Why Investors Are Still Hungry for New Bank Equity


capital-10-12-18.pngThe U.S. economy is riding high. Bank stocks, while their valuations are down somewhat from their highs at the beginning of the year, are still enjoying a nice run. For most banks that want to raise new equity capital, the window is still open.

The banking industry is already well capitalized and bank profitability remains strong. According to the Federal Deposit Insurance Corp., the industry earned $60.2 billion in the second quarter of this year, a 25 percent gain over the same period last year, thanks in no small part to the Trump tax cut, which has also helped prop up bank stock valuations. The truth is, in the current environment, banks don’t need to raise new equity just to increase their capital base—they can do that through retained earnings. The industry is awash with capital and most banks don’t necessarily need even more of it.

“The industry overall is enjoying capital accretion,” says Bill Hickey, a principal and co-head of investment banking at Sandler O’Neill + Partners. “Capital ratios industry-wide have continued to increase as banks have earned money and obviously enjoyed the benefits of tax reform. … I think the need for equity capital has lessened slightly as a result of capital ratios continuing to increase.”

Over the last few years, banks have clearly taken advantage of the opportunity to repair their balance sheets, which were ravaged during the financial crisis. According to S&P Global Market Intelligence, there were 123 bank equity offerings in 2016, which raised nearly $6 billion in capital at a median offering price that was 125 percent of tangible book value (TBV) and 52.8 percent of the most recent quarter’s earnings per share (MRQ EPS). There were 146 equity offerings in 2017 that raised nearly $7.5 billion, with offering price medians of 66.3 percent of TBV and 16.6 percent of MRQ EPS. (The industry was much less profitable in 2016 than in 2017, which explains the wide disparity between the median values for the two years.) And through Sept. 26, 2018, there were just in 66 offerings—but they have raised $7.6 billion in equity capital, with a median offering price that was 175 percent of TBV and 13.3 percent of MRQ EPS.

As the median offering prices as a percentage of TBV have gone up over the last two and a half years, while also declining as a percentage of the most recent quarter’s earnings per share—which means that institutional investors are in effect paying more and getting less from a valuation perspective—you might think investor appetite for bank equity would begin to wane. But according to Hickey, you would be wrong.

“There is a lot of money out there looking to be deployed in financial services and banks,” he says. “So there are folks who need to deploy capital—pension funds, funds specifically focused on investing in financial institutions. They have cash positions they need to deploy into investments. So there is a great demand for equity, particularly bank equity at the current time.”

Hickey says most of this new equity was raised to fuel growth, either organic growth or acquisitions. But any bank considering doing so needs to provide investors with a detailed plan for how they intend to use it. “You have to be able to articulate a strategy for the use of the capital you intend to raise,” says Hickey. “That seems obvious, but it needs to be explained quite well to the investment community so they understand how the capital is going to be deployed and have a sense of what their return possibilities are.”

And if you’re going to tap the equity market to support your strategic growth plan, make sure you raise enough the first time around. “Arguably, a company [should] raise enough money that will allow it to fund their growth for at least 18 to 24 months,” Hickey explains. “Investors don’t like it when they’re investing today and then 12 months later the same company comes back looking for more capital. Investors would [prefer] to minimize the number of offerings so they’re not diluted in the out years.”

How One Top-Performing Bank Explains Its Remarkable Success


strategy-10-5-18.pngThe closer you look at U.S. Bancorp’s performance over the past decade, the more you’re left wondering how the nation’s fifth biggest commercial bank by assets has achieved its remarkable success.

Here are some highlights:

  • It was the most profitable bank on the KBW Bank Index for seven consecutive years after the financial crisis.
  • It emerged from the crisis with the highest debt rating among major banks.
  • Its employee engagement scores are consistently at the top of the industry.
  • It has been named one of the most ethical companies in the world for four consecutive years by the Ethisphere Institute.

How has the $461 billion bank based in Minneapolis, Minnesota, accomplished all this?

If you ask Kate Quinn, the bank’s vice chairman and chief administrative officer, the answer lies in its culture.

“There’s a reason that sayings like ‘culture eats strategy for lunch’ are stitched into pillows,” says Quinn.

