Managing Risk When Buying Technology for Engagement

No bank leader wants to buy an engagement platform, but they do want to grow customer relationships. 

Many, though, risk buying engagement platforms that won’t grow relationships for a sustained period of time. Most platforms are not ready-made for quality, digital experience that serve depositors and borrowers well, which means they threaten much more than a bank’s growth. They are a risk to the entire relationship with each customer.  

Consumers are increasingly expressing a need for help from their financial providers. Less than half of Americans can afford a surprise $1,000 expense, according to a survey from Bankrate; about 60% say they do not have $1,000 in savings. One in 5 adults would put a surprise expenditure on a credit card, one of the most expensive forms of debt. More than half of consumers polled want more help than they’re getting from their financial provider. However, the 66% of those  who say they have received communication from their provider were unhappy about the generic advice they received. 

This engagement gap offers banks a competitive opportunity. Consumers want more and better engagement, and they are willing to give their business those providers who deliver. About 83% of households polled said they would consider their institution for their next product or service when they are both “satisfied and fully engaged,” according to Gallup. The number drops to 45% if the household is only satisfied. 

Banks seeking to use engagement for growth should be wary of not losing customer satisfaction as they pursue full engagement. As noted earlier, about 66% of those engaged aren’t satisfied with the financial provider’s generic approach. What does that mean for financial institutions? The challenge is quality of engagement, not just quantity or the lack thereof. If they deliver quantity instead of quality, they risk both unsatisfied customers as well as customers who ignore their engagement. 

According to Gallup, only 19% of households said they would grow their relationship when they are neither satisfied nor fully engaged. This is a major risk banks miss when buying engagement platforms: That the institution is buying a technology not made for quality, digital experiences and won’t be able to serve depositors and borrowers well any time soon. 

But aren’t all engagement platforms made for engagement? Yes — but not all are made for banking engagement, and even fewer are made with return on investment in mind. Banking is unique; the tech that powers it should be as well. Buyers need to vet platforms for what’s included in terms of know-how. What expertise does the platform contain and provide for growing a bank? Is that built into the software itself?

A purpose-built platform can show bankers which contact fields are of value to banking engagement, for example, and which integrations can be used to populate those fields. It can also show how that data can become insights for banks when it overlaps with customers’ desired outcomes. And it offers the engagement workflows across staff actions, emails, print marketing and text messaging that result in loan applications, originations, opened accounts or activated cards.   

Previously, the only options available were generic engagement platforms made for any business; banks had to take on the work of customizing platforms. Executives just bought a platform and placed a bet that they could develop it into a banking growth tool. They’d find out if they were right only after paying consultants, writers, designers, and marketing technologists for years.  

Financial services providers no longer need to take these risks. A much better experience awaits them and their current and prospective customers clamoring for a relationship upgrade.

How to Build a Bank From Scratch

Corey LeBlanc is best known as the man behind the @InkedBanker Twitter handle, inspired by his affection for tattoos. He’s also co-founder, chief operating officer and chief technology officer of Locality Bank, a newly chartered digital bank based in Fort Lauderdale, Florida. In the interview below, which has been edited for length, clarity and flow, he talks about the value of standing out and the process of standing up a de novo digital bank.

BD: How did you become known as the InkedBanker?
CL: A few years ago, Jim Marous, co-publisher of The Financial Brand, told me that I had to get on Twitter. When my wife and I created the profile, we needed something that made sense. I’ve had tattoos since I was 18 – full sleeves on both arms, on my back and chest — so that’s what we picked. It’s turned out to be incredibly important for my career. People remember me. It gives me an edge and helps me stand out in an industry where it’s easy to get lost in the mix.

             Corey LeBlanc, Locality Bank

BD: What’s your vision for Locality Bank?
CL: The best way to think about Locality is as a digital bank that’s focused on the south Florida market. There’s a void left in a community after its locally owned banks are either bought by bigger, out-of-state rivals or grow so much that they no longer pay attention to their legacy markets. Our vision is to fill that void using digital distribution channels.

BD: Was it hard to raise capital?
CL: Not especially. Our CEO, Keith Costello, has been a banker for many years and was able to raise an initial $1.8 million in December 2020 from local investors to get us off the ground. We later went back to that same group to raise the actual capital for the bank, and they committed another $18 million. Altogether, including additional investors, we raised $35 million between October and November of 2021. Because that was more than the $28 million we had committed to raise, we had to go back to the regulators to make adjustments to our business plan, which delayed our opening.

