Connecting with Millennials By Going Beyond Traditional Services


technology-8-28-19.pngBanks are at a crossroads.

They have an opportunity to expand beyond traditional financial services, especially with younger customers that are used to top-notch user experiences from large technology companies. This may mean they need to revisit their strategy and approach to dealing with this customer segment, in response to changing consumer tastes.

Banks need to adjust their strategies in order to stay relevant among new competition: Accenture predicts that new business models could impact 80% of existing bank revenues by 2020. Many firms employ a “push” strategy, offering customers pre-determined bundles and services that align more with the institution’s corporate financial goals.

What’s missing, however, is an extensive “pull” strategy, where they take the time to understand their customers’ needs. By doing this, banks can make informed decisions about what to recommend to customers, based on their major consumer life milestones.

Only four in 10 millennials say that they would bundle services with financial institutions. Customers clearly do not feel that banks are putting them first. To re-attract customers, banks need to look at what they are truly willing to pay for — starting with subscription-based services. U.S consumers age 25 to 34 would be interested in paying subscription fees for the financial services they bundle through their bank such as loans, identity protection, checking accounts and more, according to a report from EY. With banks already providing incentives like lower interest rates or other perks to bundle their services, customers are likely to view a subscription of bundled services with a monthly or annual fee as the best value.

Subscription-based services are a model that’s already found success in the technology and lifestyle sector. This approach could increase revenue while re-engaging younger generations in a way that feels personal to them. Banks that decide to offer subscription-based services may be able to significantly improve relationships with their millennial customers.

But in order to gain a deeper understanding of what services millennials desire, banks will need to look at their current customer data. Banks can leverage this data with digital technology and partnerships with companies in sectors such as automotive, education or real estate, to create service offerings that capitalize on life events and ultimately increasing loyalty.

Student loans are one area where financial institutions could apply this approach. If a bank has customers going through medical school, they can offer a loan that doesn’t need to be repaid until after graduation. To take the relationship even further, banks can connect customers who are established medical professionals to those medical students to network and share advice, creating a more personal experience for everyone.

These structured customer interactions will give banks even more data they can use to improve their pull strategy. Banks gain a more holistic view of customers, can expand their menu of services with relevant products and services and improve the customer experience. Embracing a “pull” strategy allows banks to go above and beyond, offering products that foster loyalty with existing customers and drawing new ones in through expanded services. The banks that choose to evolve now will own the market, and demonstrate their value to customers early on.

Why Some Banks Purposefully Shun the Spotlight


strategy-8-9-19.pngFor as many banks that would love to be acquired, even more prefer to remain independent. Some within the second group have even taken steps to reduce their allure as acquisition targets.

I was reminded of this recently when I met with an executive at a mid-sized privately held community bank. We talked for a couple hours and then had lunch.

Ordinarily, I would go home after a conversation like that and write about the bank. In fact, that’s the expectation of most bank executives: If they’re going to give someone like me so much of their time, they expect something in return.

Most bank executives would welcome this type of attention as free advertising. It’s also a way to showcase a bank’s accomplishments to peers throughout the industry.

In this particular case, there was a lot to highlight. This is a well-run bank with talented executives, a unique culture, a growing balance sheet and a history of sound risk management.

But the executive specifically asked me not to write anything that could be used to identify the bank. The CEO and board believe that media attention — even if it’s laudatory — would serve as an invitation for unwanted offers to acquire the bank.

This bank in particular has a loan-to-deposit ratio that’s well below the average for its peer group. An acquiring bank could see that as a gold mine of liquidity that could be more profitably employed.

Because the board of this bank has no interest in selling, it also has no interest in fielding sufficiently lucrative offers that would make it hard for them to say “no.” This is why they avoid any unnecessary media exposure — thus the vague description.

This has come up for me on more than one occasion in the past few months. In each case, the bank executives aren’t worried about negative attention; it’s positive attention that worries them most.

The concern seems to stem from deeper, philosophical thoughts on banking.

