Fee Income at Premium as Crisis Threatens Credit

Companies today have to work smarter and harder to survive the coronavirus crisis, said Green Dot Corp. CEO Daniel Henry in the company’s recent earnings call.

Henry joined Pasadena, California-based Green Dot as CEO on March 26, and has been working remotely to get up to speed on the $3 billion financial company’s operations, which include prepaid cards, tax processing and a banking platform. Those diversified business lines are a source of strength, he said.

“We’re in a much better position than just kind of a monoline neo-bank to weather the storm,” he says. “We’ve got positive free cash flows, strong revenues and cash in the bank.”

After a couple of years of moderately rising interest rates, the Federal Reserve began to back off mid-2019. They dramatically dropped them to zero in February as one tool to fight the economic downturn caused by the Covid-19 pandemic and have promised to keep them low until the economy shows firm signs of recovery. Now, it looks like the industry needs to strap in for another lengthy period of low interest rates.

All this puts further pressure on already-squeezed net interest margins.

While the spread between deposits and loans represents a bank’s traditional method of generating revenue, banks also focus on fee income sources to drive profitability. Business lines that expand non-interest income opportunities could be particularly valuable in the current environment.

With this in mind, Bank Director ranked publicly traded institutions based on noninterest income as a percentage of net income, using year-end 2019 data from S&P Global Market Intelligence. We focused on profitable retail banks with a return on average assets exceeding 1.3%.

Many of these banks rely on traditional sources of noninterest income — mortgages, insurance, asset management — but two differentiate themselves through unique business models.

Green Dot topped the ranking, with the bulk of its fees generated through prepaid card transactions. It also earns revenue through its Banking-as-a-Service arrangements with companies such as Uber Technologies, Apple, Intuit and long-term partner Walmart.

Meta Financial Group deploys a similar model, offering prepaid cards and tax products. The Sioux Falls, South Dakota-based bank will soon issue federal stimulus payments via prepaid cards to almost four million Americans through a partnership with the U.S. Treasury.

The remaining banks in our list take a more traditional approach.

Institutions like Dallas-based Hilltop Holdings primarily generate fee income through mortgage lending. Keefe, Bruyette & Wood’s managing director Brady Gailey believes the low-rate environment will favor similar financial institutions. “Hilltop has a very strong mortgage operation … which should do even better this year, given the lower rate backdrop that we have now,” he says.

The $15.7 billion bank announced the sale of its insurance unit, National Lloyds Corp., earlier this year; that deal is expected to close in the second quarter. Even without its insurance division, Hilltop maintains diverse fee income streams, says Gailey, through mortgage, investment banking (HilltopSecurities) and commercial banking.

Hilltop CEO Jeremy Ford said in a January earnings call that the insurance business wasn’t “core. … this will allow us to really focus more on those three businesses and grow them.”

As the fifth-largest insurance broker in the U.S., Charlotte, North Carolina-based Truist Financial Corp. enjoys operating leverage and pricing power, according to Christopher Marinac, the director of research at Janney Montgomery Scott. “[Insurance will] be a key piece of that income stream,” he says. “I think insurance is going to be something that every bank wishes they had — but Truist truly does have it, and I think you’re going to see them take advantage of that.”

In Green Dot’s earnings call, Henry said he’s still evaluating the company’s various business lines. But with Covid-19 pushing consumers to dramatically increase their use of electronic payment methods — both for online shopping and more hygienic in-person transactions — he’s bullish on payments.

Covid is really forcing a lot of consumers [to] search out a digital solution,” Henry said. Visa recently reported that while face-to-face transactions declined significantly in April, there was an 18% uptick in digital commerce spending.

Recently, Green Dot investigated a spike in card sales in a particular area. It turned out that a local cable company’s offices were closed due to Covid-19. A sign on the company’s door instructed customers wanting to make in-person payments to go to a store across the street and buy a Green Dot card so they could make their payment electronically.

