Nonbank competitors challenge the way banks serve small business clients, who are always on the hunt for efficiency. Banks that address key pain points for those customers have a better shot at winning their business — and their loyalty, says Derik Sutton, chief marketing officer at Autobooks. Payments are a particular obstacle, he says. Financial institutions that can help their small business customers simplify accounts receivable and payable can lock in those relationships in 2023.
One set of attributes for effective bank directors, especially as community banks navigate a changing and uncertain operating environment, are curiosity and inquisitiveness.
Providing meaningful board oversight sometimes comes down to directors asking executives the right questions, according to experts speaking on Sept. 12 during Bank Director’s 2022 Bank Board Training Forum at the JW Marriott Nashville. Inquisitive directors can help challenge the bank’s strategy and prepare it for the future.
“Curiosity is a great attribute of a director,” said Jim McAlpin Jr., a partner at Bryan Cave Leighton Paisner and newly appointed board member of DirectorCorps, Bank Director’s parent company. He encouraged directors to “ask basic questions” about the bank’s strategy and make sure they understand the answer or ask it again. He also provided a number of anecdotes from his long career in working with bank boards where directors should’ve asked more questions, including a $6 billion deal between community banks that wasn’t a success.
But beyond board oversight, incisive — and regular — questioning from directors helps institutions implement their strategy and orient for the future, according to Justin Norwood, vice president of product management at nCino, which creates a cloud-based bank operating platform. Norwood, who describes himself as a futurist, gave directors a set of questions they should ask executives as they formulate and execute their bank’s strategy.
1. What points of friction are we removing from the customer experience this quarter, this year and next year? “It’s OK to be obsessive about this question,” he said, adding that this is maybe the most important question directors can ask. That’s because many technology companies, whether they’re focused on consumer financials or otherwise, ask this question “obsessively.” They are competing for wallet share and they often establish customer expectations for digital experiences.
Norwood commended banks for transforming the middle and back office for employees, along with improving the retail banking experience. But the work isn’t over: Norwood cited small business banking as the next frontier where community banks can anticipate customer needs and provide guidance over digital channels.
2. How do we define community for our bank if we’re not confined to geography? Community banking has traditionally been defined by geography and physical branch locations, but digital delivery channels and technology have allowed banks to be creative about the customer segments and cohorts they target. Norwood cited two companies that serve customers with distinct needs well: Silicon Valley Bank, the bank unit of Santa Clara, California-based SVB Financial, which focuses on early stage venture-backed companies and Greenlight, a personal finance fintech for kids. Boards should ask executives about their definition of community, and how the institution meets those segments’ financial needs.
3. How are we leveraging artificial intelligence to capture new customers and optimize risk? Can we explain our efforts to regulators? Norwood said that artificial intelligence has a potential annual value of $1 trillion for the global banking industry, citing a study from the McKinsey & Co. consulting group. Community banks should capture some of those benefits, without recreating the wheel. Instead of trying to hire Stanford University-educated technologists to innovate in-house, Norwood recommends that banks hire business leaders open to AI opportunities that can enhance customer relationships.
4. How are we participating in the regulatory process around decentralized finance? Decentralized finance, or defi, is a financial technology that uses secure distributed ledgers, or blockchains, to record transactions outside of the regulated and incumbent financial services space. Some of the defi industry focused on cryptocurrency transactions has encountered financial instability and liquidity runs this summer, leading to a crisis that’s been called “crypto winter” by the media. Some banks have even been ensnared by crypto partners that have gone into bankruptcy, leading to confusion around customer deposit coverage.
Increasingly, banks have partnerships with companies that work in the digital assets space, or their customers have opened accounts at those companies. Norwood said bank directors should understand how, if at all, their institution interacts with this space, and the potential risks the crypto and blockchain world pose.
When I think of bookkeeping, the first thing that comes to mind is a scene out of “Peaky Blinders:” a sharply dressed man pacing the floor with a heavy leather book, frantically crunching the numbers to figure out which accounts have an overdue balance and of how much.