In the case of the bank I recently visited, its executives and directors prioritize the bank’s customers over the other constituencies it serves. After that comes the bank’s communities, employees and regulators. Its shareholders, the biggest of which sit on the board, come last.

This is reflected in the bank’s loan-to-deposit ratio. If the bank focused on maximizing profits, it would lend out a larger share of deposits. But it wants to have liquidity when its customers and communities need it most – in times when credit is scarce.

Reading between the lines reveals an interesting way to gauge how a bank prioritizes between its customers and shareholders. One prioritization isn’t necessarily better than the other, as both constituencies must be appeased, but it’s indicative of an executive team’s philosophical approach to banking.

There are, of course, other ways to fend off unwanted acquisition attempts.

One is to run a highly efficient operation. That’s what Washington Federal does, as I wrote about in the latest issue of Bank Director magazine. In the two decades leading up to the financial crisis, it spent less than 20% of its revenue on expenses.

This may seem like it would make Washington Federal an attractive partner, given that efficiency tends to translate into profitability. From the perspective of a savvy acquirer, however, it means there are fewer cost saves that can be taken out to earn back any dilution.

Another way is to simply maintain a high concentration of ownership within the hands of a few shareholders. If a bank is closely held, the only way for it to sell is if its leading shareholders agree to do so. Widely dispersed ownership, on the other hand, can invite activists and proxy battles, bringing pressure to bear on the bank’s board of directors.

Other strategies are contractual in nature. “Poison pills” were in vogue during the hostile takeover frenzy of the 1980s. Change-of-control agreements for executives are another common approach. But neither of these are particularly savory ways to defend against unwanted acquisition offers. They’re a last line of defense; a shortcut in the face of a fait accompli.

Consequently, keeping a low media profile is one way that some top-performing banks choose to fend unwanted acquisition offers off at the proverbial pass.

While being acquired is certainly an attractive exit strategy for many banks, it isn’t for everyone. And for those banks that have earned their independence, there are things they can do to help sustain it.

A Common Trait Shared by Elite Bankers


investment-8-2-19.pngIf you talk to enough executives at top-performing banks, one thing you may notice is that not all of them see themselves as bankers. Many of them identify instead as investors who run banks.

It’s a subtle nuance. But it’s an important one that may help explain the extraordinary success of their institutions.

This came up in a conversation I had last week with the president and chief operating officer of a $2.6 billion asset bank based in New England. (I’d share the bank’s name, but they prefer to keep a low profile.)

His bank is among the most profitable in the country and is a regular fixture atop industry rankings, including our latest Bank Performance Scorecard.

Its profitability and earnings growth are consistently at the top of its peer group each year. More importantly, its total shareholder return (dividends plus share price appreciation) ranks in the top 3% of all publicly traded banks since the current leadership team gained control in 1993.

The distinction between investors and bankers seems to lay in how they prioritize operations and capital allocation.

For many bankers, capital allocation plays a supporting role to operations. It’s a pressure release valve that purges a bank’s balance sheet of the excess capital generated by operations. As capital builds up on the balance sheet, it impairs return on equity, which can foster the illusion that a bank isn’t earning its cost of capital.

To investors, the relationship between operating a bank and allocating its capital is inverted: The operations are the source of capital, while the efficient allocation of that capital is the ultimate objective.

Bankers who identify as investors also tend to be agnostic about banking. If a different industry offered better returns on their capital, they’d go elsewhere. They’ve gravitated to banking only because it’s a peculiarly profitable endeavor. In no other industry are businesses leveraged by a factor of 10 to 1 and financed with government-insured funds.

There are plenty of other bankers that fall into this categorization. The recently retired chairman of Citigroup, Michael O’Neill, is one of them. He said this when I interviewed him recently for a profile to be published in the upcoming issue of Bank Director magazine.

O’Neill’s time as chairman and CEO of Bank of Hawaii bears this out. A major objective of his, after refocusing its geographic footprint, was reducing the bank’s outstanding share count.

Bank of Hawaii had 80 million shares outstanding when O’Neill became CEO in 2000. When he left 4 years later, that had declined by 38% to only 55 million outstanding shares. This helped the bank’s stock price more than triple over the same stretch.