“A lot of the consumers that were hanging on to cash over the last few months really didn’t have an option and got pushed into the electronic payments world,” he said. “That will definitely benefit us at Green Dot.”

 

Top Fee Income Generators

Rank Bank Name Ticker Primary Fee Income Source Total Noninterest Income ($000s), YE 2019
#1 Green Dot Corp. GDOT Card $1,071,063
#2 Hilltop Holdings HTH Mortgage $1,206,974
#3 Waterstone Financial WSBF Mortgage $129,099
#4 HarborOne Bancorp HONE Mortgage $59,411
#5 Meta Financial Group CASH Card $221,760
#6 Truist Financial Corp. TFC Insurance $5,337,000
#7 FB Financial Corp. FBK Mortgage $135,038
#8 JPMorgan Chase & Co. JPM Asset management $58,456,000
#9 PNC Financial Services Group PNC Corporate services $7,817,138
#10 U.S. Bancorp USB Payments $9,761,000

Sources: S&P Global Market Intelligence, bank 10-Ks

Coronavirus Ushers Banks Into New Digital Banking Era

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

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

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

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

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

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

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

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

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

Six Timeless Tenets of Extraordinary Banks

flywheel-image-v4.pngIf you want to understand innovation and success, a good person to ask is Jeff Bezos, the chairman and CEO of Amazon.com.

“I very frequently get the question: ‘What’s going to change in the next 10 years?’ And that is a very interesting question,” Bezos said in 2012. “I almost never get the question: ‘What’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two, because you can build a business strategy around the things that are stable in time.”

In few industries is this truer than banking.

Much of the conversation in banking in recent years has focused on the ever-evolving technological, regulatory and operational landscapes. The vast majority of deposit transactions at large banks nowadays are made over digital channels, we’re told, as are a growing share of loan originations. As a result, banks that don’t change could soon go the way of the dinosaurs.

This argument has merit. But it also needs to be kept in perspective. Technology is not an end in itself for banks, it’s a means to an end — the end being to help people better manage their financial lives. Doing this in a sustainable way calls for a marriage of technology with the timeless tenets of banking.

It’s with this in mind that Bank Director and nCino, a provider of cloud-based services to banks, collaborated on a new report, The Flywheel of Banking: Six Timeless Tenets of Extraordinary Banks.

The report is based on interviews of more than a dozen CEOs from top-performing financial institutions, including Brian Moynihan at Bank of America Corp., Rene Jones at M&T Bank Corp. and Greg Carmichael at Fifth Third Bancorp. It offers unique and invaluable insights on leadership, growth, risk management, culture, stakeholder prioritization and capital allocation.

The future of banking is hard to predict. There is no roadmap to reveal the way. But a mastery of these tenets will help banks charge ahead with confidence and, in Bezos’ words, build business strategies around things that are stable in time.

 

The Six Tenets of Extraordinary Banks

Jonathan Rowe of nCino describes the traits that set exceptional banks — and their leaders — apart from the industry.

To download the free report, simply click here now.

The Biggest Priorities for Banks in Normal Times

Banks are caught in the midst of the COVID-19 pandemic sweeping across the United States.

As they care for hurting customers in a dynamic and rapidly evolving environment, they cannot forget the fundamentals needed to steer any successful bank: maintaining discipline in a competitive lending market, attracting and retaining high-quality talent and improving their digital distribution channels.

Uncovering bankers’ biggest long-term priorities was one of the purposes of a roundtable conversation between executives and officers from a half dozen banks with between $10 billion and $30 billion in assets. The roundtable was sponsored by Deloitte LLP and took place at Bank Director’s annual Acquire or Be Acquired conference at the end of January, before the brunt of the new coronavirus pandemic took hold.

Kevin Riley, CEO of First Interstate BancSystem, noted that customers throughout the $14.6 billion bank’s western footprint were generally optimistic prior to the disruption caused by the coronavirus outbreak. Washington, Oregon and Idaho at the time were doing best. With trade tensions and fear of an inverted yield curve easing, and with interest rates reversing course, businesses entered 2020 with more confidence than they entered 2019.

