Risk Practices For Today’s Economy

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Organizations’ ability to strategically navigate change proved crucial during the Covid-19 pandemic, which required financial institutions to respond to a health and economic crisis. The resiliency of bank teams proved to be a silver lining in 2020, but banks can’t take their eye off the ball just yet.

Bank Director’s 2021 Risk Survey, sponsored by Moss Adams LLP,  focuses on the key risks facing banks today and how the industry will emerge from the pandemic environment. In this video, Craig Sanders, a partner in the financial services practice at Moss Adams, shares his perspective and expertise on these issues.

  • Managing Credit Uncertainty
  • More Eyes on Business Continuity
  • Cybersecurity Today

How Digital Channels Can Complement Physical Branches

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With the rise of digital services and changing customer habits during Covid-19, the future of brick-and-mortar banking may seem in doubt.

Looking ahead, physical bank branches remain crucial for any community bank’s outreach and distribution strategy, but their use and purpose will continue to evolve. Digital acceleration is an opportunity for community banks to reshape the in-person banking environment. Incorporating the digital channel allows banks to offer more comprehensive, customer-focused experiences that complement their brick-and-mortar branches.

Physical Banks Remain a Valuable Asset
Digital banking is a critical way for community banks to provide excellent service. Integrating best-in-class online services allows financial institutions of all sizes to compete against larger banks that may be slower to innovate. Digital branch tools can bring greater accessibility and convenience for customers, a larger customer base and enhanced automation opportunities.

While many customers are excited by digital tools, not every demographic will adapt right away. Customers of all ages may lack confidence in their own abilities and prefer to talk to someone in person. These visits can be a prime opportunity for staff to educate customers on how to engage with their digital platforms.

In-person banking is an opportunity for banks to offer above-and-beyond customer service, especially for more complex services that are difficult to replicate digitally. An in-person conversation can make all the difference when it comes to major financial decisions, such as taking out a mortgage or other loans. Customers may start out with remote tools, then visit a branch for more in-depth planning.

How One Community Bank Is Evolving
Flushing Bank in Uniondale, New York, is using digital account opening software to accelerate growth. The $8 billion bank’s mobile and online banking capabilities went live in March 2020 — the timing of which allowed the bank to more easily serve customers remotely. Digital deposit account openings comprised 19% of Flushing’s customer growth between April and June.

Implementing digital account opening expanded Flushing Bank’s geographic footprint. The online account opening software allowed the existing branches to become more efficient and have a wider reach within the surrounding community, servicing more customers without building new branches.

At the same time, in-person branches and staff remain irreplaceable for Flushing Bank. The bank is leveraging digital tools as more than just an online solution: New technology includes appointment booking, improved phone services and enhance ATM video capabilities, creating a digital experience that is safe, convenient and delightful.

Transforming Brick-and-Mortar Banking for the Future
Digital tools allow more transactions to occur remotely, which may lessen in-person branch traffic while expanding the institution’s geographic reach. Banks can focus on the transactions that do occur in person, and ensure that digital tools improve customer service in branches.

A report from Celent and Reflexis surveying banks on their current strategies noted how more institutions could use digital tools for maximum effect. Just as digital channels offer comprehensive data analysis capabilities, banks can more effectively track each customer’s in-person journey as well. One starting point is to determine why customers visit physical locations — in one case, a bank learned many customers come in looking for a notary and will quickly leave if one is not available.

The report suggests that digital tools can automate their staff’s workflow, ultimately contributing to an improved customer experience. For instance, only a third of surveyed banks offer digital appointment booking, a service that can create a more efficient experience for both customers and staff. Or, banks could onboard customers with account opening software on tablets at physical branches. These tablets are often easier for customers to understand, lower the burden on staff, and help prevent fraud with thorough identity validation.

Community banks have an opportunity during this transitional time to develop a digital strategy that complements their physical branches. A comprehensive plan includes best-in-class digital tools for remote transactions while bringing new digital capabilities to brick-and-mortar locations to ensure the highest-quality customer service.

Honing Your Strategic Vision

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The financial institutions examined in Bank Director’s 2021 RankingBanking study, sponsored by Crowe LLP, demonstrate the fundamentals of successful, long-term performance. What can we learn from these top performers — and how should bank leaders navigate today’s challenging environment? Crowe Partner Kara Baldwin explores these issues, based on the lessons learned in the RankingBanking study, and shares her own expertise. To view the complete results of the 2021 RankingBanking study, click HERE.

  • Weaving Digital Into Your Bank’s Strategy
  • Being Efficient Without Being “Cheap”
  • Today’s Uncertain Credit Environment
  • Considerations for Bank Boards

Keeping the Digital Accelerant Going

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Digital transformation and strategy are further examined as part of Bank Director’s Inspired By Acquire or Be Acquired, launched today on BankDirector.com. Click here to access the content.

The coronavirus pandemic has been an accelerant for digital bank transformations. Banks must now keep that fire going.