Another example is the Turner family, which has run Great Southern Bancorp for almost half a century. Since going public in 1991, Great Southern has repurchased nearly 40% of its original outstanding share count. A $2 million investment during the initial public offering would have been worth $140 million last year.

The Turners never said this when I talked with them last year, but it seems safe to infer that they view banking in a similar way. They’re not trying to build a banking empire for the sake of running a big bank. Instead, they’re focused on creating superior long-term value.

This philosophical approach coupled with meaningful skin in the game insulates a bank’s executives from external pressures to chase short-term growth and profitability at the expense of long-term solvency and performance.

“Having a big investment in the company … gives you credibility with institutional investors,” Great Southern CEO Joe Turner told me last year. “When we tell them we’re thinking long term, they believe us. We never meet with an investor that our family doesn’t own at least twice as much stock in the bank as they do.”

M&T Bank Corp. offers yet another textbook example of this. Of the largest 100 banks operating in 1983, when its current leadership team took over, only 23 remain today. Among those, M&T ranks first when it comes to stock price growth

I once asked its chairman and CEO René Jones what has enabled the bank to create so much value. One of the main reasons, he told me, was that they could gather 60% of the voting interests in the bank around the coffee table in his predecessor’s office.

And the bank in New England that I mentioned at the top of this article is the same way. The family that runs it, along with its directors, collectively hold 40% of the bank’s stock.

The moral of the story is that it’s tempting to think that capital allocation should play second fiddle to a bank’s operations. But many of the country’s best bankers see things the other way around.

Three Critical Strategies for Digital Wealth, Trust Success


strategy-7-31-19.pngThe robot (wealth advisors) are here.

The robo-advisor revolution promised to render legacy firms like broker-dealers, asset managers, and registered investment advisors obsolete.

The fear of being left behind motivated many companies across the wealth industry to respond with an open checkbook. BlackRock dropped $150 million to buy FutureAdvisor in 2015. Other firms, like JPMorgan & Chase Co., spent more than three years and millions of dollars building their own robo-advisors. And others, like Northwestern Mutual, spent $250 million to acquire and then ultimately shutter their offering.

Despite all the effort, money and time invested, these companies don’t have much to show for it. The amount of assets under management at these nascent efforts is underwhelming; when combined with ultra-low robo-fee rates, the revenue doesn’t come close to providing any real return on their upfront sizable investments.

What’s the real takeaway for banks? The problem isn’t the technology so much as it is the corresponding business strategy. When it comes to robo-advising, altering the strategy and deconstructing the technology will give banks the biggest returns on their investments. There will be benefits for the brokerage side of the bank, but even greater returns in the trust division, which typically relies on outdated processes based on paper and people.

If banks look at technology with a lens toward driving margin as well as revenue growth, the way they deploy robo-technology changes. Instead of launching robo-advisors and hoping customers stream in, a better strategy could be to become hyper-focused, using the technology in order to maximize its inherent value. Banks thinking about using digital solutions to improve their wealth and trust offerings can focus on three areas in order to get operational and revenue benefits:

  1. Eliminate paper-based trust account opening processes. Using digital trust account opening can dramatically reduce the total client onboarding time and begin the investing and billing processes sooner, accelerating the time it takes to generate revenue from a newly opened account. For example, the typical trust account takes about 40 days to get correctly opened and funded. Technology can reduce that time by 30 days, driving at least 8% more revenue with those extra days, while simultaneously decreasing the people- and paper-based costs.
  2. Automate existing smaller agency accounts. Automating processes like risk assessment, model management and rebalancing can significantly reduce the amount of time and people needed to manage those smaller, less profitable accounts. Banks can achieve higher customer satisfaction via the improved and streamlined process, as well as higher advisor satisfaction from the drastic reduction in operating time.
  3. Retain flight risk retail customers. Retail customers who do not meet the account minimums to utilize a bank’s wealth services often find wealth offerings elsewhere, taking their assets outside of your bank. By digitizing wealth offerings, banks can lower their operational costs and enable a profitable way to service smaller wealth accounts, retain more customers and increase revenue. The key is using technology to correctly segment customers to better predict when they are most likely to become a flight risk to consumer-facing robo-advisors like Betterment.