The growth efforts reflect a broader trend. “In our 2020 M&A Trends survey, corporate respondents cited ‘efficiency and effectiveness in change management’ and ‘aligning cultures’ as the top concerns for new acquisitions,” says Liz Fennessey, M&A principal at Deloitte Consulting.

A major benefit that flows from an acquisition is talent. “More and more, we’re seeing M&A used as a lever to access talent, which presents a new set of cultural challenges,” Fennessey continues. “In the very early stages of the deal, the acquirer should consider the aspects core to the culture that will help drive long-term retention in order to preserve deal value.”

One benefit of the benign credit environment that banks enjoyed at the end of last year is that it enabled them to focus on core issues like talent and culture. Tacoma, Washington-based Columbia Banking System has been particularly aggressive in this regard, said CEO Clint Stein.

The $14.1 billion bank added three new people to its executive committee this year, with a heavy emphasis on technology. The first is the bank’s chief digital and technology officer, who focuses on innovation, information security and digital expansion. The second is the bank’s chief marketing and experience officer, who oversees marketing efforts and leads both a new employee experience team and a new client experience team. The third is the director of retail banking and digital integration, whose responsibilities include oversight of retail branches and digital services.

Riley at First Interstate has employed similar tactics, realigning the bank’s executive team at the beginning of 2020 to add a chief strategy officer. The position includes leading the digital and product teams, data and analytics, as well as overseeing marketing, communications and the client contact center.

The key challenge when it comes to growth, particularly through M&A, is making sure that it improves, as opposed to impairs, the combined institution’s culture. “It is important to be deliberate and thoughtful when aligning cultures,” says Matt Hutton, a partner at Deloitte. “It matters as soon as the deal is announced. Don’t miss the opportunity to build culture momentum by reinforcing the behaviors you expect before the deal is complete.”

Related to the focus on growth and talent is an increasingly sharp focus on environmental, social and governance issues. For decades, corporations were operated primarily for the benefit of their shareholders — a doctrine known as shareholder primacy. But this emphasis has begun to change and may accelerate alongside the unfolding health crisis. Over the past few years, large institutional investors have started promoting a more inclusive approach known as stakeholder capitalism, requiring companies to optimize returns across all their stakeholders, not just the owners of their stock.

The banks at the roundtable have embraced this call to action. First National Bank of Omaha, in Omaha, Nebraska, publishes an annual community impact report, detailing metrics that capture the positive impact it has in the communities it serves. Columbia promotes the link between corporate social responsibility and performance. And First Interstate, in addition to issuing an annual environmental, social and governance report, has taken multiple steps in recent years to improve employee compensation and engagement.

Despite the diversity of business lines and geographies of different banks, these regional lenders shared multiple common priorities and fundamental focuses going into this year. The coronavirus crisis has certainly caused banks to change course, but there will be a time in the not-too-distant future when they and others are able to return to these core focuses.

Coronavirus Underlines Digital Transformation Urgency

The passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act means up to $350 billion in loans guaranteed by the Small Business Administration is set to flow to small businesses by the June 30 funding deadline.

Community and regional institutions are, of course, the logical partners for distribution of this capital. But a challenge remains: How will those financial institutions reach out to the market when their lobbies may not be open, and businesses may not be comfortable with face-to-face interactions?

Banks have done little to change the way they interact with their business customers in the digital age. In good times, this lack of transformation allowed large technology companies like Amazon.com, PayPal Holdings and Square to siphon customers away. The current environment complicates efforts for banks that have not already transformed to be responsive to their customers immediate needs.

Customers prioritized convenience — now banks will be forced to. Even prior to social distancing, consumers prioritized speed and convenience, whether it came to new technology or where they banked.

Winning at business banking was always going to require banks to offer business customers a frictionless experience. But the ability to operate business banking functions digitally has taken on new meaning — from defining quality service to becoming a necessity during a pandemic.

