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.

Three Ways to Break the Mold of Digital Banking

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digital-9-9-19.pngCommunity banks should look for ways to make their digital banking experience stand out for consumers in the face of increasingly commoditized offerings.

Most community banks in the United States are focusing on enhancing the digital experience for their customers, making sure they offer most, if not all, of the features that the top five banks offer. However, most community banks are doing the exact same thing, creating digital banking experiences that look and feel eerily similar.

These banks are using the same technology, the same channels and the same process workflows. Outside of the bank’s branding, it can be difficult to tell what differentiates one digital bank from another.

While these similarities help ensure that customers don’t switch banks for one down the street, it’s not preparing institutions to hold their own against new competitors. Challenger banks like N26 and Chime are creating a new, different experience for users — and quickly taking over the market.

Creating a differentiated experience for users takes more than new features or an updated interface. It comes down to banks being able to build for the future with a platform that can be scaled and easily integrated — a platform built on APIs.

APIs, or application programming interfaces, provide the flexibility and customization that is often lacking in banking. APIs allow banks to work with a wider pool of partners to build a more-personalized experience at a fraction of the development cost. APIs have enabled three trends and transformations that allow for differentiated community banking: real-time payments, true any-channel offerings and personalized user experiences.

Real time transactions
JPMorgan Chase & Co. recently launched real-time payments, which allows customers to instantly execute provider payments. This move creates urgency for other large institutions to implement similar offerings. But delivering this real time experience could require some midsize banks to undergo a complete digital transformation and create a technical infrastructure that can support real-time interactions: one built with an API-first architecture.

Any-channel
Any-channel, or omni-channel, means delivering the same services across multiple channels. But true, any-channel technology should focus on a platform that allows institutions to adopt any-channel — regardless of what that looks like in the future — while maintaining a single experience.

With an API-first architecture, multiple channels don’t translate to redundant development work. Instead, banks can focus on iterating on the overarching experience and translating that to each separate channel. Any-channel becomes less of a never-ending goal and more of a strategic vision.

The Ideal User Experience
Consumers not only want the same experience across channels — they want a seamless experience. Banks using an API approach can build workflows and processes that update automatically, so that users who start an application online can finish that process in the branch, on their mobile app or over the phone. APIs allow banks to build an experience around the user, not the channel.

When banks focus on the user experience instead of the channel or feature, the options are endless. Any number of micro-services can be integrated into a custom experience that is specific to the bank’s audience.

Just Holding On, or Thriving?
Most banks do a great job at maintaining their online experiences in their current states: their clients won’t leave because their competitors offer the same digital experience. But when it comes to acquiring new customers, it’s a different story.

New, digital-only banks are quickly taking wallet-share from consumers with sleek and personalized user experiences. Only those banks using APIs will have the ability and agility to keep up with the competition.

Preparing Cards for the Next Era in Payments

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credit-card-9-3-19.pngAdvancements in payments technologies have forever changed consumer expectations. More than ever, they demand financial services that stay in step with their busy, mobile lives.

Financial institutions must respond with products and services that deliver convenience, freedom and control. They can stay relevant to cardholders by enabling secure and easy digital transactions through their debit and credit cards. Banks should digitize, utilize, securitize and monetize their card programs to meaningfully meet their customers’ needs.

Digitize
Banks should develop and deploy digital solutions like wallets, alerts and card controls, to provide an integrated, seamless and efficient payments experience. Consumers have an array of choices for their financial services, and they will go where they find the greatest value.

Nonfinancial competitors have proven adept at capturing consumers via embedded payment options that deliver a streamlined experience. Their goals are to gather cardholder information, cross-sell new services and extract a growing share of the payments value chain. Financial institutions can ensure their cards remain top-of-wallet for consumers by developing a digital strategy focused on driving deep cardholder engagement. Digital wallets are the place to start.