So, what should a bank do to digitize a wealth or trust offering?

Start by targeting efficiency. While you may be tempted by the siren song of new customers and revenue, the biggest short-term returns for technology always come through cost reduction and margin expansion. Find the areas of your business with the most friction and surgically target them with technology to notch meaningful gains. Once your operations are running faster and smoother, target existing at-risk customers. Yes, you’ll be repricing those deposits, but it’s always better to reprice, retain and ultimately grow deposits than it is to lose them to one of the consumer-facing robo-advisors.

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.

Why It’s Hard for Banks to Get Answers From Their Systems


core-7-17-19.pngIt starts with a simple question from a director or regulator about the bank’s loans, deposits or customers. It should be easy to answer but for some reason, it takes days or weeks to get the information.

The struggle of bank executives to pull answers from their core systems has been on my mind lately, so I asked a few how often they encounter this problem:

“Just recently, our examiners asked for a detailed listing showing applicable data around brokered, listing service and money desk deposits. I needed a way to get the answers quickly.” – Chief operating officer at a Texas bank, $4 billion in assets

“It’s definitely a pain point for us. We spend so much time assembling data to get basic intelligence about our business activities; those delays add up in terms of delayed decision making. We want to make faster, more informed decisions.” – CEO at a Missouri bank, $2 billion in assets

It has always been surprising to me that it is so difficult for executives to answer basic questions using their systems. The process to extract this information is often manual and painfully slow, involving subordinates who push down the request to their subordinates, and the manual aggregation of data from various systems and even paper files. The actual question can take days or weeks to get answered.

In our experience, bankers are hampered by three big problems. Here’s what they can do about them.

Systems Designed for Processing Only
Banks in the U.S. live and die with their core, but these systems were designed for processing, not reporting. While the core vendors often supply reporting and business intelligence tools, they may not include or store information from other systems or providers. Ease of use can also be a problem; many systems require someone with technical know-how to coax out the answers so they can be manually merged with results from other systems. To fix this, banks should consider implementing a simple enterprise reporting solution that consolidates information from multiple systems, including the core.

Disparate Systems Can’t Communicate
During a recent conversion, one of our clients discovered 72 different systems that were connected to their legacy core system. These systems were not well integrated or configured so executives could poll them for an answer. Banks often accumulate these systems as individual departments select solutions that fit their specific needs, such as loan review, credit administration or lending. But this creates massive information redundancy, which flourishes because no one is charged with addressing this holistically.

To help remedy this problem, banks should consider hiring a solution architect to analyze their existing systems for redundancies, and then craft a roadmap for eliminating and consolidating systems. A smart workaround at banks where a full-time systems architect may not be practical would be to select and implement a system that has built-in best practices. These systems can’t eliminate all the redundancies but can address them by integrating different systems and clearly identifying the systems of record for critical business information.

Failed System Implementations
Vendors are good at selling software with slick demonstrations that seem easy to use. But many bankers have experienced failed implementations, which can happen when vendors are more focused on setup and configuration and less on the adoption process. Vendors need to serve as true partners for clients, guiding them through the mine fields and providing solutions when issues arise.

That puts the onus on bank executives when it comes to vendor selection. Bankers need to consider a vendor’s willingness and ability to be a true consulting partner, and how it will work to understand a bank’s business and incorporate its unique needs into their system.

Implementing a solution that can seamlessly generate answers to bankers’ questions can be a sizable undertaking, but banks can make vast improvements by implementing a consolidated reporting solution, eliminating redundancies across systems and selecting vendors that are known for their ability to partner with clients.

Engaging Branch Staff to Build Merchant Services Momentum


services-7-3-19.pngThe success of a bank’s merchant services program lives or dies by the support from branch staff.

