Designing an Experience that Empowers Businesses to Succeed

With more businesses choosing fintechs and neo-banks to address their financial needs, banks must innovate quickly and stay up-to-date with the latest business banking trends to get ahead of the competition.

In fact, 62% of businesses say that their business banking accounts offer no more features or benefits than their personal accounts. Fintechs have seized on this opportunity. Banks are struggling to keep up with the more than 140 firms competing to help business customers like yours manage their finances.

Narmi interviewed businesses to identify what their current business banking experience is like, and what additional features they would like to have. To help banks better understand what makes a great business banking experience, we’ve put together Designing a Banking Experience that Empowers Businesses to Succeed, a free online resource free for bank executives.

A banking platform built with business owners in mind will help them focus on what matters most — running a successful company. In turn, banks will be able to grow accounts, drive business deposits and get ahead of fintech competitors encroaching on their market share.

Understanding How Businesses Bank
No business is the same. Each has different financial needs and a way of operating. Narmi chose to talk with a range of business owners via video chat, including an early-stage startup, a dog-walking service, a bakery, a design agency and a CPA firm.

Each business used a variety of banks, including Wells Fargo & Co., JPMorgan Chase & Co., SVB Financial Group, Bank of America Corp. and more.

A few of the questions we asked:

  1. How is your current business banking experience?
  2. Which tools do you most frequently use to help your business run smoothly?
  3. How often do you log in?
  4. What are the permissions like on your business banking platform?
  5. What features do you wish your business banking platform could provide?

We conducted more than 20 hour-long interviews with the goal of better understanding how business owners use their bank: what they liked and disliked about their banking experience, how they would want to assign access to other employees, and explore possible new features.

We learned that businesses tended to choose a financial institution on three factors: familiarity and ease, an understanding of what they do and competitive loan offers. Business owners shared with us how their experience with the Small Business Administration’s Paycheck Protection Program factored into their decision about where they currently bank.

They tended to log into their accounts between once a day and once a week and oscillated between their phone and computers; the more transactions they had, the more frequently they checked their accounts. They appreciated when their institution offered a clean and intuitive user experience.

We also uncovered:

  • How do businesses handle their payments.
  • What do businesses think of their current banking features.
  • How do business owners want to manage permissions.

Want to read more? Download a free copy of Designing a Banking Experience that Empowers Businesses to Succeed.

Seven Costs of Saying “No” to Cannabis Banking

Ask the typical bank executive why their institution isn’t providing banking services to state-legal cannabis-related businesses (CRBs), and you will likely hear a speedy retort along these lines:

“We’re not allowed to — it’s still federally illegal.”

“We would love to, but we don’t know enough about that industry to manage the risk.”

“We don’t think our customers would want our name and reputation associated with that.”

On the surface, these prudent practices make perfect sense. A complex legal landscape, inability to assess regulatory risk and desire to protect the institution’s reputation are compelling reasons to stay far away from cannabis-related proceeds. But there are hidden costs to saying “no” to cannabis banking. These hidden costs accrue to CRBs, the communities in which they are located, the financial institutions that avoid them and potentially society at large.

Community Risks

Community risks stem from direct and indirect sources. The obvious risks, such as the increased potential for crime and the resulting challenges to law enforcement, are frequently cited. The indirect risks are less obvious, such as a community’s inability to identify or collect appropriate taxes on CRB proceeds.

Cash on hand invites crimes of opportunity. A retail location that is known to have large volumes of cash on hand produces a seductive temptation for the criminal element.

Cash is easy to conceal from revenue officials. Fewer dollars in the public coffers are the inevitable outcome when revenue goes uncollected. In its “Taxing Cannabis” report, the Institute on Taxation and Economic Policy indicates that tax evasion and ongoing competition from illicit marijuana operations remain an ongoing concern in legal use states.