“There’s never been a more important time for bank executives to think strategically,” says Cornerstone Advisors cofounder Steve Williams. The pandemic accelerated digital transformation plans by about two to three years, he estimates. It will soon be up to opportunistic bankers to continue that transformation in order to better position their institutions for the future and increase shareholder value during what could be a prolonged economic recovery.

The pandemic’s impact on physical spaces like branches underscored the importance of digital channels, capabilities and products. No longer was it acceptable for institutions to tack digital offerings onto existing branch initiatives and force customers to do a cross-channel dance: Open an account or loan in the branch but service it online, for instance.

Going forward, outperformers will be the banks that successfully overhaul or transform legacy tech, expenses, buildings, organizational structures and vendor contracts into next-generation capabilities. Williams says smarter banks are led by executive teams with a focused strategy, that leverage data strategically and actively manage vendor partnerships, rather than relying on their core processors. They also attract the talent and skills that the bank will need in the future, rather than just filling the vacancies that exist today.

The first place that banks direct their energies and attention to continue their digital momentum is the legacy branch network, says Tim Reimink, a managing director at Crowe. Branches are expensive to operate, have been closed for an extended period of time and were potentially underperforming prior to the pandemic. Banks also have the data to prove that customers will continue banking with them if locations are closed, and that many are now comfortable using digital channels.

“Every single location must be evaluated,” says Crowe Senior Manager Robert Reggiannini. Executives should weigh the market opportunity, penetration and existing wallet share of small businesses and consumer customers, as well as how the branch fits in with the rest of the network. Rationalizing the network frees up capital to redeploy into digital transformation or other areas of operation that need greater investment in the post-pandemic economy.

Certainly some banks have gotten that message. It wasn’t uncommon to see banks across the country announce double-digit rationalizing efforts, often announcing they would cut 20%. In December 2020 alone, banks opened 43 branches but permanently closed 240, according to S&P Global Market Intelligence data. For the year, they opened 982 locations and closed 3,099.

Reducing the branch network will necessitate changes in how bank staff interact with customers, Reggiannini adds. Banks should not assume tellers at a branch will find the same success in the digital chat environment, call center or at in-person meetings conducted outside of the branch.

He says banks should train staff in developing the skills needed to service a customer outside of a branch and consider how they will manage and measure staff for flexibility and productivity. “Engagement with customers is going to be critical going forward,” Reggiannini says.

The branch network, and the foot traffic and relationships they used to attract, have been under pressure from digital banks, often focused on consumer and retail relationships. But Williams warns that the pandemic underlined the vulnerability of commercial relationships. Numerous fintechs competed successfully against banks in issuing Paycheck Protection Program loans from the Small Business Administration, and a number of businesses are shifting more of their relationships to payment processors like Stripe and Square.

“Disruption will come to business banking – not as fast as retail banking but it’s coming,” Williams says. “If we lose the deposit and business relationship with commercial customers, will banks be able to keep their returns? We don’t think so.”

Why Banks Should Scrap Their Digital Strategy

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The last thing banks need when they pursue a digital transformation is a digital strategy.

Not too many banks get this right. Rather than create a digital strategy, companies instead need one cohesive enterprise strategy for how to be the best in serving their clients’ needs.

Setting up distinct channel strategies, or a digital strategy that runs outside of your bank strategy, only generates a bunch of disparate go-to-market ideas. That siloed approach puts your bank on a road to failure by generating and instigating conflicts, as teams vie for differentiated levels of support and resources to strengthen now-competing channels.

Instead of standing on its own, digital should shape and drive your single banking strategy. You are striving for integrated omnichannel delivery, which will translate into the best experience no matter how customers engage with you. Even if you want customers to handle the overwhelming percentage of their banking online, many will continue to walk into branches, particularly for complex transactions like mortgage applications, and call you with questions.

Granted, safer-at-home guidance in response to the coronavirus pushed digital adoption forward, more by necessity than desire. In July, nearly five months after the pandemic started, 91% of consumers conducted banking online, mostly to deposit checks or review account balances. Even more striking: 40% of consumers reported using their bank’s mobile app more often. But bankers shouldn’t take these adjustments for granted or consider them permanent.

Customers don’t care that different teams manage your digital, branch and telephone channels. They want to trust you to meet them wherever they are, and not have to explain who they are and what they want every time they interact with your bank. Digital allows you to walk that fine line with insights to follow their electronic footprints to specific products that match their financial needs.

Digital Is a Tool, Not a Product
This is so important that I need to repeat it: Digital is a tool, not a product.

I already know some folks are saying, “But, yes, it is. We produced a mobile app.” That’s not the same. You created that app for its own purpose. It also needs to be connected to something else — your banking systems — and deliver a real solution.

Granted, your bank needs digital visionaries who can envision powerful, engaging capabilities and stay ahead of customers. But these leaders must start with your banking strategy and weave their innovative ideas into that bedrock. Your team should be constantly stepping up its capabilities and services, and positioning them in a near-linear fashion alongside the customer journey so that customers can get what they want, when they need it.

