Five Questions to Ask When Weighing Banking Software

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A contract for banking software should be the start of a working relationship.

When your bank purchases a new banking system, you should get more than a piece of software. From training to ongoing support, there’s a tremendous difference between a vendor who sells a system and a true partner who will work to enhance your banking operations.

But how do you know which is which? Here are some questions that could help you determine if a vendor is just a vendor — or if they could become a more-meaningful resource for your bank.

Do they have real banking expertise?
A software vendor that lacks real-world banking experience will never have the institutional knowledge necessary to serve as a true partner. The company may have been founded by a banker and their salespeople may have some cursory knowledge of how their solution works in a banking environment. However, that is not enough. You need a vendor that can offer expert insights based on experience. Ask salespeople or other contacts about their banking background and what they can do to help improve your bank.

Do they want to understand your issues?
A vendor won’t be able to help solve your problems if they aren’t interested in learning what they are. You should be able to get a sense of this early in the process, especially if you go through a software demonstration. Does the salesperson spend more time talking about features and system capabilities, or do they ask you about your needs first and foremost? A vendor looking to make a sale will focus on their program, while a true partner will take time to find out what your challenges are and what you really want to know. Look for a vendor who puts your needs above their own and you’ll likely find one who is truly invested in your success.

How quickly do they respond?
Vendors will show you how much they care by their turnaround speed when you have a question or need to troubleshoot a problem with your banking system. Any delay could prove costly, and a good partner acts on that immediate need and moves quickly because they care about your business. It can take some companies weeks to fully resolve customer issues, while others respond and actively work to solve the problem in only a few hours. Go with the software provider who is there for you when you need them most.

Do they go above and beyond?
Sometimes the only way to address an issue is to go beyond the immediate problem to the underlying causes. For example, you might think you have a process problem when onboarding treasury management customers, but it could actually be an issue that requires system automation to fully resolve.

A vendor that can identify those issues and give you insights on how to fix them, instead of bandaging the problem with a quick workaround, is one worth keeping around. This may mean your vendor proposes a solution that isn’t the easiest or the cheapest one, but this is a good thing. A vendor that is willing to tell you something you may not want to hear is one that truly wants what’s best for your organization.

Do they continue to be there for you?
Some software companies consider the engagement over once they’ve made the sale. Their helpline will be open if you have a problem, but your contact person there will have moved on to new targets as you struggle with implementation and the best way to utilize the software.

Find a vendor that plans to stick with your institution long after agreements have been signed. They should not only provide training to help facilitate a smooth transition to the new system, but they should remain accessible down the road. When a new software update becomes available or they release a new version of the system, they should proactively reach out and educate you on the new features — not try to sell you the latest development. Although you won’t know how those interactions will go until after you’ve made your purchase, it pays to evaluate the service you’re getting from your vendors at every stage of your engagement.

Finding a software vendor that you trust enough to consider a partner isn’t always easy. But by looking for some of the characteristics discussed above, you can identify the most trustworthy vendors. From there, you can start building a relationship that will pay dividends now and into the future.

Creating the Next Opportunity for Your Bank

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Health, social, political and economic stressors around the world are bumping up business uncertainty for banks everywhere.

Some bankers may find a hunker-down posture fits the times. Others are taking a fresh look at opportunities to achieve their business objectives, albeit in a different-than-planned environment. What is your bank trying to accomplish right now? What are you uniquely positioned to achieve now that creates value for your institution, your shareholders and your customers?

The best opportunities on your bank’s list may be straightforward initiatives that may have been difficult to prioritize in a non-crisis environment. This can be a good time for banks to review their suppliers and vendors, their risk management, cybersecurity and compliance plans and protocols.

We’ve seen bank clients of ours with rock-solid foundations find themselves with the ability to leverage these times to pursue growth, to increase their technology offerings and explore niche markets, such as an all-digital delivery of banking services. These institutions are creating their own opportunities.

From straightforward to downright bold opportunities, BankOnIT and our client banks across the United States have observed that skillful execution requires one constant: a solid technology and systems foundation.

Here are a few examples of various objectives that we see our clients pursuing:

Embrace and Excel at Digital Banking
Digital banking, not to be confused with online banking, is more than a trend. Banks with user-friendly digital experiences are meeting the needs of millennials and Generation Z by offering activities that were once only accessible from the banking center. It removes geographical barriers and limitations of the traditional bank, such as operating hours and long lines.

