Profits Over Growth

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The last few weeks have been a whirlwind for banking. As bank stock indices plummet and investors make bets about which bank will fail, I’m headed to one of Bank Director’s most important conferences. 

But the agenda isn’t packed with discussion about investor and depositor panic. Experience FinXTech on May 9-10 in Tampa, Florida, is for bankers and technology company leaders who want to make connections and learn from each other. Still, the news headlines will be on people’s minds. I’m thinking about how the new environment is going to impact banks and technology companies. Two years ago, a consultant to tech companies said to me, “The last five years have found that you don’t have to be profitable to be a company.” 

Tech founders focused on growth, not profitability; and once they had market share, they went public or sold to a bigger company, taking their billions in equity to retire at 30 on an island in the Caribbean.

The times are changing.

Some banks may pull back on planned tech implementations. I think some fintechs will be forced to sell.  Venture capital deals fell 60% in value in the fourth quarter of 2022 compared to a year prior, according to the news site PitchBook. Banks are choosing a vendor or partner while also considering the company’s financial stability. Banks don’t want their partners and vendors to disappear or be gobbled up by larger companies that disinvest in the platform.

But the current environment is not all bad for partnerships, either. In a contrast from two years ago, fintech founders tell me they’re concentrating on profitability these days and not just growth. The good news is that fintechs in general have gotten leaner, more focused and driven to create successful partnerships. 

Bankers still need to act like private detectives and investigate those fintechs. Bank Director Managing Editor Kiah Lau Haslett explores due diligence in Bank Director’s recently released FinXTech report, “Finding Fintechs.” But I’m convinced a group of fintechs focused on bank success — rather than growth for its own sake — can only be good for banks.

Unlocking 35% More Value With Emotional, Community-Focused Branding

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Effective strategy leverage branding and marketing to make an emotional connection with your audience. Research shows your financial brand will have a 35% higher lifetime value if it makes an emotional connection. That’s 35% more value — not from technology, rates or even the customer journey. Just from branding. It’s that powerful and should be central to your bank’s strategic plans.

According to analytics platform FICO, 52% of consumers are more likely to open an online bank account than before the Covid-19 pandemic; Forbes notes that nearly eight in 10 consumers now prefer to bank digitally. Those numbers can’t be ignored in your strategic branding plan.

To stay competitive and release untapped opportunities, forward-thinking financial leaders are introducing incremental innovations that can bring updated tools and efficiencies to market quickly. They are also entering niche markets and offering targeted niche products and services for specific communities, along with tailored branding that helps deliver sizeable results.

Redefine Community With Real Client Data
Community is no longer a physical construct. Banks can take advantage of this by bringing new products to market that serve specifically defined communities with branding that galvanizes these customers to action. Niche financial products and brands resonate in groups defined by their profession, culture, passion or any other identify demarcations.

To help identify a customer segment that’s a natural fit for your financial institution, first consider your own analytics. Often, incisive data analysis can reveal patterns like a high concentration of consumers in particular fields or stages of life that can benefit from tailored services that your institution can provide.

Leverage Niches to Your Advantage
More than a few community banks have chosen to invest in niche opportunities, from full-service banking experiences to bespoke products that serve specific needs. For example, Greenwood, an offering from Coastal Community Bank, a $3.1 billion bank based in Everett, Washington, is tailored for customers who identify as members of the African American and Latinx communities or seek to support them.

Greenwood’s “financial movement” offers incentives such as automated meal donations linked to account creation, spare change round-ups that benefit charities and monthly small business grants to Black- and Latinx-owned businesses. This community reinvestment, combined with personal financial education tools and requisite security and convenience, makes for a powerful branding package to Greenwood’s audience.

Watseka, Illinois-based IF Bancorp launched Hitched in 2021, marketing its digital brand to help newlyweds build shared financial strength. Solutions such as shared savings, collaborative goal setting and financial education for couples help this unique community of consumers build their financial future together. Hitched partnered with popular wedding sites like WeddingWire and leveraged bold, eye-catching design to make a splash as a new banking brand.

To appeal to young Generation Z consumers, Holyoke, Massachusetts-based PeoplesBank developed ZYNLO,. ZYNLO offers mobile-optimized account opening, early access to direct-deposited paychecks, daily balance alerts and 24/7 customer support. To market these offerings, ZYNLO partnered with social media influencers in home renovation, dining out and finance for endorsements that resonated with young consumers.

