How Fintechs Can Help Advance Financial Inclusion

Last year, the coronavirus pandemic swiftly shut down the U.S. economy. Demand for manufactured goods stagnated while restaurant activity fell to zero. The number of unbanked and underbanked persons looked likely to increase, after years of decline. However, federal legislation has created incentives for community banks to help those struggling financially. Fintechs can also play an important role.

The Covid-19 pandemic has affected everyone — but not all equally. Although the number of American households with bank accounts grew to a record 95% in 2019 according to the Federal Deposit Insurance Corp.’s “How America Banks” survey, the crisis is still likely to contribute to an increase in unbanked as unemployment remains high. Why should banks take action now?

Financial inclusion is critical — not just for those individuals involved, but for the wider economy. The Financial Health Network estimates that 167 million America adults are not “financially healthy,” while the FDIC reports that 85 million Americans are either unbanked or “underbanked” and aren’t able to access the traditional services of a financial institution.

It can be expensive to be outside of the financial services space: up to 10% of the income of the unbanked and underbanked is spent on interest and fees. This makes it difficult to set aside money for future spending or an unforeseen contingency. Having an emergency fund is a cornerstone of financial health, and a way for individuals to avoid high fees and interest rates of payday loans.

Promoting financial inclusion allows a bank to cultivate a market that might ultimately need more advanced financial products, enhance its Community Reinvestment Act standing and stimulate the community. Financial inclusion is a worthy goal for all banks, one that the government is also incentivizing.

Recent Government Action Creates Opportunity
Recent federal legislation has created opportunities for banks to help individuals and small businesses in economically challenged areas. The Consolidated Appropriations Act includes $3 billion in funding directed to Community Development Financial Institutions. CDFIs are financial institutions that share a common goal of expanding economic access to financial products and services for resident and businesses.

Approximately $200 million of this funding is available to all financial institutions — institutions do need not to be currently designated as a CDFI to obtain this portion of the funding. These funds offer a way to promoting financial inclusion, with government backing of your institution’s assistance efforts.

Charting a Path Toward Inclusion
The path to building a financially inclusive world involves a concerted effort to address many historic and systemic issues. There’s no simple guidebook, but having the right technology is a good first step.

Banks and fintechs should revisit their product roadmaps and reassess their innovation strategies to ensure they use technologies that can empower all Americans with access to financial services. For example, providing financial advice and education can extend a bank’s role as a trusted advisor, while helping the underbanked improve their banking aptitude and proficiency.

At FIS, we plan to continue supporting standards that advance financial inclusion, provide relevant inclusion research and help educate our partners on inclusion opportunities. FIS actively supports the Bank On effort to ensure Americans have access to safe, affordable bank or credit union accounts. The Bank On program, Cities for Financial Empowerment Fund, certifies public-private partnership accounts that drive financial inclusion. Banks and fintechs should continue joining these efforts and help identify new features and capabilities that can provide affordable access to financial services.

Understanding the Needs of the Underbanked
Recent research we’ve conducted highlights the extent of the financial inclusion challenge. The key findings suggest that the underbanked population require a nuanced approach to address specific concerns:

  • Time: Customers would like to decrease time spent on, or increase efficiency of, engaging with their personal finances.
  • Trust: Consumers trust banks to secure their money, but are less inclined to trust them with their financial health.
  • Literacy: Respondents often use their institution’s digital tools and rarely use third-party finance apps, such as Intuit’s Mint and Acorns.
  • Guidance: The underbanked desire financial guidance to help them reach their goals.

Financial institutions must address both the transactional and emotional needs of the underbanked to accommodate the distinct characteristics of these consumers. Other potential banking product categories that can help to serve the underbanked include: financial services education programs, financial wellness services and apps and digital-only banking offerings.

FIS is committed to promoting financial inclusion. We will continue evaluating the role of technology in promoting financial inclusion and track government initiatives that drive financial inclusion to keep clients informed on any new developments.

2021 Risk Survey Results: High Anxiety

An outsized crisis requires bold action. The banking industry responded in kind when the economy spiraled as a result of the Covid-19 pandemic.

