An Outsider’s Perspective on Banking

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In 2021, $26.5 billion Arvest Bank Group hired Laura Merling from Google to lead a multi-year transformation effort at the Bentonville, Arkansas-based bank. 

Merling, Arvest’s chief transformation and operations officer, had never worked in a bank. But she thrives off the challenge to drive change at an incumbent organization with years of history — a familiar effort after starting her career at Ford Motor Co. with an internship in the 1980s. “That’s probably where transformation means the most; it has the broadest impact,” she says. She’s worked at startups, too, but there “you might be transforming an industry or an individual product.” And that’s it. 

But transforming an established bank like Arvest requires rolling up your sleeves to address “people, process and technology,” Merling says. All three components are critical elements as she guides the organization through a five-year map that sets clear but flexible goals for staff. 

A successful transformation effort requires everyone’s involvement; it’s not just a task delegated to IT. At Arvest, Merling blends skills from other outsiders as well as legacy staff with deep experience in banking. But as much as Merling’s role requires execution, it also requires one action that seems so simple: Listening to employees. “Listening gives you a good idea of where to start … And when they see the impacts — ‘you’ve heard me, and then you did something about it’ — [that] makes a big difference.” 

She’s also working with technology partners such as Google Cloud and Thought Machine to modernize the bank’s technology infrastructure. “What it lets us do is create custom products in a more interesting way, and it lets us have that flexibility to define them,” she says. “That will be important as we look forward in the future, both to how we serve customers, but also as new regulations come through.”

In this edition of The Slant podcast, Merling shares her background and how she’s leveraging her outsiders’ perspective at Arvest — and what she’s learned in her 18 months as a newbie banker. She also explains how small achievements help drive progress toward the bank’s ultimate vision to build “the leading community-focused bank serving small and medium business customers.” 

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

Loan Automation Benefits for Community Banks

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Why would a prospective borrower choose a community bank with loan applications that still use paper forms, printed records and a branch visit to begin the application process, when they can select one that has an online loan application system that takes minutes? In today’s digital-first world, clients’ increasing expectations are putting pressure on banks to deliver a simple, clear and responsive experience.

Business loan automation can help with digital transformation efforts, allowing a bank to scale within its preferred risk. It can increase application growth, increase speed to funding, decrease decision time and lower default risk.

Automation puts a digital infrastructure around the loan origination process, where humans set the rules and the software handles the heavy lifting. Its ability to start small and expand means it can adapt to meet the unique needs of each financial institution.

At a high level, loan automation software works to:

  • Analyze customer-submitted data. The customer submits required information, such as files and documents necessary to the application process, via a secure digital portal.
  • Analyze third-party data. Through application programming interfaces, or APIs, the software communicates to third-party data sources, such as banks and credit bureaus, to obtain cash flow information, tax returns, verification of identity, business and personal credit scores and more.
  • Analyze risk with machine learning. The software analyzes and processes the gathered data and generates a risk score. This saves a bank employee from having to comb through mountains of data.
  • Make intelligent, rules-based decisions. The software passes all the data through a decision-making engine based on a bank-defined credit policy and credit risk appetite. The digital lending software makes credit decisions in real time.

Power and Scale
Automated loan origination is meant to operate based on the bank’s existing lending process — just as any bank employee would. But the software can process more data points, process applications faster, and do it at scale.

Community banks that don’t have the budget to hire a large workforce can augment their existing workforce with loan automation software, leveling the playing field with larger competitors. Automated, rules-based lending platforms can provide the following benefits for community banks:

  • Efficiency: Streamline every step of the process and eliminate manual processes. This allows banks to service a higher volume of borrowers without the need to hire additional staff.
  • Accuracy: Optimize the application processing for accuracy, since the software uses the specific rules set up by the bank. This reduces human error in the process.
  • Consistency: Loan decisions are consistent and predictable, based on the bank’s underwriting policies and risk appetite.
  • Compliance: The software can automatically collect and store necessary documents in accordance with the bank’s record retention policies.
  • Customer service: A digital platform gives both banks and borrowers a place to upload all necessary documents and communicate back and forth. Banks can leverage this platform for ongoing relationship management while allowing customers to complete their applications when and where they choose.
  • Customer experience: A digital application means customers don’t need to print anything out or make unnecessary trips to a local branch, and they receive a loan decision faster.

The bank has the power and scale to automate its business loan decisions without increasing risk — a true win-win for the bank and its customers.

Automation Versus Partial Automation
The reality is not all banks will opt to shift their traditional loan application process to a full digitization overnight. These things take time, buy-in and a lot of due diligence before selecting an appropriate banking platform for an institution.