Opportunity Costs

Early adopters have demonstrated that the cannabis industry is willing and able to accept higher price points from financial institutions in exchange for the safety and convenience of obtaining traditional banking services. Your bank’s avoidance means forfeiting both short-term and long-term opportunities to generate fee income while giving others a head start on future business opportunities.

Cost of lost fee income. It is not uncommon to hear of small financial institutions generating multimillion-dollar annual fee income from CRB accounts. In less-established markets, accounts yield monthly fees based on their average deposit balances.

Cost of missing out. Just like its social media counterpart — FOMO or fear of missing out — COMO is real. If 5% to 10% of your peers are already banking CRBs, imagine what will happen as the next 10% step in. And then the next 10% after that. Before the real race has even begun, you’ve ceded some portion of the addressable market simply by not being present in the market today.

Economic Costs

The suppression of legal cannabis businesses weakens their potential to inform decisions and progress. Anecdotal and scientific evidence supports that mental and physical health benefits can be derived from responsibly sourced and properly administered cannabis-based products. Data from countries that are moving quickly to align public policy with sentiment and science on these issues indicates that sustainable economic benefits are possible.

Cost of falling behind in medical and other scientific research and advances. In 2018, 420Intel identified six countries for their cannabis research: Spain, Canada, the Czech Republic, Uruguay, the Netherlands and Israel. This type of research cannot be conducted in the United States because of federal prohibitions that require clearing multiple regulatory hurdles, at great cost.

Costs of pain and suffering to those in need of relief. Even if your personal belief sets don’t allow you to explore cannabis topics with an open mind, you need look no further than your media feeds or internet searches to find immeasurable examples of individuals who claim that using cannabis or cannabinoids have provided them with physical and mental health benefits.

Cost of lost economic growth potential. While exact numbers are hard to come by, there more than 110 studies taking place in Israel alone, funded at rates in the six and seven figures apiece. BNN Bloomberg reported that Canada’s legalized cannabis sector contributed $8.26 billion to its gross domestic product in its first 10 months of national legalization.

So before your bank decides the risks of saying “yes” to banking CRBs is still too high, pause to consider the risks you’re allowing to affect your institution and local community when you say “no.” Perhaps it’s time to take a fresh look at whether CRB banking is for you.

Six Reasons to Have a Fintech Strategy


fintech-7-23-19.pngFinancial technology, or fintech, is rapidly and dramatically changing the financial services landscape, forcing banks to respond.

Banks are taking different approaches to capitalize on the opportunities presented by fintech, mitigating the risks and remaining competitive. Some of these approaches include partnering with fintech companies, investing in them, investing in internal innovation and development or creating or participating in fintech incubators and labs. Some banks focus on a single strategy, while some mix and match. But many have no plan at all.

The board of directors oversees the bank’s strategic direction and provides senior management with risk parameters to exercise their business discretion. Fintech must be part of that strategic direction. A thoughtful and deliberate fintech strategy is not only a best practice, it is a necessity. Here are six reasons why.

1. Fintech is Here to Stay. Bankers who have seen many trends come and go could be forgiven for initially writing off fintech as a fad. However, fintech is wholly reshaping the financial services industry through digital transformation, big data, cybersecurity and artificial intelligence. Fintech now goes far beyond core systems, enhancing capabilities throughout the bank.

2. Customers Expect It. Demographics are changing. Customers under 40 expect their banking services to be delivered by the same channels and at the same speed as their other retail and consumer services like online shopping and ride-hailing applications. Banks that cannot meet those expectations will force their younger customers to look elsewhere.

3. Competition and Differentiation. Community banks may not be able to compete with the largest banks on their technology spend, but they should be competitive with their peers. Developing and executing a thoughtful fintech strategy will enhance a bank’s identity and give them a competitive advantage in the marketplace.

4. Core Systems Management. Banks must have a strategy for their core banking systems. Replacing a legacy system can take years and requires extensive planning. Banks must weigh the maintenance expense, security vulnerability and reduced commercial flexibility of legacy systems against the cost, potential opportunities and long-term efficiencies of the next generation platforms.

