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benefits for the brokerage side of the bank, but even greater returns in the trust division, which typically relies on outdated processes based on paper and people.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.

Does Your Digital Strategy Include the “Last Mile?”

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strategy-3-20-19.pngThe “last mile” is a ubiquitous term that originated in the telecommunications industry to represent the final leg of delivering service to a customer. Most of the time it referred to installing copper wire that connected the local telephone exchange to individual landlines.

More recently, the term represents what can be the final and most challenging part of a consumer interaction. Generally, it’s the point at which a broad consumer service interacts with an individual customer to deliver a personalized experience.

In banking, this is most often in the form of digital documents created to meet the exact specifications and compliance requirements of an individual transaction that allow a loan or deposit to be booked.

The last mile concept is changing the way financial institutions approach their digital strategy. Previously, many banks focused on digital services to a broad customer base that allowed end users to access account information, pay bills and transfer funds. Lesser in the strategy was the ability to originate a loan or deposit transaction through a digital channel, and even less likely to be contemplated was the customer experience while documenting and booking these types of transactions.

Often, what would begin as a digital experience through a mobile device, tablet or PC would quickly revert to a less accessible process that concluded with a customer coming to a branch to manually sign an agreement.

Banks today are recognizing that a shift in their digital strategy is required. Increasingly, institutions are reshaping their digital presence to focus on the “last mile” – the hardest part of the customer journey that requires an individualized experience. Building a foundation focused on this critical customer touchpoint requires banks to deploy technology that documents, in a fully compliant manner, consumer and commercial loan and deposit transactions while at the same time supporting a fully digital customer experience.

In seeking fintech partners that can support this digital strategy shift, institutions are identifying essential attributes and capabilities to enable effective execution:

  • Integrated Capabilities: Disparate systems require data to be imported and exported to avoid data conflict. A single system of record, integrated with digital document capabilities and a two-way data flow, supports data integrity while eliminating the need to access separate solutions.
  • In-house Compliance Expertise: Documenting transactions in a compliant manner is essential. State and federal mandates change frequently. In-house compliance expertise supported by unique research capabilities ensures the documented words are accurate and up to date.
  • Electronic Closing Enabled: The ability to leverage technology from origination to customer signature without deploying manual workarounds or static forms.
  • Reinvestment in Technology: Digital capabilities continue to evolve. Gone are the days of generic templates and static documents. A partner that’s focused on both current and future capabilities ensures an institution isn’t left behind the times.

As your bank begins to formulate a digital strategy or if you’re revising your existing strategy, ask yourself if you’ve contemplated the “last mile.” If not, focus on this part of the customer interaction first to deliver a comprehensive, compliant, and digitally enabled experience.

This Bank Is Winning the Competition for Deposits

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deposits-3-15-19.pngFrom the perspective of a community or regional bank, one of the most ominious trends in the industry right now is the organic deposit growth at the nation’s biggest banks.

This trend has gotten a lot of attention in recent years. Yet, the closer you look, the less ominous it seems—so long as you’re not a community or regional bank based in a big city, that is.

The experience of JPMorgan Chase & Co. serves as a case in point.

Deposits at Chase have grown an average of 9.4 percent per year since 2014. That’s more than twice the 4.6 percent average annual rate for the rest of the industry. Even other large national banks have only increased their deposits by a comparatively modest 5.3 percent over this period.

This performance ranks Chase first in the industry in terms of the absolute increase in deposits since 2014—they’re up by a total of $215 billion, which is equivalent to the seventh largest commercial bank in the country.

If any bank is winning the competition for deposits, in other words, it seems fair to say it’s Chase.

But why is it winning?

The answer may surprise you.

It certainly helps that Chase spends billions of dollars every year to be at the forefront of the digital banking revolution. Thanks to these investments, it has the single largest, and fastest growing, active mobile banking base among U.S. banks.