Financial institutions across the country assisted small businesses by issuing Paycheck Protection Program loans. Banks also almost universally modified loans to help borrowers weather the storm, according to Bank Director’s 2021 Risk Survey, sponsored by Moss Adams LLP. At the peak of the downturn, 43% of the directors, CEOs, chief risk officers and other senior executives responding to the survey say their bank modified more than 10% of the loans in their portfolio.

Conducted on the heels of a tumultuous 2020 — with the pandemic, social strife and political change continuing into January — the survey reveals high levels of anxiety across the risk spectrum. In particular, respondents indicate greater unease regarding cybersecurity (92%) and credit (89%), as well as strategic (62%) and operational (52%) risks.

Almost half of respondents indicate that some or most of the loan modifications extended into the fourth quarter 2020, and two-thirds reveal concerns about concentrations in their loan portfolio, with most pointing to commercial real estate (43%) and/or the hospitality industry (31%).

Forty-three percent indicate that their bank tightened underwriting standards during the downturn. Looking ahead, many are unsure whether they’ll ease their standards to lend to business customers in 2021 and 2022. The challenges to bankers have been deep during the past year.

As the CEO of a small, southeastern community bank put it: “What doesn’t kill you makes you stronger.”

Despite this uncertainty, bankers express some optimism. More than three-quarters believe that supporting their communities during the pandemic has positively affected their bank’s reputation. Eighty-seven percent expect fewer than 10% of their bank’s business customers to fail. And 84% will improve their bank’s business continuity plan due to what they’ve experienced.

Key Findings

More Robust Stress Testing
More than 80% say their bank conducts an annual stress test. Of these, 60% have expanded the quantity and/or depth of economic scenarios examined in response to the Covid-19 pandemic.

Cybersecurity Gaps
Sixty-three percent say their institution increased its oversight of cybersecurity and data privacy in 2020. Most say the bank needs to improve its cybersecurity program by training staff (68%) and implementing technology to better detect or deter threats and intrusions (65%).

Pandemic Plans Adjusted
Respondents identify several areas where they’ll enhance their business continuity plan as a result of the pandemic. The majority point to formalizing remote work procedures and policies (77%), educating and training employees (56%) and/or providing the right tools to staff (55%). Roughly half say that fewer than a quarter of employees will work remotely when the pandemic abates; 25% say that no employees will work remotely.

Banking Marijuana
Forty-one percent of respondents represent a bank headquartered where marijuana use is at least partly legal. Overall, one-third are unsure if their bank would be willing to serve marijuana businesses. Just 7% serve these businesses; 34% have discussed banking this industry but don’t work with these companies yet.

Climate Change Still Not a Hot Topic
Just 14% say their board discusses the risks posed by climate change at least annually; this is up slightly from 11% in last year’s survey. Fewer than 10% say an executive reports to the board about the risks and opportunities that climate change presents to the institution.

To view the full results of the survey, click here.

Pandemic-Induced Innovation Charts Path Toward New Normal

As the financial institutions industry embarks on 2021, our reflections capture a world disrupted by the Covid-19 pandemic. Economic uncertainty continues to impact strategic and growth plans for an inestimable period of time. Banks are closely monitoring loan payment trends and deposit account fluctuations as customers continue to struggle with stable employment and small businesses fight to survive.

The Covid-19 crisis occurred at a time of strength for most financial institutions. Unlike the 2008 Great Recession, banks have been able to rely on strong capital positions, which was crucial when it became no longer possible to continue operating business as usual.

Essentially overnight, consumer behavior shifted away from most face-to-face interactions, prompting an increase in online and contactless activity. Banks had to quickly adapt and explore innovation in order to meet both customer and employee needs. Outdated manual processes, continuity vulnerabilities and antiquated methods of communication immediately became apparent, with institutions pivoting to operate effectively. The pandemic became an accelerant and forced banks to embrace innovation to avoid business interruption, while prioritizing information security and employee and customer safety. Necessity is the mother of invention, and the Covid-19 pandemic created necessity — with an emphasis on urgency.