5. Fiduciary Duty Demands It. A board’s fiduciary duty includes having a fintech strategy. The board is accountable to the bank’s shareholders and must create sustainable, long-term value. Director are bound by the fiduciary duty of care to act in the best interest of the bank. Given fintech’s rapid expansion, heightened customer expectations and the need to remain competitive, it is prudent and in the long-term best interest of the bank to have a fintech strategy.

6. Regulatory expectations. Boards are also accountable to bank regulators. The Office of the Comptroller of the Currency issued a bulletin in 2017 to address the need for directors to understand the impact of new fintech activities because of the rapid pace of development. The OCC is not the only regulator emphasizing that insufficient strategic planning in product and service innovation can lead to inadequate board oversight and control. A deliberate fintech strategy from the board can direct a bank’s fintech activities and develop a risk management process that meets regulatory expectations.

The best fintech strategy for a bank is one that considers an institution’s assets, capabilities, and overall business strategy and allows it to stay competitive and relevant. Not having a fintech strategy is not an option.

Your Bank’s Answer to the Cannabis Conundrum


strategy-5-30-19.pngBanks should not wait on lawmakers taking action on the myriad of proposed cannabis banking bills to make important strategic decisions about servicing marijuana-related business.

It is unclear if any of the proposed cannabis banking bills will gain enough traction and support in Washington to pass through Congress. Despite the inaction, a growing number of financial institutions are choosing to provide banking services to the cannabis industry. Banks considering doing business with cannabis companies need to determine if it fits within the institution’s overall strategy and risk appetite. To determine whether the business fits, a board should ask and answer the following four questions:

To be or not to be a cannabis bank? Every board needs to ask itself this question. Even if your bank does not actively seek out cannabis business customers, it is likely your bank has been or will be approached by a customer in the business who is seeking banking services.

The vast majority of banks in the U.S. have marijuana-related or hemp businesses in their market areas, now that more than three-fifths of the country permit some sort of legal cannabis production and use–medical, recreational or industrial hemp. It is quite possible your bank is unwittingly providing banking services to a customer who is at least tangentially related to the business. It is important for your board to definitively establish where your institution stands on this business line and communicate that to the business development, sales and other customer-facing personnel. Are you in or out? Not having a stance risks being flat-footed when an opportunity or a threat arises.

What is a marijuana-related business? The Financial Crimes Enforcement Network, or FinCEN, issued guidance in 2014 on how financial institutions can provide services to marijuana-related businesses in a manner consistent with their Bank Secrecy Act obligations. But neither FinCEN nor any bank regulator has defined the term “marijuana-related business,” or MRBs.

As a result, it is not always clear if your bank is doing business with an MRB. Certainly, those firms that physically handle the plant are MRBs: cultivators, processors, testing facilities, packagers, transporters and dispensaries. If they are required to have a state license, they are an MRB. Your bank should follow the FinCEN guidance regarding suspicious activity report filings when transacting with these companies.

But what about other individuals or companies that are indirectly connected to marijuana-related businesses, such as equipment suppliers, payment processors, consultants, landlords and advisors? There is no simple answer. If a significant portion of the customer’s revenue is dependent on the industry, it could be considered an MRB.

If your bank decides to offer banking services to cannabis businesses, the board and executives must establish a method to determine which indirectly related businesses are MRBs and prepare for revisions to the method if regulators provide further guidance.

Develop in-house compliance programs or engage a consultant? FinCEN is clear that a bank working with marijuana-related businesses must have a robust customer due diligence process. Shortcomings in the diligence process could lead to mistakes and missteps when it comes to compliance with the Bank Secrecy Act and anti-money laundering laws and lead to serious adverse outcomes.

Bank boards must determine whether their institutions have sufficient internal staff to develop and implement customer diligence and other compliance programs, or if they will outsource these functions. Any compliance function will require the board and management to provide appropriate oversight and monitoring of the cannabis-related compliance program.

