median of seven technology vendors, including its core processor.
  • Sixty-one percent say their board has brought in relevant bank staff to better educate itself about technology. Twenty-nine percent have a board-level technology committee that regularly presents to the board.
  • Cybersecurity remains the top issue focused on by the board, at 93 percent.

To view the full results to the survey, click here.

The Three C’s of Compliance



Compliance doesn’t have to be the department of ‘no:’ It can be a benefit, rather than a burden. Barbara Boccia of Wolters Kluwer explains the three C’s that drive a culture of compliance and describes how to integrate these factors within the organization.

  • Turning Compliance Into a Competitive Advantage
  • Key Factors That Drive Compliance Culture
  • Elevating Compliance as a Strategic Asset

Considering Fintech Partnerships? Don’t Forget the Fundamentals


fintech-4-30-18.pngAs the benefits of partnerships between banks and financial technology (fintech) organizations have become more evident, bankers’ fears of being displaced by the wave of fintech startups have cooled.

Increasingly, bankers see that taking on a fintech partner can enable them to offer new products and services, develop new delivery models, and enhance the efficiency and effectiveness of back-office functions.

And yet, despite the growing awareness of the value of these partnerships, dispositional mismatches between banks and fintech companies have caused banks to struggle to make these partnerships work.

One of the most common sources of discord is in the area of risk management. Bank risk and compliance professionals are wired to mitigate risk rather than to manage it. The urge to shelter banks from risk through traditional risk and compliance practices, however, can dampen the innovation that is at the core of fintech’s appeal.

Banks aiming to get more out of these partnerships should review and hone their operations, aligning business goals and risk management goals across strategy, culture and information sharing.

Strategy Trumps Granular Problem-solving
Fintech companies and banks entering into partnership agreements often fail to effectively think through and communicate about their individual corporate strategies and how the partnership fits in.

Banks might approach a partnership with a problem they would like the fintech company to solve, without clearly defining how the partnership fits into their overall business strategy.

An important first step for banks is to think of a fintech engagement as a true partnership, rather than a vendor relationship.

The two organizations should sit down together to collectively identify the objectives and goals of each organization and how the partnership can advance those goals.

Going further, both organizations should establish boundaries around what they are willing to do to achieve their objectives, what resources will be made available to deal with challenges, and what will trigger the escalation of an issue to executives’ attention.

Ultimately, the purpose of the partnership must be clearly tied to the broader strategy of each organization, and at the outset, the partners should establish a process to ensure that purpose and strategy will remain aligned.

Meet at Cultural Crossroads
Fintech companies and banks often experience a culture clash at the outset of a partnership. The more traditional culture of a bank can seem starkly different from that of an innovative and fast-moving fintech company, particularly in the area of risk tolerance. While banks often view any loss adversely, fintech companies are much more comfortable with the idea of taking a small loss in the spirit of innovation and learning.

This question of culture fit rarely is considered in the traditional vendor management process. But finding a way to align the two, often disparate, cultures is critical in forging a successful partnership.

Both parties should evaluate prospective partners’ values at the outset. Once a partnership is formed, the parties should establish a set of principles that define practices and policies that are deemed acceptable on both sides. This set of principles should be viewed not as rules per se, but as broad guidelines.

Another important aspect of culture is how both organizations treat failure. Rather than taking a punitive approach to all failures, banks should be open to the idea that some failures can be positive if they advance innovation.

Information Sharing
Fintech companies sometimes are hesitant to share their data, either because they consider it proprietary or because they simply do not know what data banks want. On the other hand, banks, particularly in light of privacy regulations, might be hesitant to share information that does not directly affect the partner relationship.

Both parties should work to overcome barriers to information sharing, as the degree of transparency in a partnership is directly related to its success. With more data, partners can better assess performance and identify unforeseen compliance risks that emerge.

As in the case of strategy and culture considerations, expectations defining the process and extent of data sharing should be set up front. Banks should consider what information they can provide to fintech partners that might not be directly related to the product – but which might help grow the strategy or solution.

Competitive Advantage Through Thoughtful Partnerships
By establishing some basic principles around strategy, culture, and information sharing, bank executives can make better decisions as they enter into partnerships with fintech companies. Poor execution on fundamentals should not be allowed to hamper the successful execution and growth of these partnerships.