BD: How long did it take to get your charter?
CL: It was about 10 months. We filed our charter application on St. Patrick’s Day of 2021. We received our conditional approvals from the state in mid-September, and then we had our conditional approval from the [Federal Deposit Insurance Corp.] in early November. Our full approval came on Jan. 11, 2022.

BD: What was it like working with the regulators?
CL: You hear bankers say that regulators make everything difficult and stop you from doing what you want to do. But we didn’t find that to be the case. Just the opposite. They served more like partners to us. They worked with us to fine-tune our business plan to better meet the needs of the customers and markets we’re targeting, while still trying to accomplish our original objectives.

BD: What’s your go-to-market strategy?
CL: We’re going to be a lend-first institution. Our primary focus is on the south Florida commercial market — small to medium-sized businesses all the way up to early stage, larger enterprises. We’ll expand as we grow, but we want to be hyper-focused on serving that market. To start out, we’re offering two commercial accounts: a basic commercial checking account and a money market account. Then we’ll expand to providing accounts with more sophisticated capabilities as well as [Interest on Lawyer Trust Accounts] for lawyers. Because of the markets we’re in, those two accounts are absolutely necessary.

BD: As a new bank, how do you ensure that you’re making good loans?
CL: It was a top priority for us to recruit good, trusted bankers who understand that you need to balance the needs of the bank and the needs of the market. The bankers we’ve hired know how to do that. On top of this, if you can get a banker who’s been successful with the tool set that most traditional institutions give them, and then you give them a better set of tools, imagine the experience that you’re creating for those bankers and their customers. You’re empowering them to do something exponentially greater than they could in the past. And by giving them that set of tools, you’ve now inspired and motivated them to push even further and start challenging systems that otherwise they would have never challenged. We see it very much as a virtuous circle.

Why Are Bank Marketing Departments Not Profit Centers?

It’s 2022 and the technological changes in everything in life have never been more rapid or meaningful. And while the banking industry has made some progress, it continues to encounter challenges on the digital journey.

Marketing efficiently to customers and prospects remains a big one. Transforming a bank marketing department from a necessary evil and cost center to a thriving profit center that actively generates revenue is not a far-fetched reality. Traditional marketing strategies and tactics can seem downright primitive in a rapidly expanding and flourishing digital economy. Banks must recognize that their account holders are in fact digital users and have high expectations about all of their digital experiences.

So why hasn’t bank marketing adopted to the digital economy? Even though the benefits are easy to visualize, the issues and factors preventing this transformation are real and complex.

Over the past decade, banks have made significant investments in technology. At the top of the list were digital banking apps, which became the main gateway for customers to interact with their banks. Bank transactions became virtual. But while transactional activities took precedence, customer engagement was not top-of-mind for bank executives.

The question that many banks failed to ask themselves is: Are we doing enough digitally to let our account holders know that we understand and value them? It’s vital that banks engage with their customers uniquely, at scale. This engagement must be unique; each consumer is experiencing a different life state and distinctive financial odyssey. Accomplishing this involves a journey — not an event or app.

In a world of intense competition and tech savvy consumers, digital engagement is not only needed for a bank to survive, never mind thrive. How does it begin? For a bank to transform their marketing department, the strategy and investment starts at the top. How important is digital engagement to the bank? What tools and resources does the bank need to expand the digital universe of a financial institution? Does the marketing department have the authority to comply and seek out the solutions to help in this journey?

Changing how marketing works requires executives to treat modern data-driven marketing as a key growth strategy for their banks. Developing high-level goals will drive clear revenue objectives, generate data-driven strategies and leverage  digital marketing technology to power legitimate marketing performance metrics.

Differing priorities, lack of clear direction, fear of change, uncertainty about results and confusion about available solutions — these are not small challenges faced by bank marketing professionals. Banks motivated to make the changes to better equip their departments with the tools and resources they need should not underestimate these issues; it’s important to recognize and address these genuine issues when they arise.

Interestingly, most banks won’t need to make significant additional investments. That’s because they won’t be spending any more on marketing — they’ll be spending it differently, in ways that generate positive results. This digital marketing investment relies on data — business  and artificial intelligence —for smarter communication with consumers, so they understand that their trusted bank truly knows them and humanizes every interaction, even though the medium is digital.