While offering competitive rates and top-notch customer service is important, those things won’t make a difference if bank branch staff isn’t discussing merchant services with customers. Programs suffer without the support and enthusiasm of staff. Here are some best practices on keeping branch staff engaged in merchant services promotion.

Set Goals
A bank should employ a top-down directive from leadership that emphasizes the importance of cross-selling merchant services during customer interactions. It is imperative that the directive includes clear, attainable goals for branches and employees. “Goals are the fuel in the furnace of achievement,” writes development consultant and author Brian Tracy.

Goals help motivate branch staff to sell these services. Leadership also needs to track performance and offer recognition. If staff gets the impression that set goals are not followed up on, it can be incredibly demoralizing.

Empower Your Sales Staff
Employees may hesitate to sell products they have not been fully educated on. But the growing popularity of online banking means it’s important that branch staff capitalizes on every opportunity to cross-sell. It may be the only chance they have to speak face-to-face with a prospect.

Executives need to make sure that bank staff is trained up on all products and services. They can do this through role-playing exercises of different situations that focus on improving communication skills and preparing for curveball questions. This is one of the best ways to prime employees for productive conversations with prospects.

Implement an Incentive Campaign
Managers should encourage staff to stretch for sales goals through an incentive campaign. These campaigns can include referral bonuses, sold-product goals, raffle campaigns and more. Some merchant services providers may sponsor incentive campaigns for their partner banks. Additionally, incentive campaigns aren’t limited to employees; banks should consider incentivizing existing clients through referrals.

Provide Ongoing Training
Payment card technology is constantly changing. Executives need to provide branch staff with tools that will help them stay up-to-date on current trends and industry changes. One way to do this is through a portal that is regularly updated with new resources and information. It is vital that executives cultivate an environment where branch staff feels comfortable asking for additional training or information.

The success of a merchant services program rests on the shoulders of a bank’s branch staff. Executives must make sure they equip their front-line people with all the tools and knowledge they need. The investment of time and resources up front will pay dividends in the future. Every win for branch staff is a win for the bank.

Five Reasons Behind Mortgage Subservicing’s Continued Popularity


mortgage-6-3-19.pngMortgage subservicing has made significant in-roads among banks, as more institutions decide to outsource the function to strategic partners.

In 1990, virtually no financial institution outsourced their residential mortgage servicing.

By the end of 2018, the Federal Reserve said that $2.47 trillion of the $10.337 trillion, or 24%, of mortgage loans and mortgage servicing rights were subserviced. Less than three decades have passed, but the work required to service a mortgage effectively has completely changed. Five trends have been at work pushing an increasing number of banks to shift to a strategic partner for mortgage subservicing.

  1. Gain strategic flexibility. Servicing operations carry high fixed costs that are cannot adapt quickly when market conditions change. Partnering with a subservicer allows lenders to scale their mortgage portfolio, expand their geographies, add product types and sell to multiple investors as needed. A partnership gives bank management teams the ability to react faster to changing conditions and manage their operations more strategically.
  2. Prioritizes strong compliance. The increasing complexity of the regulatory environment puts tremendous strain on management and servicing teams. This can mean that mortgage businesses are sometimes unable to make strategic adjustments because the bank lacks the regulatory expertise needed. But subservicers can leverage their scale to hire the necessary talent to ensure compliance with all federal, state, municipal and government sponsored entity and agency requirements.
  3. Increased efficiency, yielding better results with better data. Mortgage servicing is a data-intensive endeavor, with information often residing in outdated and siloed systems. Mortgage subservicers can provide a bank management team with all the information they would need to operate their business as effectively and efficiently as possible.
  4. Give borrowers the experience they want. Today’s borrowers expect their mortgage lender to offer comparable experiences across digital channels like mobile, web, virtual and video. But it often does not make sense for banks to build these mortgage-specific technologies themselves, given high costs, a lack of expertise and gaps in standard core banking platforms for specific mortgage functions. Partnering with a mortgage subservicer allows banks to offer modern and relevant digital servicing applications.
  5. Reduced cost. Calculating the cost to service a loan can be a challenging undertaking for a bank due to multiple business units sharing services, misallocated overhead charges and hybrid roles in many servicing operations. These costs can be difficult to calculate, and the expense varies widely based on the type of loans, size of portfolio and the credit quality. A subservicer can help solidify a predictable expense for a bank that is generally more cost efficient compared to operating a full mortgage servicing unit.