Technological hurdles are grievances of both digital and traditional banks. The simple solution is unrestricted technology capabilities that improve reliability and increase security, especially when introducing features like artificial intelligence and digital banking.

A Growth Plan with The Ability To Compete
Customers’ expectations are shifting; banks need to be technologically nimble in response. With a high-growth plan in place, one BankOnIT client viewed outsourcing the network infrastructure to a partner with industry knowledge as the key to success. The result: opening four bank offices in seven months.

“We have all of the benefits of a large bank infrastructure, and all of the freedom that comes with that, without being a large bank,” said Kim Palmer, chief information officer at St. Louis Bank.

Partnering with Fintechs To Reach Niche Markets
The trick to accessing new markets will vary from bank to bank, but your strategy should start with the network infrastructure technology. This will be the foundation upon which all other technology in the institution is built upon. Cloud computing, for example, provides digital and traditional banks with resources needed to improve scalability, improve efficiency and achieve better results from all the other applications that rely upon the network foundation.   

Banks should look for partners that help them tailor their banking operations to benefit consumers who are conducting business in the virtual world. Technology at the forefront can keep business running smoothly during the global pandemic. Bloomfield Hills, Michigan-based Mi Bank, for example, is able to accommodate customers during the pandemic, just like before.

“We can leverage technology to allow our customers to function as normal as possible,” said Tom Dorr, chief operating officer and CFO. “BankOnIT gives us the flexibility to function remotely without any disruption to our services. Our structure allows us to compete with the bigger institutions without sacrificing our personal service.”

Is your technology reliable, scalable, and capable of sustaining your goals post-pandemic?

A Solid Foundation
Take the opportunity to review your institution’s goals. How do they line up with the opportunities to act in the midst of this unplanned business environment? This may be your opportunity to build a solid technology, systems and compliance foundation. Or, this may be your time to seize the opportunities that are created from turning technology into a source of strength for your institution.

Three Steps to Mastering Digital Connection

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Before the coronavirus crisis, I heard bank leaders talk about “becoming digital,” but less than 15% considered themselves digital transformation leaders.

The pandemic has pushed banks to close the digital experience gap. Executives must take a hard look at what their customers expect and what digital tools (and products) they need to weather this crisis.

Digital transformation can’t happen without mastering the art of digital connection, which requires both technology and authentic human connection. To do this, banks must harness the power of data, technology, and their people to create customers for life. Here are three steps to help your bank master the art of digital connection.

Maximize Customers Data to Transform the Experience
If a customer walked into a branch for a typical transaction, the teller would have immediate visibility into their entire relationship and recent interactions — and would be empowered to recommend additional, relevant bank products or services. They would feel known and well-served by your teller.

Your digital infrastructure should provide the same humanized experience through email, customer service and other interactions with your bank. But unorganized, siloed data causes problems and impedes creating this experience. To maximize your customers’ data, you’ll need to:

  • Consolidate your view of each customer.
  • Ensure that teams have access to a high-level view of customer data and activity, from marketing to customer service.
  • Group them by segments in order to deliver relevant information about products and services. This step requires a solid understanding of your customer, their financial needs and their goals.

Invest in Technology That Reaches Customers Today
To inform, educate and engage your customers during this time of transition, you need sophisticated, best-in-class banking technology. Many banks have already come to this conclusion and are looking for help modernizing their banking experience.

A key component in meeting your customers where they are is quite literal. While some of your customers are well-versed in online banking, others have exclusively used their branch for their financial needs. The information these two audiences will need during this transition will look different, based on their previous interactions. Compared to customers who are already familiar with digital banking, those who have never done it before will need more specific, useful instructions to help them navigate their financial options and a clear pathway to 1-on-1 assistance. This kind of segmentation requires modern marketing technology that works in tandem with banking and lending tools.

Amplify Human Connections to Build Trust
Many banks have trouble letting go of the branch experience; customers have had the same reservations. In an Accenture survey of financial services, 59% of customers said it was important to have a real person available to give in-person advice about more complex products.

