Shaking Up Traditional Banking

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banking-strategy-2-10-17.pngUnlike some executives, David Becker likes to be told what he’s doing wrong. The chairman and chief executive officer of First Internet Bank in Fishers, Indiana, says bank interns speak to the senior leadership team at the end of their internships to discuss ways the bank could improve. He expects the same of staff throughout the organization.

“[Our hire] is the dissatisfied banker,’’ he says. “They were in an organization that had a boatload of rules and policies. We take the banker who says, ‘What if we did this?’ We want the person who questions the day-to-day operations.”

Running the bank in such a way has paid off.

The bank’s holding company, $1.8 billion asset First Internet Bancorp, grew loans 31 percent last year from the year before, to $1.3 billion. Net income grew to $12.1 million from $8.9 million in 2015. The bank’s return on average assets was 0.81 percent in the fourth quarter of 2016, and its return on average equity was 11.24 percent. First Internet has its headquarters in Fishers, a suburb of Indianapolis, and a loan production office in Tempe, Arizona, and that’s it. With a focus on digital banking, First Internet can grow its loan book nationally while keeping expenses low. One of its niches is digitally savvy investors who own properties or businesses in multiple states because the bank can accommodate lending that may take place in different parts of the country.

Investment bank Keefe, Bruyette & Woods has an outperform rating on the stock, in part based on its cheapness relative to the bank’s performance. The bank will have to continue to grow to achieve efficiencies, because internet banks have to pay slightly more for deposits than other banks do, says Michael Perito, a KBW analyst who follows the stock.

Becker feels as if the big banks are getting consumers more accustomed to digital banking, and therefore, more likely to leave for digital-only banks. When he first started the internet bank in 1999, customers had to deposit checks by sending them in the mail to the bank. Now, they can just remotely deposit them through the bank’s mobile banking app. If customers use another bank’s ATM, First Internet reimburses them for up to $10 per month in surcharges—making up for the bank’s lack of a branch network.

The bank has been growing lately in part because it is hiring seasoned bankers to tend to its loan book of mortgages, commercial real estate and consumer loans. Becker says the bank has managed to survive by building slowly and carefully in its early years, so as not to overstep its infrastructure. “The team we have on board are all folks at the senior level that worked at multistate, large, regional banks and have the expertise and the ability to help us grow to that multi-billion-dollar position,’’ Becker says. “It is all about the people. We can create computer tools and algorithms, but at the end of the day, somebody has to talk to you if there is a problem and know how to underwrite a loan.”

The bank is acutely focused on customer service, and in its early days, it didn’t hire anyone right out of high school or in their first job. “We needed talented people who could handle anything that came in the door,’’ Becker says. There are no tellers per se, and everyone who works in customer service needs to handle multiple functions, from wire transfers to starting a new deposit account. Staffers can communicate with their customers on the phone, in online chat rooms or via email. They keep track of customer reviews on sites such as Yelp, because bad reviews can damage the company’s reputation. Software vendors are held to account, and the bank doesn’t sign any long-term contracts with vendors, Becker says.

Although the bank relies on vendors rather than developing its own software, it follows the workplace ethic of a tech company: a 24-hour gym is available, and people can show up in jeans to work every day. “We use technology to revolutionize the banking process,’’ Becker says. “There really isn’t any limit to our potential growth. Are we a drop in the bucket in the whole community of financial services? Yes. But the consumer is coming our way. We are getting better at it and we are bigger day by day.”

Three Ways Fintech is Riding the Social Commerce Wave

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Consider two of the most prevalent digital trends over the last decade or so: social media and e-commerce. A growing number of users are interacting with companies on social media platforms such as Facebook, Pinterest and Instagram. An increasing number of people are also turning to the internet and e-commerce to purchase virtually any item, for any occasion. For these reasons, the emerging “social commerce” trend makes a lot of sense.

Social commerce is roughly defined as the intersection of social media and e-commerce. For example, Facebook has added a “buy” button, so consumers can make purchases directly without ever leaving the social network. In many ways, 2016 was the “Year of Social Commerce.” Worldwide, revenue earned directly through e-commerce using social media totaled $20 billion dollars in 2014, according to the software provider ReadyCloud.

As social commerce grows, so will the demand for products and services to manage the flow of payments from social networks to vendors and institutions on the back end. Fintech startups and banks are coming up with new ways to meet these demands. Here are three examples.

Social Gifting
There’s something inherently social about gift giving. Over the years, gift cards have become popular among both consumers and brands of all shapes and sizes. While gift cards might seem tailor-made for social commerce on a surface level, for the most part, people are still buying physical gift cards at retail locations and gifting them to friends and family, who then have to keep them in their wallet with countless others, which can be inconvenient.

That’s the problem that Texas social commerce startup Swych is aiming to solve. Swych has created a digital platform where consumers can send, manage and redeem their gift cards all in one place. Currently, Swych is available as an iOS app for U.S. consumers, and major retailers such as Amazon, REI and Sephora offer gift cards through the platform. Swych users can eliminate their physical gift cards by uploading them into the application if the retailer is on Swych. The company also introduced “Swychable” gift cards that can be redeemed with any retailer within the Swych ecosystem.