Top Five Covid-19 Challenges That Prompted Innovation

  1. To reduce the potential virus spread, executives found alternative means of meeting and interacting with employees and customers. Virtual meetings were the solution for many banks.
  2. While many institutions allowed for some remote work, this was not permitted for most employees prior to the pandemic. In some cases, chief technology officers had to quickly implement secure VPN access, evaluate hardware availability, order laptops and expand upon remote working policies and procedures.
  3. Digital transformation immediately moved from “wouldn’t it be great if we did this?” to “to be competitive and survive we must accomplish this immediately.” No. 1 on the transformation list was enhancing the customer experience. To remain competitive, transformation was no longer optional but absolutely required. Digital channels have been trending as customers’ preferred way to bank in the last few years, but this became the primary channel for customer engagement out of necessity. This shift prompted banks to reevaluate and enhance digital channel offerings along with supporting technologies.
  4. Round one of the Paycheck Protection Program was a difficult, labor-intensive process for participating institutions. The need for an efficient PPP application process prompted lenders of all sizes to embrace automation and fintech partnerships, resulting in a smoother process during round two.
  5. C-suite executives and bankers across the organization found themselves in a position where it was difficult to access information quickly and easily in order to make timely decisions to improve the customer experience and manage the bank. For many institutions, especially community financial institutions, this continues to be a challenge.

The need for accurate and efficiently delivered information and data across the organization has never been so great. It is still quite common for financial institutions to manage information in data silos, making it impossible to create the contextual customer intelligence necessary to compete in the post-pandemic environment. Financial institutions have the most intimate data about their customers. This data is of little value until it is transformed into meaningful information that can be easily digested, interpreted, and acted upon.

Banks that recognize that their data is a valuable asset are actively seeking out intelligent analytics tools to create contextual customer intelligence that can be strategically deployed across the organization and leveraged for consistent multichannel experiences to generate sales, increase customer and employee loyalty and reduce operating expenses. Financial institutions must have the ability to gather, aggregate and analyze their complex data assets quickly and accurately to remain competitive, meet regulatory reporting expectations and to achieve market success. The ability to analyze this data and act decisively is the path to not only being a better financial institution but prospering in uncertain times. Leveraging high-value data is imperative to thriving and increasing an institution’s competitive advantage.

A Look at the Great Loan Modification Experiment

After almost a year, Congress’ decision to suspend loan modifications rules was an unprecedented, unorthodox and, ultimately, effective way to aid banks and borrowers.

The banking industry is going on four quarters of suspended requirements for coronavirus loan modifications. Suspending the reporting rules around loan modifications was a creative way for regulators and lawmakers to encourage banks in the spring of 2020 to work with borrowers facing coronavirus-related hardships. The result is that the industry, and economy, had more time to reassess the rapidly uncertain environment before needing to process troubled credits.

“Standing here today, having completed most of my year in audit and having a pretty good idea of how things are panning out — I would call it a raging success,” says Mandi Simpson, a partner in Crowe’s audit group. She adds that the decision to pause loan payments may have helped avoid a number of business closures and foreclosures, which will help the economy stabilize and recover long-term.

Ordinarily, these modifications, like no payments or interest-only payments for a period of time before restarting payments and catching up, would have been categorized as troubled debt restructurings, or TDRs, under U.S. generally accepted accounting principles.

TDRs occur after a bank offers a concession on a credit that it wouldn’t otherwise make to a borrower experiencing financial difficulties or hardship. The CARES Act suspended the determination that a loan modified because of the coronavirus would count as a TDR, “including impairment for accounting purposes.” Banks could now offer deferments and modifications to borrowers impacted by the coronavirus without needing to record them as TDRs.

The suspension came as part of the Coronavirus Aid, Relief, and Economic Security Act of 2020, or CARES Act, and was extended in the stimulus bill passed before the end of the year. The move was supported by the U.S. Securities and Exchange Commission, the Financial Accounting Standards Board and bank regulators, who had encouraged banks to work with borrowers prior to the suspension. It is scheduled to be in effect through until Jan. 1, 2022, or 60 days after the termination of the national emergency, whichever is earlier.

“The regulatory community gets a high-five for that, in my opinion,” says Christopher Marinac, director of research at Janney Montgomery Scott. “Think about the accounting change in TDRs as another form of stimulus … For the companies and the clients that received deferrals – this pandemic is not their fault. … There was a recognition that this gave people a way to buy time. The one variable you can’t quantify in a crisis is time.”