Try All Ideas, Big and Small
Finding your bank’s niche does not have to mean fully reinventing your brand. Financial brands that identify niche markets can start building brand loyalty by providing new, digital solutions to their shared problems. Transformation can start with something as simple as one new or reimagined service, branded for a specific community. Implementing micro-innovations to serve them can power change for now and beyond.

As financial institutions look to modernize their decision-making processes and build strong brands, it’s important to consider the evolving concept of community in the digital age. By identifying and targeting specific groups of consumers with tailored services and branding, financial brands can build relationships and drive growth in the digital marketplace.

It’s not necessary to reinvent the wheel to appeal to niche customers. But it is necessary to understand their needs and provide functional solutions. Start by solving their biggest problem and delighting them with services that speak to them with ongoing micro-innovations that reinforce loyalty to your brand.

How Banks Can Win the Small Business Customer Experience

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

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

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

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

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

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

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

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

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

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

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

Banks Are Letting Deposits Run Off, but for How Long?

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In September, the CEO of Fifth Third Bancorp, Tim Spence, said something at the Barclays investor conference that might have seemed astonishing at another time. The Cincinnati, Ohio-based bank was letting $10 billion simply roll off its balance sheet in the first half of the year, an amount the CEO described as “surge” deposits.

In an age when banks are awash in liquidity, many of them are happily waving goodbye to some amount of their deposits, which appear as a liability on the balance sheet, not an asset.
Like Fifth Third, banks overall have been slow to raise interest rates on deposits, feeling no urgency to keep up with the Federal Reserve’s substantial interest rate hikes this year.

Evidence suggests that deposits have begun to leave the banking system. That may not be such a bad thing. But bank management teams should carefully assess their deposit strategies as interest rates rise, ensuring they don’t become complacent after years of near zero interest rates. “Many bankers lack meaningful, what I would call meaningful, game plans,” says Matt Pieniazek, president and CEO of Darling Consulting Group, which advises banks on balance sheet management.

In recent years, that critique hasn’t been an issue — but that could change. As of the week of Oct. 5, deposits in the banking system dipped to $17.77 trillion, down from $18.07 trillion in August, according to the Federal Reserve. Through the first half of the year, mid-sized banks with $10 billion to $60 billion in assets lost 2% to 3% of their deposits, according to Fitch Ratings Associate Director Brian Thies.

This doesn’t worry Fitch Ratings’ Managing Director for the North American banking team, Christopher Wolfe. Banks added about $9.2 trillion in deposits during the last decade, according to FDIC data. Wolfe characterizes these liquidity levels as “historic.”

“So far, we haven’t seen drastic changes in liquidity,” he says.

In other words, there’s still a lot of wiggle room for most banks. Banks can use deposits to fund loan growth, but so far, deposits far exceed loans. Loan-to-deposit ratios have been falling, reaching a historic low in recent years. The 20-year average loan-to-deposit ratio was 81%, according to Fitch Ratings. In the second quarter of 2022, it was 59.26%, according to the Federal Deposit Insurance Corp.

In September, the Federal Reserve’s Board of Governors enacted its third consecutive 75 basis point hike to fight raging inflation — bringing the fed funds target rate range to 3% to 3.25%. Banks showed no signs of matching the aggressive rate hikes. The median deposit betas, a figure that shows how sensitive banks are to rising rates, came in at 2% through June of this year, according to Thies. That’s a good thing: The longer banks can hold off on raising deposit rates while variable rate loans rise, the more profitable they become.

But competitors to traditional brick-and-mortar banks, such as online banks and broker-dealers, have been raising rates to attract deposits, Pieniazek says. Many depositors also have figured out they can get a short-term Treasury bill with a yield of about 4%. “You’re starting to see broker-dealers and money management firms … promot[e] insured CDs with 4% [rates],” he says. “The delta between what banks are paying on deposits and what’s available in the market is the widest in modern banking history.”

The question for management teams is how long will this trend last? The industry has enjoyed a steady increase in noninterest-bearing deposits over the years, which has allowed them to lower their overall funding costs. In the fourth quarter of 2019, just 13.7% of deposits were noninterest bearing; that rose to 25.8% in the second quarter of 2021, according to Fitch. There’s a certain amount of money sitting in bank coffers that hasn’t left to chase higher-yielding investments because few alternatives existed. How much of that money could leave the bank’s coffers, and when?