Now that going into a branch is not an option, your bank must find a way to use technology to amplify the human connections between your customers and staff. Especially now, sending meaningful, humanized communications will position your bank as a trusted financial partner. To transform your digital experience, and keep people at the center of every interaction, you must:

  • Personalize your messages — beyond just putting a customer’s name in the salutation. Data allows emails to be very specific to segments or even individuals. Don’t send out generic emails that contain irrelevant product offers.
  • Humanize your customer experience. Communicate that you know who you’re talking to each time a customer picks up the phone or contacts your help line.
  • Support a seamless omnichannel experience. Provide customers with clear avenues to get advice from your staff, whether that’s by email, phone or text.

Investment in innovation comes from the top down. Your bank must buy into this opportunity to transform your customer experience from leadership to all lines of your business. The opportunity is here now; this shift toward digital interactions is here to stay.

There’s no longer a question of whether a fully digital banking experience is necessary. Banks must leverage modern technology and the human connections their customers know them for to improve their overall customer experience. Excellent customer experience comes from delivering value at every touchpoint. This is the new bar all banks must meet.

Helping Customers When They Need It Most

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Orvin Kimbrough intimately understands the struggles shared by low-to-moderate income consumers. Raised in low-income communities and the foster care system, he also worked at the United Way of Greater St. Louis for over a decade before joining $2.1 billion Midwest BankCentre as CEO in January 2019. “[Poverty costs] more for working people,” he says. “It’s not just the financial cost; it’s the psychological cost of signing over … the one family asset you have to the pawn shop.”

His experiences led him to challenge his team to develop a payday loan alternative that wouldn’t trap people in a never-ending debt cycle. The interest rate ranges from 18.99% to 24.99%, based on the term, amount borrowed (from $100 to $1,000) and the applicant’s credit score. Rates for a payday loan, by comparison, range in the triple digits.

The application process isn’t overly high-tech, as applicants can apply online or over the phone. The St. Louis-based bank examines the customer’s credit score and income in making the loan decision; those with a credit score below 620 must enroll in a financial education class provided by the bank.

Industry research consistently finds that many Americans don’t have money saved for an emergency — a health crisis or home repair, for example. When these small personal crises occur, cash-strapped consumers have limited options. Few banks offer small-dollar loans, dissuaded by profitability and regulatory constraints following the 2008-09 financial crisis.

If the current recession deepens, more consumers could be looking for payday loan alternatives. Regulators recently encouraged financial institutions to offer these products, issuing interagency small-dollar lending principles in May that emphasize consumers’ ability to repay. 

“Everybody needs to belong to a financial institution if you’re going to be financially healthy and achieve your financial aspirations,” says Ben Morales, CEO of QCash Financial, a lending platform that helps financial institutions automate the underwriting process for small-dollar loans.

QCash connects to a bank’s core systems to automate the lending process, using data-driven models to efficiently deliver small-dollar loans. The whole process takes “six clicks and 60 seconds, and nobody has to touch it,” Morales says. QCash uses the bank’s customer data to predict ability to repay and incorporates numerous factors — including cash-flow data — into the predictive models it developed with data scientists. It doesn’t pull credit reports.

Credit bureau data doesn’t provide a full picture of the customer, says Kelly Thompson Cochran, deputy director of FinRegLab and a former regulator with the Consumer Financial Protection Bureau. Roughly a fifth of U.S. consumers lack credit history data, she says, which focuses on certain types of credit and expenses. The data is also a lagging indicator since it’s focused on the customer’s financial history.

In contrast, cash flow data can provide tremendous value to the underwriting process. “A transaction account is giving you both a sense of inflows and outflows, and the full spectrum of the kind of recurring expenses that a consumer has,” says Cochran.

U.S. Bancorp blends cash flow data with the applicant’s credit score to underwrite its “Simple Loan” — the only small-dollar loan offered by a major U.S. bank. The entire process occurs through the bank’s online or mobile channels, and takes just seven minutes, according to Mike Shepard, U.S. Bank’s senior vice president, consumer lending product and risk strategy. Applicants need to have a checking account with the bank for at least three months, with recurring deposits, so the bank can establish a relationship and understand the customer’s spending behavior.

“We know that our customers, at any point in time, could be facing short-term, cash-flow liquidity challenges,” says Shepard. U.S. Bank wanted to create a product that was simple to understand, with a clear pricing structure and guidelines. Customers can borrow in $100 increments, from $100 to $1,000, and pay a $6 fee for every $100 borrowed. U.S. Bank lowered the fee in March to better assist customers impacted by the pandemic; prior to that the fee ranged from $12 to $15.