The adoption curve for digital wallets follows the path of online banking’s early years, suggesting an impending sharp rise in the use of digital wallets. A majority of the largest retailers now accept contactless payments, according to a 2019 survey from Boston Retail Partners. And one in six U.S. banking consumers reported paying with a digital wallet within the last 30 days, according to a 2018 Fiserv survey. Almost three-fourths of cardholders say paying for purchases is more convenient with tokenized mobile payments, a Mercator Advisory Group survey found.

Financial institutions can deliver significant benefits to consumers and reap measurable returns by leveraging existing and emerging digital tools, such as merchant-based geographic reward offers.

Utilize
Banks need to provide their cardholders with comprehensive information about how digital solutions can meet their expectations and needs. Implementing digital tools, providing a frictionless financial service experience and helping customers understand and use their benefits can empower them to transact in real-time on their devices, including mobile phones, computers and tablets. Banks’ communications programs are important to encourage adoption and use the implemented digital products and services.

Securitize
Banks will have to balance digital innovation with risk mitigation strategies that keep consumers safe and don’t disrupt transactions. Digital payments are highly secure due to tokenization — a process where numerical values replace consumers’ personal information for transaction purposes. Tokenized digital wallet transactions are an important first step toward preventing mobile payments fraud.

Mobile apps that enable cardholders to receive transaction alerts and actively manage card usage also significantly improving card security. Fiserv analysis shows use of a card controls app may reduce signature fraud by up to 53%, while increasing card usage and spending.

Banks need strategies focused on detecting and preventing fraud in real time without impacting card usage and cardholder satisfaction. This can be a significant point of differentiation for card providers. A prudent approach can include implementing predictive analytics and decision-management technology. And because consumers want to be involved in managing and protecting their accounts, they should have the option to create customized transaction alerts and controls. Finally, direct access to experienced risk analysts who work to identify evolving fraud threats can significantly improve overall results.

A recent analysis from the Federal Reserve indicated debit fraud is running at approximately 11.2 basis points, which compares the average value of fraud to total transaction dollars. In comparison, Fiserv debit card clients experience only 5.08 basis points of fraud.

Card issuers balance risk rules that help mitigate fraud against cardholder disruption stemming from falsely-declined transactions. These lost transaction opportunities can reduce revenue and increase reputational risk. An experienced risk mitigation partner can help banks strike the right balance between fraud detection and consumer satisfaction to maximize profitability.

More Engaged Users Are

Based on these average monthly debit transactions: Gray = Low 12.6, Blue = Casual (medium) 18.3, High = High 21.4, Orange = Super (highest) 28.4
Net Promoter Score = Measure of cardholder loyalty and value in institution relationship
Cross-Sold Ration = Percentage of householders with a DDA for longer for longer than six months but open to a new deposit or loan account in the most recent six months
Return on Assets = Percentage of profit related to earnings

Monetize
Banks can turn digital solutions into engines of growth by creating stronger, more lasting consumer relationships. A digital portfolio can be more than just a set of solutions — it can drive significant new revenue and growth opportunities. By delivering secure, frictionless digital services to consumers when and where they need them, banks can maintain their positions as trusted financial service providers. Engaged users are profitable users.

Digitize. Utilize. Securitize. Monetize. Achieving the right combination of innovative products and exceptional consumer experiences will enhance a bank’s card portfolio growth, operational efficiency and market share.

Three Critical Strategies for Digital Wealth, Trust Success

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strategy-7-31-19.pngThe robot (wealth advisors) are here.

The robo-advisor revolution promised to render legacy firms like broker-dealers, asset managers, and registered investment advisors obsolete.

The fear of being left behind motivated many companies across the wealth industry to respond with an open checkbook. BlackRock dropped $150 million to buy FutureAdvisor in 2015. Other firms, like JPMorgan & Chase Co., spent more than three years and millions of dollars building their own robo-advisors. And others, like Northwestern Mutual, spent $250 million to acquire and then ultimately shutter their offering.