As of the end of 2018, Chase had 49 million active digital customers, 33 million of which actively use its mobile app. Eighty percent of transactions at the bank are now completed through self-service channels, yielding a 15-percent decline in the cost to serve each consumer household.

Yet, even though digitally engaged customers are more satisfied with their experience at Chase, spend more money on Chase-issued cards and use more Chase products, its digital banking channels aren’t the primary source of the bank’s deposit growth.

Believe it or not, Chase attributes 70 percent of the increase in deposits to customers who use its branches.

“Our physical network has been critical in achieving industry-leading deposit growth,” said Thasunda Duckett, CEO of consumer banking, at the bank’s investor day last month. “The progress we’ve made in digital has made it easier for our customers to self-serve. And we’ve seen this shift happen gradually across all age groups. But even as customers continue to use their mobile app more often, they still value our branches. Convenient branch locations are still the top factor for customers when choosing their bank.”

This bears repeating. Despite all the hoopla about digital banking—much of which is legitimate, of course—physical branches continue to be a primary draw of deposits.

Suffice it to say, this is why Chase announced in 2018 that it plans to open as many as 400 new branches in major cities across the East Coast and Mid-Atlantic regions.

Three of Chase’s flagship expansion markets are Boston, Philadelphia and Washington, D.C. This matters because large metropolitan markets like these have performed much better in the ongoing economic expansion compared to their smaller, nonmetropolitan counterparts.

The divergence in economic fortunes is surprising. A full 99 percent of population growth in the country since 2007 has occurred in the 383 urban markets the federal government classifies as metropolitan areas. It stands to reason, in turn, that this is where deposit growth is occurring as well.

Chase isn’t the only big bank expanding in, and into, large metropolitan markets, either. Bank of America Corp. is doing so, too, recently establishing for the first time a physical retail presence in Denver. And U.S. Bancorp and PNC Financial Services Group are following suit, expanding into new retail markets like Dallas.

The point being, even though the trend in deposit growth has led analysts and commentators to ring the death knell for smaller community and regional banks without billion-dollar technology budgets, there’s reason to believe that the business model of many of these banks—focused on branches in smaller urban and rural areas—will allow them to continue prospering.

Exclusive: How U.S. Bancorp Views Expansion

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bancorp-3-14-19.pngGreat leaders are eager to learn from others, even their competitors. That’s why Bank Director is making available—exclusively to our members—the unabridged transcripts of the in-depth conversations our writers have with the executives of top-performing banks.

Few banks fit this description as well as U.S. Bancorp, the fifth-largest retail bank in the United States. It has generated one of the most consistently superior performances in the banking industry over the past decade. It’s the most profitable and efficient bank among superregional and national banks. It’s the highest-rated bank by Moody’s. It’s also been named one of the world’s most ethical companies for five years in a row by the Ethisphere Institute. And it has emerged as a leader of the digital banking revolution.

Bank Director’s executive editor, John J. Maxfield, interviewed U.S. Bancorp Chairman and CEO Andy Cecere for the first quarter 2019 issue of Bank Director magazine. (You can read that story, “Growth Through Digital Banking, Not M&A,” by clicking here.)

In the interview, Cecere sheds light on U.S. Bancorp’s:

  • Strategy for expanding into new markets
  • Progress on the digital banking front
  • Perspective on the changes underway in banking
  • Experience through the financial crisis

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

download.png Download transcript for the full exclusive interview

The Most Important Question in Banking Right Now

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banking-2-15-19.pngTo understand the seismic shifts underway in the banking industry today, it’s helpful to look back at what a different industry went through in the 1980s—the industry for computer memory chips.

The story of Intel Corp. through that period is particularly insightful.

Intel was founded in 1968.

Within four years, it emerged as one of the leading manufacturers of semiconductor memory chips in the world.

Then something changed.

Heightened competition from Japanese chip manufacturers dramatically shrank the profits Intel earned from producing memory chips.

The competition was so intense that Intel effectively abandoned its bread-and-butter memory chip business in favor of the relatively new field of microprocessors.