Pieniazek encourages bank boards and management teams to discuss how much in deposits the bank is willing to lose. And if the bank starts to see more loss than that, what’s Plan B? These aren’t easy questions to answer. “Why would you want to fly blind and see what happens?” Pieniazek asks.

What sort of deposits is the bank willing to lose? What’s the strategy for keeping core deposits, the industry term for “sticky” money that likely won’t leave the bank chasing rates? Pieniazek suggests analyzing past data to see what happened when interest rates rose and making some predictions based on that. How long will the excess liquidity stick around? Will it be a few months? A few years? He also suggests keeping track of important, large deposit relationships and deciding in what circumstances the bank will raise rates to keep those funds. And what should tellers and other bank employees say when customers start demanding higher rates?

For its part, Fifth Third has been working hard in recent years to ensure it has a solid base of core deposits and a disciplined pricing strategy that will keep rising rates from leading to drastically higher funding costs. It’s been a long time since banking has been in this predicament. It’s anyone’s guess what happens next.

Banking is Changing: Here’s What Directors Should Ask

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One set of attributes for effective bank directors, especially as community banks navigate a changing and uncertain operating environment, are curiosity and inquisitiveness.

Providing meaningful board oversight sometimes comes down to directors asking executives the right questions, according to experts speaking on Sept. 12 during Bank Director’s 2022 Bank Board Training Forum at the JW Marriott Nashville. Inquisitive directors can help challenge the bank’s strategy and prepare it for the future.

“Curiosity is a great attribute of a director,” said Jim McAlpin Jr., a partner at Bryan Cave Leighton Paisner and newly appointed board member of DirectorCorps, Bank Director’s parent company. He encouraged directors to “ask basic questions” about the bank’s strategy and make sure they understand the answer or ask it again. He also provided a number of anecdotes from his long career in working with bank boards where directors should’ve asked more questions, including a $6 billion deal between community banks that wasn’t a success.

But beyond board oversight, incisive — and regular — questioning from directors helps institutions implement their strategy and orient for the future, according to Justin Norwood, vice president of product management at nCino, which creates a cloud-based bank operating platform. Norwood, who describes himself as a futurist, gave directors a set of questions they should ask executives as they formulate and execute their bank’s strategy.

1. What points of friction are we removing from the customer experience this quarter, this year and next year?
“It’s OK to be obsessive about this question,” he said, adding that this is maybe the most important question directors can ask. That’s because many technology companies, whether they’re focused on consumer financials or otherwise, ask this question “obsessively.” They are competing for wallet share and they often establish customer expectations for digital experiences.

Norwood commended banks for transforming the middle and back office for employees, along with improving the retail banking experience. But the work isn’t over: Norwood cited small business banking as the next frontier where community banks can anticipate customer needs and provide guidance over digital channels.

2. How do we define community for our bank if we’re not confined to geography?
Community banking has traditionally been defined by geography and physical branch locations, but digital delivery channels and technology have allowed banks to be creative about the customer segments and cohorts they target. Norwood cited two companies that serve customers with distinct needs well: Silicon Valley Bank, the bank unit of Santa Clara, California-based SVB Financial, which focuses on early stage venture-backed companies and Greenlight, a personal finance fintech for kids. Boards should ask executives about their definition of community, and how the institution meets those segments’ financial needs.

3. How are we leveraging artificial intelligence to capture new customers and optimize risk? Can we explain our efforts to regulators?
Norwood said that artificial intelligence has a potential annual value of $1 trillion for the global banking industry, citing a study from the McKinsey & Co. consulting group. Community banks should capture some of those benefits, without recreating the wheel. Instead of trying to hire Stanford University-educated technologists to innovate in-house, Norwood recommends that banks hire business leaders open to AI opportunities that can enhance customer relationships.

4. How are we participating in the regulatory process around decentralized finance?
Decentralized finance, or defi, is a financial technology that uses secure distributed ledgers, or blockchains, to record transactions outside of the regulated and incumbent financial services space. Some of the defi industry focused on cryptocurrency transactions has encountered financial instability and liquidity runs this summer, leading to a crisis that’s been called “crypto winter” by the media. Some banks have even been ensnared by crypto partners that have gone into bankruptcy, leading to confusion around customer deposit coverage.

Increasingly, banks have partnerships with companies that work in the digital assets space, or their customers have opened accounts at those companies. Norwood said bank directors should understand how, if at all, their institution interacts with this space, and the potential risks the crypto and blockchain world pose.