Despite all the effort, money and time invested, these companies don’t have much to show for it. The amount of assets under management at these nascent efforts is underwhelming; when combined with ultra-low robo-fee rates, the revenue doesn’t come close to providing any real return on their upfront sizable investments.

What’s the real takeaway for banks? The problem isn’t the technology so much as it is the corresponding business strategy. When it comes to robo-advising, altering the strategy and deconstructing the technology will give banks the biggest returns on their investments. There will be benefits for the brokerage side of the bank, but even greater returns in the trust division, which typically relies on outdated processes based on paper and people.

If banks look at technology with a lens toward driving margin as well as revenue growth, the way they deploy robo-technology changes. Instead of launching robo-advisors and hoping customers stream in, a better strategy could be to become hyper-focused, using the technology in order to maximize its inherent value. Banks thinking about using digital solutions to improve their wealth and trust offerings can focus on three areas in order to get operational and revenue benefits:

  1. Eliminate paper-based trust account opening processes. Using digital trust account opening can dramatically reduce the total client onboarding time and begin the investing and billing processes sooner, accelerating the time it takes to generate revenue from a newly opened account. For example, the typical trust account takes about 40 days to get correctly opened and funded. Technology can reduce that time by 30 days, driving at least 8% more revenue with those extra days, while simultaneously decreasing the people- and paper-based costs.
  2. Automate existing smaller agency accounts. Automating processes like risk assessment, model management and rebalancing can significantly reduce the amount of time and people needed to manage those smaller, less profitable accounts. Banks can achieve higher customer satisfaction via the improved and streamlined process, as well as higher advisor satisfaction from the drastic reduction in operating time.
  3. Retain flight risk retail customers. Retail customers who do not meet the account minimums to utilize a bank’s wealth services often find wealth offerings elsewhere, taking their assets outside of your bank. By digitizing wealth offerings, banks can lower their operational costs and enable a profitable way to service smaller wealth accounts, retain more customers and increase revenue. The key is using technology to correctly segment customers to better predict when they are most likely to become a flight risk to consumer-facing robo-advisors like Betterment.

So, what should a bank do to digitize a wealth or trust offering?

Start by targeting efficiency. While you may be tempted by the siren song of new customers and revenue, the biggest short-term returns for technology always come through cost reduction and margin expansion. Find the areas of your business with the most friction and surgically target them with technology to notch meaningful gains. Once your operations are running faster and smoother, target existing at-risk customers. Yes, you’ll be repricing those deposits, but it’s always better to reprice, retain and ultimately grow deposits than it is to lose them to one of the consumer-facing robo-advisors.

Exclusive: The Inside Story of Colorado’s Leading Bank

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bank-4-25-19.pngGreat leaders are eager to learn from others, even their competitors. That’s why Bank Director is making available—exclusively to members of our Bank Services program—the unabridged transcripts of in-depth conversations our writers have with the executives of top-performing banks.

One such bank is FirstBank Holding Co.

With $18.5 billion in assets, FirstBank is the third-largest privately-held bank in the United States and the biggest bank based in Colorado, where its headquarters sits 10 miles west of downtown Denver. It’s among the most efficient institutions in the industry, with an efficiency ratio often dipping below 50 percent. It has an abundance of risk-based capital. And its return on equity has ranked in the top 10 percent of large bank holding companies in all but one of the past 12 years.

Bank Director’s executive editor, John J. Maxfield, interviewed FirstBank’s CEO Jim Reuter and Chief Operating Officer Emily Robinson for the second quarter 2019 issue of Bank Director magazine. (You can read that story, “How FirstBank Profits from Being Private,” by clicking here.)

In the interview, Reuter and Robinson shed light on:

  • The benefits of being a privately-held bank
  • How FirstBank became a leader in the digital evolution of banking
  • Strategies to stay disciplined at the top of the cycle
  • The advantage of having three former FirstBank CEOs serving on the board
  • Their philosophy on capital management and allocation

The interview has been edited for brevity, clarity and flow.

download.png Download transcript for the full exclusive interview

Consolidating Technology for a Merger of Equals

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merger-4-24-19.pngMergers of equals are gaining in popularity, judging by the flurry of recently announced deals, but a number of tough decisions about technology have to be made during the post-merger integration phase to set up the new bank for success.