It’s like McDonald’s switching from hamburgers to tacos.

In the words of Intel’s CEO at the time, Andy Grove, the industry had reached a strategic inflection point.

“[A] strategic inflection point is a time in the life of a business when its fundamentals are about to change,” Grove later wrote his book, “Only the Paranoid Survive.”

“That change can mean an opportunity to rise to new heights,” Grove continued. “But it may just as likely signal the beginning of the end.”

The parallels to the banking industry today are obvious.

Over the past decade, as attention has been focused on the recovery from the financial crisis, there’s been a fundamental shift in the way banks operate.

To make a deposit a decade ago, a customer had to visit an ATM or walk into a branch. Nowadays, three quarters of deposit transactions at Bank of America, one of the biggest retail banks in the country, are completed digitally.

The implications of this are huge.

Convenience and service quality are no longer defined by the number and location of branches. Now, they’re a function of the design and functionality of a bank’s website and mobile app.

This shift is reflected in J.D. Power’s 2019 Retail Banking Advice Study, a survey of customer satisfaction with advice and account-opening processes at regional and national banks.

Overall customer satisfaction with advice provided by banks increased in the survey compared to the prior year. Yet, advice delivered digitally (via website or mobile app) had the largest satisfaction point gain over the prior year, with the most profound improvement among consumers under 40 years old.

It’s this change in customers’ definition of convenience and service quality that has enabled the biggest banks over the past few years to begin growing deposits organically, as opposed to through acquisitions, for the first time since the consolidation cycle began in earnest nearly four decades ago.

And as we discussed in our latest issue of Bank Director magazine, the new definition of convenience has also altered the growth strategy of these same big banks.

If they want to expand into a new geographic market today, they don’t do so by buying a bunch of branches. They do so, instead, by opening up a few de novo locations and then supplementing those branches with aggressive marketing campaigns tied to their digital banking offerings.

It’s a massive shift. But is it a strategic inflection point along the same lines as that faced by Intel in the 1980s?

Put another way, has the debut and adoption of digital banking changed the fundamental competitive dynamics of banking? Or is digital banking just another distribution channel, along the lines of phone banking, drive-through windows or ATMs?

There’s no way to know for sure, says Don MacDonald, the former chief marketing officer of Intel, who currently holds the same position at MX, a fintech company helping banks, credit unions, and developers better leverage their customer data.

In MacDonald’s estimation, true strategic inflection points are caused by changes on multiple fronts.

In the banking industry, for instance, the fronts would include regulation, technology, customer expectations and competition.

Viewed through this lens, it seems reasonable to think that banking has indeed passed such a threshold.

On the regulatory front, for the first time ever, a handful of banks don’t have a choice but to focus on organic deposit growth—once the exclusive province of community and regional banks—as the three largest retail banks each hold more than 10 percent of domestic deposits and are thus prohibited from growing through acquisition.

Furthermore, regulators are making it easier for firms outside the industry—namely, fintechs—to compete directly against banks, with the Office of the Comptroller of the Currency’s fintech charter being the most obvious example.

Technology has changed, too, with customers now using their computers and smartphones to complete deposits and apply for mortgages, negating the need to walk into a branch.

And customer expectations have been radically transformed, as evidenced by the latest J.D. Power survey revealing a preference toward digital banking advice over personal advice.

To be clear, whether a true strategic inflection point is here or not doesn’t absolve banks of their traditional duty to make good loans and provide excellent customer service. But it does mean the rules of the game have changed.

Why Soccer And Restaurant Reviews Are Becoming Part of Digital Banking

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fintech-9-27-18.pngFor years banks have looked to fintechs to make their digital offerings more convenient, an area where legacy core systems have been slow to develop. That remains a primary goal for some institutions that have been slower to adopt modern digital capabilities.

Banks attending Finovate Fall Sept. 24-26 in New York City were looking for fintech partners that could help them bolster their main value proposition: deep customer relationships and personalized customer service. Several companies are serving up unique capabilities such as providing restaurant recommendations or basing savings goals on how well your favorite soccer team performs.