The widespread forbearance allowed borrowers to adapt their businesses, get a handle on their finances or apply for Paycheck Protection Program funding from the Small Business Administration. It also gave banks a chance to reassess their borrowers’ evolving risk and offer new loan terms, if needed.

Reported Bank Deferral Data for 2020

Quarter Loans in deferral, median Low range High range Number of banks reporting
Q1’2020 11.1% 0.3% 38% 224
Q2’2020 15.3% 1.2% 46.4% 234
Q3’2020 3% 0% 21.5% 240
Q4’2020 1.4% 0% 14.5% 238

Source: Reports authored by Brad Milsaps, managing director at Piper Sandler & Co.

A number of institutions took advantage of the suspension to offer borrowers relief. Simpson remembers that many banks freely offered short-term forbearance in the second quarter, and panicked borrowers accepted. When those forbearance periods expired in the third quarter, borrowers had a better sense of their financial condition — aided by the PPP — and banks were better prepared to work with customers under continued pressure.

By the end of the second quarter, most banks “expressed optimism” about the direction of deferrals and reported “minimal” second requests, mostly related to restaurant and hotel borrowers, wrote Brad Milsaps, managing director at Piper Sandler & Co.

He expected deferrals to become “less of a focus going forward,” as those loans’ performance normalized or banks felt confident in marking them as nonaccruals. To that end, the median ratio of criticized loans to total loans, excluding Paycheck Protection Program loans, increased to 3.6% at the end of the third quarter, from 2.9% in the second quarter.

“Deferrals were an impactful tool utilized at the beginning of the pandemic, but have fallen to a very minimal level given the impact of PPP, the CARES Act, and improvement in the economy,” he wrote in a February 2021 report. “Although deferral data continues to be disclosed by most banks, the investment community has mostly moved on from deferrals as an area of primary focus.”

But the suspension of TDR guidance is not a green light for banks to wholly ignore changing credit risk. If anything, the year of deferrals gave banks a better sense of which customers faced outsized challenges to their businesses and whether they could reasonably and soundly continue supporting the relationship. Marinac points out that many banks have risk-rated loans that received modifications, set aside reserves for potential losses and migrated those that continued to have stress over time.

And as documented in Milsaps’ reports, a number of banks decided to share their modification activity with the broader public, with many including geography, industry and sometimes even the type of modification offered. These disclosures weren’t required by regulators but demonstrated the credit strength at many banks and reassured investors that banks had a handle on their credit risk.

The suspension of TDR reporting requirements through the end of 2021 gives the industry and stakeholders like FASB, the accounting board FASB, to consider the usefulness of the existing TDR guidance.

The reporting involved with TDRs involves an individual discounted cash flow analysis, which makes the accounting complicated and tedious. TDRs also can carry negative connotations that are impossible to shake: A modified TDR, even if it’s performing, is always recorded as a TDR. Simpson points out that the loan modification disclosures banks made in lieu of reporting TDRs was, in many cases, more useful and insightful than if the banks had just treated all modified loans as TDRs. And while mass loan modifications may have been a lot of work for banks in the midst of the pandemic’s most uncertain days, it would have been exponentially more complicated to do mass restructuring recordings and discount cash flow analyses over those four quarters.

“If you aren’t going to do TDR reporting at the time when — in theory — it would be the most valuable, doesn’t that call into question whether TDR identification is really that useful after all?” Simpson asks. “The standard-setters are doing some outreach and taking a second look with exactly that in mind.”

ESG: Walk Before You Run

Covid-19 and last year’s protests over racial injustice added to the mounting pressure corporations face to make progress on environmental, social and governance (ESG) issues — but banks may be further ahead than they believe.

“ESG took on a life of its own in 2020,” says Gayle Appelbaum, a partner at the consulting firm McLagan. Institutional investors have slowly turned up the heat on corporate America, along with community groups, proxy firms and ratings agencies, and regulators such as the Securities and Exchange Commission, which now mandates a human capital management disclosure in annual reports. Customers want to know where companies stand. Prospective employees want to know if a company shares their values. And President Joe Biden’s administration promises to focus more on social and environmental issues.