What if banks operated with clarity of purpose, a strategy for growth, a transition path to digital engagement and the ability to source practical solutions? It’s not about having the newest shiny object, but instead having a reliable and robust tech platform that drives new sales for financial institutions every day. Proof and results matter. Solutions can help your bank grow by simplifying digital marketing with amazing customer experiences, resulting in new product sales and lasting long-term relationships with your digital users.

Banks can revolutionize their marketing department into a future-proofed, thriving profit center. Who is ready?

How Engagement, Not Experience, Unlocks Customer Loyalty

In casual conversations, “customer engagement” and “customer experience” are often used interchangeably. But from a customer relationship perspective, they are absolutely not synonymous and it’s critical to understand the differences. Here’s how we define them:

Customer experience (CX) is the perception of an individual interaction, or set of interactions, delivered across various touch points via different channels. The customer interprets the experience as a “moment in time” feeling, based on the channel and that specific, or set of specific, interactions. A visit to an ATM is a customer experience, as is the wait time in a branch lobby on a Saturday morning or the experience of signing up for online banking.

Customer engagement, on the other hand, is the sum of all interactions that a customer has throughout their financial lifecycle: direct, indirect, online and offline interactions, face-to-face meetings, online account opening and financial consulting. Engagement with a customer over time and repeatedly through dozens of interactions should ideally build trust, loyalty and confidence. It should ultimately lead to a greater investment of the customers’ money in the bank’s product and service offerings.

Why the Difference Matters
As customers demanded and used self-service and digital banking capabilities, bank executives focused on the user experience (UX); however, that is merely a subset of CX and a poor substitute for actual customer engagement. Moreover, the promise of digital-first often doesn’t meet adoption and usage goals, worsening the customer experiences while underutilizing the technology. The addition of digital-first channels can also cause confusion, frustration and dead-ends — resulting in an even worse CX than before.

Take for example the experience of using an ATM. If the ATM is not operational, this singular transaction — occurring at one specific point in time — is unsatisfactory. The customer is unable to fulfill their transaction. However, it is doubtful that after this one experience the customer will move their accounts to another institution. But if these negative experiences compound — if the customer encounters multiple instances in which they are unable to complete their desired transactions, cannot reach the appropriate representative when additional assistance and expertise is needed or is not provided with the most up-to-date information to quickly resolve the issue — they are going to be more willing to move to a competitor.

When banks focus on experience, they tend to only look at point interactions in a customer’s journey and make channel-specific investments — missing the big picture of customer engagement. This myopic focus can produce negative outcomes for the institution. Consider the addition of a new loan origination system that produces unsustainable abandonment rates. Or introducing live chat, only to turn it off because the contact center cannot support the additional chat volume and its subsequent doubling of handle times. These are prime examples of how an investment in a one channel, and not the entire engagement experience, can backfire.

While banks often look at point interactions, or a customer’s experiences, to assess operational performance, bank customers themselves judge their bank based on the entire engagement. Engagement spans all customer interactions and touch points, from self-service to the employee-assisted and hyper personalized. Now is the time for bankers to consider things from the customers’ perspectives.

Instead, banks should prioritize engagement as being critical to their long-term success with customers. Great things happen when banks engage with their customers. Engagement strengthens emotional, ongoing banking relationships and fosters better individual customer experiences over account holders’ full financial lifecycle.

Engagement enables revenue growth, as new customers open accounts and existing consumers expand their relationship. Banks can also experience increased productivity and efficiency as each interaction yields better results. Improving customer engagement will naturally increase the satisfaction of individual customer experiences as well.

The distinction between customer engagement and customer experience is central to the concept of relationship banking. Rather than providing services that aim to simply fulfill customer needs, banks must consider a more holistic customer engagement strategy that connects individual experiences into a larger partnership — one that delights account holders and inspires long-term loyalty with each interaction.

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.

Customer Loyalty and the Competition for Stable Funding

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Using Data Platforms to See Customers

Customers leave behind valuable breadcrumbs about their interests, needs and intentions across their financial lives.

What’s their current financial health? Are they shopping for a new credit card? Even: Are they considering switching to a competitor?