Executives should keep in mind that they can still use loan automation software to facilitate a bank’s digital transformation at their own pace. For example, a bank can start by partially automating certain loan workflows before having them reviewed and approved by a human employee. Banks can get comfortable with the software, test it in a live environment and gather the necessary data to feel confident before automating additional parts of the loan origination workflow.

This piece was originally published in the second quarter 2023 issue of Bank Director magazine.

Community Bankers Emphasize Calmness, Stability Amid Crisis

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You can’t communicate too much during a banking crisis – even when your bank is not the one actually experiencing the crisis.

After regulators shut down SVB Financial Group’s Silicon Valley Bank and Signature Bank two weeks ago, community bankers across the nation began working behind the scenes to field questions from their boards, their clients and their frontline staff. They checked their access to the Federal Reserve’s discount window and sought to reassure customers and directors of their own institution’s liquidity position.

Locality Bank, a de novo bank based in Fort Lauderdale, Florida, still has ample liquidity from its capital raising efforts and simply by virtue of being a new bank. The $116 million Locality, which first opened a little over a year ago, reiterated these points in a letter it sent out to clients the day after Silicon Valley Bank was closed by state regulators, CEO Keith Costello says.

“We don’t have a portfolio of low-interest securities or loans,” the letter reads in part. “We have capital of almost three times the level required to have a well-capitalized rating, and our liquidity ratio at 54.17% at month end of February is one of the strongest in the U.S. Our securities portfolio, because we bought our securities when rates went up, has no appreciable decline in value.”

That letter went a long way toward assuaging customer fears around the ongoing banking crisis, Costello says, adding, “We just got a tremendous response from clients who emailed, who called, who just said, ‘Hey, we love that letter. We feel so much better about everything.’”

Communicating with frontline staff has also been critical, says Julieann Thurlow, CEO of Reading Cooperative Bank in Massachusetts. Not only are those workers spending a lot of time interacting with customers, but they also may have their own questions about how ongoing events impact their livelihoods.

“Not every teller reads The Wall Street Journal,” Thurlow says. “So make sure that you actually communicate with them as well because there was a level of uncertainty … ‘Is the banking community in trouble?’”

Some community bankers also took to social media to get the word out, including Jill Castilla, CEO of $358 million Citizens Bank of Edmond. Since the March 12 failure of Silicon Valley Bank, Castilla has taken to Twitter and LinkedIn to provide a rundown of the crisis and explain how Silicon Valley Bank and Signature differed from a typical community bank.

Even larger banks whose stocks have taken a hit sought to distance themselves from those banks. Phil Green, CEO of Cullen/Frost Bankers in San Antonio, Texas, took to CNBC to discuss the subsidiary Frost Bank’s liquidity position. The $53 billion Frost Bank CEO told “Mad Money” host Jim Cramer that the bank has a low loan-to-deposit ratio and roughly 20% of its deposits are held in highly liquid accounts at the Federal Reserve.

Even though Cullen/Frost Bankers’ stock price has taken a hit this year — down more than 10% since Silicon Valley Bank failed, mirroring the fall in the KBW Nasdaq Bank Index this year — Green expressed confidence in the long term.

“Frost Bank’s deposit base has been very strong,” he said, adding “We’ve seen really no unusual activity.”

While Reading Cooperative already tests its liquidity lines on a quarterly basis, the $796-million bank double-checked its access to the Federal Reserve’s discount window after Silicon Valley Bank failed.

“We could almost refinance the entire bank with our liquidity lines,” she says.

Meanwhile, Costello says that a handful of customers made their accounts joint accounts in order to get coverage from the Federal Deposit Insurance Corp., and he said that Locality also tapped its cash service with IntraFi, a privately held deposit placement firm, for the first time. He also added that Locality’s messaging around the crisis and its own liquidity position and relative stability resonated with non-customers, too.

“You find people that aren’t your clients will call you at times like this, too,” Costello says. “We did actually pick up some business as a result.”

Other community bankers also reported a similar experience picking up new business in the crisis. In a post on LinkedIn, Castilla reported that deposits continued to increase at her bank and “my lobby today is full of happy customers!”

Thurlow says Reading Cooperative picked up a few new larger accounts, although she was also cautious not to characterize that as a “flight to safety.”

“It’s not something that we’re marketing or looking to capitalize on,” she says. “This is a time for calm. We’re not looking to create or exacerbate a problem.”