Will your institution bank marijuana, hemp, or both? Recent changes in the Farm Bill made this a legitimate and important question for bank boards. Before the new Farm Bill was signed into law, the processes and procedures for dealing with hemp businesses were the same as cannabis businesses, because they were treated the same under the Controlled Substance Act.

The 2018 Farm Bill amended the Controlled Substance Act, including removing hemp from the definition of marijuana as long as it contains not more than 0.3% tetrahydrocannabinol, or THC. The bill also allowed states to establish programs for the licensure and regulation of cultivation, production, processing and sale of hemp products.

The Farm Bill changes mean it might become less difficult for banks to work with hemp-related customers from an operational and compliance standpoint. But neither the FinCEN nor federal bank regulators have issued updated guidance on working with hemp businesses following this change.

As federal policy on cannabis continues to evolve, banks will be well-served by internal evaluations and aligning their positions toward this industry sooner rather than later. Those four questions should assist any bank board in establishing their strategy for cannabis-related business.

New Big Bank Digital Ventures Could Threaten Community Banks


big-banks-8-14-18.pngAs if community banks don’t have enough to worry about, along comes Finn. And Access. And in the not-too-distant future, Greenhouse. All three are new digital banking platforms that have been introduced or are being test run by some of the country’s largest banks—JPMorgan Chase & Co., Citizens Financial Group and Wells Fargo & Co., respectively—and they mark a significant escalation in the digital banking space, with more new entrants to come. For example, Citigroup—at $1.9 trillion in assets, the country’s third largest bank—announced in late March that it plans going nationwide with a new mobile banking platform, although it hasn’t disclosed an exact release date.

The digital banking space is already crowded with countless fintech neobanks that work with bank partners behind the scenes to offer banking services along with unique personal financial management capabilities to millennials and other digitally-savvy consumers. Included in the mix are somewhat older challenger banks, like Simple, which is owned by BBVA Compass Bancshares (which is itself owned by Spanish banking conglomerate Banco Bilbao Vizcaya Argentaria); well-established direct banks like Bank of Internet USA, a subsidiary of $10 billion asset BOFI Holdings, which started operations in 1999; and unique players like Marcus, a digital platform launched in 2016 by investment bank Goldman Sachs, which combines an automated consumer loan capability with various deposit products—all aimed at a lower-brow customer base than Goldman has traditionally focused on.

“There is not a single incumbent bank in the U.S. with more than 20 branches who would surprise me if they launched a digital subsidiary,” says Peter Wannemacher, an analyst at Forrester Research who focuses on digital strategy in the financial services space. “What I mean by that is, I think every bank in America is considering this option.”

Why so much activity now when digital banking—including mobile—isn’t exactly new? “Incumbent banks are under a lot of pressure,” Wannemacher says. “Some of that’s market pressure. A lot of it is internal pressure. That is, their boards or their C-level executives desperately want to be relevant and be talked about in the digital space.”

Finn, which is branded as “Finn by Chase,” was launched nationwide by JPMorgan Chase (the largest U.S. bank with $2.5 trillion in assets) in June of this year as an all-mobile bank that is separate and distinct from its existing consumer banking product set, including its branch, online and mobile banking distribution channels. Finn includes a checking account with a debit card, a savings account, remote deposit and a multi-featured financial management tool set. Melissa Feldsher, a managing director who heads up the Finn operation, says that Chase is responding to what its research showed was “an unmet need” by a “smaller growing portion of the country that was truly looking for an end-to-end mobile banking experience.” Feldsher says that Finn is specifically targeting all “digitally savvy” consumers rather than just millennials, although she adds that those individuals “will tend to skew younger.”

Wells Fargo, the third largest U.S. bank with $1.9 trillion assets, is developing its own standalone mobile banking app, called Greenhouse. “Greenhouse is currently in a limited customer and team member pilot, and will expand to several states for iPhone users later this year on the Apple App store,” a spokesperson wrote in an email. “We will determine the national rollout following the pilot.” According to published reports, Greenhouse offers a spending account for paying bills, a savings account, debit card and financial management tools. Like Finn, this is a separate offering than what Wells customers receive through its consumer bank.