Does Your Bank Have a Deposit Strategy?


strategy-1-22-18.pngMany banks lack a clear, written deposit strategy and funding plan. For the last several years, that’s been somewhat understandable. After all, deposits flowed into banks and have now reached historic highs, even though banks on average pay little or nothing in interest on the vast majority of those deposits.

Now that’s changing. Deposits are an increasingly important topic for bank boards. We are on the front end of an environment bankers have not seen in almost a decade. The Federal Reserve raised the fed funds target rate by 75 basis points last year, and three more rate increases are expected this year.

Banks already are seeing deposit competition heat up. Close to 64 percent of bankers said that deposit competition had increased in the last year, and 77 percent expected it to increase during the subsequent 12 months, according to Promontory Interfinancial Network’s Bank Executive Business Outlook Survey in the third quarter of 2017. Although in the past banks have had to compete in rising rate environments, we’ve never seen a point in history quite like this one, and it would be wise to assume rising rates will impact deposits, as well as your bank’s funding mix and profit margins.

There are a couple of reasons why the environment has changed. Historically, big banks ignored the rate wars for deposits, a game that was left to community banks. But this time, the new liquidity coverage ratio requirement that came out of the Basel III accords could encourage big banks to get more competitive on deposit rates. The ratio, finalized in the U.S. in 2014, requires banks with more than $250 billion in assets to keep a ratio of 100 percent high-quality liquid assets, such as Treasury bonds, relative to potentially volatile funds. Banks that move toward more retail deposits will have a lower expected level of volatile funds.

Also, banks have a majority of their deposits in liquid accounts while term deposits, such as CDs, are at historic lows. There’s no hard-and-fast rule to know how much of those non-term deposits will leave your bank as rates rise.

As the economy has improved, surging loan growth has put more pressure on the need to grow deposits. Loan-to-deposit ratios are rising, and as banks need to fund further growth, demand for deposits will rise. What this will do to competition for deposits and, therefore, deposit rates, is unclear. We have found that many banks aren’t raising rates on their loans, and the best borrowers can easily shop around to get the best rates. This will put pressure on margins if banks don’t raise rates on loans as interest rates rise.

Still another factor is that people have had a decade since the financial crisis to get comfortable with the benefits of online and mobile banking. Online banks, not incurring costs associated with physical branches, often offer higher interest rates on deposits than traditional banks.

One of the best ways to prepare for the changing environment is to make sure your bank has a written, well-prepared deposit strategy. We’re not talking about a 100-page document. In fact, the asset/liability committee (ALCO) of the bank may need a five- to 10-page report highlighting the rate environment, the bank’s deposit strategy, and alternative funding plans and projections. The bank’s full board may just need a three- to four-page summary of the bank’s deposit strategy, making sure that management is able to address key questions:

  1. Who are your bank’s top 10 competitors, and what are they doing with rates? What new products are they offering?
  2. How will the Federal Reserve’s expected moves in the coming year impact our rates, our margins and our annual net income?
  3. What is our bank’s strategy for contacting our largest depositors and determining their needs?
  4. What new deposit products do we plan to offer, and how will we offer them only to our best customers? Not all customers or deposits have equal value to the bank.
  5. What is our funding plan? In other words, what are our alternatives if we need deposits to grow, and what will they cost? This is perhaps the most difficult question to answer.

While it’s important not to be caught off guard in a rising-rate environment, rising rates can be a good thing for a bank with a solid deposit strategy in place. For the first time in a long time, the wind will be in the sails of bankers. They just need a plan for navigating the changing environment ahead.

Seven Secrets of Succession Success


succession-1-19-18.pngOne of a bank board’s most vital responsibilities is overseeing the plan of succession for the CEO. Whether driven by a looming retirement or change in the incumbent’s personal timeline, a well-orchestrated plan of succession and leadership continuity reassures employees, investors and communities. Unfortunately, too many bank boards still take a passive approach to CEO succession, rather than acknowledging that as directors, they are responsible for the selection and ongoing evaluation of CEO performance.

Good succession planning for any executive role starts with understanding the potential succession timeline and the bank’s strategy. These seven steps will help to guide the board and incumbent CEO in developing a solid succession plan.