Quinn doesn’t talk about U.S. Bancorp’s culture from a distance; since joining the bank in 2013 to oversee its rebranding campaign, she has led the charge on articulating and capturing the bank’s culture in a series of value and purpose statements.

“When I was starting to do the work of building the brand, I looked into the history of the company, its genealogy, to figure out our core attributes—the attributes our customers and employees associate with us,” says Quinn. “What I found was this unique thing about us. Any company can say ‘we bring our minds to our customers,’ but there aren’t many companies that can credibly say ‘we bring our hearts to our customers,’ and we can say that. It is real.”

Given that executives at all companies will tell you the same thing, the challenge is to differentiate between companies that pay lip service to these ideals and those that genuinely embrace them.

“The real insight you get about a banker is how they bank,” Warren Buffett has said in the past. “Their speeches don’t make any difference. It’s what they do and what they don’t do [that defines their greatness].”

One way to gauge what a bank does and doesn’t do is to look at its financial performance over an extended period of time. It’s an imperfect proxy, admittedly, but a revealing one nonetheless, as businesses built on unethical or immoral foundations simply aren’t sustainable. At one point or another, the chickens always come home to roost—just ask Wells Fargo & Co.

This is why U.S. Bancorp’s performance, since its current leadership took control of Cincinnati-based Star Banc in 1993, is so significant. It didn’t commit mishaps that caused it to fall prey to a larger competitor in the consolidation cycle of the 1990s. A decade later, it sidestepped the accounting scandals surrounding Enron, WorldCom, Tyco and others that tarnished the images of so many bigger banks. And it steered clear of the worst excesses in the mortgage and securities markets in the lead-up to the financial crisis.

Anyone who knows U.S. Bancorp’s former chairman and CEO Richard Davis will tell you that he embodied principled leadership, adopting an approach that wasn’t only ethical and rational, but also one that embraced balance. He never sent emails to his employees at night, for instance, because he didn’t want to interfere with their home lives. He was also known to call his employees’ parents on their birthdays.

When it came to bottling U.S. Bancorp’s culture, then, one of Quinn’s objectives was to capture Davis’ approach.

“As I was getting my head around what do we do and what are we trying to do, I realized that it isn’t about the products and services,” says Quinn. “When you think about what a bank does—and this came from Richard—it’s really about powering human potential. I told him that I wanted to build his DNA into the company—the culture, the purpose, the core values. That is the part of Richard that has become the fabric of this company.”

But Davis’ influence is just one element of U.S. Bancorp’s broader culture. Other elements come from Davis’ predecessor and successor.

His predecessor, Jerry Grundhofer, was a tactical operator with few equals. He was the dean of efficiency, one of the valedictorians of banking throughout the 1990s.

“Jerry brought a set of values and capabilities to the company that was needed—scrappiness, cut to the chase, financial discipline,” says Quinn. “When Richard came in, he didn’t change that piece of it, he built on top of what Jerry did by adding the human dimension. Jerry had always put the shareholders first. Richard came in and put the employees at the top.”

The same is true of Davis’ successor, the bank’s current chairman and CEO, Andy Cecere, who adds another element into the mix. Cecere’s reputation is that of a practical innovator who’s pushing the bank to focus on change, innovation and technology. His favorite presentation slides, for example, compare the Old Western TV series Bonanza to the Jetsons.

Again, things like this are easy to dismiss as vacuous corporate-speak. But one lesson you learn after spending enough time with top-performing bank CEOs is that just because something sounds trite doesn’t mean it isn’t true.

Quinn understands that. It’s why she’s writing these cultural attributes into U.S. Bancorp’s DNA with revamped value and purpose statements. Facile notions of efficiency and operating leverage may excite analysts on quarterly conference calls, but the true source of U.S. Bancorp’s competitive advantage lies in its commitment to doing what’s right.

Fueling Future Growth


2017-Compensation-White-Paper.pngOver the past year and a half, there’s been a lot of good news for the banking industry. New regulators have been appointed who are more industry-friendly. Congress managed to not only pass tax reform, but also long-awaited regulatory relief for the nation’s banks. And the economy appears to remain on track, exceeding 4 percent gross domestic product (GDP) growth in the second quarter of 2018, according to the Bureau of Economic Analysis.