After every deal, management teams are under a great deal of pressure to realize the deal’s projected expense savings as quickly as possible. While the average industry timeline to select and negotiate a core processing contract is nine months, a bank merger team has about a third of that time—the Cornerstone framework estimates 100 days—to choose not just the core, but all software as well, and to renegotiate pricing and contract terms for the most critical systems so that integration efforts can begin.

Start with the Core
A comparison of core systems is often the first order of business. These five factors are the most relevant in determining which solution will provide the best fit for the post-merger institution:

  • Products and services to be offered by the continuing bank. If one institution has a huge mortgage servicing portfolio or a deeper mix of commercial lending, complex credits and treasury management, the core system will need to support those products.
  • Compatibility and integration with preferred digital banking solutions. If one or both merger partners rely on the delivery channel systems offered by their core providers, the integration team should evaluate the core, online and mobile solutions as a bundled package. On the other hand, if the selection process favors a best-of-breed digital channel solution with more-sophisticated service offerings, that decision emphasizes the need for a core system that supports third-party integration.
  • Input from system users. The merger team must work closely with other departments to evaluate the functionality of the competing core systems for their operations and interfacing systems.
  • Contractual considerations. The costs of early contract termination with a core, loan origination, digital channel or other technology provider can be significant, to the point of taking priority over functionality considerations. If it is going to cost $4 million to get out of a digital banking contract, the continuing organization may be better off keeping that system, at least in the near-term.
  • Market trends. Post-merger, the combined bank will be operating at a new scale, so it may be instructive to look at what core systems other like-size financial institutions have chosen to run their operations.

A lot of factors come into play when the continuing bank is finalizing what that solution set looks like, but at the end of the day, it is about functionality, integration, cost and breadth of services.

Focus on the Top 20
The integration team should use a similar process to select the full complement of technology required to run a modern financial institution. Cornerstone suggests ranking the systems currently in operation at both banks by annual costs, based on accounts payable data sorted by vendor in descending order. Next, identify contract lifecycle details to compare the likely costs of continuing or ending each vendor relationship, including liquidated damages, deconversion fees and other expenses.

That analysis lays the groundwork to assess the features, functionality and pricing of like systems and rank which options would be most closely aligned with customer service strategies, system capabilities and cost efficiencies. It might seem that an objective, side-by-side comparison of technology systems should be a straightforward exercise, but emotions can get in the way.

A lot of people are highly passionate and have built their bank on being successful in the market. That passion may come shining through in these discussions—which is not necessarily a bad thing.

Working with an expert third party through the processes of system selection and contract negotiations can help provide an objective perspective and an insider’s view of market pricing. An experienced business partner can help technology integration teams and executives set up effective decision-making processes and navigate the novel challenges that may arise in realizing a central promise in a merger of equals—to create value through vendor cost reductions.

Toward that end, the due diligence process should identify about 20 contracts—for the core, online and mobile banking, treasury management, card processing and telecom systems, to name a few—to target for renegotiation in advance of the official merger date. A bank has hundreds of vendors to help run the enterprise, but it should focus most of the attention on the top 20. The bank can drive down costs through creative economies of scale by focusing on those contracts that are the most negotiable.

With its choice of two solutions for most systems and the promise of doubling volume for the selected vendors, the new bank can negotiate from an advantageous position. But its integration team must work quickly and efficiently to deliver on market expectations to assemble an optimal, cost-effective technology infrastructure—without cutting corners in the selection process and contract negotiations.

Think of this challenge like a dance. It is possible to speed up the tempo, but it is not possible to skip steps and expect to end up in the right place. The key components—the proper due diligence, financial reviews and evaluations—all still need to happen.

Download the free white paper, “Successfully Executing a Merger of Equals,” here.