The broader economic trends underpinning the growing popularity of mortgage subservicing look to be strengthening, which will only accelerate this trend. Once an operational cost save, mortgage subservicing has transformed into a strategic choice for many banks.

Are These the Best of Times for Bank Directors?


strategy-5-13-19.pngFor someone who has covered the banking industry as long as I have (hint: I wrote my first banking story in 1986), these are among the best days to be a banker—or director of a bank—that I can remember. Profitability is high, as is capitalization, and the industry is gliding on the updraft of a strong economy and lower taxes.

The current health of the industry was apparent from what we did not talk about at Bank Director’s Bank Board Training Forum, which took place on May 9-10 in Nashville. There were no sessions about deteriorating loan quality, or the best way to structure a loan workout program, or the need to raise capital. Indeed, our managing editor, Kiah Lau Haslett, wrote a story that published Friday on this website warning against the perils of complacency.

When your biggest challenge is guarding against complacency, you’ve definitely found yourself in tall cotton.

It’s worth drilling down a little bit into the industry’s strong fundamentals. In addition to the continuation of a strong U.S. economy, which will be a record expansion if it continues much longer, banks have also benefited—more than any other industry—from last year’s steep cut in corporate tax rates, as well as a modest rollback of regulations in the Dodd-Frank Act.

Joseph Fenech, managing principal and head of research at the investment banking firm Hovde Group, explained during a presentation that thanks to the tax cut, both return on average assets and return on average tangible common equity jumped to levels last seen prior to the Great Recession. And not only has deregulation had a measurably positive impact on the industry’s profitability, according to Fenech, it has also brought new investors into the sector.

“It’s really driving change in how investors think about banks,” he says.

The only bad news Fenech offered was his assessment that bank M&A pricing has peaked. From 2008 to 2016, stocks of the most active acquirers traded at a premium to book value while many distressed targets traded at a discount, which translated to favorable “deal math” for buyers, according to Fenech. Deal pricing began to edge up from 2016 to 2018 as more acquirers came into the market. Many transactions had to be priced at a premium to book value, which began to make the deal math less favorable for the buyer.

Generally, the higher the deal premium, the longer it takes for it to be accretive. Since the beginning of this year, says Fenech, many investors have become wary of deals with high premiums unless they are clearly accretive to earnings in a reasonable period of time. Undisciplined acquirers that overpay for deals will see their stocks shunned by many investors.

This new dynamic in bank M&A also impacts sellers, who now may receive a lower premium for their franchise.

“I think the peak pricing in bank M&A was last year,” says Fenech.

An important theme during the entire conference was the increased attention that board diversity is getting throughout the industry. Bank Director President Mika Moser moderated a general session panel discussion on board diversity, but the topic popped up in various breakout sessions as well. This is not always a comfortable discussion for bank boards since—let’s face it—most bank boards are comprised overwhelming of older white males.

For many proponents, the push for greater board diversity is not simply to accomplish a progressive social policy. Diverse groups usually offer a diversity of thought—and that makes good business sense. Academic research shows that diverse groups or teams make better business decisions than more homogenious groups, where the members are more inclined to affirm each other’s biases and perspectives than challenge them. Larry Fink, the chairman and CEO of Blackrock—the world’s largest asset manager—believes that diverse boards are less likely to succumb to groupthink or miss emerging threats to a company’s business model, and are better able to identify opportunities that promote long-term growth.

The banking industry still has a lot of work to do in terms of embracing diversity in the boardroom and among the senior management team, but I get the sense that directors are more sensitive—and more open to making substantive changes—than just a few years ago.

The Bank Board Training Forum is, at its core, a corporate governance conference. While we cover a variety of issues, it’s always through the perspective of the outside director. James McAlpin, Jr., a partner and leader of the financial services client services group at the law firm Bryan Cave, gave an insightful presentation on corporate governance. But sometimes the simplest truth can be the most galvanizing.