How Fifth Third Crafts Successful Bank-Fintech Partnerships

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From the start, Eric White anticipated the solar lender he launched in 2013 would eventually be owned by a bank. But it wasn’t until last fall that he settled on the $207 billion Fifth Third Bancorp in Cincinnati, Ohio.

The bank announced on Jan. 19 that it would acquire Dividend Finance for an undisclosed amount and closed the deal in May, with White, its founder and CEO, continuing to run the business.

White recalled two moments that made him feel certain his company had found its ideal buyer — the first was last fall when a group of Fifth Third’s top executives visited the fintech’s San Francisco’s headquarters for an initial meeting and the second was not much later when he met Ben Hoffman, Fifth Third’s chief strategy officer.

“It starts with people,” White says. “You have to like the people who are on the other side of the table from you before you get on the same side of the table as them.”

Hoffman echoed that, saying Fifth Third has come up with a couple of heuristics that help it determine whether it wants to pursue a partnership with a particular fintech. One is the way it assesses the entrepreneurs at the helm.

“We look at the leadership team and we ask, ‘Are these people that we could see filling other roles in the bank? Not because we intend to take them off mission — quite the opposite. When we bring these leaders in, it’s about empowering them to continue doing the thing that they’re incredibly passionate about and great at,” Hoffman says.

Not all bank-fintech partnerships turn into acquisitions, nor does Hoffman intend them to. And not all acquisitions start out as partnerships. Fifth Third and Dividend Finance had not worked together prior to striking their deal.

But Fifth Third’s introspective question serves as “a real test for cultural fit,” Hoffman says. “If there isn’t another real job on the org chart that you think these individuals could do, how can you expect them to understand us, and how can you expect us to really understand them, and to appreciate each other?” 

Ensuring a Cultural Fit
In anticipation of rising interest rates, White began seeking prospective bank buyers for Dividend Finance late last year. His prerequisite was that the banks had to be experienced with indirect lending, as his company is a point-of-sale lender that partners with contractors nationwide to provide their customers with financing for solar and other home improvement projects.

White says Fifth Third’s long partnership with GreenSky – a point-of-sale lender that offers home improvement loans through merchants – gave him comfort. Fifth Third invested in and began collaborating with GreenSky starting in 2016. (Goldman Sachs acquired the fintech in March.)

“Indirect lending is a very different model than direct lending. Some banks just don’t get it, and Fifth Third did,” White says.

But it was in that first meeting with Fifth Third, as then-President Tim Spence talked about how he had previously worked at technology startups and as a strategy consultant, when White first felt a sense that this bank stood out from the other contenders. Spence had been lured away from Oliver Wyman, where he focused on helping banks — Fifth Third among them — with their digital roadmaps. (He succeeded Greg Carmichael as Fifth Third’s chief executive officer in July.)

“Hearing Tim introduce himself and give his background was an eyeopener in and itself. He doesn’t come from a traditional bank executive background,” White says. “So, it was a different and a very refreshing perspective. It was very exciting for us.”

Hoffman made just as strong an impression on White when they met later on, further reassuring him that Dividend Finance had found “a perfect cultural fit” in terms of management philosophy and the long-term goals of both sides.

Hoffman previously worked with Spence as part of the Oliver Wyman team that advised Fifth Third and other banks; he followed Spence to the bank side in 2016. Hoffman’s mandate has evolved over the years, but one facet of his duties is overseeing Fifth Third’s fintech activities. White gives Hoffman rave reviews, calling him “one of the most creative thinkers that I’ve come across in my entire career.”

With the people test passed, the most salient selling point for White was “how the bank thinks about technology and product.”

In his perspective, too many banks are stuck in “archaic approaches” to managing growth and innovation. But Spence’s answer when asked why he decided to work at a bank in Cincinnati “really stuck with me,” White says. “He viewed Fifth Third as a platform to combine the best elements of traditional banking along with the opportunity to infuse innovation and a technology-driven approach to product development and organizational management.”

It gave White confidence that Fifth Third would not make the mistake that he believes other banks sometimes do, which is “trying to make the fintechs conform to the way that the bank has operated historically and in doing so, stripping out the qualities that make that fintech successful.”

White says his confidence has only grown since the acquisition. At Fifth Third, his title is Dividend Finance president, and he operates the business with a comfortable level of autonomy, reporting to Howard Hammond, executive vice president and head of consumer banking.