  1. Understand the succession timeline. What is the intended horizon for the incumbent leader to remain at the helm? This timeline is often fluid, which can create a challenge for the board. It is natural for many healthy CEOs to struggle with stepping out of a role that has been so closely tied to their personal identity. Yet, boards must insist on some understanding of the timing in order to maximize the development of potential internal contenders and to avoid frustrating executives who are waiting in the wings.
  2. Strategy informs profile. One of the most critical elements of planning for CEO succession is the bank’s strategic plan. The direction of the bank going forward should help to clarify the skills and attributes required in the bank’s next leader. Given the massive transformation of the industry over the past decade, the old maxim—what got you here may not get you there—may truly apply. Directors need to align around the bank’s strategy to develop a profile for the bank’s next CEO.
  3. Identify key skills. There are countless technical and industry skills needed in a bank leader today—so many, in fact, that it is virtually impossible to find an executive with all of the ideal requisite experiences. So, prioritize the specific banking skills that the bank must have versus those the board would like to have. Key experiences such as commercial credit skills, regulatory experience, balance sheet management, board experience and risk management are often considered critical to success as a bank CEO today.
  4. Determine critical attributes. What are the most important elements of a potential leader’s personal style and leadership philosophy that are necessary at this time for the institution? For example, most community banks see a CEO’s community presence and visibility as critical for success, as well as creating and achieving a strategic vision. Strong communication skills, cultural agility and the ability to attract top talent also rank high these days.
  5. Develop a process. Successful succession at the CEO and other executive levels involves a robust and thoughtful process, not just putting together a list of who the board knows or who the incumbent leader suggests. Boards today not only need to select a superior executive as their next leader, but are often called upon to defend their decision—and how they made it—to investors, customers and their communities. This does not mean that an external or formal search is always warranted, but it does mean that there needs to be a genuine effort to source, screen, assess and validate serious contenders, which ultimately adds credibility to the board and the selected leader.
  6. Make your bank attractive to star talent. Despite the declining number of banks in the country today, the crop of qualified bankers available to fill the growing ranks of retiring CEOs is not deep enough. Thus, the market is competitive for top bankers, and relocating someone to a new and potentially smaller market remains a challenge. Star bankers will ask tough questions of the board and will want to understand the bank’s strategy, as well as the level of support, engagement and strategic value they can expect from the bank’s directors.
  7. Prepare for an emergency. As most boards know, the bank should plan for the best and prepare for the worst. Reviewing and updating the bank’s emergency succession plan on a regular basis is a must for good governance and regulatory satisfaction. There have been too many instances where this backup plan has been called into action. Having a scenario ready to keep the train on the tracks during an unexpected situation is critical to keeping the institution moving forward.

There is no greater responsibility for a bank’s board of directors than ensuring that the organization has the right leader in place. While there are many important elements to successful CEO succession, the most important point is to maintain the topic of leadership succession as a regular and ongoing board-level discussion.

Improving Governance By Using Board Portals


board-portal-12-11-17.pngIf you counted the minutes in a day that you save because of technology, it would add up to quite a bit. With so many issues confronting financial boards, adequate time for strategic planning is a valuable commodity, so time is exactly what busy board members of financial institutions need.

Changes in the economy and the financial markets have complicated matters for boards of all sizes. Larger banks and conglomerates are finding it difficult to adapt to increasing regulations. Community banks are finding it harder to compete with larger banks. At the same time, financial institutions are finding it difficult to provide the level of technology that their customers want and need, in addition to other significant strategic issues.

Board portals help directors focus more of their time on strategic decisions. These portals have all of the features that directors need, and ensure that the information they need is available to them wherever they are, while also remaining secure.

Preparing board handbooks manually with paper copies and binders places a huge burden on the board secretary. Every time a board meeting approaches, the secretary spends countless hours copying and collating documents, and filing them into the proper sections of the handbook. Updating a board portal requires some work on the part of board secretaries, but they only have to upload a document one time. And secretaries can limit access to certain documents only to the people who need to view them.

In addition to the time savings, board portals provide material and environmental savings. Financial institutions save the cost of reams of copy paper, other office supplies and the labor to assemble board books. The savings can net banks upwards of $1,100 per board meeting. Board portals are environmentally friendly as well. Banks and credit unions contribute less paper to the landfills, and they expend less electricity to produce it. According to a recent analysis by Diligent, boards of banks and credit unions can save up to $10,000 a year by using a board portal.