Since the loan is a digital product, it’s convenient for the customer and efficient for the bank.

Ultimately, the Simple Loan places U.S. Bank at the center of its customers’ financial lives, says Shepard. By offering a responsible, transparent solution, customers “have a greater perception of U.S. Bank as a result of the fact that we were able to help them out in that time of need.”

Coronavirus Ushers Banks Into New Digital Banking Era

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The Covid-19 pandemic has forced dramatic changes in the U.S. economy at a breakneck speed that seemed impossible only a few short months ago.

The banking industry has risen to the challenge, managing more than a million applications for the Small Business Administration’s Paycheck Protection Program, modifying countless loan terms, deferring payments and redesigning the customer experience to minimize in-branch foot traffic — all while shifting a significant portion of operations to employees’ home offices.   

We are in uncharted territory. The business decisions your bank is making now impact your institution’s ability to meet customers where they are today, but also where they expect you to be in the future. The digital bridge you build for online account opening can help take you there.

Even before most of us learned the term “coronavirus,” few banks would have disagreed with the need to automate digital account opening and invest in systems to support the online customer experience. Your institution may have already identified this as a strategic objective for 2020. And even if you already offer the service, shutdowns and closures stemming from Covid-19 may have highlighted friction in the account opening experience that either previously lacked visibility or was considered acceptable for the limited number of customers who took advantage of it. With customers now primarily directed toward a digital channel, you should reconsider the metrics used to define a satisfactory user experience.

The right channel. Online account opening may have been one of several customer channels your bank offered, but it may not have been marketed as the primary or best channel — especially when compared to the high-touch experience of in-person banking. It’s become clear, though, that a digital model that complements, and works cohesively with, a branch model is necessary to meet customers where they are. The steps you take to cultivate online account opening as the right channel for your bank should also establish the hallmarks of a preferred user experience.

An end-to-end strategy. Do your customers need to visit a branch or make a phone call to complete application paperwork? Does your solution provide for safe digital identity verification? Does it support electronic signing? Are your account opening documents optimized for viewing on mobile devices? An online account opening strategy that does not consider these questions will likely reduce efficiency, resulting in a poor user experience that may cause customers to abandon the account opening process before completing it.

Continuing the relationship. Online service must be full service and seamlessly dovetail with your in-person customer model. Offering an online account opening experience that then requires a phone call or a branch trip to manage name or address changes is the sort of partial digital transformation that unnecessarily complicates customer service. Online account maintenance must have the option to be fully driven by customers as an embedded component of your online account experience. Fully embracing a well-conceived online strategy will include opportunities for marketing and cross-selling as part of the digital maintenance experience. If your bank cannot fully service customer needs remotely, they may seek institutions that better address their banking usability preferences.

Continuing the investment. Investment priorities for your organization have undoubtedly been revisited two, potentially three, times in the last few months. Use these opportunities to reevaluate your digital delivery model and the technology that supports it. Technology that speeds up identity verification processes and solutions that support the digital signing of mobile-optimized documents are critical components of your digital architecture that will reduce friction for your customers as they move through the online process.

You have already made vast changes to your operating model to meet the needs of your customers during very trying times. Now is the time to maximize your return on those changes and continue developing your digital strategy.

The Best Way To Increase Digital Deposits

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Consumers have come to expect the ability to do banking — and a wide range of other activities — online. These expectations are only likely to grow with the Covid-19 pandemic.

While some banks have offered online services for some time, many others may be rethinking their strategy as they consider options that might help them grow market share beyond their traditional or geographically limited service areas. After all, digital banking has the potential to draw deposits and service loans from a broader pool of potential customers. As banks of all sizes contend with margin compression and increased competition, one of the easiest and most expeditious ways to cut costs is through the use of technology.

As banks work to increase deposits in an increasingly digital world, they have the opportunity to take different, sometimes divergent, approaches to connecting with audiences and compelling them to become customers. Two key strategies are:

  • Establishing a digital branch — a digital version of an existing branch
  • Launching an entirely new digital bank, with an entirely different look and feel from the existing brand

There is no right approach as long as banks are meeting customers’ digital needs. Each bank should pursue an approach that incorporates their brand, their core strategies and their target audiences. But small community banks don’t have to be hampered by the lack of big budgets or deep pockets when providing excellent experiences to their customers and fuel consistent growth, though. By leveraging truly optimized digital capabilities, community banks can grow faster and at a low cost.