Dan Latimore, senior vice president of banking at the research firm Celent, tweeted that customer experience was the leading topic of discussion at this year’s fintech-heavy U.S. conference, but it’s not just the conveniences of a robust mobile app that banks are rolling out. Some banks are working with fintechs to build unusual but highly personalized capabilities in their digital experience to drive human interaction and improve the quality of their customer relationships.

Three unique examples of bringing the bank and its customers closer together involve recommendations from the bank through its fintech partner.

Tinkoff Bank – Tinkoff Bank, a branchless Russian bank with $278 billion in assets according to its most recent disclosure, bills itself as a “digital ecosystem of financial and lifestyle products.” The bank’s mobile app goes beyond traditional banking services to provide things like restaurant recommendations, user tips and troubleshooting advice. Tinkoff engages its user base of about 7 million customers through stories that are similar to those used in popular social media apps like Instagram.

Meniga – This London-based fintech’s transaction categorization engine helps banks personalize their digital channels. Meniga presented at the conference with client Tangerine Bank, a Canadian direct bank and subsidiary of Toronto-based Scotiabank with $38 billion in total assets. The bank’s app recommends personalized savings goals.

For example, Tangerine’s app will notice if a user is a fan of a particular soccer team based on their purchasing history. The app can then automate a savings challenge for the user that will move money from their checking account to savings every time the team scores a goal.

Bond.AI – One of several chatbots in attendance at Finovate, Bond brands itself as an “empathy engine” that understands the context of financial data. In addition to answering basic banking inquiries, Bond proactively recommends behaviors users should take and products that fit their lifestyle.

Meniga and Bond.AI were both awarded Best in Show by conference attendees. They represent an emerging focus on understanding a customer’s lifestyle through transaction data and then making helpful recommendations to them based on that information, which are often described as artificial intelligence or machine learning. This is the latest stage in the innovation of fintech capabilities, which began by making the bank’s digital experience more convenient and friendly to mobile users.

These capabilities have been popular topics at national conferences, including Bank Director’s FinXTech Summit, held in May at The Phoenician in Phoenix, Arizona.

There’s no doubt that the challenges of partnering with fintechs was a much different proposition than when fintech firms were stood up some 10 years ago. Now, more than a decade into some fintech life cycles, the firms have matured.

Fintechs have learned to work within the regulatory framework, core system capabilities and other legacy issues banks have long been familiar with. Banks, on the other hand, have become more open to partnership with smaller, nimble tech companies.

The technology banks need to engage customers on a meaningful level has arrived. Fintechs have established themselves as viable business partners. Consumers are demanding more convenient digital experiences and many banks are progressing in meeting those demands, but those who don’t continue to lose ground in being able to grow or remain competitive.

Five Lessons You Can Learn from Tech-Savvy Banks

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technology-9-20-18.pngFew directors and executives responding to Bank Director’s 2018 Technology Survey believe their bank to be industry-leading when it comes to how they strategically approach technology—just five percent, compared to 70 percent who identify their bank as a fast follower, and 25 percent who say their bank is slow to implement or struggles to adopt new technology.

While most banks understand the need to enhance their technological capabilities and digital offerings, the leaders of more tech-savvy banks reveal they’re seeking outside help, as well as focusing greater internal resources and more board attention to the technological conundrum faced by the industry; that is, how to make their banks more efficient, and better serve customers so they don’t take their deposit dollars or loan business to another competitor—whether that’s the local credit union, one of the big banks or a digital challenger.

Based on the survey, we uncovered five lessons from these banks that you should consider adopting in your own institution. At the very least, you should be discussing these issues at your next board meeting.

1. Tech-savvy banks see a primarily digital future for their organizations.
While innovation leaders and laggards are equally as likely to cite the improvement of the digital user experience as a top goal over the next two years, respondents from tech-savvy banks are less likely to focus on the branch channel. Just 14 percent plan to upgrade their branch technology in the next two years, and 14 percent plan to add new technology in their branches, compared to roughly half of respondents from fast follower or technologically struggling banks.