Today, accounting software digitizes the majority of this reconciliation process. The problem with this? There are hundreds of software solutions a business can choose from — but more poignantly, software offered by a business’ bank seldom falls at the top of that list.
Many banks have historically been slow to service their small business customers. Account opening, applying for a loan or even getting business cards has traditionally forced business owners to head to a branch. The crucial need for bookkeeping software has turned businesses onto disruptors in the space: Intuit’s Quickbooks, Block’s Square software system, PayPal Holdings, etc. These incumbents, and others, are ready to pounce on a market that’s estimated to grow as big as $45.3 billion.
But banks have the chance to claim some of that market.
The Paycheck Protection Program showed small businesses that there were gaps fintechs couldn’t fill — ones that financial institutions could. Bank leaders looking to strengthen the relationship between their institution and their small business customers may want to start with accounts payable (AP) technology.
If your bank doesn’t already offer small business customers an integrated AP software as a benefit of having a business account, it’s time to seriously consider it.
Some larger banks — U.S. Bancorp, Fifth Third Bancorp — have built in-house AP offerings for their commercial customers. Others, like my $4 billion bank in southeast Iowa, do not — and probably can’t even afford to consider building. Detroit-based Autobooks provides those in-between banks with a platform to help service the AP and invoicing needs of small businesses.
Autobooks lets banks offer its white-labeled software to their small-business customers to manage accounting, bill pay and invoicing from within the institution’s existing online banking system. This eliminates the need for businesses to go anywhere else to handle their AP, and keeps invoicing and payment data within the bank’s ecosystem. More data can lead to better insights, campaigns and products that generate revenue for the bank.
Autobooks receives payments via credit card, Automated Clearing House (ACH) transfers and lockbox transactions. Because small businesses are already working within the bank’s online system, received funds are automatically deposited directly into the business’ bank account.
Paymode-X from Bottomline Technologies is another solution that banks could use. Paymode-X is an electronic, business-to-business payments network that integrates with the existing cash management systems of a bank’s business customers. It eliminates manual initiation and tracking of electronic and ACH payments; its bi-directional connection to accounting systems helps automate reconciliation. Constant electronic monitoring of payments also better traces and tracks payments for banks.
Bottomline Technologies handles vendor outreach and enrollment into the system, and also helps banks identify opportunities to earn additional revenue through the rebates and discounts a vendor may offer to encourage paying electronically, paying early or buying in high volumes.
In addition to offering it to commercial customers, banks can also use Paymode-X for their internal AP needs.
Bill.com has also marked itself as a notable fintech partner. Bill.com Connect is an end-to-end payments management platform that commercial clients access through a bank’s online portal or mobile app. Platform features include a payments inbox to receive, manage and process invoices digitally, automatic forwarding of invoices to the appropriate party, digital signatures and customizable workflows to enable automated approvals.
Bill.com also touts a network of over three million businesses, which could be an attractive benefit for commercial clients looking to expand, partner and more simply get paid.
There is still time and space for banks to plant their flag in the small business space; fintech partners could be an attractive way to break that ground.
Autobooks, Bottomline Technologies and Bill.com are all vetted companies for FinXTech Connect, a curated directory of technology companies who strategically partner with financial institutions of all sizes. For more information about how to gain access to the directory, please email [email protected].
Modernizing a bank’s technology has the potential to improve efficiency, reduce errors and free up resources for further investment. Still, with all those benefits, many banks are still woefully behind where they need to be to compete in today’s digital environment.
According to Cornerstone Advisors’ What’s Going On In Banking 2022 research, just 11% of banks will have launched a digital transformation strategy by the end of 2022. So what’s the holdup? For one thing, transformation is hamstrung by the industry structure that has evolved with banking vendors. Stories of missed deadlines, releases with dingbat issues, integrations that stop working and too few knowledgeable professionals to assist in system implementation and support are commonplace.
A large part of a bank’s future depends on how it hires and develops technical talent, manages fintech partnerships and scrutinizes and optimizes its technology contracts. Here are three key truths for bank officers and directors to consider in advance of their next strategic planning session:
1. There is no university diploma that can be obtained for many areas of the bank.
Our research finds that 63% of financial institution executives cited the ability to attract qualified talent as a top concern this year — up dramatically from just 19% in 2021. But even in the face of an industry shift to digital-first delivery and a need to better automate processes and leverage strong data intelligence, most banks have neither invested enough, nor sufficiently developed, their IT team for the next decade.