Board Portals Provide Mobility and Improve Security
There’s nothing worse than the panic that a director of a bank feels in learning that an important piece of paper is missing from the board book. This could happen easily enough with busy board members who travel often for business and pleasure as they juggle suitcases and briefcases in cars and on airplanes. Board portals let busy directors access their board documents with ease on any electronic device, including laptops, tablets and phones. Directors no longer need to lug heavy board books through busy airports and risk valuable information getting into the wrong hands. Most board portals have a double authentication process with a user ID, password and scrambled PIN code, so even if an electronic device gets lost or stolen, sensitive board information remains safe and secure.

Choosing a Board Portal
While board portals are generally intuitive and user-friendly, some directors who are not adept at technology may find that they have a learning curve. But most board directors adapt quickly with a little training and experimentation.
Board portals for banks are a single tool that stores meeting materials, communications, bylaws, archived documents and more in neatly arranged files. Many of the features that board portals provide are of great use to directors, particularly board rosters, board biographies, electronic surveys, voting history and shared notations. Many portals also have a built-in time tracker, so directors know how much time they are spending on board business. This feature can help boards evaluate whether directors are dedicating enough time to board service to comply with proper governance principles. Once they get used to the tool, board members appreciate the ease of posting news items, linking documents, sharing agenda items and calendars, and using the chat and email features. Premium products may also include offline capability, which is an important feature for many bank board directors.

Look for a board portal product that is easy to use and that has knowledgeable customer service support that is available around the clock. As with most products that consumers buy, less expensive board portals aren’t necessarily the best value. Board directors will spend a significant amount of time on the portal, so it’s best to conduct a thorough review of the features, usability, speed and functionality before investing in a portal. The right board portal will do all that you need it to do and more.

When Disaster Strikes, You Better Have a Plan


strategy-9-14-17.png

Hurricanes Harvey and Irma, which struck different locations on the U.S. coastline in August and September, were a tragic reminder that we live in an uncertain world, and natural disasters can cause widespread devastation. The individuals who have been directly affected will always be the first concern, but it’s equally important that businesses and government agencies be able to rebound quickly after a widespread disaster because their ability to function effectively is vital to the recovery of the communities they serve.

Every bank needs a business continuity management plan that the senior executive team and board of directors can activate in the event of a disaster like Harvey or Irma. The plan should be reviewed and tested annually, and updated as needed, suggests Christopher Wilkinson, a principal in Crowe Horwath’s Technology Risk Consulting Group who oversees business continuity planning and penetration assessments for the firm’s cybersecurity team. A common mistake that many organizations make is to see business continuity planning as purely an IT issue, when in fact it is much broader than that. “It’s important to make sure that you focus, first and foremost, on business continuity as a business issue and not just as an IT issue,” he says. In an interview with Bank Director Editor in Chief Jack Milligan, Wilkinson talks about the basic elements of a sound business continuity management program.

BD: What are the primary elements of a good plan?
Wilkinson: When you take a look at business continuity management (BCM) programs, there are four key components. The first component starts with a business impact analysis (BIA). Organizations used to look at business continuity as an IT problem when in fact it really is a business issue. IT is a big component of restoring business operations, but business continuity as a whole is not just an IT problem. A lot of organizations have made the shift to say, “When an event happens, I don’t necessarily want to restore [just] my payroll application. I want to make sure that the process of paying my individuals is restored in full.” And the BIA builds the requirements for each one of the organization’s critical business processes.

One of the biggest components, or variables, that is set during the business impact analysis is the recovery time objective, or RTO. This tells an organization how long a specific business process like HR or payroll can be placed on the back burner before it significantly impacts the organization.

You can look at the impact from a variety of different perspectives. The obvious one would be the financial impact to the organization, but there are others, like the ability to attract new customers or the impact on servicing existing customers. There are a variety of factors that you want to measure the impact of for each business process to determine the overall impact on the organization.

The second important variable in BCM is the recovery point objective, or RPO. This one is a little bit more difficult, but what this variable tells us is, if I had to go to a snapshot of data in the past for some of the systems associated with a business process, how far back could I go? Depending on how dynamic the data is, are we talking minutes, hours or days?

Disaster recovery is an IT issue, and basically what it tells the organization is, “How do I strategically prepare my critical applications to meet the RTO and RPO expectations from the process owners?”