Big banks like Bank of America Corp. and JPMorgan Chase & Co. have been responding to these pressures, but now ESG is trending down through the industry. With the right approach, banks may find that these practices actually improve their operations. However, smaller community and regional banks can’t — and probably shouldn’t — merely copy the ESG practices of their larger brethren. “People have to think about what’s appropriate for their bank, given [its] size and location,” says Appelbaum. “What are they already doing that they could expand and beef up?”

That means banks shouldn’t feel pressured to go big or go home when it comes to ESG. Begin with the basics: Has your bank reduced waste by encouraging paperless statements? How many hours do employees spend volunteering in the community? “When you sit down and talk to bankers about this, it’s interesting to see [their] eyes open,” says Brandon Koeser, senior manager and financial services senior analyst at the consulting firm RSM. The pandemic shed light on how banks support their employees and communities. “The reality is, so much of what they’re doing is part of ESG.”

Robin Ferracone, CEO of the consultancy Farient Advisors, tells companies to think of ESG as a journey, one that keeps strategy at its core. “You need to walk before you run. If you try to bite [it] all off at once, you can get overwhelmed,” she says. Organizations should prioritize what’s important to their strategy and stakeholders. ESG objectives should be monitored, revisited and adjusted along the way.

Stakeholders are watching. Glacier Bancorp CEO Randall Chesler was surprised to learn just how closely in a conversation with one of the bank’s large investors two years ago.

“One of our investors asked us, ‘Have you looked at this? We see your score isn’t very good; are you aware of that? What are you going to do about it?’ And that was the first time that we started to dig into it and realized that we were being scored by ISS,” says Chesler. (Institutional Shareholder Services provides an ESG rating on companies, countries and bonds to inform investors.)

It turned out that $18.5 billion Glacier was doing a lot, particularly around the social and governance aspects of ESG. The Kalispell, Montana-based bank just wasn’t telling its story. This is a common ESG gap for community and regional banks.

Glacier worked with consultants to develop a program and put together a community and social responsibility report, which is available in the investor relations section of its website, along with other governance documents such as its code of ethics. This provided the right level of information to lift Glacier’s score. “Our benchmark was, we want to be at our peer-level scoring on ESG,” says Chesler. “[We] ended up actually better. And we continue to watch our scores.”

“Community banks have the social and governance aspects covered better than many industries because [banks are] heavily regulated,” says Joe Scott, a managing director at Kroll Bond Rating Agency. Where they likely lag, he says, is around the environment; most are just beginning to assess these risks to their business. And it’s important that banks get this right as stakeholders increasingly focus on ESG. “We’re hearing that, beyond equity and debt investors, larger depositors — particularly corporate depositors, institutional depositors, state treasurers’ officers [and] others like that — are incorporating ESG into their considerations on who they place large deposits with. That could be a theme over time— other kinds of stakeholders factoring in ESG more and more.”

How Banks Kept Customers During the Pandemic, Even Commercial Ones

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

Despite closed branches and masked interactions, the coronavirus pandemic may have actually improved customers’ relationships with their banks. They have digital channels to thank.

That’s a shift from the mentality pervading the industry before the pandemic. Business lines like commercial lending seemed firmly set in the physical world: a relationship-driven process with high-touch customer service. The Paycheck Protection Program from the U.S. Small Business Administration completely uprooted that approach. Banks needed to deliver loans “as fast as possible” to their small commercial customers, says Dan O’Malley, CEO of data and loan origination platform Numerated during Bank Director’s Inspired By Acquire or Be Acquired. More than 100 banks are currently using the platform either for PPP applications or forgiveness.

The need for rapid adoption forced a number of community banks to aggressively dedicate enough resources to stand up online commercial loan applications. Sixty-five percent of respondents to Bank Director’s 2020 Technology Survey said their bank implemented or upgraded technology due to the coronavirus. Of those, 70% say their bank adopted technology to issue PPP loans. This experiment produced an important result: Business customers were all too happy to self-service their loan applications online, especially if it came from their bank of choice.

“Self-service changes in business banking will be driven by customer demand and efficiency,” O’Malley says, later adding: “Customers are willing to do the work themselves if banks provide them the tools.”