Extending the Brand Name
There’s great value in brand loyalty. Many community banks have long-standing positive relationships; strong brand awareness and loyalty are firmly established within the communities they serve. When doubling down on offering online services, leveraging its existing brand name can help the bank establish immediate awareness and preference for its services.

Leveraging the existing brand name can be a less-costly undertaking, since new logos, branding platforms, key messages and marketing collateral don’t need to be established.

The potential downside? When reaching into new markets, an existing brand name may not have enough awareness to compete against the large, national, online brands. Fortunately, the online landscape offers even very small community banks the opportunity to build a very large footprint. To do that, some are launching new brands designed to reach an entirely new target audience.

Launching a New Online Brand
Reaching a new audience is one of the biggest benefits for banks that launch a new online brand. It also creates an opportunity to shift the bank’s image if the existing brand has not been strong or does not convey the modern, nimble image that tends to appeal to younger audiences.

The drawbacks, though, include the costs of creating a new brand, both in terms of time and money with no certainty or guarantee that the new brand will gain traction in the market. In addition, launching a new brand relinquishes any opportunity to leverage any existing brand equity. Operational planning and related costs may also be higher, given the likelihood that some positions and services will be duplicated between physical and online branches.

Still, community banks should carefully consider both options in light of their unique positioning, strategies and goals. While both approaches represent some level of risk, they also provide specific benefits that can be capitalized on to grow market share and revenue. We’ve worked with banks in both camps that have seen incredible growth and gained operational efficiencies well beyond their goals.

No matter the approach, when it comes to digital banking, it’s imperative to have clear objectives, buy-in from all stakeholders, focused resources to make it happen, and partners that can provide guidance and best-practices along the way.

Customer Experience: The Freedom to Experiment

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NYMBUS.pngSurety Bank faces the same geographic limits to growth that other small community banks do. The $137 million bank operates four branches in Daytona Beach, Pierson, Lake Mary and DeLand, Florida, its headquarters. These are, at most, no more than 45 miles from one another.

But CEO Ryan James believes the bank can fuel deposit growth nationwide through the launch of a digital brand, booyah!, which targets college students and young graduates with fee-free deposit accounts. The bank’s relationship with its core is enabling him to make this bet.

Surety converted from a legacy core provider to the Nymbus SmartCore in 2018. It launched booyah! a year later using Nymbus SmartLaunch, a bank-in-a-box product designed to help banks quickly and inexpensively stand up a digital branch under an existing charter.

Nymbus SmartLaunch received the award for the Best Solution for Customer Experience at Bank Director’s 2020 Best of FinXTech Awards in May. Backbase, a digital banking provider, and Pinkaloo, a white-labeled charitable giving platform, were also finalists in the category. (Read more about how Pinkaloo worked with a Massachusetts community bank here.)

Bigger banks have reported mixed results from their efforts to establish digital brands. Wyomissing, Pennsylvania-based Customers Bancorp was one of the first to do so when it established its BankMobile division in 2015, targeting millennials. The $12 billion bank partnered with T-Mobile US three years later to offer accounts to the cell phone carrier’s 86 million customers. Meanwhile, JPMorgan Chase & Co. closed its digital bank, Finn, last year.

Growth costs money. Opening a freestanding branch can cost anywhere from $500,000 to $4.5 million, according to a 2019 Bancography survey. And unlike bigger banks, small institutions face significant obstacles in opening a separate digital brand to differentiate themselves nationwide — they don’t have capital to spend on experiments.

But if a small bank can establish a new digital brand at a reasonable cost, the experiment becomes more feasible.

“Why can’t you start a digital bank cheap?” says James. Surety’s legacy customers and booyah!’s new customers share the same user experience — SmartLaunch offers online applications for deposit and loan accounts, along with remote deposit capture, payment options, bill pay and debit card management. Bank customers can also set custom alerts and take advantage of personal financial management tools. Creating booyah! was really just a matter of adding a new logo and color scheme.