Three Critical Points of Friction in Business Banking
Now more than ever, it should be every institution’s goal to make working with businesses as easy as possible, especially when distribution of SBA dollars is at stake.

To meet this moment, banks need to remove three critical friction points from their business banking experience:

  • The Application: Paper applications are long and tedious, and the process is even more difficult for SBA 7(a) loans. To remove friction, institutions need to focus on data and access. They should use available data and technology to pre-fill applications as much as possible, and provide them digitally either for self-service or with banker assistance.
  • The Decisioning: Underwriting loans is a labor-intensive process that can delay decisions for weeks. An influx of Paycheck Protection Program loan applications will only compound the inefficiencies of the underwriting process. Banks need to automate as much of the underwriting and decisioning process as possible, while keeping their risk exposure in mind. It’s critical that banks select companies that allow them to use their own, unique credit policies.
  • The Account Opening: Banks also need to think about long-term relationships with the businesses they serve during this time. That means eliminating common obstacles associated with opening a business deposit account. For example: If a business has already completed a loan application, their bank should have all the information they need for a new account application and shouldn’t ask for it twice. They need to ensure businesses can complete as much of this process remotely as possible.

At Numerated, the sense of urgency we hear from bank leaders is palpable. Our team has been working overtime — remotely — to provide banks with a quick-to-implement CARES Act Lending Automation solution. Banks have been working just as fast to understand the current environment and build strategies that will help them meet their customers’ rapidly shifting needs.

In many ways, the COVID-19 pandemic has forced banks to consider digital transformation as a solution to this problem. Still, many firms have held off for any number of reasons. Institutions that have focused on digital transformation will be the most successful in improving the business banking customer experience and will lead the way during this pandemic as a result.

From Eastern Bank Corp. in Boston that used digital lending to become the No. 1 small to midsized business lender in their competitive market, to First Federal Lakewood, in Lakewood, Ohio, that is using digital experiences to retain and grow strategic relationships, institutions of all sizes have launched new digital capabilities, better positioning them to face what’s ahead.

As the nation’s businesses grapple with this new reality, these financial institutions are examples for others exploring how to serve business customers when they can’t see them face to face. Doing so will require a reimagining of the way we do business banking.

Defending Commercial Deposits From Emerging Risks

The competition for commercial deposits has become fiercer in the new decade.

The rate of noninterest deposits growth has been declining over the last three years, according to quarterly reports from the Federal Deposit Insurance Corp. The percentage of noninterest deposits to total deposits has also dropped over 250 basis points since 2016. This comes as the cost of funding earning assets continues to rise, creating pressure on banks’ net interest margins.  

At the same time, corporate customers are facing changes in their receipt of payments. Emerging payment trends are shifting payers from paper-based payments to other methods and avenues. Checks and paper-based payments — historically the most popular method — continue to decline as payers’ preferred payment method. Electronic payments have grown year-over-year by 9.4%.

Newer payment channels include mobile, point of presentment and payment portals. However, these new payment channels can increase the cost of processing electronic payments: 88% of these payments must be manually re-keyed by the accounting staff, according to one study. This inefficiency in manually processing payments increases costs and often leads to customer service issues.

Treasurers and senior corporate managers want automated solutions to handle increased electronic payment trends. Historically, banks have served their corporate customers for years with wholesale and retail lockbox services. But many legacy lockbox services are designed for paper-based payments, which are outdated and cannot handle electronic payments. Research shows that these corporate customers are turning to fintechs to solve their new payment processing challenges. Payments were the No. 1 threat that risked moving to fintechs, according to a 2017 Global Survey from PricewaterhouseCoopers.

Corporate customers are dissatisfied with their current process and are looking to use technology to modernize, future-proof, and upgrade their accounts receivable process. The top five needs of today’s treasurer include: enterprise resource planning (ERP) integration, automated payment matching, support for all payment channels, consolidated reporting and a single historical archive of their payments. 