And while you should never have a distinct digital strategy, you do need a dedicated team to monitor and track performance in this channel and identify new customer needs and opportunities. This is the essence of digital transformation, as you continue iterating your offerings and migrating more customers and transactions into your digital channel.

Changing the Internal Mindset
Digital transformation is about changing who you are as a bank and bringing that to your customers. The starting point is always your enterprise strategy, which anchors your value propositions on how you serve customers and your role in the community.

Every bank associate will have a role in achieving the future vision defined in that strategy. Be clear on how digital connects to your bank strategy and communicate expectations so that everyone from the call center team to the C-suite understands where they fit in. Even as your bank inches forward, it remains on a treadmill: continuing to advance to stronger performance that outpaces the competition but never crossing the finish line.

As you develop your bank’s enterprise strategy, establish and monitor metrics upfront to gauge success and maturity, including in the digital channel. Some metrics to consider include improved efficiency, the amount of customers adopting digital behaviors and successfully escalating the right transactions in your digital channel.

Be sure to measure progress in three dimensions: Are you getting more efficient as customers migrate to higher digital usage? Are you freeing up funds to invest in other initiatives? And are you maintaining the customer experience that defines your bank?

Because if you lose that in the long run, you’re going to lose your customers.

Strategic Insights from Leading Bankers: WSFS Financial Corp.

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RankingBanking will be further examined as part of Bank Director’s Inspired By Acquire or Be Acquired, featured on BankDirector.com, which will include a discussion with WSFS CEO Rodger Levenson and Al Dominick, CEO of Bank Director, about weaving together technology and strategy. Click here to access the content.

Digital transformation in the banking industry has become an important factor driving deal activity, evidenced by recent acquisition announcements involving First Citizens BancShares, PNC Financial Services Group and Huntington Bancshares. A more tech-forward future also drove $13.8 billion WSFS Financial Corp.’s August 2018 acquisition of $5.8 billion Beneficial Bancorp, expanding its presence around Philadelphia and putting it well over the $10 billion asset threshold. Importantly, it provided the scale WSFS needed to make a $32 million, five-year investment in digital delivery initiatives.

The Wilmington, Delaware-based bank’s long-term focus on strategic growth, particularly in executing on its digital initiatives, led to a fourth-place finish in Bank Director’s 2021 RankingBanking study, comprised of the industry’s top performers based on 20-year total shareholder return. Crowe LLP sponsored the study. Bank Director Vice President of Research Emily McCormick further explores the bank’s digital transformation in this conversation with WSFS Chairman and CEO Rodger Levenson. The interview, conducted on Oct. 27, 2020, has been edited for brevity, clarity and flow.

BD: How does WSFS strategically approach strong, long-term performance?

RL: It comes from the top. The board has always managed this company with the goal of sustainable long-term performance, high performance. Every discussion, every decision and every strategic plan that we put together is looked [at] through that lens. And I would point to the most recent decision around the Beneficial acquisition as an opportunity for us to invest in [the] long term while recognizing that we’d have some short-term negative impact. And by that I mean, if you look back over the last decade or so, coming out [of] ’09, 2010 — WSFS had been on a fairly consistent, nicely upward-sloping trajectory of high performance. … But what the board said as part of our strategic planning process and the conversation with Beneficial was that we could only continue down that path for so long if we didn’t address a couple of important issues.

One was, if you look at that growth, it was primarily centered on our physical presence, mostly in Delaware. It’s our home market, but it’s a pretty small market, less than a million people. A very nice economy, but certainly not as robust as we grew to the size that we had grown to support that. We needed to get into a larger market, particularly into Philadelphia, [which is] very robust demographically, very large to give us that opportunity to continue to grow at above-peer levels.

The second thing as part of that process is like everybody else — and this was obviously all pre-pandemic — we were analyzing and watching our customers shift how they interacted with us to more digital interaction and less physical interaction. And we said, for us to keep up we’re going to have to start shifting some of that long-term investment, that we’ve historically [put] into building branches, into funding our technology initiatives.

The two of those things came together for Beneficial, [which] obviously gave us the larger market; it also gave us the scale to attack that transition from physical to digital. We knew it would impact earnings for a couple of years while we put that together and prepared for the next decade or so of growth. The board had a very robust dialogue around the trade-offs that were involved, and clearly said that we need to manage the company for the long term.

This is a great opportunity to invest in the long term; we’ll take the short-term knock on performance because of where we’re ultimately headed. We saw that with the reaction of the Street to our stock price, but that didn’t change or waiver the long-term vision. … Our board principles and guidelines [have] been ingrained in us all the way down through management: If you want to provide the best long-term value for your shareholders, you have to not get tied up in quarter-to-quarter or year-to-year performance. You have to look at it over longer horizons and make decisions that support that.

BD: How are you strategically approaching technology investment?