Ensuring a Strategic Fit
Fifth Third has partnerships with about a dozen fintechs at any given time and, over the past year and a half, has acquired two niche digital lenders outright, Dividend Finance, in the ESG space, and Provide, in the healthcare space. (ESG stands for Environmental, Social and Governance, and is often used to refer to the components of a sustainability-minded business approach.)

ESG and healthcare are two categories that align with Fifth Third’s own areas of focus, in accordance with a rule Hoffman follows when choosing fintechs of interest, whether for partnerships or acquisitions. He considers this rule — the fintech must help the bank improve on its existing strategy — key to helping ensure a partnership will eventually produce enough of a return to make Fifth Third’s investment of time, effort and money worthwhile.

As a result of the Dividend Finance acquisition, Fifth Third is actively assessing whether to increase its sustainable finance target. The bank had set a goal two years ago that called for achieving $8 billion of lending for alternative energy like solar, wind and geothermal by 2025.

“The things that we do with fintech are things that we were going to do one way or another. We’re not taking on incremental missions. We’re just pursuing those missions in different form. So, that framing completely changes the analysis that we’re doing,” Hoffman says.

Other banks might have to look broadly at competing priorities to decide between partnering with a specific fintech or tackling some other important initiative. But Fifth Third engages in a different thought process.

“It’s not, if we decide to partner with Provide, or should we acquire Dividend Finance, what will we not do?” Hoffman says.

Instead, Fifth Third asks, does this accelerate the timeframe for achieving a goal the bank has already set for itself?

“These partnerships are successful when they are aligned to our strategy and they accelerate, or de-risk, the execution of that strategy, as opposed to being separate and apart from the core ambitions of the franchise,” Hoffman says.

Assessing the Priority Level of Partnering — for Both Sides
Beyond that, any proposed partnership also needs to be “a top five priority” for both the fintech’s leadership and the relevant Fifth Third business line.

Hoffman advises other banks against the common approach of setting up a “tiny” partnership for the two sides to get to know each other with the idea of taking things to the next level when the time is right. “The likelihood of the timing ever being right, is very, very low,” he says. Those relationships often end up as distracting “hobbies” rather than ever escalating to the priority level necessary to add value for both sides and pay off in a meaningful way.

His insight is informed by experience. Hoffman leads Fifth Third’s corporate venture capital arm, which makes direct minority investments in fintechs. Given recent regulatory changes, it also participates as limited partners in several fintech-oriented venture capital funds.

His team is responsible for nurturing Fifth Third’s fintech partnerships, offering strategic insight and facilitating access to resources within the bank.

“As you can imagine, with some of the early-stage companies that we invest in, it’s six partners and an idea. Meanwhile, we have 20,000 people and branches and a half-dozen regulators and all of that. So, we provide a single point of contact to help sort of incubate and nurture the partnership until it reaches a level of stability and becomes a larger business,” Hoffman says.

“We work hard, as the partnerships mature, to stabilize the operating model such that the handholding, the single point of contact, becomes less necessary.”

That transition typically happens as the fintech gets better integrated into the day-to-day operations of the core business with which it is partnering, whether consumer banking, wealth management or another area in the bank.

Delivering Above and Beyond
With Provide, a digital lending financial platform for healthcare practices, the bank was an early investor, taking a lead role in a $12 million funding round with the venture capital firm QED Investors in 2018.

Fifth Third began funding loans made on the platform about two years later, with the amount increasing over time to the point where it was taking about half of Provide’s overall loan volume, the largest share among the five participating banks.

Through the Fifth Third partnership, Provide also expanded its offerings to include core banking and payments services, which are now used by more than 70% of the doctors for whom the fintech provides acquisition financing nationwide.

In announcing the agreement to buy Provide in June 2021, Fifth Third says the fintech would maintain its brand identity and operate as an independent business line.

Daniel Titcomb oversees Provide as its president and reports to Kala Gibson, executive vice president and chief corporate responsibility officer. (Gibson had oversight of business banking when Titcomb came on board and, though he’s in a new role as of March, continues to work with Provide.) Under Fifth Third’s ownership, Titcomb, who co-founded the fintech with James Bachmeier III in 2013, envisions being able to fuel loan growth and offer expanded services that help make starting and running a healthcare practice easier for doctors.

Since its launch, Provide has originated more than $1 billion in loans, largely through “practice lending,” which enables healthcare providers to start, buy or expand their practices. Its average loan size is $750,000.