“It’s the same thing [we] already have,” he says. “Why does it have to be hundreds of millions of dollars in investments?”

That was the story from his old core provider, he says. But Nymbus didn’t leverage hefty fees to make booyah! a reality. What’s more, Surety isn’t locked into its experiment.

“What I love about them is you test, you pivot, and you do what makes sense” for your bank, James says. “You don’t have to give away years of your profits to try something new.”

Whether or not booyah! is a success, Nymbus provides Surety with the flexibility to quickly and easily spin up other brands that focus on specific customer segments, or shutter anything that doesn’t work, like Chase did with Finn.

If its digital brand works, Surety has a lot to gain. With the industry squeezed for profits in a prolonged low-rate environment, cheaply expanding its footprint to draw more deposits could help the bank maintain its high level of profitability in an increasingly challenging environment. The bank maintains a high return on equity (15.11% as of Dec. 31, 2019), return on assets (1.68%) and net interest margin (4.05%), according to the Federal Deposit Insurance Corp.

In a world populated with countless First National Banks, Farmers Banks and the like, booyah! certainly doesn’t sound like a typical bank. So, why booyah? Curious, I asked James. “Why not?” he replies. 

The name, frankly, isn’t the point.

Ultimately, Chase didn’t need Finn; it was already a nationwide bank with an established, well-recognized brand and millions of customers using its mobile app. But for Surety Bank, booyah! represents the potential to gain deposits outside its Florida footprint — without putting the bank’s bottom line at risk.

How Consolidation Changed Banking in Five Charts

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Over the past 35 years, few secular trends have reshaped the U.S. banking industry more than consolidation. From over 18,000 banks in the mid-1980s, 5,300 remain today.

Consolidation has created some very large U.S. banks, including four that top $1 trillion in assets. The country’s largest bank, JPMorgan Chase & Co., has $2.7 trillion in assets.

Historically, very large banks have been less profitable on performance metrics like return on average assets (ROAA) and return on average tangible common equity (ROTCE) than smaller banks. The standard theory is that banks benefit from economies of scale as they grow until they reach a certain size, at which point diseconomies of scale begin to drag down their performance.

This might be changing, according to interesting data offered Keefe, Bruyette & Woods CEO Thomas Michaud in the opening presentation at Bank Director’s 2020 Acquire or Be Acquired conference. The rising profitability of large publicly traded banks and one of the underlying factors can be seen in five charts from Michaud’s presentation.

Profitability is High

Profitability
Banking has been highly profitable since the early 1990s — except, of course, for that big dip starting in 2006 when earnings nosedived during the financial crisis. The industry’s profitability reached a post-crisis high in the third quarter of 2018 when its ROAA hit 1.41%. Keep in mind, however, this chart looks at the entire industry and averages all 5,300 banks.

Banking 2016

Sweet Spot of Profitability
Banking is also highly differentiated by asset size: many very small institutions at the bottom of the stack,  four behemoths at the top. Michaud’s “sweet spot” in banking refers to a specific asset category that allows banks to maximize their profitability relative to other size categories. They have enough scale to be efficient but are still manageable enterprises. In 2016, this sweet spot was in the $5 billion to $10 billion asset category, where the banks’ pre-tax, pre-provision income was 2.32% of risk weighted assets.

Banking 2019

Sweet Spot Shifts
It’s a different story three years later. In 2019, the category of banks with $50 billion in assets and above captured the profitability sweet spot, with pre-tax, pre-provision income of 2.43% of risk weighted assets. What’s especially interesting about this shift is that, by my count, there are just 31 U.S. domiciled banks in this size category. (I excluded the U.S. subsidiaries of foreign banks, but included The Goldman Sachs Group and Morgan Stanley.) Of course, these 31 banks control an overwhelming percentage of the industry’s assets and deposits, so they wield disproportionate power to their actual numbers. But what I find most interesting is that as a group, the biggest banks are now the most profitable.