RL: It was really a decision to follow our customers. … There’s nothing we can do to try and compete with [the] big guys. You know the stats. You know how many billions of dollars they’re spending on technology. We’re not trying to catch up to them or be like them. We want to have a digital product offering that allows us to be very flexible and have optionality so that when new products and services come along that our customers want, we can move quickly toward offering those products and services, and have an offering that is competitive with the big guys, but maybe not the bleeding edge. We’re marrying it with the traditional community bank model of access to decision-making, local market knowledge [and] a high level of associate engagement, which translates into what we think is world-class service. Our vision is to have a product offering that we can marry up with those other things that will allow us to compete effectively against the big guys.

Most of what the big guys spend their money on is R&D. They have teams and teams of technology people, data [scientists and] all those other things, because they’re building their proprietary products and services. Our view is we don’t have to do that R&D, because that R&D is getting done in the fintech space for us.

BD: WSFS has brought on board some high-level talent around digital transformation; you’ve also got expertise on the board. You’re working to recruit more in the data space, as well as building your in-house technology expertise. In addition to building relationships with fintechs, why is that internal expertise important, and how are you leveraging that?

RL: When we got started on this, we had almost nobody focused on it in the company. We realized for us to be as effective as we felt we needed to be, we needed to have some teams that were fully involved in this as a day-to-day job. In terms of funding it, obviously we closed or divested a quarter of our branches with Beneficial after the deal. When you do that, you not only have the cost savings from the savings in the lease expense, but there’s people expense as well. Fortunately, even though net/net, our positions in our retail network decreased by about 150 from those closures or divestitures, nobody lost their job. We were able to absorb that through natural attrition or in the one case, we sold six of our branches in New Jersey, and all those people were guaranteed a job as part of that deal.

This was a process that occurred over the course of a year. It was methodically laid out, leading up to the conversion of the brand and the systems in August 2019. Over that year, our teams did a fabulous job [of] managing people and the normal attrition that goes on in that business. That gave us the ability to fund not only some of the technology that we’re buying, but also some of these other positions internally. It’s exactly aligned with shifting that investment that we made in branches — which is not just the bricks and mortar; it’s the people, it’s the technology, it’s everything else — shifting a chunk of that into digital. This is a part of that whole process.

EM: How did the pandemic impact your strategy?

RL: The pandemic confirmed and accelerated everything that we’ve seen over the last few years, and reinforced our desire to [respond] as quickly as we can to the acceleration of these trends. Clearly, 2020 has been a totally different year because of remote work and all those things, but the longer-term trends have been validated and reinforced the strategic direction that we embarked upon before the pandemic. At some point, we will start moving back to a more normal environment, and we feel like we’re uniquely positioned.

It feels like there’s not a week that goes by with a bank that’s announcing some big branch reduction program and shifting that money into digital. We’re not trying to pat ourselves on the back, but I do think we happened to have that opportunity with Beneficial. It provided us the forum for attacking that issue sooner rather than later, so we’ve got somewhat of a head start down that road. This is just a confirmation of everything we saw when we did that analysis.

Strategic Insights From Leading Bankers: Bank OZK

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RankingBanking will be examined further as part of Bank Director’s Inspired By Acquire or Be Acquired virtual platform, which will include a panel discussion with Gleason and Mark Tryniski, CEO of Community Bank System. Click here to access the agenda.

Is Bank OZK misunderstood?

The $26.9 billion bank may be based in Little Rock, Arkansas — with offices primarily in the southeastern United States — but Chairman and CEO George Gleason II will quickly, but politely, correct you if you refer to Bank OZK as a community bank.

“We consider our bank a truly national bank and presence,” Gleason says, adding that in 2019, he spent 153 days outside of the bank’s headquarters traveling across the United States and internationally. “Sometimes people [comment] that we do a lot of loans outside of our area,” he adds. “I consider it absurd, because the United States is our market, and we do loans all over the United States. It’s a very balanced, diversified portfolio by product type and geography.”

Bank OZK’s unique business model positioned it to top Bank Director’s 2021 RankingBanking study, sponsored by Crowe LLP. To delve further into the bank’s performance, Bank Director Vice President of Research Emily McCormick interviewed Gleason about his views on factors impacting long-term performance, including how OZK positions itself to take advantage of opportunities in the marketplace. The interview was conducted on Oct. 26, 2020, and has been edited for brevity, clarity and flow.

EM: First off, tell me how you approach long-term performance for Bank OZK and balance that with short-term expectations.

GG: I’ve been doing this job over 41 years now, and I hope to continue to do it a number of years more. When you’ve been in a job a long time, and you expect to be in it a long time in the future, thinking about long-term performance is much easier than if you’re new to a job, and you’re in it for a very short period of time. With that said, we all live in a world where our stock price moves day to day based on short-term results, and many investors seem to be overly focused on short-term results. So, it takes a lot of discipline and a willingness to be viewed as not doing the best you can do in the short run to achieve the long-term results.