Titcomb cited “a shared belief” in bank-fintech partnerships as one reason the early relationship with Fifth Third proved to be a success. “We both had a view of the future that didn’t include one destroying the other,” he says.

Years ago, fintechs and banks were often wary of each other — even adversarial — with banks being labeled by some as “dumb pipes,” the implication being that they were unable to keep up with nimble and innovative startups and were useful merely for product distribution to a larger customer base, Titcomb says. But he always found Fifth Third to be thoughtful and strategic, defying those stereotypes.

Though selling his business was scary, he says, “it was a lot less scary than it could’ve been,” given the established relationship.

Still, “we had to get comfortable and confident that they weren’t going to encourage us to spend less on technology,” he added. “Any time you enter into an agreement like that, you hope, but you don’t know.”

Titcomb says he is thrilled that the consistent feedback from Fifth Third since he joined has been: “You run this business the way you think it should be run.”

“It’s a relief,” he says.

Given outcomes like those experienced by White and Titcomb, Fifth Third has become known in fintech circles as a strong partner that delivers on its promises. Hoffman works hard to maintain that reputation—a competitive advantage.

“These companies have options, and some of those options are very compelling,” Hoffman says, adding that his goal is to make sure Fifth Third is “the partner of choice” for the fintechs it targets. That only happens, he says, if their experience after signing a deal aligns with what he says beforehand.

Count an enthusiastic Titcomb among those who attest that it has. “They have delivered above and beyond,” Titcomb says.

Capitalism with a Conscience

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In this edition of The Slant Podcast, Julieann Thurlow, CEO of the $691 million Reading Cooperative Bank in Massachusetts and vice chair of the American Bankers Association, discusses the bank’s new retail banking apprenticeship. Like many of its peers in the cooperative banking movement, Reading Cooperative is owned by its customers and was founded in 1886 primarily to help working families buy homes. And there are some interesting parallels between that mission and the work it’s doing today in the city of Lawrence. The bank has been on a years-long journey to establish a branch in Lawrence, where it will offer check cashing services as part of a broader appeal to the city’s unbanked.

This episode, and all past episodes of The Slant Podcast, are available on Bank Director, Spotify and Apple Music.

3 Considerations for Your Next Strategic Planning Session

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Modernizing a bank’s technology has the potential to improve efficiency, reduce errors and free up resources for further investment. Still, with all those benefits, many banks are still woefully behind where they need to be to compete in today’s digital environment.

According to Cornerstone Advisors’ What’s Going On In Banking 2022 research, just 11% of banks will have launched a digital transformation strategy by the end of 2022. So what’s the holdup? For one thing, transformation is hamstrung by the industry structure that has evolved with banking vendors. Stories of missed deadlines, releases with dingbat issues, integrations that stop working and too few knowledgeable professionals to assist in system implementation and support are commonplace.

A large part of a bank’s future depends on how it hires and develops technical talent, manages fintech partnerships and scrutinizes and optimizes its technology contracts. Here are three key truths for bank officers and directors to consider in advance of their next strategic planning session:

1. There is no university diploma that can be obtained for many areas of the bank.
Our research finds that 63% of financial institution executives cited the ability to attract qualified talent as a top concern this year — up dramatically from just 19% in 2021. But even in the face of an industry shift to digital-first delivery and a need to better automate processes and leverage strong data intelligence, most banks have neither invested enough, nor sufficiently developed, their IT team for the next decade.

Every financial institution has a unique combination of line of business processes, regulatory challenges, and vendors and systems; the  expertise to manage these areas can only be developed internally. Identifying existing skill sets across the organization will be critical, as will providing education and training to employees to help the organization grow.

A good place for directors and executives to start is by developing a clear and comprehensive list of the jobs, skills and knowledge the bank needs to develop across four key areas of the bank: payments, commercial credit, digital marketing and data analytics.

2. Financial institutions and fintechs are on different sides of table.
Over the past decade, there have been profound changes in the relationship between financial technology and financial institutions. “Banking as usual” no longer exists; as much as banks and fintechs want to work at the same table together, they have very different needs, different areas of dissatisfaction with the relationship and are sitting on different sides of that table.

A fintech can create viable software or a platform for the bank to build upon, but the bank needs to have the internal talent to leverage it (see No. 1). A culture of disciplined execution and accountability that ensures the fintech solution will be deployed in a high performance, referenceable way will go a long away in strengthening the partnership.