Bank Director’s 2018 Compensation Survey, sponsored by Compensation Advisors, a member of Meyer-Chatfield Group, finds that the challenges faced by the nation’s banks may have diminished, but they haven’t disappeared, either.

Small business owners are more optimistic than they’ve been in a decade, according to the second quarter 2018 Wells Fargo/Gallup Small Business Index survey. This should fuel loan demand as business owners seek to invest in and grow their enterprises. In turn, this creates even more competition for commercial lenders—already a hot commodity given their unique skill set, knowledge base and connections in the community. Technological innovation means that bank staff—and boards—need new skills to face the digital era. These innovations bring risk, in the form of cybercrime, that keep bankers—and bank regulators—up at night.

For key positions in areas like commercial lending and technology, “banks have to spend more,” says Flynt Gallagher, president of Compensation Advisors. “You have to pay top dollar.”

But a solid economy with a low unemployment rate—dropping to 3.8 percent in May, the lowest rate the U.S. has seen in more than 18 years—means that banks are facing a more competitive environment for the talent they need to sustain future strategic growth.

And regulatory relief doesn’t mean regulatory-free: With the legacy of the financial crisis, along with the challenges of facing economic, strategic and competitive threats, all of which are keeping boards busy, there’s more resting on the collective shoulders of bank directors than ever before, and boards will need new skill sets and perspectives to shepherd their organizations forward.

For more on these considerations, read the white paper.

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

One Thing That Will Make You a Better Bank CEO


leaders-9-11-18.pngThere’s a reason great leaders also tend to be better than the average Joe and Jane at forecasting the future. As multiple conversations with participants on the first day of the 2018 Bank Board Training Forum in Chicago reveal, effective leadership and accurate predictions seem to derive from the same underlying trait.

For a long time it was believed that forecasting was about as accurate as throwing darts at a dartboard with a blindfold on. It’s common knowledge and running joke, after all, that economists have predicted nine out of the past five recessions.

But a growing body of research, spearheaded by Philip Tetlock, the Annenberg professor at the University of Pennsylvania’s Wharton School of Business, has found not only that some people are better at forecasting than others, but also that certain traits make some better at predicting the future than others.

What’s that important trait?
Tetlock refers to it as perpetual beta—“the degree to which one is committed to belief updating and self-improvement.” In other words, if you’re dedicated to constantly learning and accumulating knowledge, chances are you’ll be better at predicting the future than an ordinary person.

Perpetual beta isn’t just slightly more important than other traits; it’s vastly more important. “It is roughly three times as powerful a predictor as its closest rival, intelligence,” Tetlock wrote in his book Superforecasting: The Art and Science of Prediction.

This is interesting in and of itself, but what makes it more interesting is this idea of constant improvement and knowledge accumulation also happens to be one of the most robust commonalities of great bankers.

Bank Director CEO Al Dominick noted this in his opening remarks at this year’s training forum, when he talked about the three traits of top bank boards. No. 2 was cultivating curiosity—embracing a learner’s mindset.

It was also a theme that coursed through the keynote conversation with Katherine Quinn, vice chairman and chief administrative officer of U.S. Bancorp, the fifth-largest commercial bank in the country and long one of the best-performing companies in the industry.

Quinn took it one step further, connecting the dots between diversity, knowledge and decision-making. The more diverse your employee base is, she explained, the wider the spectrum of ideas your organization will be exposed to, making it more likely you’ll arrive at the optimal solution to whatever issues you need to address.

The connection between constant learning and effective leadership was also a point that Tom Brown, the founder and CEO of Second Curve Capital, a hedge fund that invests in publicly traded financial services companies, made in a conversation on the sidelines of this year’s training forum.

Brown would know. Walk into the corner office of most superregional or major money center banks and the chances are good that, at one time or another, he has been there.

So, how do you pursue knowledge and get others in your organization to follow suit? You have to read—a lot. It sounds simple, but it’s incredibly powerful.

Asked once for advice on how to become a successful investor, Warren Buffett, the chairman and CEO of Berkshire Hathaway, pointed to a stack of papers: “Read 500 pages like this every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”

You’ll hear the same thing from other extraordinary bankers.