Integrated receivables have three primary elements: payment matching, ERP integration and a single reporting archive. Automation matches payments from all channels using artificial intelligence and robotic process automation to eliminate the manual keying process. The use of flexible business rules allows the corporate to tailor their operation to meet their needs and increase automated payments over time. A consolidated payment file updates the corporates’ ERP system after completing the payment reconciliation process. Finally, integrated receivable provides a single source of all payment data, including analytics and reporting. An integrated receivables platform eliminates many disparate processes (most manual, some automated) that plague most businesses today. In fact, in one recent survey, almost 60% of treasurers were dissatisfied with their company’s current level of AR automation.

Banks can play a pivotal role in the new payment world by partnering with a fintech. Fintechs have been building platforms to serve the more-complex needs of corporate treasury, but pose a threat to the banks’ corporate customers. A corporate treasurer using a fintech for integrated receivables ultimately disintermediates the bank and now has the flexibility to choose where to place their depository and borrowing relationships. 

The good news is that the treasurer of your corporate customer would prefer to do business with their bank. According to Aite Research, 73% of treasurers believe their bank should offer integrated receivables, with 31% believing the bank will provide these services over the next five years. Moreover, 54% of the treasurers surveyed have planned investments to update their AR platform in the next few years. 

Many fintechs offer integrated receivables today, with new entrants coming to market every year. But bankers need to review the background and experience of their fintech partner. Banks should look for partners with expertise and programs that will enable the bank’s success. Banks should also be wary of providers that compete directly against them in the corporate market. Partnering with the right fintech provides your bank with a valuable service that your corporate customers need today, and future-proofs your treasury function for new and emerging payment channels. Most importantly, integrated receivables will allow your bank to continue retaining and attracting corporate deposits.

Five Issues Bank Boards Should Consider Now


governance-12-18-17.pngThere are a number of significant issues and emerging trends affecting U.S. companies and the economy, both of which are crucial to the health and vibrancy of the financial institutions sector. In this environment, it is imperative that bank executives and board members think about five key issues in evaluating their strategic plans. These are areas in which changes have already taken place or are on the verge of being implemented.

1. Regulatory changes
Financial institutions face a number of regulatory and accounting changes. First, a new rule under the Home Mortgage Disclosure Act requires 48 new or modified data points, which will allow regulators to determine if unfair lending practices are occurring. The new rules promise to be expensive to implement.

Institutions growing via acquisition should consider how adoption of the CECL model will affect accounting for loans, securities and other affected instruments at the target institution. And the new standard for revenue recognition issued jointly by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) could prove more challenging than many institutions realize.

2. Tax reform
Banks have expanded to new markets to generate loan growth in response to a challenging rate environment. However, many have not considered the state and local tax liabilities for loans originated outside of their physical footprint. To date, certain states have not rigorously enforced compliance, but banks could be on the radar as cash-strapped state and local governments face revenue shortfalls.

If Congress passes a tax reform bill that lowers the corporate tax rate, institutions in a net deferred tax asset position will need to realize the adverse effect that the new rate would have on the value of its assets. The impairment of the value of the deferred tax asset would need to be recognized upon the effective date of the tax change, resulting in a corresponding decrease in regulatory capital. Institutions may consider increasing their deferred tax liabilities as part of their year-end tax planning process to minimize the impact of any rate decrease on the value of the deferred asset. Further, the expected impact should be factored into capital planning. Institutions that have made a subchapter S election should also monitor the outcome of individual tax reform in combination with corporate tax reform to determine if the subchapter S election remains the most tax-efficient model for operations.

3. Data management
Financial technology firms capture the same consumer data that community banks do, but typically are more effective in their ability to leverage and capitalize on it. Large banks are harnessing this data as well, but smaller banks may not have the resources to make the effort profitable. The data may be residing in multiple systems, or it may be inaccurate or outdated. But the ability to efficiently capture and leverage data will fundamentally change how banks go to market and drive profitability. Banks that want to capitalize on the consumer data they already have will need to make a strategic decision to imitate fintech companies or partner with them.