For example, when you talk about RTO, do I have a system designed in such a way with data backups and system redundancy, and the ability to recover that system within the required recovery time objective that the business has given me? So in essence, it’s giving you a service-level agreement, or an SLA, for each and every one of your applications. It tells the IT department, “Here’s how long I can go without this system. Now it’s your job to make sure that system is positioned strategically to meet expectations.”

The third component of a BCM program is the business continuity plan. This is, once again, a business issue. When we document business continuity plans for organizations, one of the things that we’re doing is making sure that certain processes can still be performed in the event of a disaster. If it’s payroll, for example, what can I prepare beforehand to ensure that I can pay employees given the absence of either the systems, the people, or the resources and facilities that are available?

The fourth component of BCM is testing. Are we doing our tabletop testing? Are we getting the right people in a room and walking through disaster scenarios on an annual basis? Are we testing the business side and the business continuity plan? Are we testing the disaster recovery plan, and the ability for IT to recover both the systems and the data that support the business function?

BD: What mistakes do companies, including banks, typically make in their business continuity planning?
Wilkinson: That is a great question. I think one of the more common mistakes that I mentioned earlier is looking at business continuity as an IT issue, instead of as a business issue.

If we’re dealing with payroll and HR as an example, I very likely could recover the payroll application. But there may be other dependencies within the payroll process that aren’t up and running that aren’t IT related.

So it’s important to make sure that you focus, first and foremost, on business continuity as a business issue and not just as an IT issue.

Another mistake is that some of the smaller banks under $10 billion in assets haven’t done a business continuity risk assessment, where you’re prioritizing your threat based upon the company profile. That could be geographic location, which is probably one of the largest factors for banks. As you can imagine, if I’m a bank in the Florida Keys, I’ll have much different concerns with regards to the types of events or threats that may impact me than a bank in the Midwest.

So I need to make sure that I take a look at those threats, and then take a look at the controls that are in place from a business continuity perspective. Look at the most effective controls that are required for each one of those types of events, and then put those in place, and make sure that they’re effective.

BD: Do banks have any special issues when it comes to business continuity?
Wilkinson: Banks are probably a little less challenging than other kinds of organizations. If you think about manufacturing and distribution, you have to worry about supply chain management. The Japanese tsunami in 2011 was a great example of that; it disrupted the supply chain for folks in many industries. It became quite a challenge to be able to find some of the parts and raw materials that companies needed, especially if they were coming from Japan.

Probably the most challenging aspect within the banking world is the number of branches they have and their geographic distribution. Banks need to review their facilities and understand where the critical business processes lie within each one of those facilities, and then strategically design a business continuity plan for each one of those facilities, based upon their geographic footprint. That is probably the most challenging thing that bankers face that other industries may not.

BD: Are there other risks that banks need to worry about from a business continuity standpoint that don’t necessarily relate directly to some kind of natural disaster?
Wilkinson: There absolutely is. And that’s why when we talk about more mature organizations and their business continuity management program, what we’re starting to see is the convergence of the business continuity management program and the crisis management plan.

Having a crisis management playbook and a communication strategy for things like an active shooter scenario are starting to converge with business continuity management. The primary area where we see overlap is the management structure that’s going to be leading that organization through one of those events. They are very different situations if you think about a tornado versus an active shooter. But the overall management structure, and who’s leading the organization and making key decisions and putting out public communication—that’s where the primary overlap is for those two different kinds of events. In the past, we’ve looked at them as two different programs. More mature organizations are starting to converge those two into one larger program that speaks to business resiliency.

BD: Any last points you want to make before we close this out?
Wilkinson: Today we are a very mobile workforce. How am I to use that mobility strategically to assist my business continuity program?

One of the ways that organizations can take advantage of this mobility is if they have a laptop refresh program. Let’s assume that a certain number of bank employees carry laptops, and those laptops get refreshed on an annual, biannual or every-three-year basis. If you’re not leasing those laptops and you own them, it’s a good opportunity to take those laptops, put them in a secure location and leverage them in case something does happen. It’s a lot easier to pull out 15- or 20-year-old laptops that already have a lot of the software and systems I need loaded on them than it is for me to create new systems from scratch.