Michael “Mick” Blodnick, the former CEO of Glacier Bancorp, the second best-performing bank of all time based on total shareholder return, spent years staying up late reading about banking. And anyone who worked with Robert Wilmers, the late chairman and CEO of M&T Bank, the top-performing bank of all time, will tell you he was a voracious reader.

And it’s not just about reading either, a point Bank of America chairman and CEO Brian Moynihan made in a recent interview with Bank Director magazine, which will appear in the fourth quarter.

“Reading is a bit of a short-hand for a broader type of curiosity,” said Moynihan. “The reason I attend conferences is to listen to other people, to pick up what they’re talking and thinking about. It’s about being willing to listen to people, think about what they say. It’s about being curious and trying to learn. The minute you quit being educated formally your brain power starts to shrink unless you educate yourself informally.”

Ideas like this can sound trite—a point great CEOs will readily acknowledge—but after hearing it enough times from enough of them and you can’t help but conclude that what’s trite also often tends to be true.

Traits That All Strong Bank Boards Share


governance-9-7-18.pngFor years, I’ve shared one of my favorite proverbs when talking about the value of high-performing teams: to go fast, go alone; to go far, go together. Now, as we prepare to welcome nearly 200 people to the Four Seasons Chicago for our annual Bank Board Training Forum, this mindset once again comes front and center.

In many ways, banks may appear to be on solid footing. Unfortunately, evolving cyber risks, the battle for deposits and pressures to effectively leverage technology make clear that banking leaders have challenges aplenty. Given the industry’s rapid pace of change, one would be forgiven to think the best course of action would be to go fast at certain challenges. However, at the board level, navigating an industry marked by both consolidation and emerging threats demands coordinated, strategic planning.

Our efforts in the days ahead aim to provide finely tailored insight to help a bank’s board go further, together.

This annual forum caters to an exclusive audience of bank CEOs, chairmen and members of the board. It is a delight to have Katherine Quinn, vice chairman and chief administrative officer, from U.S. Bancorp, as our keynote speaker. U.S. Bancorp has the highest debt rating among all banks and consistently leads its peer group in terms of profitability, efficiency and innovation. Bank Director Executive Editor John Maxfield will have a one-on-one conversation with Quinn and cover everything from the qualities of good leadership to diversity to the Super Bowl.

Following her remarks, we explore strategic issues like building franchise value, creating a vibrant culture and preparing for the unexpected. Against the backdrop of this year’s agenda, there are five elements that characterize the boards at many high-performing banks today. Some are specific to the individual director; others, to the team as a whole.

#1: The Board Sees Tomorrow’s Challenges as Today’s Opportunities
Despite offering similar products and services, a small number of banks consistently outperform others in the industry. One reason: their boards realize we’re in a period of significant change, where the basic premise of “what is a bank” is under considerable scrutiny. Rather than cower, they’ve set a clear vision for what they want to be and hold their team accountable to concepts such as efficiency, discipline and the smart allocation of capital.

#2: Each Board Member Embraces a Learner’s Mindset
Great leaders aren’t afraid to get up from their desks and explore the unknown. Brian Moynihan, the chairman and CEO of Bank of America, recently told Maxfield that “reading is a bit of a shorthand for a broader type of curiosity. The reason I attend conferences is to listen to other people, to pick up what they’re talking and thinking about… it’s about being willing to listen to people, think about what they say. It’s about being curious and trying to learn… The minute you quit being educated formally your brain power starts to shrink unless you educate yourself informally.”

You can read more from Bank Director’s exclusive conversation with Moynihan in the upcoming 4th quarter issue of Bank Director magazine.

#3: The Board Prizes Efficiency
In simplest terms, an efficiently run bank earns more money. This allows it to write better loans, to suffer less during downturns in a credit cycle, to position it to buy less-prudent peers at a discount all while gaining economies of scale.

#4: Each Board Member Stays Disciplined
While discipline applies to many issues, those with a laser focus on building franchise value truly understand what their bank is worth now — and might be in the future. Each independent director prizes a culture of prudence, one that applies to everything from underwriting loans to third-party relationships.