Big Banks

Big Bank Profitability
Even the behemoths have stepped up their game. You can see from the chart that KBW expects five of the six big banks — Bank of America Corp., JPMorgan, Wells Fargo & Co., Morgan Stanley and Goldman Sachs — to post ROTCEs of 12% or better for 2019. And some, like JPMorgan and Bank of America, are expected to perform significantly better. KBW expects this trend to continue through 2021, for the most part. What’s behind this improved performance? Buying back stock is one explanation. For example, between 2017 and 2021, KBW expects Bank of America to have repurchased 27.6% of its outstanding stock at 2017 levels. But there is more to the story than that.

bank share

Taking Market Share
The 20 largest U.S. banks have aggressively grown their national deposit market share – a trend that seems to be accelerating. Beginning during the financial crisis in 2008, the top 20 began gaining market share at a faster rate than the rest of the industry. The differential continues to widen through at least the third quarter of last year. But the financial crisis ended over a decade ago, so a flight to safety can no longer explain this trend. Something else is clearly going on.

Consumers across the board are increasingly doing their banking through digital channels. Digital banking requires a significant investment in technology, and this is where the biggest banks have a clear advantage. Digital has essentially aggregated local deposit markets into a single national deposit market, and the largest banks’ ability to tap this market through technology gives them a significant competitive advantage that is beginning to drive their profitability.

Having too much scale was once a disadvantage in terms of performance — that may no longer be the case. Banking increasingly is becoming a technology-driven business and the ability to fund ambitious innovation programs is quickly becoming table stakes.

How Umpqua Bank Is Navigating the Digital Transformation

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Writers look for interesting paradoxes to explore. That’s what creates tension in a story, which engages readers.

These qualities can be hard to find in banking, a homogenous industry where individuality is often viewed skeptically by regulators.

But there are exceptions. One of them is Umpqua Holdings Co., the biggest bank based in the Pacific Northwest.

What’s unique about Umpqua is the ubiquity of its reputation. Ask just about anyone who has been around banking for a while and they’re likely to have heard of the $29 billion bank based in Portland, Oregon.

This isn’t because of Umpqua’s size or historic performance. It’s a product, instead, of its branch and marketing strategies under former CEO Ray Davis, who grew it over 23 years from a small community bank into a leading regional institution.

Umpqua’s branches were particularly unique. The company viewed them not exclusively as places to conduct banking business, but instead as places for people to congregate more generally.

That strategy may seem naïve nowadays, given the popularity of digital banking. But it’s worth observing that other banks continue to follow its lead.

Here’s how Capital One Financial Corp. describes its cafes: “Our Cafés are inviting places where you can bank, plan your financial journey, engage with your community, and enjoy Peet’s Coffee. You don’t have to be a customer.”

Nevertheless, as digital banking replaces branch visits, Umpqua has had to shift its strategy — you could even say its identity — under Davis’ successor, Cort O’Haver.

The biggest asset at O’Haver’s disposal is Umpqua’s culture, which it has long prioritized. And the key to its culture is the way it balances stakeholders.

For decades, corporations adhered to the doctrine of shareholder primacy — the idea that corporations exist principally to serve shareholders. The doctrine was even formally endorsed in 1997 as a principle of corporate governance by the Business Roundtable, an organization made up of CEOs of major U.S. companies.

Umpqua, on the other hand, has focused over the years on optimizing rewards to all its stakeholders — employees, customers, community and shareholders — as opposed to maximizing the rewards to just one group of them.

“We’re not the most profitable or highest total shareholder return bank in the country,” O’Haver says. “We have to give some of that up because of the things we do. If we’re going to innovate, if we’re going to have programs that give back to our employees and our communities, it costs money to do that. But we think that’s the right thing to do. It attracts customers and great quality associates who bring passion to what they do.”

The downside to this approach, as O’Haver points out, are lower shareholder returns. But the upside, particularly now, is that this philosophy seeded a collaborative culture that can be leveraged to help navigate the digital transformation.

Offering digital distribution channels isn’t hard. Any bank can pay third-party partners to build a mobile application. What’s hard is seamlessly blending these channels into a legacy ecosystem once dominated by branches and in-person service.

“How are you going to get your people to actually embrace new technology and use it? How are they going to sell it if they don’t feel like it’s valuable for them?” O’Haver says. “Yeah, it’s valuable for your shareholders because it’s cheaper. But if you’re not counterbalancing that, how are you going to get your associates to embrace it and sell it to customers? That’s more important than the product itself, even in financial terms. If they don’t embrace it, you will fail.”

This, again, may seem like a trite way to approach business. Yet, Umpqua’s more balanced philosophy towards stakeholders has proven to be prescient.