Number two, when we see banks or organizations connecting their business continuity programs, in the unfortunate case where there is an event, communication is key. There are a lot of different systems out there that allow me to communicate with my employees and my customers. Pricing varies between the different products that are available, but the ability to send text messages—especially because typically that’s one of the last things that ultimately will go down from an infrastructure perspective in terms of the amount of data that’s used across networks—is changing the way that we as practitioners implement our plans.

How a Board Can Become a Strategic Asset



Issues like cybersecurity, digital transformation and future business models now require the attention of not just management teams, but also bank boards. As directors engage more deeply in these issues, Bill Fisher of Diligent explains how they can enhance the effectiveness of the board to be a true strategic asset to the bank.

  • The Board’s Role as a Strategic Asset
  • Enhancing Board Effectiveness
  • Addressing Board Skills

Why Your Bank Should Be Watching Amazon


amazon-7-7-17.pngCould Amazon be a threat to banks? The online retailer announced in June that its Amazon Lending program, a small-business loan service that the company began offering in 2011, had surpassed $3 billion in loans globally, to more than 20,000 small businesses. One-third of those loans—$1 billion—were created in the past year, making it larger than most small banks.

Competition from nonbanks in small business lending isn’t new. But while lending startups in the past have often excelled in technology, they struggled to gain customers, and funding was more expensive than for traditional banks. In contrast, banks have had the expertise and relationships, and can fund loans more cheaply.

Amazon’s loan growth may represent a new phase in loan disruption, according to Karen Mills, a senior fellow at Harvard Business School and former head of the U.S. Small Business Administration.

“Having a pipeline into a set of small business owners who are doing business with the platform, knowing a lot of data about their business, could very well be the equivalent of a customer pipeline that’s unparalleled except at some of the most important traditional banks,” Mills says.

Amazon isn’t putting banks out of business, at least not in the foreseeable future. While 20,000 small businesses and $3 billion in loans is nothing to sneeze at, the program is invitation-only and limited to Amazon sellers, with the company leveraging its data on its client businesses to make credit decisions.

“Amazon looks at everything as basically a use case,” says Steve Williams, a partner at Cornerstone Advisors, based in Scottsdale, Arizona. “Is it something that we can do that the customer would want, can we technically deliver it, and can we make a business out of it?”

Banks should prepare for a reality, led by companies such as Amazon, where customers expect rapid credit decisions and an easy loan process. An employee describes the lending process as “three fields and three clicks” in a video published by Amazon in 2014.

“You can’t waste your customer’s time, and Amazon is relentless in trying to make things easier for its partners and customers,” says Dan O’Malley, the chief executive officer at Boston-based Numerated Growth Technologies, which spun off from Eastern Bank’s lab unit in May. That unit developed an express business loan program for the bank, and banks can now license the lending platform through Numerated.

Mills recommends that banks examine whether they want to grow their small business lending portfolio and if so, examine if they can provide the platform in-house or need to use an outside company.

Banks have been increasingly partnering with fintech firms, but Amazon’s suitability as a partner is debatable: O’Malley says Amazon is notoriously difficult to work with. But Amazon seems open to relationships of convenience. JPMorgan Chase & Co. offers an Amazon Prime Rewards Visa credit card, which gives 5 percent cash back to Amazon Prime members on their Amazon.com purchases. BBVA Compass has been testing the Amazon Locker program in its Austin, Texas, branches, so Amazon customers can safely and conveniently pick up their orders. Presumably, this would drive more traffic to BBVA’s branches.

And there’s Alexa, Amazon’s voice-operated digital assistant, which is used in Internet-enabled speakers such as the Echo. So far, Capital One Financial Corp. and American Express are among the few financial institutions whose customers can use Alexa for tasks like making a credit card payment or getting details on spending.

Amazon sees promise in its voice-enabled devices. “We’re doubling down on that investment,” Chief Financial Officer Brian Olsavsky said in Amazon’s first quarter 2017 earnings call. With the Echo, Dot and Tap products, Amazon has about 70 percent of the smart speaker market cornered, according to TechCrunch.

“Voice commerce and having to deal with voice as a channel is an important thing that [banks] are going to have to figure out,” says James Wester, the research director responsible for the global payments practice at IDC Financial Insights.

Amazon likely doesn’t have its sights set on becoming a bank—at least not for now, says Wester. But the company’s customer-first approach to improving processes is setting the tone for commerce, and if Amazon thinks it can make life easier for its customers and make money doing it, it won’t shy away from competing with the banking industry.