Digital capabilities like self-service platforms are one way for banks to meaningfully deepen existing relationships with commercial borrowers. Numerated found that borrowers, rather than bankers, completed 84% of PPP loan applications that were done using the company’s platform, and 94% of forgiveness applications. That is no small feat, given the complexity of the application and required calculations.

Those capabilities can carve out efficiencies by saving on data entry and input, requesting and receiving documentation, the occasional phone call and the elimination of other time-consuming processes. One regional bank that is “well known for being very relationship driven” was able to process 3,000 “self-service” PPP loan applications in a morning, O’Malley says. Standing up these systems helped community banks avoid customer attrition, or better yet, attract new customers, a topic that Bank Director magazine explored last year. Already, banks like St. Louis-based Midwest BankCentre are reaping the gains from digital investments. The $2.3 billion bank launched Rising Bank, an online-only bank, in February 2019, using fintech MANTL to open accounts online.

The impetus and inception for the online brand dates back more than three years, says President and CFO Dale Oberkfell during an Inspired By session. Midwest didn’t have a way to open accounts online, and it wanted to expand its customer base and grow deposits. It also didn’t want to replicate the branch experience of opening an account — Midwest wanted to compress the total time to three minutes or less, he says.

Creating the brand was quite an investment and undertaking. Still, Rising Bank has raised $160 million in deposits — as many deposits as 10 branches could — with only two additional employees.

“We didn’t spend the dollars we anticipated spending because of that efficiency,” Oberkfell says.

Midwest BankCentre is exploring other fintech partnerships to build out Rising Bank’s functionality and product lines. The bank is slated to add online loan portals for mortgages and home equity lines of credit — creating the potential for further growth and efficiencies while strengthening customer relationships. He adds that the bank is looking to improve efficiencies and add more tools and functionality for both customers and employees. And how are they going to fund all those technology investments?

Why, with the fees generated from PPP loans.

Keeping the Digital Accelerant Going

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.”

E-signatures Move from Nice to New Normal

The coronavirus pandemic has been a pivotal catalyst within the financial services industry, as banks of all sizes adopt and launch digital tools and services at an unprecedented pace. While not a new initiative, e-signatures suddenly became a top priority for banks, as customer sought ways to complete their financial transactions and certify documents remotely. According to BAI’s August Banking Outlook research on digital banking trends during Covid-19, half of consumers use digital products more since the pandemic, and 87% indicate they plan to continue after the pandemic. Banks now realize they must implement a digital transformation strategy in order to navigate these challenging times and new consumer expectations.

However, some financial institutions still view e-signatures as a luxury — a solution that holds benefit and value but is not at the top of their list of digital priorities. To defend their market share and ensure future success, banks must embrace digital transformation and provide customers with a more personalized, engaging experience. The crucial link is e-signatures.

The coronavirus means banking customers need to be able to conduct banking business, open new accounts, obtain new loans or modify or extend existing loans while avoiding traditional in-person contact and interaction with bank staff. It has never been more important to transmute traditional, paper-based processes to the digital realm. Declines in branch visits and ATM transactions, an increased focus on touchless interactions and payments and the rapid operational migration to remote operations moved e-signatures from a nice-to-have, convenient solution to a critical tool every bank must offer to empower their customers to process daily transactions.

Adoption rates for e-signatures were on the rise prior to the pandemic, but have now taken on an even larger and more significant role, enabling banks to move transactions forward in an era of social distancing. E-signatures allow the continuation of normal banking activities in a secure environment while protecting the safety of both the customer as well as the bank employee. It’s apparent that other unexpected conditions could arise in the future that would force the same technological need. They’ve moved from a convenience offering to a banking infrastructure necessity.

Basic banking services like opening an account, arranging a line of credit and applying for a mortgage all require an exchange of documents. In the age of Covid-19, the ability to do that electronically has become mandatory. The most frequent use for of e-signatures has been with new account opening and new loan origination and closing processes. The Small Business Administration’s Paycheck Protection Program also drove a dramatic rise in e-signature requirements. Banks are leveraging e-signatures to enable daily account service and maintenance transactions such as address changes, name changes, stop payment requests, wire transfer requests and credit card disputes. E-signatures provide service convenience to customers as they move through the stages of the lending process or digital account opening.