How One Bank Transformed Its Board & Shareholder Base in 6 Years

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The McConnell family has had a controlling interest in Pinnacle Financial Corp., based in Elberton, Georgia, since the 1940s. But over the past few years, Jackson McConnell Jr., the bank’s CEO and chairman, has worked to dilute his ownership from roughly 60% to around a third. “It’s still effective control, but it’s not an absolute control,” he says.

McConnell, a third-generation banker, has seen a lot of family-owned banks struggle with generational change in ownership as well as management and board succession issues, and he’s seen some of it firsthand when Pinnacle acquires another bank. It’s a frequent problem in community bank M&A. In Bank Director’s 2023 Bank M&A Survey, 38% of potential sellers think succession is a contributing factor, and 28% think shareholder liquidity is. 

“One of the things that I’ve experienced in our effort to grow the bank [via M&A is] the banks that we’re buying … maybe the ownership is at a place where they would like to liquidate and get out, or the board [has] run its course, or the management team is aging out,” he says. “And they end up saying the best course of action would be to team up with Pinnacle Bank.” 

There’s not another generation of McConnells coming through the ranks at $2 billion Pinnacle, and he doesn’t want the same result for his bank. “I want to make sure that I’m doing everything that I can to put us in a position to continue to perpetuate the company and let it go on beyond my leadership,” he says. Putting the long-term interests of the bank and its stakeholders first, Pinnacle is reinventing itself. It’s transitioned over the past few years from a Subchapter S, largely family-owned enterprise with fewer than 100 owners to a private bank with an expanded ownership base of around 500 shareholders that’s grown through M&A and community capital raises. As this has transpired, Pinnacle’s also shaking up the composition of the board to better reflect its size and geographic reach, and to serve the interests of its growing shareholder base.

Pinnacle is a “very traditional community bank,” says McConnell. It’s located in Northeast Georgia, with 27 offices in a mix of rural and what he calls “micro metro” markets, primarily college towns. It has expanded through a mix of de novo branch construction and acquisitions; in 2021, it built three new branches and acquired Liberty First Bank in Monroe, Georgia — its third acquisition since 2016. 

The bank’s acquisitions, combined with three separate capital raises to customers, personal connections and community members in its growing geographic footprint, have greatly expanded the bank’s ownership. 

But McConnell says he’s sensitive to the liquidity challenges that affect the holders of a private stock, who can’t access the public markets to buy and sell their shares. “We’ve done several things to try to provide liquidity to our shareholders, to cultivate buyers that are willing to step up,” McConnell says. “You can’t call your broker and sell [the shares] in 10 minutes, but I can usually get you some cash in 10 days. If you’re willing to accept that approach, then I can generally overcome the liquidity issue.” Sometimes the bank’s holding company or employee stock ownership plan (ESOP) can be a buyer; McConnell has also cultivated shareholders with a standing interest in buying the stock. The bank uses a listing service to facilitate these connections.

“We have a good story to tell,” McConnell says. “We’ve been very profitable and grown and have, I think, built a good reputation.”

The board contributes to that good reputation, he says. During one of the bank’s capital raises, McConnell met with a potential buyer. He had shared the bank’s private placement memorandum with the investor ahead of time and started his pitch. But the buyer stopped him. “He said, ‘Jackson, it’s OK. I’ve seen who’s on your board. I’m in,’” McConnell recalls. “That really struck me, to have people [who] are visible, [who] are known to be honorable and the type of people you want to do business with … it does make an impact.”  

The current makeup of Pinnacle’s board is the result of a multi-year journey inspired by the bank’s growth. Several years ago, the board recognized that it needed to represent the bank’s new markets, not just its legacy ones. And as the bank continued to push toward $1 billion in assets — a threshold it passed in 2020 — the board became concerned that the expertise represented in its membership wasn’t appropriate for that size. 

“If we wanted to be a billion dollar bank, we needed a billion dollar board,” says McConnell. The board started this process by discussing what expertise it might need, geographic areas that would need representation, and other skills and backgrounds that could help the bank as it grew. 

The board also chose to change its standing mandatory retirement policy to retain a valuable member. While the policy still has an age component, exceptions are in place to allow the bank to retain members still active in their business or the community, and who actively contribute to board and committee meetings. 

But there was a catch, says McConnell. “We said, ‘OK, we’re going to do this new policy to accommodate this particular board member — but for us to do this here and make this exception, let’s all commit that we’re going to do a renewal process that involves bringing in some new board members, and some of you voluntarily retiring.’” The board was all-in, he says. “I had a couple of board members approach me to say, ‘I don’t want to retire, but I’m willing to, because I think this is the right way to go about it,’” he recalls.