The possibilities are endless. Amazon unveiled its Amazon Vehicles webpage as a research tool for consumers in 2016, and the retailer is gearing up to sell cars online in Europe, according to Reuters. “There’s no reason that people won’t say, ‘I’m going to buy my car through Amazon and finance it,’” says Cornerstone’s Williams. Auto loans may very well be the next financial product on Amazon’s radar, and then, what’s next?

Should TBV Dilution Be Dead?


TBV-5-29-17.pngAs bank executives look to add value through mergers and acquisitions (M&A), a recurring source of frustration is the tendency of investors and analysts to rely on narrow metrics to measure a deal’s value. Simple metrics are inadequate for evaluating the true value of a transaction. One widely used but misleading metric is the dilution of tangible book value (TBV) that occurs as a result of a transaction, coupled with the TBV earn-back period. TBV dilution and earn-back are poor indicators of a transaction’s full effect on the overall value of an organization.

Rather than using a single number to evaluate the success of a transaction, shareholders, boards and analysts should strive toward more comprehensive evaluations. Broader measures, coupled with a more qualitative evaluation of a transaction’s effects on bank strategy and shareholder value, can provide a holistic understanding of the relative worth of a merger or acquisition.

Gaps and Challenges
Despite its widespread use, TBV dilution earn-back can produce an incomplete measure of the viability of a bank M&A transaction. Reliance on simple metrics produces gaps and challenges such as the following:

  1. M&A structure: TBV dilution earn-back and other popular metrics are significantly affected by the way an acquisition or merger is structured. An all-cash acquisition will have a different effect on book value and earnings metrics than a deal that involves the issuance of new stock.
  2. External factors: Management actions such as post-deal stock repurchases can influence TBV dilution earn-back and various other earnings-based metrics. These metrics also are shaped by numerous external factors that can affect stock price, such as the run-up in bank stock values in the month after the 2016 election, when the markets began to anticipate regulatory reform.
  3. Regulatory expense: Despite expectations of future regulatory relief, regulatory expense will continue to contribute to banks’ financial pressures in the near term, reinforcing the need for continued growth in order to spread compliance-related costs across a larger base. Moreover, many banks still are likely to find it challenging to price deals fairly, due to the constraints of regulatory capital requirements.
  4. Indirect consequences: The market’s reliance on simple metrics can pose less immediate—but equally serious—indirect consequences. For example, negative perceptions about prior deals can limit a publicly traded bank’s growth opportunities, since its ability to compete in future deals often hinges on the value of its stock. This limitation can be damaging for banks and thrifts whose growth strategies are built around continuing M&A activity.

Measurable Success
Serious investors begin their evaluations with an estimate of the deal’s impact on earnings and earnings per share (EPS), but they also consider factors such as projected cost savings, expenses related to the transaction itself, and the speed and costs associated with a successful integration of the two organizations.

Management should lay out meaningful steps with measurable indicators of success. When evaluating cost savings, both the recurring savings and the one-time expenses that will be incurred to achieve them must be considered. An equally stringent standard also should be applied to projected merger-related expenses, such as professional fees and operational costs.

The totality of these various projections should be compared to the actual results achieved in prior transactions. If they vary significantly—or if earlier deals failed to achieve promised results—management should be able to explain the variations and rationale for the current projections.

The financial impact of an M&A transaction also should be compared with its potential return. Management should outline the rationale for the deal compared to alternative uses of capital, and it should be ready to present complete and relatively detailed plans, timetables, and targets. This analysis might be time-consuming, but it produces a clearer picture of a transaction’s true value.

A Comprehensive Approach to Deal Valuation
A complete analysis involves studying factors such as a deal’s impact on capital ratios, management’s integration plans and benchmarks, projected cost savings, and the management team’s track record and credibility. Thorough analysis also takes into account unpredictable external factors such as general economic conditions, changing interest rates, new competitive pressures, future technological advances and the changing needs of bank customers.

When management demonstrates a history of competence and a clear and credible rationale for its planned actions, it makes a more compelling case for investor confidence than simple metrics can offer. This more analytic approach can help investors, analysts, and other stakeholders—and ultimately bankers—by encouraging a more disciplined and comprehensive approach to deal valuation.