Financial institutions are experiencing a boom in digital-first relationships with new and existing customers. Customers are requesting new account openings and loan applications online, and perhaps modifying or extending existing loans. It all must be done electronically. Additionally, the day-to-day demand of account service and maintenance transactions have only increased, and require a new solution to those daily operational activities. E-signatures are one way to place electronically fillable forms on an bank’s website or online banking center so allow customers can complete and sign the appropriate documents and submit directly to the bank. Now more than ever, e-signatures and digital transaction management are critical technologies for financial institutions.

Masks and Zoom Conferencing: What Dealmaking Looks Like During a Pandemic

M&A will be further examined as part of Bank Director’s Inspired By Acquire or Be Acquired featured on BankDirector.com. Click here to access the content.

Bank mergers and acquisitions fall apart for any number of reasons. Try doing one in a pandemic.

In March, Kenneth Mahon, CEO of $6.6 billion Dime Community Bancshares, was on the edge of announcing a major deal in the New York metropolitan area. His Brooklyn, New York-based executive team and that of $6.3 billion Bridge Bancorp in Bridgehampton, New York, had agreed to a $489 million merger of equals. Each had fully vetted the other’s balance sheets.

Then came the body bags. It was late March in New York City, which had become ground zero for one of America’s first Covid-19 death waves. Mahon remembers hearing the news that morgues were overflowing and body bags were being delivered to the city.

“We had a conversation in the next day or so about whether that was really the right time [to announce a deal],” he says.

M&A took a nose-dive in 2020, with only 112 announced deals — less than half of the announced deals from the year before, according to S&P Global Market Intelligence. That may be changing. Deal volume increased in the fourth quarter last year as stock prices improved and banks felt more comfortable about asset quality, which could lead to even more M&A ahead. But those who did get deals done during the pandemic learned a whole lot about remote consolidation and online negotiation, skills they were forced to learn quickly.

In Dime’s case, Mahon knew that putting a deal on hold is never a good thing. Rumors can spread and the news may leak, causing uncertainty among staff and impacting the value of the transaction. But this was not a good time to shake hands, in person or not. As the pandemic suspended life in New York City  midstream, so it did the bank’s announcement.

It wasn’t until July that the two institutions announced the deal, after the exchange ratio of Dime stock to Bridge stock came back to the agreed upon 0.648%. Bridge CEO Kevin O’Connor will serve as CEO of the combined institution when the deal closes, which is expected within weeks. The merged banking company will have $11 billion in assets and go by the name Dime Community Bancshares. Mahon will serve as executive chairman.

Doing a deal remotely over video conferencing software hasn’t been easy. Mahon logs onto Zoom Video Communications meetings from a 400-square-foot studio apartment in Brooklyn. What is it like to build trust with a mask concealing your face? Not easy.

Mahon says he meets in person regularly with four other executives where they sit apart in a conference room and lift the masks. “Body language is important,” he says.

Curtis Carpenter, a senior managing director at investment bank Hovde Group, is amazed at how many executives and board members are still willing to travel to meet in person, jumping on private planes or flying commercially. He mostly serves banks in the Texas and Oklahoma region. One meeting was called off when one of the attendees got Covid. But mostly, people could still get together, he says.

“Everyone would wear a mask when entering the bank and when entering the conference room. In most cases, the mask would come off,” he adds. “It’s hard to have a discussion about buying and selling and executive contracts, of such an important personal nature; you want to see the person’s face.”

Others say they got a deal done without shedding the masks. “We were following appropriate safety measures,” says Keene Turner, executive vice president and CFO of $8.4 billion Enterprise Financial Services Corp. in Clayton, Missouri, which bought Seacoast Commerce Banc Holdings in San Diego for $169 million in November 2020.

The bank had already started discussions pre-pandemic with Seacoast. Executives knew each other, having first met attending a Bank Director conference years ago, Turner says. “That familiarity was built up over time,” he says. “In this case, we were comfortable with each other already.” The bank has gathered employees, all wearing a mask, to go over processes and procedures, but most meetings are remote.