But we have always focused preeminent attention on achieving longer-term objectives, and that has paid off for us tremendously well. Probably the best example of that is our unwavering commitment to asset quality, credit quality. There have been a number of times in my 41-year career where our growth for a few quarters or even a few years has been disappointing, relative to what people thought we were capable of doing, because we held to our credit standards and our discipline, and let competitors take share from us when we thought some of those competitors were being too aggressive. That has always paid off for us in the long run, every single time.

EM: Out of the last crisis, Bank OZK participated in several FDIC deals. We’re in another, very different crisis. Are you applying some lessons that you learned through the last crisis, or through your experience in banking, to what we’re going through now?

GG: I’ve been through a lot of downturns, and the causes are always different. It may be excesses in real estate; it may be excesses in subprime mortgage finance. It may be a bust in the oil and gas industry [or] the savings and loan crisis. [N]ow you’ve got the Covid-19 pandemic-induced recession. Causes vary, but all economic downturns result in people being out of work and suffering economically, and businesses struggling and suffering, and businesses closing. Every economic downturn creates challenges for people that are in the credit business, as we are, but it also creates a lot of opportunities.

The key to being able to capitalize on the opportunities is No. 1, being appropriately disciplined in the good times so that you are not so consumed with problems in the bad times that you can’t think opportunistically. No. 2, you’ve got to have adequate capital, adequate liquidity and adequate management resources. If you have those ingredients and combination … you’re able to spend much more time in a downturn focused on capitalizing on opportunities, as opposed to mitigating your risk. That’s been an important part of our story for several decades now, is we have almost universally been able to find great opportunities in those downturns. … [W]e’re already finding some ways to benefit in this downturn. So, the causes are different, but the result is always the same: [Y]ou’ve got challenges, you’ve got opportunities and you’ve got to be ready to capitalize on those opportunities.

EM: What opportunities are you seeing now, George?

GG: Obviously in the very early days, there was some tremendous dislocation in the bond market. We had a couple of good weeks where we were able to buy things at really advantageous prices. The Fed was so aggressive in their efforts to fix the plumbing of the monetary system that they took those opportunities away literally in a matter of weeks.

We’ve seen a lot of competitors pull back from the [commercial real estate] space; that’s given us an opportunity to both gain market share and improve pricing. We have seen customers evolve [in] how they deal with our branches; it’s given us an opportunity to create some efficiencies [and] advance our rollout of some future technology, all of which have helped us accelerate our movement toward a more consumer-friendly, technology-oriented way of dealing with our customers.

And frankly, Emily, we’re so early in seeing all of the economic impacts from this recession. Some of the impacts, I think, have been pushed out several quarters by the aggressive monetary and fiscal policy actions out of Washington. I think that really good, attractive opportunities will appear in 2021 and 2022. I think we’re just getting started on seeing opportunities begin to emerge.

EM: OZK maintains high capital levels. Why do you view that as important, and how are you strategically thinking through capital?

GG: We’re operating from a position of having excess capital, and that is probably a great and appropriate thing in this environment. [We’re] certainly in an environment where you’d rather have too much capital than too little today and … I believe there are a lot of opportunities that will emerge over the next four to eight quarters where we’ll be able to put that capital to work in a very profitable manner for our shareholders. So, we feel very good about the fact that today we have one of the highest capital ratios of all of the top 100 banks.

EM: Bank OZK has seen some high-level departures in the past few years; most recently, your chief credit officer. I think sometimes that gives people pause, and I wanted to give you the opportunity to address that.

GG: The reality of that is we are very dependent upon human capital and intellect in running our business. … I have always put an emphasis on hiring, training and developing really smart people who have intense work ethics, and who love to win and want to be part of a winning team. We have an abundance of talent in our company, and we’re constantly training, grooming and improving that talent.

When you hire and develop that quantity and quality of well-trained, well-developed staff, hard-charging people who want to win and want to succeed and want to push, some of those people are going to go on and pursue other opportunities, and that is great. And because we have such an abundance of talent, we’re in a position where we can say, “Congratulations, we’re happy for you. Thank you for everything you have done for us,” and I can turn around and say, “Next man up; let’s go.” That really is our culture. So yes, we plan for people to leave. We have plans in place on how we’re going to replace people if they are not available for one reason or another, and we’ve got the depth of talent that it lets us move on without missing a beat.

EM: One more question: Bank OZK has a record of strong performance, which is why it’s included in this year’s RankingBanking study. That said, I sometimes hear whispers of doubt about what you guys are doing, perhaps due to your unique model. I’m curious about how you respond to those doubts from the financial and investment communities.

GG: We feel under-appreciated ourselves sometimes. [W]e have built an extraordinary bank with an extraordinary team of people and a great business model; maybe one of the absolute best business models in the banking industry. I think it will prove to be very durable and very profitable over a long period of time.