Conversations with directors who still view themselves as contributing members can be a challenge for any bank, but McConnell believes the board’s transparency on this has helped over the years, along with the example set by those retiring legacy board members. Over roughly six years, Pinnacle has brought on nine new board members. That’s a sizable portion of the bank’s outside directors, which currently total 10.

McConnell leveraged his own connections to fill that first cohort of new directors in 2016. The second and third cohorts leveraged the networks of Pinnacle’s board members and bankers. McConnell has had getting-to-know-you conversations with candidates he’s never previously met, explaining the bank’s vision and objectives. But he’s also transparent that it may not be a fit in the end for the individual or the board. “We talked openly about what we were trying to do, and also openly about how I might end up recruiting you, only to say, ‘No,’ later,” he says.

Director refreshment is an ongoing process; Bill McDermott, one of the independent directors that McConnell first recruited in 2016, confirms that the board spends time during meetings nominating prospective candidates for board seats.  

Both McConnell and McDermott say the diversity of expertise and backgrounds gained during the refreshment process has been good for the bank. Expansion into new markets led to bringing on an accountant and an attorney, as well as two women: a business owner and the chief financial officer of a construction company, who now make up two of the three women on the board.  

New, diverse membership “adds a lot of energy to the room. It’s been very successful,” says McConnell.

To onboard new directors, there’s a transition period in which the new directors and outgoing board members remain on the board for the same period of time — anywhere from six to 12 months — so sometimes the size of the board will fluctuate to accommodate this. 

It can take new directors with no background in banking time to get used to the ins and outs of a highly regulated industry. That’s led to some interesting discussions, McConnell says. “There is some uneasiness and awkwardness to some of the questions that get asked, but it’s all in the right spirit.” 

External education, in person and online, helps fill those gaps as well. McDermott says the board seeks to attract “lifelong learners” to its membership.

One of the factors that attracted McDermott to Pinnacle was the bank’s culture, which in the boardroom comes through as one built on transparency and mutual respect. “I was just attracted by an environment where everybody checked their egos at the door. The relationships were genuine,” he says. “[T]hat kind of environment, it’s so unique.” And he says that McConnell sets that tone as CEO.

“There is lively discussion,” says McDermott. “Jackson encourages people to ask thoughtful questions, and sometimes those thoughtful questions do lead to debate. But in the end, we’ve been able to synthesize the best part of the discussions around the table and come up with something that we think is in the best interest of the bank.”

Additional Resources
Bank Director’s Online Training Series library includes several videos about board refreshment, including “Creating a Strategically Aligned Board” and “Filling Gaps on Your Board.” For more context on term limits, read “The Promise and the Peril of Director Term Limits.” To learn more about onboarding new directors, watch “A New Director’s First Year” and “An Onboarding Blueprint for New Directors.” For more information about the board’s interaction with shareholders, read “When Directors Should Talk to Investors.” 

Bank Director’s 2023 Bank M&A Survey, sponsored by Crowe LLP, surveyed 250 independent directors, CEOs, chief financial officers and other senior executives of U.S. banks below $100 billion in assets to examine current growth strategies, particularly mergers and acquisitions. Bank Services members have exclusive access to the complete results of the survey, which was conducted in September 2022. 

Finding Your Customer’s Moment of Need

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A banker may think the quote, “You’ve got to take on growth tactics and a growth mindset that’s different than the way you did in the past,” had come from the main stage at Bank Director’s annual Acquire or Be Acquired Conference, an event that focuses primarily on financial institution growth. Instead, it came from a tiny studio six floors up, in a recorded conversation between two non-bankers.

Derik Sutton, chief marketing officer of Autobooks, a payments technology company that provides banks invoicing, accounts receivable and accounts payable solutions for their business customers, owns those words. He believes that community banks are positioned to earn and retain business customer relationships by finding and acting on their customers’ moments of need.

In this episode of Reinventing Banking, a special podcast series brought to you by Bank Director and Microsoft Corp., Sutton describes traditional banking practices that can be reimagined for digital, why convenience is king in the payments space and how asking hard questions could be key to getting ahead.

Instead of discerning what their business customers need from digital reports, it may be time for bankers to lace up their boots and get back on Main Street to find out for themselves.

This episode, and all past episodes of Reinventing Banking, are available on FinXTech.com, Spotify and Apple Music.

Community Banks Fuel the Future of Renewable Energy

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The transformational Inflation Reduction Act (IRA) contains a number of provisions designed to entice a large numbers of community and regional banks to deploy capital into renewable energy projects across the US.