#5: The Board Adheres to a People-Products-Performance Approach
Smart boards don’t pay lip service to this mindset. Collectively, they understand their institution needs to (a) have the right people, (b) strategically set expectations around core concepts of how the bank makes money, approaches credit, structures loans, attracts deposits and prices its products in order to (c) perform on an appropriate and repeatable level.

Looking ahead, a sixth pillar could emerge for leading institutions; namely, diversity of talent. Now, I’m not talking diversity for the sake of diversity. I’m looking at getting the best people with different backgrounds, experiences and talents into the bank’s leadership ranks. Unfortunately, while many talk the talk on diversity, far fewer walk the walk. For instance, a recent New York Times piece that revealed female executives generally still lack the same opportunities to move up the ranks and there are still simply fewer women in the upper management pipeline at most companies.

At Bank Director, we believe ambitious bank boards see the call for greater diversity as a true opportunity to create a competitive advantage. This aligns with Bank Director’s 2018 Compensation Survey, where 87 percent of bank CEOs, executives and directors surveyed believe a diverse board has a positive impact on the performance of the bank. Yet, just 5 percent of CEOs above $1 billion in assets are female, 77 percent don’t have a single diverse member on their board and only 20 percent have a woman on the board.

So as we prepare to explore the strong board, strong bank concept in Chicago, keep in mind one last adage from Henry Ford: if all you ever do is all you’ve ever done, then all you’ll ever get is all you’ve ever got.

Breaking Down Deregulation Based On Asset Size


deregulation-9-5-18.pngIn May, President Donald Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act into law, clearing the last hurdle for an expansive roll-back of U.S. banking regulations. The bill will relieve many of the nation’s banks from compliance and regulatory obligations imposed by the 2010 Dodd-Frank Act, adopted in the aftermath of the 2008 financial crisis.

The legislation benefitted from significant support from the banking industry, and in particular from the Independent Community Bankers of America and other representatives of community banks. Proponents of the bill assert that the oversight and compliance obligations imposed by Dodd-Frank disproportionately burdened community banks with the costs and organizational challenges associated with compliance, even though these institutions do not pose the same level of risk to the domestic or global financial systems as their larger national bank counterparts.

To address these concerns, the new law adjusts existing regulatory requirements to create a more tiered regulatory framework based on institution asset size, primarily by (i) removing certain compliance obligations to which community banks are subject, and (ii) increasing the threshold triggering application of some of the most stringent oversight and compliance requirements.

The most significant regulatory changes for community and regional banks resulting from the law include:

Under $3 Billion:
Raises the qualification threshold from $1 billion in assets to $3 billion in assets for: (i) an 18-month exam cycle for well-managed, well-capitalized banks, and (ii) the Federal Reserve’s Small Bank Holding Company Policy Statement.

Under $10 Billion:
No longer subject to the Volcker Rule enacted as part of Dodd-Frank. The Volker Rule restricts proprietary trading by FDIC-insured institutions, and imposes related reporting and compliance obligations on these institutions as a result. These reporting and compliance obligations reflected regulators’ belief that proprietary trading poses high systemic risk. But because it is typically only large national institutions that engage in proprietary trading, the community banking industry argued that smaller banks should not be subject to the Volcker Rule.

Deems certain mortgages originated and retained in portfolio as Qualified Mortgages if: (i) they comply with requirements regarding prepayment penalties, (ii) they do not have negative amortization or interest-only features, and (iii) the financial institution considers and documents the debt, income and financial resources of the customer. Qualified Mortgages are legally presumed to comply with Dodd-Frank’s Ability to Repay requirements.

Truth In Lending Act escrow requirement exemption for depository institutions that originated no more than 1,000 first lien mortgages on principal dwellings in the previous year.

Directs federal banking regulators to develop a Community Bank Leverage Ratio (equity capital to consolidated assets) between 8 and 10 percent. Banks exceeding this ratio will be deemed well capitalized and in compliance with risk-based capital and leverage requirements. Federal banking agencies may consider a bank’s risk profile when evaluating whether it qualifies as a community bank for purposes of the ratio requirement.