In addition, regulators are increasing reporting requirements for institutions as a way to conduct efficient, ongoing monitoring, which is fundamentally changing the way regulatory exams are conducted. Institutions that can leverage data for risk management purposes will see better regulatory outcomes and improved profitability.

Cybersecurity remains an immediate threat, and regulatory scrutiny in this area has ramped up accordingly. Banks need to have an effective data security plan in place to deal with the threats that come with gathering so much information.

4. Labor and workforce
A lack of qualified workers may constrain growth, service and innovation if not addressed from a strategic perspective. It has become particularly difficult to find qualified and well-trained credit analysts and compliance officers in a tight labor market. Given most community and regional banks’ focus on commercial real estate lending, the projected shortage of qualified appraisers presents a significant challenge. Banks in smaller markets are particularly challenged in attracting and retaining talent, but they can partially or completely outsource many responsibilities, such as those in information technology, asset liability management and regulatory compliance. A thoughtful approach to outsourcing can assist in maintaining core activities while allowing internal resources to focus on strategic activities.

5. Changing consumer preferences
As customers move to digital channels, acquiring new customers—and increasing wallet share of existing customers—should be top areas of strategic focus throughout 2018. Boomers are shifting from accumulating wealth to maintaining and preserving it, and as a group they prefer a mix of in-person and digital interactions. In an effort to retain these customers, many banks are modernizing branches into sleek, welcoming locations with a number of amenities and educating this demographic on the ability to leverage digital channels in a secure manner, while also responding to the digital demands of younger consumers.

Banks need to find the balance between the digital and the personal, and be agile enough to respond to these changing preferences.

Are You Digitally Native or Just Digitally Naive?


digital.png

Your bank’s survival could hinge on how you answer this question.

In recent years, we’ve seen a tremendous increase in use of technology. According to a range of surveys, at least one in every three people in developed markets now carries a smartphone. And in the United States alone, smartphones account for more than half of all mobile subscriptions, meaning that at least a third of all consumers potentially will use their phones to make payments and purchases.

The digital era is here to stay and adopting a digital-first mindset is no longer a matter of preference but rather, a question of necessity. Traditional banks need to recognize the need to expand their own digital services and capabilities, and many have started innovating and investing heavily to do so.

If you’re ready to become a part of the digital revolution, that means your core banking platform needs to be up to the task of helping you establish a strong digital presence. Evolving into a more fully digital organization with the right core in place can help financial institutions deliver quicker and more reliable services, strengthen the relationship with current clients while helping to acquire new ones—all the while delivering a unique, personalized customer experience to all of their customers.

Looking into the future, a 2014 McKinsey & Co. research predicted that within a few years over two-thirds of all banking users will be fully adapted to the online world. However, a 2016 Bain & Co. study also indicates that adding channels to a customer’s experience can increase confusion and frustration. In other words, there are still some bumps in the road to a purely digital experience.

With the increasing adoption of digital channels, despite some snags, it’s easy to see an emerging trend: to succeed, financial institutions must adopt a digital-first view of how to do business (PDF).

The average customer will interact at least twice a day with their bank, checking on payments and balances, paying bills or making purchases. Because of this heightened activity, an increasing number of financial institutions are beginning to grasp the importance of the digital-first view of banking. North American banks have begun to invest heavily in apps that, when working in concert with existing core technologies, will improve the customer experience and cultivate stronger and longer-lasting relationships with their clients. These new apps allow banking clients to perform a range of financial activities while on the go, offering services more sophisticated than mere paperless customer experiences, which have been around for nearly a decade.

There is no doubt that the world is already experiencing a digital transformation. But can the inevitable change be advantageous? It can, if you’re ready with solid core technologies already in place. By some estimates, adopting digital technology could allow banks to decrease their physical footprint by 30 percent, resulting in a significant reduction in costs and corresponding improvement in profitability. Brian Moynihan, CEO of Bank of America Corp., cites the rise of digital usage among his customers as a prime driver behind significant workforce reductions in recent years.