Taking a somewhat different approach is $155 billion asset Citizens Financial, the country’s 13th largest bank, which in July launched Citizens Access, described as a “nationwide direct-to-consumer digital bank” that will operate separately from its branch operation. Unlike Finn and Greenhouse, Access will only offer savings accounts and certificates of deposit. Citizens Access President John Rosenfeld says direct bank deposits are growing three to five times faster than brick-and-mortar deposits nationally. “This is an opportunity to extend our footprint [so] we can now reach all 50 states,” he says, “whereas we couldn’t do that before with our branch-based web product,” which Rosenfeld says was only available in Citizen’s traditional market. “We didn’t have the capability to open accounts outside the states we were in. Now we do,” he adds.

As large banks target consumers nationwide with these new direct banking ventures, community banks will be under pressure to up their game. “The larger banks are investing more in digital capabilities … and I think that community banks, to compete, are going to have to really evolve their digital capabilities,” Rosenfeld says.

Taking a Chance on the Unbanked


unbanked-1.png

Financial inclusion is a hot topic in our community, and for good reason. The banking industry faces a real challenge serving those people who don’t have access to traditional banking services.

According to the Federal Deposit Insurance Corp.’s latest annual survey on underbanked and unbanked, 7 percent of Americans didn’t have access to banking services in 2015. That represents nine million U.S. households. The number gets even bigger when you consider underbanked households, which are defined as those that supplement their bank accounts with nonbank products such as prepaid debit cards.

Some banks look at this market and only see the risks; others deem it outside of their target audience demographic. In either instance, the outcome is avoidance. Fintech leaders, by contrast, see an emerging opportunity and are proactively developing innovative solutions to fill the gap. Which poses the question: Is it possible for banks to do the same?

Deciding to move forward with this type of initiative must start with the data. One of the areas that we pay close attention to is application approval rates. We’ve been opening accounts via our digital platform since 2009, and we were initially surprised by lower-than-anticipated account approval rates. Why was this happening? As the number of consumers who want to open a bank account online increases, there are inherent risks that must be mitigated. From what we’ve learned, identity verification and funding methods for new accounts, for example, pose heightened challenges in the anonymous world of digital banking. As such, we have stringent controls in place to protect the bank from increasingly sophisticated and aggressive fraud attempts. This is a good thing, as security is not something we are willing to compromise.

However, we realize that not everyone we decline is due to potential fraud, and that therein lies a major opportunity. A large portion of declinations we see are a result of poor prior banking history. Here’s the kind of story we see often, which may resonate with you as well: A consumer overdrew their bank account and for one reason or another didn’t fix the issue immediately, so they get hit with an overdraft fee. Before long those fees add up and the customer owes hundreds of dollars as a result of the oversight. Frustrated and confused, the customer walks away without repaying the fees. Perhaps unknowingly, the customer now has a “black mark” on their banking reports and may face challenges in opening a new account at another bank. Suddenly, they find themselves needing to turn to nonbank options.

I am not excusing the behavior of that customer: Consumers need to take responsibility for managing their finances. But, shouldn’t we banks be accountable for asking ourselves if we’re doing enough to help customers with their personal financial management? Shouldn’t we allow room for instances in which consumers deserve a “second chance,” so to speak?

At Radius we believe the answer to that question is “yes,” which brings us back to my earlier point around opportunity. Just a few weeks ago we released a new personal checking account, Radius Rebound, a virtual second chance checking account. We now have a way to provide a convenient, secure, FDIC-insured checking account to customers we used to have to turn down. In doing so, we’re able to provide banking services to a broader audience in the communities we serve across the country.