Because our model is so heavily involved in commercial real estate, and commercial real estate is something that is sometimes in fashion and sometimes out of fashion, I think we experience that sense of being out of step sometimes. But we do commercial real estate day-in, day-out, every day, up-cycle, down-cycle, and we do it in a way that allows us to be successful no matter which direction the CRE cycle is trending at any point in time.

I believe as this pandemic-induced recession plays out, our business model is going to prove its mettle and equip itself very well. I think that sense [of], “Wow, do we really want to own a CRE bank at this stage in the cycle?” will go away, because people will realize we’re a bank committed to consistent, high asset quality, and we’ve underwritten and will continue to underwrite our portfolios in a way that facilitates that. I think we’ll finally get the credit that my team deserves for the excellent work they’ve done.

I’m told a lot of times by investors, “You’re a great bank. We want to own you. Maybe in a couple of quarters will be the right time to buy a CRE bank.” I think that reflects a less than full understanding of the power of our franchise.

Steering a De Novo Through a Crisis and Beyond

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New York-based Piermont Bank opened its doors in July 2019. Just eight months later — on March 1 — a New York woman returning home from Iran became the city’s first Covid-19 case. By March 20, with cases in the state rapidly climbing, Gov. Andrew Cuomo mandated that non-essential businesses close. One hundred days after reporting its first case, New York began reopening — but as of Nov. 19, restrictions remained in place, and New York City public schools recently returned to virtual learning to combat a resurgence of Covid-19 cases.

What a time to run a bank — especially a new one.

It sounds counterintuitive at first blush, but Wendy Cai-Lee, the bank’s founder and chief executive, believes Piermont is well positioned to serve customers. The $117 million bank focuses heavily on commercial real estate loans; it also makes commercial and industrial (C&I) loans.

She points out that as a de novo, the bank’s balance sheet is clean; her team didn’t have to devote attention to working with troubled borrowers. Piermont also has a lot of capital on hand, with a leverage ratio of 32.82% as of June 30.

But Cai-Lee recognizes the broader, longer-term impact the pandemic could have on the New York market. “We have seen appraisal values essentially drop anywhere between 10% to 35%,” she says. Her team has a risk assessment meeting every Monday; when we spoke in October, they were evaluating the potential fallout from the end of unemployment benefits through the CARES Act, set to expire at the end of the year. “That’s going to impact people’s ability to pay their rent, and I do think that’s going to bring some impact to multi-family that we haven’t seen so far,” she says.

Serving customers during the pandemic had some banks scrambling to adopt new technology to serve customers; in contrast, Piermont was already positioning itself as a “tech-enabled” bank. “When it comes to innovation, I’m a big believer that it’s not only technology that we need to focus on, but also process,” says Cai-Lee. She aims to create an end-to-end digitized process without sacrificing on risk controls.

“I use technology to digitize everything that the client doesn’t see so that I can move all those resources to allow my bankers to spend the time with the client to find specific pain points” and identify the right solution, she explains. “This allows my bankers to engage the client very differently.” Piermont can close commercial loans in three days, she says, rather than a couple of weeks. And innovation isn’t limited to technology; Piermont offers subscription pricing for its services, for example, and recently announced a banking-as-a-service platform it’s offering through a partnership with Treasury Prime.

I spoke with Cai-Lee before that announcement. “We’re actually not going to be that anonymous bank behind these fintechs,” she says. “We’re actually going to market front and center along with the API partner so that we can actually focus on creating the right product for them.”

Piermont Bank also seeks to serve women- and minority-owned businesses, which have been particularly devastated by the pandemic and have historically lacked access to credit and investor capital. A lot of banks say they want to serve women and minority entrepreneurs, yet these groups remain underserved. When I ask how Cai-Lee’s plans differ from other institutions’ efforts, she credits Piermont’s diverse team.

Cai-Lee is Asian American; before founding Piermont, she led the commercial real estate, commercial lending, and consumer and business banking divisions at $50 billion, Pasadena, California-based East West Bancorp, which serves markets in the U.S. and China. Before that, she spent almost a decade at Deloitte, where she was literally the poster child for diversity. “They had a [life-size] cutout of me made and had it in the lobby of every Deloitte domestic office,” she recalls.

When she founded Piermont Bank, she prioritized adding a diverse array of voices and backgrounds when she assembled her team. She believes it’s a strength for the bank. “The reason why [women and minorities are] underserved is — no different from serving any industry or any demographic out there — unless you understand their pain points, it’s hard to come up with the right product and service to serve them,” says Cai-Lee. “If you don’t have enough representation of women, of minorities on your board and senior management [team], how do you foster an environment where [you can] address that demographic?”

Driving Innovation Through Cultural Clarity

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New York-based Quontic Bank bills itself as an adaptive digital bank; it’s also a $1 billion community development financial institution (CDFI), lending to immigrants, low-income populations, gig-economy workers and borrowers who struggle to get a traditional mortgage. That mission means that the bank’s executives — including chief innovation officer Patrick Sells — tend to think about banking a little differently.