Figures from the last few years demonstrate the success of digital banking. Online-only banks, for instance, saw more than a 30 percent rise in deposits between 2010 and 2013. Mobile banking will grow to more than 2 billion users worldwide by 2020. And according to a recent Accenture study, 20 percent of all bank customers are entirely digital users, meaning that if a bank wants to increase its customer base, catering to the needs of these new tech-savvy clients is a must.

The ability to deliver services the way customers want, including through digital channels, while not neglecting the core services that all clients demand, is increasingly crucial to establishing and maintaining long-term banking relationships. Digital change demands that financial institutions digitize their processes and drastically reset how banking staff reacts to customer needs. The adaptation of lean core banking IT systems and investment in new digital products and services that enhance and personalize customer experience will be key factors going forward.

In short, digital banking can realize astonishing improvements in earnings before interest, taxes, amortization and depreciation, while also enabling you to reach a wider set of customers through an expanded range of services. Experts estimate that a digital transformation of the financial sector and banking institutions can ensure secure transactions and minimize risks, reduce costs, ensure seamless integration with back office applications—and last but not least, streamline the customer experience.

David Mitchell is the president of Nymbus.

Mobile Deposit Penetration Key Indicator of Readiness for Digital Transformation


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Banking is being dramatically transformed by digital and mobile technologies. The widespread proliferation of smartphones, with their sophisticated cameras and mobile capture capabilities, creates a valuable opportunity for banks to shift both their retail and commercial customers from the physical banking habits of the past to new, digital channels—which can increase customer loyalty and save banks billions of dollars in operating costs. According to research by Bain & Company, branch visits are expensive for the bank, at an average cost of $4 to complete the same transaction that would cost about 40 cents if done through a mobile channel, and the branch traffic that persists today is dominated by routine transactions that could easily be transitioned to digital. As much as 8 percent of branch visits are simply to check an account balance, and a whopping 31 percent are to deposit checks.

Clearly, U.S. banks have a tremendous opportunity ahead of them if they can migrate more of their consumer and commercial customers from high-cost branches to self-service mobile channels for routine transactions. Mobile deposit technology can provide a strategic advantage by helping banks accelerate this migration. It has long been understood that mobile deposit is one of the most powerful options available to financial institutions for driving increased adoption of all mobile banking services.

Forward-thinking banks, analysts and investors are all recognizing the role that mobile deposit plays as a key indicator of a bank’s readiness for the digital future. That’s why banks like Bank of America Corp. are now reporting their mobile deposit growth rates in their quarterly earnings reports. They understand that demonstrating growing mobile deposit penetration indicates to investors that they are not only on the path to digital transformation, but that they also have the type of mobile-first customer base that every bank wants.

It’s not just consumer banking that can benefit from shifting transactions towards mobile. The commercial side of the business has a major opportunity to increase mobile banking services with mobile deposit as well. Paper checks remain the dominant form of payment for many businesses. A full 97 percent of small businesses still rely on paper checks to make and receive B2B payments, and according to the Federal Reserve, more than 17 billion checks were circulated in 2015. Yet, too many banks continue to rely on outdated practices, providing proprietary hardware to their commercial clients for scanning checks or simply expecting businesses to visit a branch or ATM to make their deposits. By leveraging commercial mobile deposit technology, businesses can batch deposit multiple checks using a mobile device faster than they can via a typical single-feed scanner. As the research firm Celent puts it, “mobile is the new scanner.” Celent also states that banks have an opportunity for 10 percent annual revenue growth over the short term by transitioning more of their commercial customers to mobile deposit.

To help transition both consumer and commercial customers from the physical banking habits of the past to the more mobile, self-service model of the future, banks must provide a superior mobile user experience. The research firm Futurion Digital conducted a thorough analysis of the mobile deposit user experience at 15 of the top U.S. banks and discovered a direct correlation between the quality of the user experience and adoption rates for mobile banking services. Banks that want to increase customer usage of their mobile banking applications would be wise to review the best practices and recommendations identified in the report in order to better position themselves against their peers.