“The responsibilities of directors can be boiled down to one simple goal—the creation of sustainable long-term value for shareholders,” he says. There are many decisions that bank boards must make over the course of a year, but all of them must be made through that prism.

Three Tech Strategies for Banks, Based on Size


strategy-5-3-19.pngHow should you position your bank for the future—or, for that matter, the present?

This is one of the most perplexing questions challenging leadership teams right now. It is not a new consideration; indeed, the industry has been in a constant state of evolution for as long as anyone on our team can remember. Yet lately, it has taken on a new, possibly more existential sense of urgency.

Fortunately, there are examples of banks, of different sizes and a variety of business models, keeping pace with changing consumer expectations and commercial clients’ needs. The industry seems to be responding to the ongoing digital revolution in banking in three ways.

The biggest banks—those like JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co.—have the resources to forge their own paths on the digital frontier.

These banks spend as much as $11 billion a year each on technology. They hire thousands of programmers to conceptualize digital solutions for customers.

The results are impressive.

As many as three-quarters of deposit transactions are completed digitally at these banks. A growing share of sales, account openings and money transfers take place over these banks’ digital channels as well. This allows these banks to winnow down their branch networks meaningfully while still gaining retail deposit market share.

The next step in their evolution is to combine digital delivery channels with insights gleaned from data. It’s by marrying the two, we believe, that banks can gain a competitive advantage by improving the financial lives of their customers.

Just below the biggest banks are super-regional and regional banks.

They too are fully embracing technology, although they tend to look outside their organizations for tailored solutions that will help them compete in this new era rather than develop the solutions themselves.

These banks talk about integration as a competitive advantage. They argue that they can quickly and nimbly integrate digital solutions developed elsewhere—growing without a burdensome branch network while also benefiting from the latest technologies without bearing the risk and cost of developing many of those solutions themselves. It is a way, in other words, for them to have their cake and eat it too.

U.S. Bancorp and PNC Financial Services Group fall into this category. Both are reconfiguring their delivery channels, reallocating funds that would be spent on expanding and updating their branch networks to digital investments.

In theory, this makes it possible for these banks to expand into new geographic markets with far fewer branches.

U.S. Bancorp announced recently that it will use a combination of digital channels and new branches to establish a physical retail beachhead in Charlotte, North Carolina. PNC Financial is doing the same in Dallas, Texas, among other markets.

Finally, smaller community banks are adopting off-the-shelf solutions offered by their core providers—Fidelity National Information Services (FIS), Fiserv and Jack Henry & Associates.

This approach can be both a blessing and a curse. It is a blessing because these solutions have enabled upwards of 90 percent of community banks to offer mobile banking applications—table stakes nowadays in the industry. It is a curse because it further concentrates the reliance of community banks on a triumvirate of service providers.

In the final analysis, however, it is important to appreciate that smaller banks based outside of major metropolitan areas still have a leg up when it comes to tried-and-true relationship banking. Their share of loans and deposits in their local markets could even grow if the major money-center banks continue fleeing smaller markets in favor of big cities.

Smaller regional and community banks dominate small business loans in their markets—a fact that was recently underscored by LendingClub Corp.’s decision to close its small business lending unit. These loans still require local expertise—the type of expertise that resides in their hometown banks. The same is true of agriculture loans.

Banks are still banks, after all. Trust is still the top factor cited by customers in the selection process. And loans must still be underwritten in a responsible way if a bank wants to survive the irregular, but not infrequent, cycles that define our economy. The net result is that some community banks are not only surviving in this new digital era, they are thriving.

But this isn’t a call to complacency—far from it.

To compete in this new era of heightened digital competition, it is more important than ever for banks of all sizes to stay committed to the quest of constant improvement. That is why our team at Bank Director is thrilled to host bank executives and board members at the JW Marriott Nashville on May 9 and 10 for our annual Bank Board Training Forum, where we will talk about how to tackle these challenges and remain relevant in the years ahead.