Swych aims to transform the gift card market from obsolete technology and a clunky user experience to a convenient and connected social future. Users can view friends’ profiles on Swych, see what brands they prefer and give a gift card that closely matches those preferences. Swych is tackling an outdated industry and making the experience better for both consumers and retailers.

Social Banking Apps
Many banks are wrestling with exactly how to adopt new technologies to capitalize on the social commerce phenomenon. Rather than spending the resources to develop social commerce technologies in-house, many banks are turning to white-label solutions. Urban FT helps banks integrate social commerce features into their online and mobile banking applications.

Specifically, Urban FT helps banks build social payment capabilities into the banks’ own apps, similar to what Venmo accomplishes. Moreover, banks can use Urban FT to provide retail customers with Yelp-style reviews, geolocation, coupons and other social features that people would typically find in third-party apps such as Foursquare or Groupon. Users can even make restaurant reservations or purchase gifts through banking apps that utilize Urban FT’s social commerce technology. Banks partnering with Urban FT realize that if they can offer these services within their own online and mobile banking ecosystem, they’ll be able to increase the lifetime value of those customers and learn more about their social commerce preferences.

Shopify Gets Social
Shopify is one of the largest players in back-end merchant e-commerce services. Anyone who wants to set up an online store, sell goods or services and collect payments recognizes that Shopify is probably the most comprehensive solution available. So it’s no surprise that Shopify is now introducing technologies that will make buying and selling on social media easy for everyday people. The company has developed a free app-based platform called Sello that allows anyone to easily set up an online store, share products on social networks and allow people to purchase these products on their mobile devices.

Sello exemplifies a broader movement within social commerce, which is the democratization of buying and selling, as social media has also done for content creation. Anyone can start a blog and share what they’ve written quickly and easily, so shouldn’t setting up a shop in order to sell something you’ve made be just as simple? Unlike online retailers like Etsy, Shopify has built Sello with social commerce at its core. The most direct purchase path of the future will be creating products, sharing them on social media and enabling a direct purchase from that point. In the future, Shopify hopes that novice Sello users become successful enough to start their own e-commerce business and migrate onto the full Shopify business platform.

Social media may be mature, but social commerce is still in a stage of growth and experimentation. The challenges of the future will be to make purchasing even more frictionless and leveraging social networks to better personalize product offerings. With innovations like social gifting and white label in-app social commerce for banks, it’s clear that our experiences on social media will likely involve much more buying and selling in the near future.

Does Your Bank Have What It Takes to Go Digital?

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I’m often askedwhat’s the best way to make for a bank to go digital. There’s never an easy answer to that question as every bank is different. Some will only make it by launching a whole new bank rather than trying to reinvent their current bank. Some will try and re-engineer their bank and fail. And a few may actually succeed, although true digital transformation is a long and tough road. Most existing banks were built for the management of paper notes and documents in a branch environment. All of the technology that has been laid over that structure has cemented a physical distribution focus into the bank’s core back office systems. Those core systems are often written in archaic code, and it’s all very complex and difficult to change. The most fundamental point here is that it is also proprietary to the bank.

What is happening now is that fintech startups are using open source architecture that relies on the internet for distribution. They have no history and therefore no constraints. They are using all the latest development environments and are incredibly agile. How can a traditional bank compete with that?

The answer is they can’t. However, what a bank can do is use the fintech ecosystem to re-engineer its operations to become faster and more efficient. That’s going to take time and it’s critically important to understand that this bank re-engineering is more than just a tech project. It’s re-thinking the bank’s business model into an open sourced marketplace ecosystem where the bank is just a platform for many players to play. The visionary banks get this and are building such capabilities as I write this post. However, those visionary banks are few and far between and, common to all of them, have a technologist in the driving seat.

When you think about that statement, it’s pretty obvious that this has to be the case. You cannot convert a traditional bank built around physical structures to a digital bank built around digital structures if you are a banker. This is because the bank is trying to transform itself from a financial institution using technology to a technology provider offering finance. It is radically different thinking, and is a cultural outlook, rather than a tech project.

How many banks are led by technologists? I can count them on one hand. The majority of banks have zero technology representation in the C-Suite. A 2015 study of the world’s largest banks found that 40 percent had no technology professionals in the C-Suite, and 33 percent had just one. Seventy-three percent of banks lack technology leadership and yet they are the very same organizations where the current leaders are shouting for change. JPMorgan Chase & Co. CEO Jamie Dimon’s comment at an investors day event in 2014 that “When I go to Silicon Valley they all want to eat our lunch” is right on the money, but what will most bankers do about it? This is where many hem and haw. They make it known within the bank that it intends to go digital—and then assign the task like it’s just another tech project.

Instead, the few banks that are really making the change are building a C-Suite where the majority of those executives have professional technology experience, and along with the CEO live, breathe and talk technology from the Boardroom to the Boardwalk. They don’t just talk the talk, they walk the walk.

This is something I see very rarely in incumbent financial institutions, so when someone asks me what’s the best way to make a bank digital, my answer is always the same: Get a digital leadership team to work the project from the Boardroom to the Boardwalk. Does your bank do that?

Innovation: The Time Is Now

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Technological transformation can be a key solution as banks seek efficiency and address changing consumer expectations. In this video, Manoj Daga of Sutherland Global Services outlines how banks should focus their efforts to innovate.

  • Technology Trends Impacting the Industry
  • Potential for Automation
  • Where Banks Should Invest