$10 Billion – $50 Billion:
No longer subject to mandatory stress testing or required to maintain risk management committees.

$50 Billion – $250 Billion:
No longer designated as “Systemically Important Financial Institutions” under Dodd-Frank. This designation triggers application of “enhanced prudential standards” under existing law, such as stress-testing and maintenance of risk management committees.

Institutions holding between $50 billion and $100 billion in assets will are exempt as of May 24, 2018, and institutions holding between $100 billion and $250 billion in assets will become exempt as of November 24, 2019.

Under $250 Billion:
Changes the application of High Volatility Commercial Real Estate (HVCRE) rules, which will now only apply to the 12 largest domestic institutions. Existing HVCRE rules apply broadly to loans made for the acquisition or construction of commercial real estate, unless one of a few exemptions applies. Loans categorized as HVCRE receive a higher risk-weighting under capital adequacy regulations, requiring the bank to hold more capital than for non-HVCRE loans. The banking industry argued the HVCRE definition was unnecessarily broad and the related guidance was redundant.

All Banks:
Exempts certain rural real estate transactions of less than $400,000 from appraisal requirements if no certified appraiser is available. Community banks argued that finding appraisers in rural areas can be difficult or expensive.

Depository institutions that originate fewer than 500 closed-end mortgages or open-end lines of credit will be exempt from certain disclosures under the Home Mortgage Disclosure Act.

The expansiveness of these reforms means a significant easing of U.S. bank regulations applicable to community and regional banks. Legislators have indicated that the Act may soon be followed by further regulatory changes. Regardless of future congressional action, the newly modified regulatory landscape will be new and very different for many banking institutions, especially those far from Wall Street and doing business on Main Street.

The Big Future of Small Business Banking


fintech-8-28-18.pngAccording to the U.S. Small Business Administration Office of Advocacy, there are currently 29.6 million micro and small businesses in the United States. Of those, 80 percent are one-person businesses, and 22 percent are made up of 10 employees or fewer. Businesses that fall within these parameters span every industry from freelancers and bloggers, to designers, developers, and start-up entrepreneurs. All are seeing a boom in sales and dependency from consumers due to the so-called “gig economy.”

A lot has been done by banks and alternative lenders when it comes to providing financing for these micro and small businesses, but given this data, it begs the question: how do they all bank?
Traditionally, banking for micro and small businesses has been limited at best and inadequate at worst. In most cases, small business owners have had no other option but to visit a physical bank branch, fill out endless paperwork, provide documentation, and then transfer items back and forth to the bank through the mail or by email. The technology is typically clunky, out of date, and inconvenient – all adjectives a far cry from how these businesses would describe themselves, and how they need to operate. In addition, these owners are, at their core, consumers. They experience cutting-edge products and technology with their own personal banking accounts, but that same innovation is not replicated on the business side.

To alleviate this burden, the banking industry has a lot of soul searching to do. Some banks have spent a lot of time and energy discussing digital banking disruption in the consumer world. The time has come for the next frontier in the small business market, which has inspired and driven forward-thinking banks to develop customized solutions for small business customers.

For banks considering entering—or reimagining their approach to—the small business segment, it begins with a solid strategic plan. Understanding the demographics and banking needs of your target market will help guide the product development and customer experience process. This covers everything from developing a product suite that will be appealing to both the market and your bottom line, to thinking through the journey as a business going from being a prospect to a customer.

At Radius, we took some learnings from our experience in the digital consumer banking space and used it to build the framework for our small business offering. While small business owners may need a little more complexity with their money management tools than consumers, designing something that was simple and straightforward was the key. The result for us was the Tailored Checking Account, which any small business can now apply for online and get opened in minutes thanks to a partnership we established with Treasury Prime, a San Francisco-based fintech.

Radius isn’t alone in its quest to help business owners better manage their finances. In addition to our offering, we’ve noticed several other fintechs focused and working to fill the void that many small business owners are experiencing. For example, Autobooks helps small businesses manage their receivables, payables, payments and accounting entirely online. Brex creates business debit cards that operate like credit cards without the need for a personal guaranty. And Rocket Dollar helps individuals unlock their retirement savings for things like funding a startup or making a small business loan.