Unfortunately, this wealth of insights is more-than-likely locked away across a series of legacy, on-site systems, stuck in siloed data warehouses and generally difficult to access due to antiquated reporting systems. Understanding and acting on customer signals has become more important in recent months as customers seek financial partners that understand their unique needs. What does it take for a bank to unlock this treasure trove of data and insights? More often than not, a customer data platform (or CDP) can help banks take an important step in making this a reality and craft a 360-degree view of their customers.

I spoke with Brian Knollenberg, vice president of digital marketing and analytics at Tukwila, Washington-based BECU, about his recent experience of setting up a CDP for one of the country’s largest credit unions in the country. 

The Need for CDP
When Knollenberg joined the $22 billion credit union, he saw that creating a marketing performance dashboard using slow-batch processing across multiple systems took 12 manual hours to produce. As a result, the data stakeholders needed to make key decisions was a week out of date by the time they received it — much less take action on it.

This speed-to-value lag wasn’t limited to just marketing dashboards; it was just one example teams encountered when trying to access timely customer data across legacy systems. His team recognized that the organization needed current data, individualized for each customer, to make timely decisions. They also needed a way to easily syndicate this across critical customer and stakeholder touchpoints. 

Knollenberg also recognized his team’s expertise was better suited to modifying processes rather than building a robust enterprise-grade tool that could ingest and process terabytes of data in near-real time. He needed a solution to transform this data hindrance into an asset, and looked for a partner with direct experience in tackling these challenges to streamline implementation.

CDP Benefits
Implementing a CDP has extended the BECU team’s ability to tackle more difficult data challenges. This included building out performance dashboards that update every 24 hours, personalized customer communications and the ability to modeling member financial health.

This last use case empowers BECU to aggregate a score based on behaviors, transactions, and trends to identify which members could benefit from proactive outreach or help. He said financial health scoring has been extremely helpful during the coronavirus pandemic to identify potential recipients of proactive outreach and assistance. Having this information readily available enables marketing, customer service and even product teams to create bespoke experiences for their members and make informed business decisions — like offering a lower rate card to a member showing large carried balances with an outside card provider.

Lessons Learned
Before tackling any new data program, Knollenberg recommends companies first identify the overall effort versus impact. He finds that while companies often invest ample time and effort into developing comprehensive strategy and goals, they often miss when planning for the execution realities to properly implement them. Spend time scaling up your bank’s execution capabilities, determine how you’ll realistically measure potential impact and test-drive product solutions via a robust proof of concept.

The best financial brands know that putting their customers first will result in returns. Building out a customer data platform for your bank can unlock powerful new insights and opportunities to engage with your customers, if done right. As you start on this journey, make sure to identify what specific use cases are most impactful for your business, and find the right software partner that will work with you to execute it properly. Once unlocked, your bank will be able to service customers at a truly personalized level and drive a greater share of wallet.

Fixing What’s Broken In Bank Product Pitches

There’s a better way to sell pens: Don’t start with the pen.

A classic teaching example for sales hands a shiny new pen to someone with the instruction, “Sell me this pen.” Typically, the student takes the pen and begins to describe it, attempting to use the looks and features of the pen to sell it. The would-be salesperson often struggles to “sell” the pen, because they fail to discover if the person needs a pen to begin with.

This is often how banks sell products and services to their customers. But the search for a solution to this sales dilemma has led to new and advanced ways to sell pens (and everything else) the wrong way.

A better way to sell the pen is to put it in your pocket and, instead, ask the customer questions. The goal is to discover the customer’s needs and help them realize that a pen — the one you happen to have in your pocket — is what will meet their needs.

Artificial intelligence companies and fintech platforms want banks to pay enormous sums of money to help identify products and services for customers. Having given away all manner of financial tools, products and advice, they’re now pursuing bank customers by offering demand and savings deposits, mortgages and loans. Some of the biggest names in technology are joining the fray as well: Facebook, Apple, Alphabet’s Google and Uber Technologies, among others.

Customers aren’t necessarily getting more savvy, but technology is.

A venture capital firm we work with that invests in fintechs was very clear that most online financial tools are merely marketing devices used to poach customers and grow assets. Often these tools expose a problem in a customer’s existing account and offer an immediate remedy if the customer transfers accounts to them. This isn’t necessarily good for the customer, but can be devasting to a bank.

Pushing product is difficult; providing solutions is far more rewarding — and efficient.

Recently, we met with a regional bank that has over 80 retail branches and offers wealth management as part of their service model. They have only 17 financial advisors to service customers in their home state. They confessed that of only 27% of their wealth management clients have a retirement account with the bank.