Large U.S. banks and corporations have made significant renewable energy tax credit investments for over a decade. Through the IRA, there is greater opportunity for community and regional banks to participate.

The act extends solar tax credits, or more broadly renewable energy investment tax credits, (REITCs) for at least 10 more years, until greenhouse gas emissions are reduced by 70%. It also retroactively increases the investment tax credit (ITC) rate from 26% to 30%, effective Jan. 1, 2022. This extension and expansion of ITCs, along with other meaningful incentives included in the act, should result in a significant increase in renewable energy projects that are developed and constructed over the next decade.

Community banks are a logical source of project loans and renewable energy tax credit investments, such as solar tax equity, in response to this expected flood of mid-size renewable projects. REITCs have a better return profile than other types of tax credit investments commonly made by banks. REITCs and the accelerated depreciation associated with a solar power project are fully recognized after it is built and begins producing power. This is notably different from other tax credit investments, such as new markets tax credits, low-income housing tax credits and historic rehabilitation tax credits, where credits are recognized over the holding period of the investment and can take 5, 7, 10 or 15 years.

Like other tax equity investments, renewable energy tax equity investments require complex deal structures, specialized project diligence and underwriting and active ongoing monitoring. Specialty investment management firms can provide support to community banks seeking to make renewable energy or solar tax credit investments by syndicating the investments across small groups of community banks. Without support, community banks may struggle to consistently identify suitable solar project investment opportunities built by qualified solar development partners.

Not all solar projects are created equally; and it is critical for a community bank to properly evaluate all aspects of a solar tax equity investment. Investment in particular types of solar projects, including utility, commercial and industrial, municipal and community solar projects, can provide stable and predictable returns. However, a community bank investor should perform considerable due diligence or partner with a firm to assist with the diligence. There are typically three stages of diligence:

  1. The bank should review the return profile and GAAP financial statement impact with their tax and audit firm to validate the benefits demonstrated by the solar developer and the anticipated impact of the investment on the bank’s earnings profile and capital.
  2. The bank should work with counsel to identify the path to approval for the investment. Solar tax equity investments are permissible for national banks under a 2021 OCC Rule (12 CFR 7.1025), and banks have been making solar tax equity investments based on OCC-published guidance for over a decade. In 2021, the new rule codified that guidance, providing a straightforward roadmap and encouraging community banks to consider solar tax equity investments. Alternatively, under Section 4(c)(6) of the Bank Holding Company Act, holding companies under $10 billion in assets may also invest in a properly structured solar tax equity fund managed by a professional asset manager.
  3. The bank must underwrite the solar developer and each individual solar project. Community banks should consider partnering with a firm that has experience evaluating and underwriting solar projects, and the bank’s due diligence should ensure that there are structural mitigants in place to fully address the unique risks associated with solar tax equity financings.

Solar tax credit investments can also be a key component to a bank’s broader environmental, social and governance, or ESG, strategy. The bank can monitor and report the amount of renewable energy generation produced by projects it has financed and include this information in an annual renewable energy finance impact report or a broader annual sustainability report.

The benefits of REITCs are hard to ignore. Achieving energy independence and reducing carbon emissions are critical goals in and of themselves. And tax credit investors that are funding renewable energy projects can significantly offset their federal tax liability and recognize a meaningful annual earnings benefit.

Venture Capital Funds Remain Hungry for Fintechs

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Fintech investment isn’t drying up, so much as resetting from rabid to rational. That’s the assessment of several bank-backed fintech investment funds, where interest in striking deals remains high.

“Given the reset in valuations, more disciplined cash burn in the companies we are looking at and record deal flow, it’s a great environment for us and I expect us to step up our pace of investments in 2023,” says Adam Aspes, general partner at JAM Special Opportunity Ventures.

Over the past two years, its JAM FINTOP joint venture has raised about $312 million from a network of more than 90 bank investors to put into promising fintech and blockchain technology. It has two funds with a five-year investment period, “so we are still in the very early days of deploying capital,” Aspes says.

Regulators have signaled that they’ll be scrutinizing bank-fintech partnerships more closely and reviewing how well compliance issues are addressed. That might have unsettled some venture capitalists, especially those from outside the industry who are sometimes referred to as fintech “tourists.” But Aspes is unphased.

“We have always had a thesis [that] there would be greater emphasis on fintechs being compliant with a bank’s regulated rails,” he says. “So, I don’t think our investment thesis has changed, but I think the market is definitely moving in our direction,” especially in the areas of blockchain technology and banking as a service, or BaaS.

Activity at the venture capital divisions of the largest U.S. banks has not cooled off significantly either, says Grant Easterbrook, a fintech consultant.