Every financial institution has a unique combination of line of business processes, regulatory challenges, and vendors and systems; the expertise to manage these areas can only be developed internally. Identifying existing skill sets across the organization will be critical, as will providing education and training to employees to help the organization grow.
A good place for directors and executives to start is by developing a clear and comprehensive list of the jobs, skills and knowledge the bank needs to develop across four key areas of the bank: payments, commercial credit, digital marketing and data analytics.
2. Financial institutions and fintechs are on different sides of table.
Over the past decade, there have been profound changes in the relationship between financial technology and financial institutions. “Banking as usual” no longer exists; as much as banks and fintechs want to work at the same table together, they have very different needs, different areas of dissatisfaction with the relationship and are sitting on different sides of that table.
A fintech can create viable software or a platform for the bank to build upon, but the bank needs to have the internal talent to leverage it (see No. 1). A culture of disciplined execution and accountability that ensures the fintech solution will be deployed in a high performance, referenceable way will go a long away in strengthening the partnership.
3. Training and system utilization reviews need to find their way into vendor contracts.
When it comes to software solutions, banks are looking at multimillion-dollar contracts and allocating tens of thousands of dollars in training on top of that. This is not the time to be penny-wise and pound-foolish.
Every organization needs to build a tightly integrated “change team” that can extend, integrate, lightly customize and monitor a growing stack of new, primarily cloud-based, platform solutions. For CFOs and the finance department, this means a punctuated investment in the raw talent to make the bank more self-sufficient from a tech perspective (see No. 1 and 2 above).
One way to launch this effort is with an inventory for executive management that details how many users have gone through which modules of training. This tool can be vitally important, involves only minor add-on costs and can and should be embedded in every vendor contract.
Many financial institutions subject themselves to unfavorable technology contract terms by entering negotiations with too little knowledge of market pricing, letting contracts auto-renew and failing to prioritize contracts that need the most attention. If managed properly, vendor contracts represent a huge opportunity for savings.
Legalized cannabis continues to gain momentum across the United States, but banks may be left out of the opportunity if they lack a strategy to service the space. As this demand grows, banks can leverage their risk and compliance teams to build new revenue opportunities. In this video, Kevin Hart, the founder and CEO of Green Check Verified, explains how banks can formulate a cannabis banking program that fits into their overall strategy and risk management appetite.
Banks need to be more agile to face the challenges in today’s marketplace, and boards and management teams need to focus on strategy more frequently. Brian Stephens of KPMG outlines the strategic issues impacting banks and how they should be addressed by bank leaders.
As unregulated competition heats up, bank CEOs and board members continue to seek ways to not just stay relevant but to stand out. In this short video, Ben Plotkin of Keefe, Bruyette & Woods, A Stifel Company, shares his perspective on how banks of all sizes can find success in 2015.
Banks today are facing a historical threat, not unlike what the publishing industry recently experienced, with non-bank competitors quietly nibbling away at their customer base. In this video, Mitchell Orlowsky, chief executive officer of Ignite Sales, Inc., discusses ways that banks can improve sales performance and competitive advantage.
Growth in commercial and industrial (C&I) lending is generating a lot of buzz in the industry. As reported in the fourth quarter banking profile released by the Federal Deposit Insurance Corp. (FDIC), C&I loans rose 12 percent during the last year to $1.5 trillion. A recent phone survey conducted by Bank Director of 142 community bank CEOs and chairmen in the southern United States confirms this growth, with 64 percent revealing plans to grow through C&I lending this year, compared to 29 percent that plan to grow through consumer lending and 7 percent through specialty finance.
Paul Merski, executive vice president, congressional relations and chief economist at the Independent Community Bankers of America (ICBA) explains that while the lending environment as a whole is highly competitive, C&I lending is a growth area where community banks with the right expertise can have an advantage over larger banks. “It’s highly competitive, and it’s really something that the community banks shouldn’t cede to the larger banks,” says Merski, as community banks have the relationships within the local business community to place themselves at a competitive advantage.