Only 27%. How is this possible? Is it because they don’t sell retirement accounts? Or is it because they don’t know their customers? After all, who doesn’t need a retirement account?

Another bank we work with wondered if they should start offering business credit cards. They didn’t understand their customers’ needs well enough to decide what products would address those needs or wants, so they opted to pitch a credit card offered by a vendor.

One of the industry’s largest digital banks confessed to us they are considering adding a human element to their arsenal, seeing a need for a digital/human hybrid approach. They’ve realized that society is moving to digital, but also recognize there is not enough value in digital alone.

The COVID-19 crisis will accelerate the shift to digital. If brick and mortar banks are going to survive, and even thrive, they need a digital component that complements their human element. Throwing money at new technology that pushes products that customers may or may not want or need will only lead to costly and disappointing results.

Banks need tools that develop and deepen customer relationships and make it possible to offer real solutions, as opposed to pushing products they hope will increase revenue.

Accenture recently released a study with five key findings about customer expectations. They are:

  1. They want integrated propositions addressing core needs.
  2. They want a personalized offering.
  3. They are willing to share data with providers in return for better advice and more attractive deals.
  4. They want better integration across physical and digital channels.
  5. Their trust in financial institutions is increasing.

Essentially, customers want personal offerings that serve their core needs and delivered in the medium they choose. Banks that want to grow revenue and increase retention shouldn’t continue to “push the pen.” They should find and offer digital/human hybrid models to help customers self-discover solutions.

Banks Risk Losing Small Businesses Forever

Have you ever been through a breakup you didn’t see coming? Judging by the stories small businesses share about their banks — and the stories that banks tell themselves about those same relationships — it seems the industry is on the verge of needing a pint of ice cream and a good cry.

It might be over between small businesses and banks.

I talk to a lot of bankers, and many tout their banks’ focus on small businesses — the restaurants, hairdressers and other staples that fuel local economies. These bankers pride themselves and their teams on knowing their clients well. If a hard rain floods the local lake, they pick up the phone to call their marina clients to make sure they’re doing OK. It’s special — but in a springtime pockmarked by pandemic, it might not be enough.

The relationships between banks and their small business customers are more strained than banks might realize, according to a January research report sponsored by Autobooks and conducted by Aite Group.

“Less than half (47%) of U.S.-based small businesses believe their primary institution understands their needs,” stated Autobooks, a Detroit-based fintech that provides small business accounting tools, in a release about the research. Aite also found that more than 60% of small businesses have turned to a nonbank provider to meet at least one financial need that their bank can’t fill.

These shortfalls have been ongoing, but changing market conditions caused by the outbreak of COVID-19 could be the final straw for underserved small businesses.

It boils down to this: Banks that haven’t invested in technology are behind the curve when it comes to helping their small business clients weather crises. At the same time, technology companies that are already providing small business customers with products they love now have clear paths to offering financial services that only banks used to be able to provide. Cash management, payments and fast loans will be crucial to the survival of small businesses; technology is going to be the key to saving them.

Nowhere is the importance of technology more crystallized than in the current debate over emergency small business loans. Banks are struggling to keep up with rising loan demand. Complicated applications, slow underwriting and a lack of payment options may convince small business customers to turn to nonbank lenders for fast funding, even if they pay a higher interest rate.

The same scenario is unfolding in the realm of government-backed loans from the Small Business Administration. Until recently, banks were the only institutions that could serve as conduits for the Economic Injury Disaster Loans that help troubled businesses in times of crisis. But big, national fintech lenders were quick to lobby for an expansion of that rule, and they got it. Congressional coronavirus relief gave the U.S. Treasury Department the authority to allow “additional lenders” to make these loans. Congress acquiesced to the change because timing is everything when it comes to small business loans in a crisis.

Half of small businesses only have enough cash on hand to operate for 27 days, and an additional 25% only have enough cash reserves to operate for 13 days without new revenue, according to an oft-cited 2016 survey from JPMorgan Chase & Co. SBA loans made through partner banks typically take several months before the cash is available to borrowers — an untenable timeline for companies with mounting expenses and no revenue. Fintech lenders say they could push emergency loans out in days, potentially saving many businesses from failure but funneling significant volume away from banks.

The loans businesses need to survive today could easily morph into larger relationships with nonbanks tomorrow, as fintechs cross old regulatory moats by securing their own charters and deposit insurance.