In short, as physical branches become less important to a bank’s consumer or business banking strategy, transitioning customers to digital channels will be critically important to ensure they still have access to the services they need. Doing so can actually help banks increase customer loyalty and save billions of dollars by moving routine transactions to lower-cost, self-service channels. As one of the most popular features among mobile banking services, mobile deposit plays a strategic role in enticing customers to adopt all mobile banking services, and a bank’s mobile deposit penetration rates serve as a key indicator of its readiness for digital transformation. By focusing on delivering a superior mobile user experience and actively engaging with customers to help them make the transition to mobile, banks will be well-positioned for the future.

Fifth Third CEO Says Pace of Bank Industry Change Is Fastest He’s Ever Seen


growth-6-14-17.pngWhile the audience was largely optimistic at Bank Director’s Bank Audit & Risk Committees Conference in Chicago yesterday, many of the speakers, including Fifth Third Bancorp President and CEO Greg Carmichael, hit a note of caution in a sea of smiles.

During an audience poll, 51 percent said the nation will see a period of economic growth ahead but 28 percent said the nation has hit a high point economically. Bank stock prices soared following the presidential election. Credit metrics are in good shape and profitability is up. Capital levels are higher than they’ve been in decades. And political power in Washington has turned against bank regulation, as evidenced by the U.S. Treasury Department’s recent report on rolling back the Dodd-Frank Act.

“It’s unlikely we will have increasing regulatory burdens and instead, we’ll go regulatory light,” said Steve Hovde, an investment banker and chairman and CEO of Hovde Group.

Although there’s a sense that bank stocks may be overvalued at this point, or “cantilevered over a pillar of hope,’’ as Comerica Chief Economist Robert Dye put it, the economy itself is resilient. “We’ll have another recession and we’ll get through it fine,” he said.

But financial technology is transforming the industry and creating entirely new business models, said Carmichael. That won’t be a problem for banks as long as they adapt to the change. “The volume and pace of what’s emerging is amazing,’’ he said. “I’ve never seen it before in our industry.”

Carmichael, who has an unusual background as a bank CEO—he was originally hired by the bank in 2003 to serve as its chief information officer—is working hard to transform Fifth Third.

Sixty percent of the bank’s transactions are now processed through digital channels, such as mobile banking. Forty-six percent of all deposits are handled digitally. And the bank has seen an increase of 17 percent in mobile banking usage year-over-year.

To meet the needs of its customers, Fifth Third recently announced it had joined the person-to-person payments network Zelle, an initiative of several large banks. It has a partnership with GreenSky, which will quickly qualify consumers for small dollar loans, and which Fifth Third invested $50 million into last year. Consumers can walk into a retailer such as Home Depot, order $17,000 worth of windows, and find out on the spot if they qualify for a loan.

Fifth Third is gradually reducing its branch count, and new branches are smaller, with fewer staff that can handle more tasks. Carmichael is trying to make the organization more agile, with less bureaucracy, and less cumbersome documentation.

Automation will allow the bank to automate processes “and allow us to better service our customers instead of focusing on processes that don’t add value,” he said.

Banks that are going to do better are those that can use the data they have on their customers to better serve them, he said. But when it comes to housing enormous amounts of personal and financial data on their customers, the biggest worry for bank CEOs is cybersecurity risk, Carmichael said–not the traditional commercial banking risk, which is credit.

When he was a chief information officer, executives often asked how the bank could make its network secure, and his completely honest response was, “when you turn it off.”

Adding to the cybersecurity challenge, returns on capital are low for the industry compared to other, more profitable sectors, and measures of reputation are middling for banks compared to more popular companies such as Apple, Nordstrom, Netflix and Netflix.

Carmichael encouraged banks not to get mired in pessimism.

“There’s a lot of change but we can step up and embrace it and leverage it to better serve our customers and create more value for our shareholders and contribute to the success of our communities,” he said.