Its culture is a true competitive advantage of the bank — and that goes beyond having good, talented people on staff who get along with one another. It requires a mission, he says, and “strategic anchors” that can guide decision-making and empower employees.

Banks were already facing an “existential crisis” around digital and technology, Sells continues. “The pandemic that we found ourselves in has only exacerbated that tension,” he says. “[W]hen there is anxiety, we tend to act irrationally, we can tend to act scattered, we go back and forth. And what’s really critical is a steady hand as to who we are and what we need to do, and how we navigate through this, so we don’t get sucked into all of that. The culture, the clarity that we have, has definitely helped us navigate this storm.” Quontic has hired almost 90 new employees during the pandemic, he adds.

Sells discusses this further in this interview with Emily McCormick, Bank Director’s vice president of research. It has been edited for brevity, clarity and flow.

BD: It’s very easy to think about innovation, and focus on the nuts and bolts of the technology, but the culture and the mindset are so critical. How do you think through culture as it applies to innovation?
PS: There’s a tragedy in that innovation is often synonymous with technology, especially in this industry, and it really shouldn’t be. Innovation as much more than that. The thing that perhaps needed the most innovation, and would yield the greatest results, was culture that I think many banks don’t have. I think culture is an area where they’ve struggled. When you compare it to what’s gone on in the world around us — there’s so many things happening, and banks haven’t kept up with that.

These issues all interplay with each other. I think the greatest existential threat to the industry of community banking is culture. We have lost the war on talent. As the first digitally-native generation grew up and came out of college, they didn’t want to go work at a community bank. So today, we’re so behind from a technology standpoint, and we’re frantically, as an industry, trying to say, “We need this, we need that.” And that’s really a Band-Aid.

If we don’t figure out how to change this and lose the next decade of talent, we don’t stand a chance. The technology that’s new and cool today, we know the pace it’s accelerating at will be nothing compared to two, three years from now. … We also know in the data that’s coming out around millennials and the generations that follow, is that the sense of purpose matters immensely. And so for us, where we really focused on innovating, or what to do differently, is all in and around culture: How do we do that, and how do we bring that to life at Quontic? That will drive us into the future and where we want to go.

BD: You’re active on Twitter; one of your recent tweets focused on the fact that culture doesn’t end at the bank, it extends to the customer. Could you expand on that concept and how that informs how Quontic meets customer needs?
PS: There’s three components to Quontic’s culture: the mission, the de-centralized decision [making], and the shared language. Core values became that shared language, but one of our core values is try it on. For example, we want to be quick to try something new, even if we don’t know if it’s the right thing or not.

The other one is saying, “Cheese.” The next time someone asks to take a picture of you and they say, “Cheese,” what happens? Both of you smile, and usually the photographer is also smiling. How do we create that interaction? I think most customers expect, when you call your bank, you’re going to get very black-and-white answers as to what can and can’t be done. And there isn’t so much a focus on making it a pleasant experience.

An example of that, when Covid[-19] first happened at the end of March or early April, as an online bank, we picked up a lot of CD customers. For the consumer, one of the great things about CDs is you commit to putting your money in for a period of time, and you typically get the highest interest rate. If you break the CD, you lose all that interest. We knew a lot of customers would be nervous about what that meant for their financials, so we quickly reached out to say, “If you need to break your CD, you can do that penalty free.”

The majority of people said, “Thank you for offering this. As of now, I don’t want to do that.” But there was another group of people who said, “Yes, I want to do that.” Those same people called us back later and said, “I ended up being OK. I want to re-establish my account with you, and I’m going to tell everyone I know about what you’ve done for me, because it was so above and beyond.”

We want to be a spot, even though there’s a lot of anxiety going on, where we can bring smiles to people’s faces. I don’t know the data, but I doubt many banks emailed their CD customers to say, “You can break penalty-free if you need to.” We’re trying something on, and what happened from it? It deepened relationships and brought new relationships because it resonates the culture of who we are with the customer that we serve.

BD: We know that small businesses continue to be devastated by this pandemic. How is Quontic thinking through meeting the needs of small businesses, as this crisis continues and past it?
PS: This gives us the opportunity, in any crisis, to reframe, which is something I talk about in terms of innovation. What is innovation? Can you reframe what’s going on? Can we become aware of these underlying assumptions that haven’t changed in a while? If we change nothing but that, everything changes — that’s where you can find your most effective innovation.

For example, there’s a lot of small business owners who are behind the ball in terms of e-commerce. There [are] two ladies that own a [boutique] that I’ve gotten to know, and they wanted to open up a Shopify account to sell products online. I helped them do that. In one lens, helping [our small business customers] establish Shopify and e-commerce doesn’t result in any new revenue for the bank; but it strengthens the relationship and the [role] that banks historically played as a resource for small business owners.