So far, 2020 has seen significant fintech advances into banking from Varo Money and LendingClub Corp. But the move that seems to have caused the most hand-wringing among traditional banks is Square’s approval for deposit insurance as part of its Utah industrial loan charter. The payments heavyweight has an established national brand among small businesses, and could divert large amounts of small business clients away from brick-and-mortar banks when it starts offering loans and deposit products in 2021.

Square has provided mission-critical financial services for small businesses since its inception. Many businesses trust their payment products for every transaction they make. Square may have the loyalty it needs to earn the entire banking relationship.

Technology companies like Square aren’t going to pick up the phone to check in on a marina client after the local lake floods. But they are going to provide timely, tuned-in products. In a crisis, that may matter more.

On the Docket of the Biggest Week in Banking

Think back to your days as a student. Who was the teacher that most inspired you? Was it because they challenged your assumptions while also building your confidence?

In a sense, the 1,312 men and women joining me at the Arizona Biltmore in Phoenix for this year’s Acquire or Be Acquired Conference are in for a similar experience, albeit one grounded in practical business strategies as opposed to esoteric academic ideas.

Some of the biggest names in the business, from the most prestigious institutions, will join us over three days to share their thoughts and strategies on a diverse variety of topics — from lending trends to deposit gathering to the competitive environment. They will talk about regulation, technology and building franchise value. And our panelists will explore not just what’s going on now, but what’s likely to come next in the banking industry.

Mergers and acquisitions will take center stage as well. The banking industry has been consolidating for four decades. The number of commercial banks peaked in 1984, at 14,507. It has fallen every year since then, even as the trend toward consolidation continues. To this end, the volume of bank M&A in 2019 increased 5% compared to 2018. 

The merger of equals between BB&T Corp. and SunTrust Banks, to form Truist Financial Corp., was the biggest and most-discussed deal in a decade. But other deals are worth noting too, including marquee combinations within the financial technology space.

In July, Fidelity National Information Services, or FIS, completed its $35 billion acquisition of Worldpay, a massive payment processor. “Scale matters in our rapidly changing industry,” said FIS Chairman and Chief Executive Officer Gary Norcross at the time. Fittingly, Norcross will share the stage with Fifth Third Bancorp Chairman and CEO Greg Carmichael on Day 1 of Acquire or Be Acquired. More recently, Visa announced that it will pay $5 billion to acquire Plaid, which develops application programming interfaces that make it easier for customers and institutions to connect and share data.

Looking back on 2019, the operating environment proved challenging for banks. They’re still basking in the glow of the recent tax breaks, yet they’re fighting against the headwinds of stubbornly low interest rates, elevated compliance costs and stiff competition in the lending markets. Accordingly, I anticipate an increase in M&A activity given these factors, along with stock prices remaining strong and the biggest banks continuing to use their scale to increase efficiency and bolster their product sets.

Beyond these topics, here are three additional issues that I intend to discuss on the first day of the conference:

1. How Saturated Are Banking Services?
This past year, Apple, Google and Facebook announced their entry into financial services. Concomitantly, fintechs like Acorns, Betterment and Dave plan to or have already launched checking accounts, while gig-economy stalwarts Uber Technologies and Lyft added banking features to their service offerings. Given this growing saturation in banking services, we will talk about how regional and local banks are working to boost deposits, build brands and better utilize data.

2. Who Are the Gatekeepers of Customer Relationships?
Looking beyond the news of Alphabet’s Google’s checking account or Apple’s now-ubiquitous credit card, we see a reframing of banking by mainstream technology titans. This is a key trend that should concern bank executives —namely, technology companies becoming the gatekeepers for access to basic banking services over time.

3. Why a Clear Digital Strategy Is an Absolute Must
Customer acquisition and retention through digital channels in a world full of mobile apps is the future of financial services. In the U.S., there are over 10,000 banks and credit unions competing against each other, along with hundreds of well-funded start-ups, for customer loyalty. Clearly, having a defined digital strategy is a must.

For those joining us at the Arizona Biltmore, you’re in for an invaluable experience. It’s a chance to network with your peers and hear from the leaders of  innovative and elite institutions.

Can’t make it? We intend to share updates from the conference via BankDirector.com and over social media platforms, including Twitter and LinkedIn, where we’ll be using the hashtag #AOBA20.