3. Training and system utilization reviews need to find their way into vendor contracts.
When it comes to software solutions, banks are looking at multimillion-dollar contracts and allocating tens of thousands of dollars in training on top of that. This is not the time to be penny-wise and pound-foolish.

Every organization needs to build a tightly integrated “change team” that can extend, integrate, lightly customize and monitor a growing stack of new, primarily cloud-based, platform solutions. For CFOs and the finance department, this means a punctuated investment in the raw talent to make the bank more self-sufficient from a tech perspective (see No. 1 and 2 above).

One way to launch this effort is with an inventory for executive management that details how many users have gone through which modules of training. This tool can be vitally important, involves only minor add-on costs and can and should be embedded in every vendor contract.

Many financial institutions subject themselves to unfavorable technology contract terms by entering negotiations with too little knowledge of market pricing, letting contracts auto-renew and failing to prioritize contracts that need the most attention. If managed properly, vendor contracts represent a huge opportunity for savings.

5 Considerations When Vetting Fintech Partnerships

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Fintech collaborations are an increasingly critical component of a bank’s strategy.

So much so that Bank Director launched FinXTech, committed to bridging the gap between financial institutions and financial technology companies. Identifying and establishing the right partner enables banks to remain competitive among peers and non-bank competitors by allowing them to access modern and scalable solutions. With over 10,000 fintechs operating in the U.S. alone, finding and vetting the right solution can seem like an arduous task for banks.

The most successful partnerships are prioritized at the board and executive level. Ideally, each partnership has an owner — one that is senior enough to make decisions that dictate the direction of the partnership. With prioritization and owners in place, banks can consider fintech companies at all stages of maturity as potential partners. While early-stage companies inherently carry more risk, the trade-off often comes in the form of enhanced customization or pricing discounts. These earlier-stage partnerships may require the bank to be more involved during the implementation, compliance or regulatory processes, compared to working with a more-mature company.

There is no one-size-fits-all approach, and it’s important for banks to evaluate potential partners based on their own strategic plan and risk tolerance. When conducting diligence on fintechs of any stage or category, banks should place emphasis on the following aspects of a potential partner:

1. Analyze Business Health. This starts with understanding the fintech’s ability to scale while remaining in viable financial conditions. Banks should evaluate financial statements, internal key performance indicator reports, and information on sources of funding, including major investors.

Banks should also research the company’s competitive environment, strength of its client base and potential expansion plans. This information can help determine the fintech’s capability to sustain operations and satisfy any financial commitments, allowing for a long-term, prosperous partnership. This analysis is even more important in the current economic environment, where fresh capital may be harder to come by.

2. Determine Legal and Compliance. Banks need to assess a fintech’s compliance policies to determine if their partner will be able to comply with the bank’s own legal and regulatory standards. Executives should include quarterly and annual reports, litigation or enforcement action records, and other relevant public materials, such as patents or licenses, in this evaluation.

Banks may also want to consider reviewing the fintech’s relationship with other financial institutions, as well as the firm’s risk management controls and regulatory compliance processes in areas relevant to the operations. This can give bank executives greater insight into the fintech’s familiarity with the regulatory environment and ability to comply with important laws and regulations.

3. Evaluate Data Security. Banks must understand a fintech’s information and security framework and procedures, including how the company plans to leverage customer or other potentially sensitive, proprietary information.

Executives should review the fintech’s policies and procedures, information security control assessments, incident management and response policies, and information security and privacy awareness training materials. In addition, external reports, such as SOC 2 audits, can be key documents to aid in the assessment. This due diligence can help banks understand the fintech’s approach to data security, while upholding the regulator’s expectations.

4. Ask for References. When considering a potential fintech partnership, executives should consult with multiple references. References can provide the bank with insight into the company’s history, conflict resolution, strengths and weakness, renewal plans and more, allowing for a deeper understanding of the fintech’s past and current relationships. If possible, choose the reference you speak with, rather than allowing the fintech to choose.

5. Ensure Cultural Alignment. The fintech’s culture plays an important role in a partnership, which is why on-site visits to see the operations and team in action can help executives with their assessment. Have conversations with the founders about their goals and speak with other members of the team to get a better idea of who you will be working with. Partners should be confident in the people and technology — both will create a mutually successful and meaningful relationship.