There’s an opportunity to rethink branches. … While there’s great technology out there, like Shopify and Square, they don’t have people who can help you. What if the branch became a place where small business owners could get help [digitalizing themselves?] Now you’re utilizing the space that so many banks already have, and you’re beginning to play that meaningful role again in society. I think there’s a tremendous opportunity for banks to think differently, and say, “How do we help our customers also embrace technology that will ultimately help their businesses thrive?” That’s an example of a way banks can reframe what those relationships look like and deepen those relationships that’s outside of the norm as to what we think banks should be doing.

BD: So essentially, it’s about having that talent and expertise within the branch that can help the customer, and empowering employees to do that.
PS: This goes back to the mission [of] financial empowerment. It’s both that the products banks offer [are] one size fits all, and that the culture or the skills are largely the same. What if banks said, “We’re going to hire kids out of college who understand social media and e-commerce natively to help our small business customers.” Now you have talent that can help your bank figure out how to evolve. You solve two problems with one stone, and begin to change the reputation and everything. Not only does that have an impact for today, [but] my suspicion is the ROI on that over a decade is tremendous.

But you have to be willing to do something different. That’s where banks struggle, understandably; we’re taught to mitigate risk and to think about risk in everything. That can stand in the way of trying things that aren’t all that risky … it’s not that risky to add another digital bell and whistle that our core provides. It may be new for the bank, but it’s not really risky or innovative. We actually have to challenge ourselves to be bold and do something differently.

Customer Loyalty and the Competition for Stable Funding

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It’s more important than ever for banks to compete on value and increase client loyalty.

Banks are increasing loan loss reserves to counteract eroding credit quality at the same time they are also contending with competitors’ high-yield savings accounts, which pay more than 0.60% APY in some cases. August’s consumer savings rate was 14%, albeit down from a high of nearly 34% in April.

It’s easy to lose sight of the importance of competing on value in this environment, even as cost-effective ways to retain funding are more necessary than ever.

When I managed cash and investment products for banks and brokerage firms, I was regularly asked to increase the interest rate we offered our clients — often because a large client was threatening to leave the firm. My response then is still relevant today: A client relationship is more than an interest rate. In fact, multiple research studies I’ve sponsored over my career showed that when it comes to their cash deposits, the majority of clients rank safety, in the form of deposit insurance protection, first; access to their cash when they need it second; and interest rate third.

It’s a given that the majority of banks are members of the Federal Deposit Insurance Corp. and have debit cards linked to savings accounts, making clients’ funds accessible. According to the FDIC, the current average national savings rate at the end of October was 0.05% APY.

I ask potential bank partners the following key questions to understand what their strategy is to retain the excess deposits as long as possible on their balance sheet.

  • Does your bank create value with relationship pricing?
  • Does your institution have an easy-to-navigate website and app?
  • Can clients easily open an account online?
  • Does your bank offer a broad range of flexible products that meet clients’ cash needs?
  • When was the last time your institution launched an innovative savings product?

We’ve learned a lot about building more value for customers from successful consumer technology over the last few decades. Decisive points include that product attributes should be intuitive for use by front-line sales, be easily incorporated into a bank’s online experience, and allow clients to co-create a banking experience that meets their individual needs.

What would tech-inspired, easy-to-use, personalized products look like in retail banking?

Example 1:
A savings ladder strategy can meet clients’ needs for safety and access to their cash. This approach gains crucial additional value, however, when a bank deploys technology linking all the steps in the ladder into one account. Clients want to see what they’re getting in advance too: to test different inputs and compare potential strategies easily prior to  purchasing. Implementing new, individualized products should be as easy as clicking on the Amazon.com “Buy” button.

Example 2
In the face of economic uncertainty and job losses, many clients may look for flexibility. Some consumers will want to readily access cash for their already-known needs — for instance, parents with college-age children, small businesses, or homeowners with predictable renovation schedules. Advanced software lets banks meet these needs by creating customizable, fixed-term deposits with optimized rates that allow for flexible withdrawals.

Banks can consider adding value to their product offering beyond rate with time-deposit accounts that are easy for clients to implement and designed to meet their specific cash needs and terms. A product with such attributes both meets clients’ individualized needs and creates value in a competitive field.

Example 3
If a client prefers safety with some exposure to the market upside, a market-linked time deposit account also helps banks offer more value without increasing rate. An index or a basket of exchange traded funds can be constructed to align with your client’s values, which is especially attractive in today’s market. Consider the appeal of a time deposit account linked to a basket of green industry stocks, innovative technology companies, or any number of options for a segment of your clients. Offering products that align with your client’s broader worldview allows you to build a more holistic, longer-lasting relationship with them.

The ability to create customer value beyond rate will ultimately determine the long-term loyalty of banking clients. Fortunately, we can look to technology for successful models that show how to add value through simple, intuitive, and individual products. At the same time, tech already has many solutions, with software and IT services that banks can access to meet their clients’ personal needs, even at this challenging moment. Innovation has never been more relevant than now — as banks need to secure their communities, their client relationships, and their funding in a cost-effective manner.