Overall, the sheer amount of micro and small businesses requires the banking industry’s attention. Consumers are increasingly turning to shopping local and supporting small businesses, only hastening the need for small business owners to manage their money on their terms—a trend that won’t decline anytime soon. This is a market that all banking professionals should be paying attention to, as the market only continues to grow. I look forward to seeing the outcome over the next year and am eager to see what the future holds for us and the rest of the small business banking industry.

Aligning Risk With Strategic Growth



The banking industry is experiencing change like it never has before. Digital delivery channels will have a profound effect on the typical bank’s business model, and further change is coming through regulatory relief. Both can offer new opportunities and new risks. KPMG’s David Reavy details what you need to know about these changes and how boards should focus on today’s risks.

  • The Future Bank Business Model
  • Regulation and Industry Change
  • Expectations for Boards

What Banks Need to Know About Fintech Partnerships


The idea that banks and fintechs need to compete with each other is unfounded and restrictive to both parties.

Both fintechs and banks have a lot to gain by collaborating, and very little to lose. For fintechs, the most widely cited reasons for partnering with banks, according to Capgemini, include enhanced visibility by partnering with established brand names, achieving economies of scale and gaining customer trust.

fintech-reasons.png

For banks, the benefits are much more tangible, and their impact on the bottom line can be immediate.

The European Business Review explained it well: “By tapping into expertise, traditional banks stand to move much more swiftly and effectively than they otherwise could to introduce new products, streamline processes, enhance customer experience, and increase revenues.”

Looking at increased revenues, Accenture claims banks can potentially gain three to five percent by partnering with fintechs, with gains coming from enhanced customer acquisition, more fee-based revenue, better pricing accuracy, and a lower cost of risk.

When approaching a partnership with a fintech, there are a few things banks should be cognizant of in order to ensure success:

1.  Serve your customers first
First and foremost, your customers should be at the center of everything you do, including your partnerships with fintechs. How well you are serving your customers dictates your success more than anything else, and every fintech partnership represents an opportunity to further build and solidify customer loyalty.

For this reason, it’s important to partner with fintechs that will address customer pain points the most effectively. There are a lot of fintechs for banks to choose from in the process of finding partners, and the degree to which a partnership with a fintech will improve the life of customers should weigh in heaviest in your decision making.

2.  Think holistically about your partnership
If you want your partnership with a fintech to be a success, you need to think deeper than your initial partnership agreement. Especially in sell-through partner channels, setting time aside to have your sales and support teams familiarize themselves with the typical FAQs and support procedures will ensure your go-to-market strategies are aligned, and you are promoting the product or service as effectively as possible in the smallest amount of time.

3.  Ongoing collaboration is necessary for success
The nature of your fintech partner’s business is bound to change and evolve. For this reason, it is essential to keep up with the best ways to sell their product or service to your customers.

Many fintechs host training and workshops for the banks they partner with, and offer marketing resources to help banks promote the value of their service. Take advantage of these things to ensure you are getting the most out of your partnerships.

Accounts Payable (AP) Automation is one example of a way a fintech partnership can become a strategic advantage for a bank.

MineralTree has seen banks build customer loyalty while simultaneously driving interchange revenue due to a few core changes, which include:

  1. The private-labeled solution streamlines a workflow for bank customers that has traditionally been very manual, paper-based, and filled with frustration.
  2. The updated workflow simplifies the process for bank customers to pay vendors through the commercial card program run by their banks.
  3. Banks are able to integrate with their customer’s business at a deeper level by addressing pain within the operations of their customers’ businesses.

Also, with AP Automation still approaching a tipping point in adoption, banks have an opportunity to drastically differentiate themselves by offering a solution that is truly disruptive.

Regardless of which types of services or products you believe can bring value to your customers, the opportunity to partner with fintechs makes the process of introducing them and quickly realizing their benefits much easier.

Why Management and Directors Need to Consider Blockchain in Overall Digital Strategy


blockchain-8-15-18.pngIf we think back to what we were doing in 1994, we would say we were using a gigantic cell phone, just hearing about the internet, addicted to the fax machine, and just starting to use email. Fast forward, and we are with blockchain where we were with the internet and email in 1994.