Last year, the Business Roundtable redefined the purpose of a corporation. No longer is it merely to maximize shareholder value; its purpose now is to fulfill a fundamental commitment to all its stakeholders.

Leading institutional investors are following suit. The CEOs of BlackRock and State Street Global Capital Advisors, the two biggest institutional investors in the country, are mandating that companies jettison shareholder primacy in favor of so-called stakeholder capitalism.

In short, while Umpqua’s decades-long emphasis on branches may seem like a liability in the modern age of banking, the culture underlying that emphasis may prove to be its greatest asset if leveraged, as opposed to lost, in the process of bridging the digital divide.

Three Things You Missed at Experience FinXTech

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technology-9-11-19.pngThe rapid and ongoing digital evolution of banking has made partnerships between banks and fintech companies more important than ever. But cultivating fruitful, not frustrating, relationships is a central challenge faced by companies on both sides of the relationship.

The 2019 Experience FinXTech event, hosted by Bank Director and its FinXTech division this week at the JW Marriott in Chicago, was designed to help address this challenge and award solutions that work for today’s banks. Over the course of two days, I observed three key emerging trends.

Deposit displacement
The competition for deposits has been a central, ongoing theme for the banking industry, and it was a hot topic of conversation at this year’s Experience FinXTech event.

In a presentation on Monday, Ron Shevlin, director of research at Cornerstone Advisors, talked about a phenomenon he calls “deposit displacement.” Consumers keep billions of dollars in health savings accounts. They also keep billions of dollars in balances on Starbucks gift cards and within Venmo accounts. These aren’t technically considered deposits, but they do act as an alternative to them.

Shevlin’s point is that the competition for funding in the banking industry doesn’t come exclusively from traditional financial institutions — and particularly, the biggest institutions with multibillion-dollar technology budgets. It also comes from the cumulative impact of these products offered by nondepository institutions.

Interestingly, not all banks struggle with funding. One banker from a smaller, rural community bank talked about how his institution has more funding than it knows what to do with. Another institution in a similar situation is offloading them using Promontory Interfinancial Network’s reciprocal deposit platform.

Capital allocation versus expenses
A lot of things that seem academic and inconsequential can have major implications for the short- and long-term prospects of financial institutions. One example is whether banks perceive investments in new technologies to be simply expenses with no residual long-term benefit, or whether they view these investments as capital allocation.

Fairly or unfairly, there’s a sense among technology providers that many banks see investments in digital banking enhancements merely as expenses. This mindset matters in a highly commoditized industry like banking, in which one of the primary sources of competitive advantage is to be a low-cost producer.

The industry’s justifiable focus on the efficiency ratio — the percent of a bank’s net revenue that’s spent on noninterest expenses — reflects this. A bank that views investments in new technologies as an expense, which may have a detrimental impact on efficiency, will be less inclined to stay atop of the digital wave washing over the industry.

But banks that adopt a more-philosophical approach to technology investments, and see them as an exercise in capital allocation, seem less inclined to fall into this trap. Their focus is on the long-term return on investment, not the short-term impact on efficiency.

Of course, in the real world, things are never this simple. Banks that approach this decision in a way that keeps the short-term implications on efficiency in mind, with an eye on the long-term implications of remaining competitive in an increasingly digitized world, are likely to be the ones that perform best over the long run.

Cultural impacts
One of the most challenging aspects of banking’s ongoing digital transformation also happens to be its least tangible: tailoring bank cultures to incorporate new ways of doing old things. At the event, conversations about cultural evolution proceeded along multiple lines.

In the first case, banks are almost uniformly focused on recruiting members of younger generations who are, by habit, more digitally inclined.

On the flipside, banks have to make hard decisions about the friction that stems from existing employees who have worked for them for years, sometimes decades, and are proving to be resistant to change. For instance, several bankers talked about implementing new technologies, like Salesforce.com’s customer relationship management solutions, yet their employees continue to use spreadsheets and word-processing documents to track customer engagements.

But there’s a legitimate question about how far this should go, and some banks take it to the logical extreme. They talk about transitioning their cultures from traditional banking cultures to something more akin to the culture of a technology company. Other banks are adopting a more-tempered approach, thinking about technology as less of an end in itself, and rather as a means to an end — the end being the enhanced delivery of traditional banking products.