Cadence Bank, a $5.4-billion asset privately owned regional bank based in Birmingham, Alabama, with locations across Alabama, Florida, Georgia, Mississippi, Tennessee and Texas, saw the highest growth in C&I loans in the nation for the fourth quarter, as reported by SNL Financial. As the result of three bank acquisitions, Cadence saw overall loan growth, including the bank’s C&I portfolio, which grew 41 percent to $1.79 billion, according to Paul Murphy Jr., CEO of Cadence Bancorp and chairman of Cadence Bank. Additionally, Cadence “hired 65 people with extensive lending experience,” Murphy says. “That would be the formula for more growth than normal.”
According to Merski, C&I loans can offer a higher rate of return than standardized loans, like mortgage loans, as these types of loans allow for greater customization and flexibility in the terms and rates offered to the borrower. In turn, this can help increase profitability for banks squeezed by net interest margins. At Cadence, C&I loans generate additional deposits, and the fee income opportunities that these loans provide are a significant benefit. Cadence has also seen advantages in cross-selling other products like treasury management, “which is also good business, and helps fund the bank,” says Murphy.
The focus of bankers on C&I has, naturally, raised the interest of regulators, who question whether terms are growing too flexible and rates are dipping too low. As with any product, having the proper risk management controls in place is key, says Merski, adding that a diverse loan portfolio that includes C&I can benefit a bank. “For community banks, not being overly concentrated in one lending area” can help improve a bank’s risk profile, he says.
Murphy stresses that banks wanting to enter the C&I fray should have lenders with the right skill set. The recent hires at Cadence hold an average of 18 years of C&I lending experience, and Murphy views C&I as the bank’s core business. “We’re not doing it because it’s en vogue,” he says. “We’re doing it because this is what we’ve always done.”
Bank Director also surveyed bank CEOs about plans to increase spending in branch technology, branch expansion, mobile applications and ATMs. Fifty-two percent do not plan additional spending in any of these areas. Twenty-one percent plan to upgrade branch technology, and 19 percent plan increased investment in mobile apps. “The mobile banking app utilization is just going through the roof,” says Murphy. “People love it.”
Cadence Bank is building an automated branch using video tellers near its Birmingham, Alabama, headquarters. The branch will feature one video teller, without in-person staff like tellers and loan officers. Murphy explains that video banking will allow Cadence to extend hours as well as save on man power by having one person handle transactions at several branches. “I think we can actually do a better job for customers,” says Murphy.
Thirteen percent of the bankers surveyed plan to open new branches, while just 2 percent plan increased investment in ATMs.
ABOUT THE SURVEY Bank Director conducted a brief survey by phone in February and March, polling 142 community bank CEOs and chairmen in Alabama, Arkansas, Florida, Louisiana, Mississippi, Oklahoma, Tennessee and Texas. The survey focused on growth in that region in advance of Bank Director’s Growth Conference to be held in New Orleans, Louisiana, on April 30 and May 1. Ninety-nine percent of the respondents were bank CEOs; most of the respondents represented the states of Texas (29 percent), Oklahoma (25 percent) and Alabama (15 percent).
Raymond P. Davis, president & CEO of Umpqua Holdings Corp. and keynote presenter at Bank Director’s 2013 Acquire or Be Acquired Conference in Scottsdale, Arizona, shares his insight on how community banks can remain competitive during this challenging economic environment.
Video Length: 45 minutes
Creating a meaningful value proposition
Differentiating yourself from the competition
What does a strong culture look like?
Advice and warnings about valuations
About the Speaker
Ray Davis is the president and CEO of Umpqua Holdings Corporation. Mr. Davis pioneered a new approach to the delivery of financial products and services built on the development of innovative store designs that engage and excite customers. Mr. Davis joined Umpqua Bank in 1994 and has grown the bank from six banking locations and $140 million in assets to nearly 200 stores and $12 billion assets today.