Training new employees online is tricky — and so is data conversion. “It’s kind of like baptism by fire,” says Mark Tryniski, CEO of $13 billion Community Bank System in Dewitt, New York.  “We had never done it that way.”

Tryniski says the bank used a lot of screen sharing and software collaboration tools in its merger with Steuben Trust Corp., which was completed in June 2020.

The pandemic created time delays and additional work for everybody.

Tupelo, Mississippi-based BancorpSouth Bank has managed two deal announcements during the pandemic. Dan Rollins III, chairman and CEO of the $24 billion bank, says his executive team ended up doing due diligence on a seller three times.

Several bankers say they think remote work is less efficient and that meetings take longer over video conferencing software, despite saving travel time. Most are eager to get back into the office again.

“If I had a choice, I wouldn’t choose to do a deal in a pandemic,” Mahon says. “It hasn’t been impossible. We have professionals who are getting it done.”

Increasing Customer Engagement to Exceed Expectations

The new normal produced by the pandemic has underpinned the need for change and connection.

One impacted area are the adjustments organizations are making as they rediscover the benefits of connecting with consumers, rather than simply selling them a product. These businesses are on the right track, as one thing is becoming abundantly clear in the wake of Covid-19: This is not the time to solely sell and advertise.

While advertising and selling inevitably play a big role in business operations, companies are often too focused on these two aspects and it doesn’t always pay off. Now is the time to connect, reach and engage with consumers on a deeper level. The coronavirus pandemic and economic fallout has impacted nearly all areas of consumers’ lives, and their interactions and needs from their banks and financial institutions need to change as a result.

Focusing on advertising and selling may work for some organizations, but with growing consumer expectations, this just won’t do for banks. Customers choose banks partially because of their emphasis on customer service and will be annoyed if the institution tries to advertise or sell them a product that doesn’t match their financial needs.

Connection goes beyond having the best catchphrase or the sunniest stock photo. True engagement is driven by identifying customer needs and communicating relevant solutions, peaking their interest and building connections that will last.

Right now, traditional, product-focused promotional efforts and marketing don’t work because people’s daily lives have drastically changed. Their financial situations may have been altered. A more personal approach develops connections and loyalty that will last for years.

It is more important than ever that banks use customer and business intelligence effectively to promote relevant products and services. Some institutions may need to return to their roots and their initial goal: to serve their communities and the people that live in them. This approach may sound simplistic, but it can prove challenging to achieve.

And banks, like their customers, don’t want to merely survive this health crisis, they want to thrive in these unprecedented times. It takes a shift in strategy to do so. “In a matter of weeks, digital and mobile banking technologies went from being a ‘nice to have’ to a ‘must have.’” The pandemic was even the catalyst for tech adoption at some financial institutions. With the help of data-driven communication systems, one-on-one communication is both realistic and accessible. The massive drive for digital solutions allows banks to reassess digital access to products and services. This immediate boost in digital engagement offers a huge opportunity for institutions that are implementing digital marketing plans, perhaps for the first time.

Practically applied, banks need to turn to smart technology to create a clear path to build better customer relationships and return to the longstanding values of one-on-one communication. While this may seem straightforward, using forward-thinking, innovative technology as the way to “get back to their roots” is an approach not previously imagined by many bank executives.

Utilizing a data-driven digital infrastructure allows banks to reach customers personally, uniquely and instantly. Banks need to embrace comprehensive digital outreach to touch people where they are with the services they need most. Customers still need access to financial services, even if they are avoiding branch locations and ATM lines. The solution is simple: Be the bank that communicates what options are easily accessible and available to them. Be the branch that shows that they care. With the help of an intelligent digital experience platform and the right technology, banks can automate the relevant communications, so the right messages reach the right person at the right financial time for them.

The pandemic sparked a much-needed shift: from being overly focused on advertising, selling and pushing products and services to establishing and building better customer relationships, increasing customer engagement as well as gaining consumers’ trust and loyalty for years to come. Returning to your bank’s original mission of serving the community will give you the ability to target consumers at the exact right time in their financial journey – reaching each customer’s specific needs and allowing banks to engage with their customers.