Despite the best intentions, not all partnerships are successful. Common mistakes include lack of ownership and strategy, project fatigue, risk aversion and unreasonable expectations. Too often, banks are looking for a silver bullet, but meaningful outcomes take time. Setting expectations and continuing to re-evaluate the success and performance of these partnerships frequently will ensure that both parties are achieving optimal results.

Once banks establish partnerships, they must also nurture the relationship. Again, this is best accomplished by having a dedicated partner owner who is responsible for meeting objectives. As someone who analyzes hundreds of fintechs to determine quality, viability and partner value, I am encouraged by the vast number of technology solutions available to financial institutions today. Keeping a focused, analytical approach to partnering with fintechs will put your bank well on its way to implementing innovative new technology for all stakeholders.

Modernizing Your Retail Banking Business

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The Covid-19 pandemic accelerated the decline of traffic in most banks’ retail branches, leading many organizations to reexamine the cost of their branch services and the ultimate viability of their branch-based services. Bank boards and executive teams must address the changing operating risks in today’s retail banking environment and assess the potential strategic risks of both action and inaction.

Speculation about the impending death of branch banking is nothing new: industry observers have debated the topic for years. As customers have become more comfortable with online banking, banks experienced a sizeable drop in in-person transactions. Regulatory changes, social trends and the growth of fintech alternatives exacerbated this development, leading many banks to cut back or centralize various branch-based activities. Between June 2010 and year-end 2020, branch offices have decreased by more than 16,000, or 16.7%, according to a Crowe analysis of report from the Federal Deposit Insurance Corp.

The pandemic also introduced important new challenges. Many banks had already shifted the focus in their branches, but greater consumer acceptance of remote and self-service options clouded the role of the branch even further. At the same time, pandemic relief programs produced a wave of liquidity, which hid or delayed the recognition of fundamental challenges many bankers expect to face: finding new ways to continue growing their core deposits at an acceptable cost.

So far, banks’ responses to these challenges have varied. Some banks — both large and small — have accelerated their branch closure plans. Others have notified regulators that they do not plan to reopen branches shuttered during lockdowns. But some banks actually are adding new offices as they reconfigure their retail banking strategies. What is the underlying strategic thinking when it comes to brick and mortar locations?

Developing and Executing an Effective Strategy

There is no one-size-fits-all approach, of course. Closing a majority of branches and becoming a digital-only organization is simply not appropriate for most banks. Nevertheless, many aspects of the physical model require innovation. Directors and executive teams can take several steps to successfully modernize their retail banking strategies.

  • Rethink branch cost and performance metrics. Banks use a variety of tools to attract deposits, sell products and build relationships, which means conventional performance metrics such as accounts or transactions per employee, cost per transaction or teller transaction times often are inadequate measurements.

A branch’s contribution also includes the visibility it provides as a billboard for the bank, access to and support for the specialized products and services it can deliver and the role it plays in establishing a community presence. Management teams need to develop tools to determine and measure the value of such contributions to the bank and its product lines, as well as their associated costs. Branches are long-term investments that require longer-term planning strategies and tactics.

  • Identify customer expectations. One factor contributing to the decline in foot traffic is what customers experience when they visit a branch. Although branch greeters can establish a welcoming atmosphere, such encounters often succeed only in a nice greeting — not necessarily in service.

Because customers can perform most banking business online, banks must ascertain why customers are visiting the branch — and then focus on meeting those needs. Ultimately, customers must leave the branch feeling fulfilled, having accomplished a transaction or task that would have been more difficult outside the branch.

  • Execute a coordinated digital strategy. Having a digital strategy means more than updating the bank’s website, streamlining its mobile banking interface or even partnering with a fintech to offer new digital products. Such catch-up activities might be necessary, but they no longer set a bank apart in today’s digital landscape or improve profitability and growth.

Beyond technology, banks should consider how their digital strategy and brand identity align and how that identity ties back to customers’ expectations. Traditionally, banks’ brand identities were linked to a specific geographic location or niche audiences, but brand identity also can reflect other communities or affinity groups or a particular service or product at which the bank is especially adept. This identity should be projected consistently throughout the customer experience, both digitally and in person.

Although most banks should not abandon their branches altogether, many will need to reevaluate their market approaches, compare opportunities for improved earnings performance and consider reimagining their value proposition for in-person services. Strategies will vary from one organization to the next, but those that succeed will share certain critical attributes — including a willingness to question conventional thinking and redeploy resources without hesitation.