“While the total dollars involved may be down relative to 2021 — as firms retrench in a down market and valuations fall — I am not seeing any signs of a major pullback from fintech,” Easterbook says. “Banks know that technology continues to be both a weakness and an opportunity, and they are looking for deals.”

Carey Ransom, managing director of the BankTech Ventures fund, is on the hunt for “real solutions to real problems,” and thinks the fintech shakeout will benefit investors like him. His goal is to find fintechs that can be of value to the more than 100 community banks in his fund by advancing their digital transformation efforts in some way. So the fund isn’t just injecting capital, but helping the fintechs grow.

“We have increasing relevance in a market shift like this,” Ransom says. “We have a very clear value proposition.”

In his view, the market had gotten out of whack with all the free-flowing money over the last year. Now the focus is on more sensible valuation metrics. “Some of it is just returning back to the right valuations and fundamentals,” he says.

David Francione, managing director and head of fintech at Capstone Partners in Boston, has a similar take, pointing out that 2021 skewed perceptions in more ways than one. With the pent-up demand following the Covid-19 pandemic, “2021 was a record year by anybody’s imagination for any metric.”

He notes that investment in fintechs for this year is up compared to the years prior to 2021, so he thinks the dramatic drop-off needs to be put into perspective. “If you strip out 2021, and you look at the prior three or so years before that, this year is still a record year, relatively speaking,” Francione says.

Still, he would not be surprised if there is a lull in activity, given factors like the geopolitical environment and the threat of a recession.

“I think this year is sort of a transition year. Things are probably taking a little bit longer to finance. At least that’s what we’re seeing in some of the transactions that we’re in,” says Francione, whose firm was recently acquired by the $179 billion Huntington Bancshares in Columbus, Ohio. “I would call it more of a pause than anything.”

Like Ransom, Francione thinks the pause could benefit banks that want to partner with fintechs. Francione’s advice to fintechs is to reflect on what they can do to solve a problem that banks — or more importantly, the bank’s customers — have.

“A lot of these fintechs that we’re talking to, they think, ‘Oh, this bank could be interesting.’ But sometimes they don’t really understand why and what they can really do for them. So they really have to peel back the onion and figure out: Who are their customers? Is it a similar target market? What are some of their needs? Does our technology solution address those needs? Can they integrate easily? What is the real value that they’re going to bring to this potential bank partnership, whether the partnership is in the form of an investment or is strictly a partnership to resell some of its products?”

Ransom says he has been in meetings where fintech executives come in saying they are out to disrupt banks. Then they find out that Ransom works with banks and because they need to raise money, “mid-conversation they shift their tone to, ‘Maybe I can help banks,’” he says.

His top recommendation to fintech executives that want to work with BankTech Ventures is to understand the value their technology can provide to community banks. “If we have to explain it, they’ll lack credibility,” Ransom says.

The fintech founders who tend to be a fit for his fund — which is backed by banks ranging in size from $200 million to $20 billion in assets — are less flashy and more pragmatic. The ideal founders also have taken care to capitalize the fintech properly.

“Don’t raise $100 million for a business that’ll sell for $200 million,” Ransom says. “That’s a change we have seen — which I see as healthy.”

Those that take on too much money create a situation where the risk is no longer worth the potential return for investors. But the total amount raised is not the only concern; the types of investments can also be an issue.

He believes some fintechs take on too much “preference capital,” the outside money that gets priority for returns over common shares, which the founding executives tend to own. If the executives think they are unlikely to get paid, it misaligns incentives and creates a risk that they could decide to leave the fintech, Ransom says.

If some fintechs are in a sudden scramble to cut expenses, slow the cash burn and move from growth to profitability faster, fintech analyst Alex Johnson suggests that it is to be expected after the heady cash free-for-all that prevailed last year.

“Between 2019 and 2021, money was just too readily available. A lot of tourists — founders looking to get rich quickly and generalist VC firms sitting on massive piles of cash — wandered into fintech and screwed stuff up,” Johnson writes in a recent edition of his Fintech Takes newsletter.

A growth-over-everything mindset prevailed and a lot of bad behavior got overlooked. “One example: the alarming amount of first-party fraud that has been tolerated by neobanks in recent years,” he writes. “And now we are all suffering through the hangover.”

Leveraging Innovations to Double Down Where Fintechs Can’t Compete

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For years, financial technology companies, or fintechs, have largely threatened the domain of big banks. But for community banks — perhaps for the first time — it’s getting personal. As some fintechs enter the lending domain, traditional financial institutions of all sizes can expect to feel the competitive impact of fintechs in new ways they cannot afford to ignore.