Goals-chart.png

Tech-savvy banks are also more likely to indicate that they plan to close branches—29 percent, compared to 8 percent of their peers—and they’re slightly more likely add branches that are smaller—57 percent, compared to 45 percent.

With branch traffic down but customers still expecting great service from their financial provider—in a digital format—many banks will need to rethink branch strategies. “There is a newer branch model that, to me, more resembles an office environment that you would go to get advice, to sit down and meet with people, but it’s really not a place where transactions are going to be taking place,” says Frank Sorrentino, the chief executive of $5.3 billion asset ConnectOne Bancorp, based in Englewood Cliffs, New Jersey. The branch still has a place in the banking ecosystem, but “people want a high level of accessibility, and the highest form of accessibility is going to be through the digital channel.”

2. Industry-leading banks are more likely to seek newer technology startups to work with, rather than established providers.
Seventy-one percent of tech-savvy banks have a board and management team who are open to working with newer technology providers that were founded within the past five years, to help implement new products and services, or create efficiencies within the organization. In contrast, 31 percent of their peers haven’t considered working with a startup, and 10 percent aren’t open to the idea.

“We in the smaller end of the banking space find ourselves constrained in how much investment we can make in technology,” says Scott Blake, the chief information officer at $4.3 billion asset Bangor Savings Bank, in Bangor, Maine. “So, we have to find creative ways to leverage the investments that we are able to make, and one of the ways that we’re able to do that is in looking at some of these earlier-stage companies that are on the right track and trying to find strategic ways that we can connect with them.”

Working with newer providers could require extra due diligence, and banks leading the field when it comes to technological adoption indicate they’re willing to take a little more time to get to know the companies with which they plan to work. This means meeting with the vendor’s executive team (100 percent of respondents from tech-savvy organizations, versus 62 percent of their peers) and visiting the vendor’s headquarters to meet its staff and understand its culture (71 percent, compared to 51 percent of peers).

“I’m a pretty big believer in trying to have these relationships be partnerships whenever possible, and that doesn’t happen if we don’t have a company-to-company relationship, and a person-to-person relationship,” says Blake. By partnership, he means the bank actively works with the startup to produce a better product or service, which benefits Bangor Savings and its customers, as well as the bank’s technology partner and its clients.

3. Tech-savvy banks dedicate a high-level executive to technology and innovation.
Eighty-three percent of respondents from tech-savvy banks say a high-level executive focuses on innovation, compared to 53 percent of their peers. They’re also more likely to report that their bank has developed an innovation lab or team, and are more likely to participate in hackathons and startup accelerators.

Strategy-chart.png

But Blake doesn’t believe that establishing an innovation unit that functions separately from the bank is culturally healthy for his organization, though it can be effective tool to attack select projects or problems. Instead, Bangor Savings has invested in additional training and education for staff who have the interest and the aptitude for innovation. “We want everyone, to some extent, to think about, ‘how can I do this task that I have to do better,’ and that will hopefully yield longer-term benefits for us,” he says.

4. The board discusses technology at every meeting.
Eighty-three percent of respondents from tech-savvy banks say directors discuss technology at every board meeting, compared to 57 percent of fast followers and one-quarter of respondents whose banks are slow or struggle to adopt technology. They’re also more likely to have a board-level technology committee that regularly presents to the board—50 percent, compared to 28 percent of their peers.

Larry Sterrs, the chairman of the board at $4.2 billion asset Camden National Corp. in Camden, Maine, says with technology driving so many changes, a committee was needed to address the issue to ensure significant items were reviewed and discussed. The committee focuses on items related to the bank’s budget around technology, including status updates on key projects, and stays on top of enhancing products, services and delivery channels, as well as back-office improvements and cybersecurity. It’s a lot to discuss, he says.