After the sale of Mechanics Bank in 2015 and subsequently leaving my role as CEO, I embarked upon a journey that has forever changed how I think; how I problem solve; how I view the boardroom; the secret society of the c-suite and most importantly, how I view technology, people and process.

There is a convergence of social media, digital retail, robotics, artificial intelligence, wearables, blockchain, Internet of Things, big data and advanced analytics. We must think about the big picture and how all of these pieces fit together in overall corporate and organizational digital strategy.

Forbes recently reported the top 20 largest businesses in the world, including top financial institutions, are all now exploring blockchain. These same companies are simultaneously evaluating and implementing the use of big data, predictive analytics, artificial intelligence and machine learning.

Since 90 percent of goods in global trade are transported through the shipping industry supply chain, let’s use the announced partnership of Maersk and IBM as our first example.

As you may know, Maersk is the largest shipping container company in the world, transporting 15 percent of the world GDP each year.

The shipping industry supply chain consists of:

  • Land transportation brokers
  • Customs brokers
  • Ports
  • Freight forwarders
  • Governments
  • Ocean carriers

Like many bank functions in the U.S., global trade functions are antiquated. The industry is still largely paper intensive with organizational silos and a heavy reliance on Excel. A typical transaction can take up to 30 people and more than 200 communications to complete. Maersk is not immune to these same challenges, but recently embarked on its own digital transformation through two partnerships:

  • Microsoft Enterprise Services to move five regional datacenters to the cloud, improve IT performance, bolster customer services, and reduce operational risk;
  • IBM to improve transparency and efficiency, with complete visibility of tracking millions of container shipments each year.

Each participant in a supply chain ecosystem can view the progress through the supply chain. They can also see the status of customs documents, view bills of lading and other data. This will all be done using blockchain technology and smart contracts.

So, what does all of this mean? Let’s take a look at how this all ties in to what I call “the digital innovation melting pot” and why we as bankers must pay attention:

In this video, the bank is partnered with the shipping, wearable device, driverless car, identity, virtual agent/chatbot, social media, social media influencers, predictive analytics, retailer, airline, and hotel industries. These 11 industries are working together to offer products, complete transactions and improve the customer experience with little in-person human interaction.

My view of blockchain, innovation and its place in the new digital world is from my role as a CEO who’s been accountable to shareholders, responsible for the bottom line. Though the top banks in the country have caught on to this trend, many banks are still in the dark ages, plagued by denial, lack of innovation knowledge and the right talent.
Many institutions still have bricked-up infrastructure, engrained in the mentality that “this is the way it’s always been done,” with a lot of outdated, dysfunctional and inefficient processes, policies and procedures.

The disregard of digital technology disruption and innovation is like a termite infestation that destroys the structure if you don’t pay attention to warnings and maintain the property.

Key Takeaways
Partnerships are the way of the future. A bank can no longer rely solely on its own infrastructure and core vendor relationships. The new digital world converges industries, so make sure you pick the right partners. To do so, understand existing infrastructure and look through the lens of generational age groups with a customer focus.

  • Does the customer want simple to use technology services and want it now?
  • Do they prefer more traditional services, and are they less trusting of new market entrants? Do they still value human advice?
  • Do they value high-quality service and view “trust as a must,” but are interested in innovation and want to be educated?
  • Is there forward-thinking leadership in the boardroom and C-suite?
  • How does the board get refreshed with new perspective?
  • Would board members be willing to give up their board seat to allow fresh perspective?
  • Has there been evaluation about current state and future growth?
  • Is there understanding about existing system capabilities, shortfalls, what works, what doesn’t?

Determine your game plan:

  • Does the front end need digitization?
  • Fix front end while gradually replacing legacy infrastructure and integrating middle and back office?
  • Go digital native – full overhaul?
  • Evaluate whether systems, processes, procedures and policies are still relevant?

Don’t forget impact on your people. Make sure new offerings do not cannibalize existing product offering and pricing. Remember that a digital expert is unnecessary in the boardroom. Instead find a digital technology translator; someone who understands the cause and effect of decisions made at the macro level. Lastly, and most importantly, figure out how to disrupt your business model before it becomes disrupted.