The good news is that fintechs can’t replicate the things that make local community banks special and enduring: the relational and personal interactions and variables that build confidence, trust and loyalty among customers. What’s even better is that local financial institutions can replicate some of the fintechs playbook — and that’s where the magic happens.

It’s likely you, the board and bank management understand the threat of fintech. Your bank lives it every day; it’s probably a key topic of conversation among the executive team. But what might be less clear is what to do about it. As your institution navigates the changing landscape of the banking industry, there are a few topics to consider in creating your bank’s game plan:

  • Threat or opportunity? Fintechs give consumers a number of desirable and attractive options and features in easy-to-navigate ways. Your bank can view this as a threat — or you can level up and find a way to do it better. Your bank should start by identifying its key differentiators and then elevating and leveraging them to increase interest, engagement and drive growth.
  • It’s time for a culture shift. Relationships are not built through transactions. Banks must move from transactional to consultative by investing time, talent and resources into the relational aspects of banking that are best done in-person. They also need to find ways to meet the transactional needs of consumers in low friction, efficient ways.
  • It’s not about you … yet. Step outside of the services your bank directly provides. Think of your institution instead as a connector, a resource and trusted advisor for current and prospective consumers. If your bank doesn’t provide a certain service, have a go-to referral list. That prospect will continue to come back to you for guidance and counsel and one day soon, it will be for the service you provide.
  • What’s in your toolbox? What is the highest and best use of your team’s time? What are your team members currently spending time on that could be accomplished more efficiently through an investment in new, different or even fintech-driven tools? By leveraging technology to streamline operations, your bank can benefit from efficiencies that create space and time for staff to focus on relationship-building beyond the transaction.
  • Stop guessing. You could guess, but wouldn’t you rather know? Banks have access to an incredible amount of data. Right now, many financial institutions are sitting on a treasure trove of data that, when activated appropriately, can help target and maximize growth efforts. Unlocking the power of this data is key to your financial institution’s growth and evolution; data drives action, offering valuable insight into consumer behaviors, preferences and needs.

Your bank can adopt a view that fintechs are the enemy. Or it can recognize that fintechs’ growth stems from an unmet consumer need — and consider what it means for your bank and its products and services. The key is doubling down on the who, what and why that is unique to your brand identity, and capitalizing on the opportunity to highlight and celebrate what makes your bank stand out, while simultaneously evolving how your institution determines and delivers against your consumers’ needs.

4 Reasons to Build a Digital-Only Brand

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Digital transformation offers many long-term benefits for community banks. But it can also pose strategic challenges, such as how to test new products and services without affecting the identity of an institution’s core brand.

One solution is to launch a digital-only brand that is distinct from the bank’s current brand. Developing a digital brand can drive powerful results that might otherwise be inaccessible for community banks that are looking to innovate but may be hesitant to make too many changes too quickly. In this piece, we explore how developing a digital-only brand can benefit banks, and which strategies are key to ensuring their success.

1. Build a New Tech Stack and Test Alternative Providers
The legacy banking technology that community banks typically rely on doesn’t always make it easy to roll out new products or customize offerings. Fortunately, new platforms can streamline the process and give them the power to easily change rates and marketing copy in real time. A digital-only brand is a great way to test out new technologies like online account opening before expanding them to the bank’s core brand.

One community bank in Missouri is doing just that. In 2019, Midwest BankCentre, based in St. Louis, Missouri, launched its digital-only brand, Rising Bank. Rising gave the 115-year-old bank a way to explore new technologies, test digital marketing methods and measure how the market would respond to product changes. In its first five months, Rising Bank experienced:

  • An average conversion rate of 48% on online applications.
  • Average initial deposits of over $55,000.
  • Net-new deposits of more than $100 million.

Launching Rising allowed Midwest to de-risk innovation efforts and test new approaches to digital transformation. The community bank was then able to take these insights and drive similar results for its core brand.

2. Attract Customers in New Markets
The right tools allow community banks to deliver great service, no matter the channel. A digital-only brand can help smaller institutions compete with megabanks’ online offerings and unlock untapped market share. Unlike a brick-and-mortar institution, a digital brand is accessible to customers anytime, anywhere. This means a bank can expand the geographic reach of its business and target new markets without building new branches.

3. Uncover Opportunities for Hyper-Personalization
Hyper-personalization means using data and analytics to develop a deep understanding of customers’ interests, expectations and gaps in service. Using these insights, banks can develop hyper-personalized products that address the needs of specific demographics, communities, profession, and underserved groups. By targeting these audiences, banks can carve out a successful niche and maintain sustainable growth.