Because of the virtual nature of the account, I was particularly encouraged by the FDIC’s finding that online banking is on the rise among the underbanked, and that smartphone usage for banking related activities is rapidly increasing as well. Fintech companies are already utilizing the mobile platform to increase economic inclusion; we believe that Radius is on the forefront of banks doing the same, and look forward to helping consumers regain their footing with banks.

Let me be clear, providing solutions for the unbanked and underbanked is more than a “feel good” opportunity for a bank—it’s a strategic business opportunity. A takeaway from the FDIC report is that the majority of underbanked households think banks have no interest in serving them, and a large portion do not trust banks. It’s upon banks to address and overcome those issues. At the same time, nonbank alternatives are increasing in availability and adoption. Like anything worth pursuing, there are risks involved and they need to be properly scoped and mitigated. But while some banks still can’t see beyond the risks, I think ignoring this opportunity would be the biggest risk of all.

Is Your Loan Origination Process Too Slow?


loan-origination-11-3-16.pngOne of the biggest disruptors to the banking industry in the past several years has been the rise of technologically based financial technology, or the fintech industry. Fintech has brought a new wave of competition by finding more efficient ways to offer many of the same services as banks, including—most recently—lending. As the OCC points out in a recent whitepaper, banks and credit unions need to start thinking seriously about incorporating technology into more of their processes if they are to compete and effectively service customers. As fintechs continue to encroach on core banking services, banks will need to begin to find ways to strengthen and quicken loan origination processes.

According to a 2015 study from McKinsey & Company, 9 percent of fintech companies tracked in the study were making headway in the commercial lending space, an area which made up 7.5 to 10 percent of global banking revenues in 2015. For banks to keep pace, bank management has to ensure that their back-office systems and procedures for loan origination are designed for efficient growth and risk mitigation.

Speed
Technology is shortening processing time for loans, and banks and credit unions, in response, need to speed up their loan origination. Fast turnaround time is the currency of the digital age. Perhaps the most striking example of speed in the lending world is Rocket Mortgage, a Quicken Loans app that launched in a splashy 2016 Super Bowl TV ad that boasted minutes-long pre-approval decisions for mortgages.

In order to increase speed in lending, institutions should start by identifying the biggest bottlenecks in their current origination process. For many institutions, it is data collection and entry. Implementing technology like an online client portal for borrowers to upload documents makes it easier to track down all the required paperwork and allows the loan officer to work in digital instead of paper files. Technology can automatically read tax returns and reduce the time loan officers spend on manual data entry.

Of course, getting the data is only half the battle. The loan still needs to be analyzed, risk rated, priced and reviewed by a loan committee, and by using integrated software and standardized templates, the entire process is streamlined, which means getting back to the customer more quickly.

Defensibility
Another competitive disadvantage that banks and credit unions must overcome is the level of regulatory scrutiny placed on loan decisions. When building a competitive loan origination system, banks should focus on implementing processes that accurately identify credit risk and enable defensible, well documented credit decisions. Three key components of a defensible origination solution include:

  • Automated data entry and calculations to avoid manual error
  • Comprehensive documentation at each step
  • Templates for processes and calculations to ensure consistency and objectivity

Scalability
If an institution wants to process 100 more loans each year, they could hire more staff. Yet, a technology-based origination process also equips the institution to grow without increasing overhead costs and by better deploying staff to high-value activities. Platforms are available that realize time savings and better information flow, giving staff the tools needed to scale the institution.

The rise of fintech in recent years is indicative of the great potential efficiencies offered by technological innovations in banking, and progressive institutions are finding ways to lead this charge. To stay competitive with other institutions as well as fintech, banks and credit unions need to re-examine their back-office processes for loan origination to find ways to increase efficiency in loan origination. Banks can automate data entry and calculations, create consistency through templates for credit analysis, risk rating and loan pricing and prepare for audits and exams more easily with thorough documentation at each step. It prepares the institution to grow, remain competitive and better service its customers.

To learn more about technological solutions for your lending process, download the whitepaper “Tapping Growth Opportunities in the Business Loan Portfolio.”