The board receives minutes and other information from the committee in advance of every board meeting, and technology is a regular line item on the agenda.

Technology committees have yet to be widely adopted by the industry: Bank Director’s 2018 Compensation Survey, published earlier this year, found 20 percent of boards have a technology committee. Bank boards also struggle to add technology expertise, with 44 percent citing the recruitment of tech-savvy directors as a top governance challenge.

5. Tech-savvy banks still recognize the need to enhance board expertise on the issue.
Individual directors of tech-savvy banks are no more likely to be early adopters of technology in their personal lives when compared to their peers, so education on the topic is still needed.

Not every director on the board can—or should—be a technology expert, but boards still need a baseline understanding of the issue. Camden National provides one or two technology-focused educational opportunities a year, in addition to written materials and videos from outside sources. If a specific technology will be addressed on the agenda, educational materials will be provided, for example. This impacts the quality of board discussion. “We always get a good dialogue and conversation going, [and] we always get a lot of really good questions,” says Sterrs.

Bank Director’s 2018 Technology Survey is sponsored by CDW. Click here to view the full results.

The Big Future of Small Business Banking

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fintech-8-28-18.pngAccording to the U.S. Small Business Administration Office of Advocacy, there are currently 29.6 million micro and small businesses in the United States. Of those, 80 percent are one-person businesses, and 22 percent are made up of 10 employees or fewer. Businesses that fall within these parameters span every industry from freelancers and bloggers, to designers, developers, and start-up entrepreneurs. All are seeing a boom in sales and dependency from consumers due to the so-called “gig economy.”

A lot has been done by banks and alternative lenders when it comes to providing financing for these micro and small businesses, but given this data, it begs the question: how do they all bank?
Traditionally, banking for micro and small businesses has been limited at best and inadequate at worst. In most cases, small business owners have had no other option but to visit a physical bank branch, fill out endless paperwork, provide documentation, and then transfer items back and forth to the bank through the mail or by email. The technology is typically clunky, out of date, and inconvenient – all adjectives a far cry from how these businesses would describe themselves, and how they need to operate. In addition, these owners are, at their core, consumers. They experience cutting-edge products and technology with their own personal banking accounts, but that same innovation is not replicated on the business side.

To alleviate this burden, the banking industry has a lot of soul searching to do. Some banks have spent a lot of time and energy discussing digital banking disruption in the consumer world. The time has come for the next frontier in the small business market, which has inspired and driven forward-thinking banks to develop customized solutions for small business customers.

For banks considering entering—or reimagining their approach to—the small business segment, it begins with a solid strategic plan. Understanding the demographics and banking needs of your target market will help guide the product development and customer experience process. This covers everything from developing a product suite that will be appealing to both the market and your bottom line, to thinking through the journey as a business going from being a prospect to a customer.

At Radius, we took some learnings from our experience in the digital consumer banking space and used it to build the framework for our small business offering. While small business owners may need a little more complexity with their money management tools than consumers, designing something that was simple and straightforward was the key. The result for us was the Tailored Checking Account, which any small business can now apply for online and get opened in minutes thanks to a partnership we established with Treasury Prime, a San Francisco-based fintech.

Radius isn’t alone in its quest to help business owners better manage their finances. In addition to our offering, we’ve noticed several other fintechs focused and working to fill the void that many small business owners are experiencing. For example, Autobooks helps small businesses manage their receivables, payables, payments and accounting entirely online. Brex creates business debit cards that operate like credit cards without the need for a personal guaranty. And Rocket Dollar helps individuals unlock their retirement savings for things like funding a startup or making a small business loan.

Overall, the sheer amount of micro and small businesses requires the banking industry’s attention. Consumers are increasingly turning to shopping local and supporting small businesses, only hastening the need for small business owners to manage their money on their terms—a trend that won’t decline anytime soon. This is a market that all banking professionals should be paying attention to, as the market only continues to grow. I look forward to seeing the outcome over the next year and am eager to see what the future holds for us and the rest of the small business banking industry.