Data collected through a digital-only brand — through online interactions, geolocation data, aggregated payments behavior and so forth — will reveal to your bank where the opportunities are. For instance, a bank could launch an online-only brand that caters to healthcare workers or the LGBTQ+ community.

4. Develop New Products Without Fear of Cannibalization
One of the concerns banks may have about developing new banking products or strategies is the potential to cannibalize existing business. It’s key that the digital brand is distinct from the core brand — while still supported by the bank’s experience and brand recognition. When the new brand and existing brand serve different purposes and appeal to different customer bases, the risk of cannibalization is low.

For example, Rising Bank and Midwest BankCentre’s core brand achieve different goals for the institution. As a digital-only brand, Rising appeals to younger demographics and has raised significant deposits from a national customer base, while Midwest is community-focused and excels at building relationships in-market. Further, Midwest and Rising avoid cannibalization given their varying interest rates. Yet both brands have achieved considerable success on digital channels.

“This year alone, Midwest BankCentre’s digital-only brand and our core brand’s online channel held the No. 1 and No. 2 spots, respectively, in most accounts opened across our organization,” says Erin Erhart, Midwest’s executive vice president of bank and digital operations.

A digital-only brand can complement the bank’s core brand in a targeted way. This large-scale digital transformation project may seem overwhelming, but vendors can help banks find the right approach and determine how to achieve the best results with a digital brand.

Research Report: Fortifying Boards for the Future

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Good corporate governance requires, among many other things, a strong sense of balance.

How do you bring in new perspectives while also sticking to your core values? How does the board balance responsibilities among committees? What’s the right balance between discussion about the fundamentals of banking, versus key trends and emerging issues?

There’s an inherent tension between the introduction of new ideas or practices and standard operating procedures. We explore these challenges in Bank Director’s 2022 Governance Best Practices Survey, sponsored by Bryan Cave Leighton Paisner LLP. But tension isn’t necessarily a bad thing.

The survey polled 234 directors, chairs and chief executives at U.S. banks with less than $100 billion in assets during February and March 2022. Half of respondents hailed from banks with $1 billion to $10 billion of assets. Just 9% represent a bank above the $10 billion mark. Half were independent directors.

We divide the analysis into five modules in this report: board culture, evaluating performance, building knowledge, committee structure and environmental, social and governance oversight in the boardroom. Jim McAlpin, a partner at the Bryan Cave law firm in Atlanta and leader of the firm’s banking governance practice, advised us on the survey questions and shared his expertise in examining the results.

We also sought the insights of three independent bank directors: Samuel Combs III, a director and chair of the board’s governance committee at $2.8 billion First Fidelity Bancorp in Oklahoma City; Sally Steele, lead director with $15.6 billion Community Bank System in DeWitt, New York; and Maryann Goebel, the compensation and governance chair at $11 billion Seacoast Banking Corp. of Florida, which is based in Stuart, Florida. They weighed in on a range of governance practices and ideas, from the division of audit and risk responsibilities to board performance assessments.

The proportion of survey respondents representing boards that conduct an annual performance assessment rose slightly from the previous year’s survey, to 47%. Their responses indicate that many boards leverage evaluations as an opportunity to give and receive valuable feedback — rather than as an excuse to handle a problem director.

Forty-seven percent of respondents describe their board’s culture as strong, while another 45% rank it as “generally good,” so the 30% whose board doesn’t conduct performance assessments may believe that their board’s culture and practices are solid. Or in other words, why fix something that isn’t broken? However, there’s always room for improvement.

Combs and Steele both attest that performance evaluations, when conducted by a third party to minimize bias and ensure anonymity, can be a useful tool for measuring the board’s engagement.

Training and assessment practices vary from board to board, but directors also identify some consistent knowledge gaps in this year’s results. Survey respondents view cybersecurity, digital banking and e-commerce, and technology as the primary areas where their boards need more training and education. And respondents are equally split on whether their board would benefit from a technology committee, if it doesn’t already have one.

And while directors certainly do not want to be mandated into diversifying their ranks, in anonymous comments some respondents express a desire to get new blood into the boardroom and detail the obstacles to recruiting new talent.

“Our community bank wants local community leaders to serve on our board who reflect our community,” writes one respondent. “Most local for[-] profit and not-for-profit boards are working to increase their board diversity, and there are limited numbers of qualified candidates to serve.”

To read more about these critical board issues, read the white paper.

To view the results of the survey, click here.