The Big Banks Are Back

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banks-1-28-19.pngIs it now a big bank world that the rest of the industry is just living in?

One could justifiably come to that conclusion based on comments by Tom Michaud, president and chief executive officer at the investment bank Keefe Bruyette & Woods during a presentation on the opening day of Bank Director’s Acquire or Be Acquired conference Sunday in Phoenix.

Approximately 1,300 people are attending the 25th anniversary of Bank Director’s Acquire or Be Acquired event at the JW Marriott Phoenix Desert Ridge resort, which will run through Tuesday.

It’s no secret the four largest U.S. banks—JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup—hold dominant positions in the country’s banking market. These four megabanks control approximately 45 percent of the U.S. deposits. But historically, large institutions have been less profitable than much smaller ones in part because their size and complexity have made them more difficult to manage.

That is now changing, according to Michaud.

Bank of America, for example, posted a return on tangible common equity (ROTCE) in 2017 of 10.8 percent. The bank’s ROTCE rose to 15.4 percent in 2018 and is projected to hit 15.9 and 16.5 percent in 2019 and 2020, respectively.

Similar ROTCE increases are forecasted for JPMorgan, Wells and Citi through 2020.

The reason these banks are now operating at a much higher level of profitability is in part because their management teams have figured out how to turn their enormous size into an advantage. Although analysts, consultants and the banks themselves have often touted the advantage of size, it has had an averaging effect on their financial performance as they have grown increasingly larger in recent years.

“It seems now that the scale argument has a lot more traction,” said Michaud.

Just three years ago, the most profitable U.S. banks based on their performance metrics were in the $5 billion to $10 billion asset category—just large enough to gain some benefits from scale but still small enough to escape the averaging effect. This so-called “sweet spot” shifted in 2017 to banks with assets greater than $40 billion, and Michaud expects these large institutions to again claim the sweet spot in 2018 by an even wider margin once the industry’s profitability data are finalized.

One important place large banks have been able to use scale to their advantage is in technology. The U.S. economy is in the midst of a digital revolution, and the banking industry is being forced to embrace digital distribution of consumer products like checking accounts and mortgages. “Consumers really like the digital delivery of retail banking services,” Michaud said.

And it’s the national and super-regional banks that are capturing the greatest share of “switchers”—consumers who are leaving their current bank for another institution that offers a better digital experience. Michaud cited data from the consulting firm AT Kearney showing that national banks are capturing about 41 percent of the digital switchers, with super-regionals taking 28 percent. Even direct banks at 11 percent have been gaining a larger share of switchers than regional banks, local banks and credit unions.

The advantage of scale becomes most apparent when you look at the amount of money large banks are able to invest to upgrade their digital capabilities. Each of the big four banks are expected to invest a minimum of $3 billion a year over the next few years in technology—and some of them will invest significantly more. For instance, JPMorgan’s annual technology spend is expected to average around $10.8 billion.

While not all of that will be invested in digital distribution, the country’s largest bank is investing heavily to build a digital banking capability capable of penetrating any consumer market anywhere in the country.

The New Philosophy That’s Catching on With Banks

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customer-12-21-18.pngBankers are right to be concerned that Amazon will one day emerge as a competitor in the financial services industry, but that shouldn’t stop banks from stealing a page from the ecommerce company’s playbook.

Banking is a relationships business. For ages, banks have tried to leverage that relationship to grow and maximize shareholder return.

Some of the ways they’ve done so seem antiquated now, like giving away toasters to anyone that opens a checking account. But the underlying logic remains sound.

That’s why many top banks are now starting to think more like Jeff Bezos, Amazon’s chairman and CEO.

In 1997, the year Bezos wrote his first shareholder letter, he cycled through the usual subjects, boasting about growth and maximizing the return for shareholders. But he also talked about the long game Amazon would play by eschewing even faster growth and profitability by instead focusing “relentlessly” on customers.

“We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise,” he wrote in his inaugural letter.

Why? Because Bezos wanted Amazon to be engrained in people’s lives, far more than just the books they were getting 20-some years ago.

“Because of our emphasis on the long term, we may make decisions and weigh tradeoffs differently than some companies,” Bezos wrote, noting that Amazon’s first and foremost priority would be serving customers, not buckling under pressure from Wall Street.

Two decades later, everything Amazon does is driven by what the “divinely discontent” customer wants, which they learn through data collection and analysis. And as a result, Amazon has become an integral part of many consumers’ lives.

“I sense that the same customer empowerment phenomenon is happening broadly across everything we do at Amazon and most other industries as well. You cannot rest on your laurels in this world. Customers won’t have it,” Bezos wrote two decades later in his 2018 shareholder letter.

It’s this relentless, single-minded drive to satisfy customers that banks are beginning to adopt, especially when it comes to serving customers over digital distribution channels.

Many banks have modernized their digital offerings to attract digitally savvy customers. An ancillary benefit is that the interactions conducted over these channels generate immense amounts of valuable data. It’s be effectively using this data that banks can build out an Amazon-like experience.

Brian Moynihan, CEO of Bank of America, recently explained to Bank Director the value of that data, and also how the $2 trillion bank can leverage it to improve customers’ experience: “We know that customer better than everybody else, because we’re seeing everything they do.”

Another bank doing this is Citizens Bank, a New England-based bank with $155 billion in assets. Citizens CEO Bruce Van Saun talked his focus on customers at the Wharton Leadership Conference this summer.

This focus is behind the bank’s decision to launch its digital offshoot, Citizens Access. It has also informed how they think and obsess over—what else—data. Van Saun said it allows them to leverage it in “moments of truth” for customers that the bank knows better than anyone.

“Citizens is doing this through an intense focus on ‘customer journeys’ – transforming the way we engage with customers at critical moments so that they are compelling, differentiated, personalized and highly user-friendly. This process starts with putting the customer – not the organization – at the center.”

Sounds an awful lot like Bezos and Moynihan. It also sounds a lot like “The Law of The Customer,” a theory discussed in Stephen Denning’s book, “The Age of Agile.”

Denning discusses a “Copernican revolution” of management that puts the customer at the center, rather than the firm. Nicolas Copernicus, of course, was first with the theory the Earth revolved around the Sun, not vice versa, a blasphemous idea in the 16th century.

What that means is delivering things like delight, enthusiasm and passion instead of products or services.

This requires a cultural transformation at organizations, Denning argues, and especially at banks that have long been driven by traditional metrics.

That is where not just the CEO, but the entire C-suite, comes in.

“If the drive to delight customers comes from the CEO alone, or from the bottom alone, the firm is lost,” Denning writes.

Most banks don’t have the manpower or capital to invest in tech capabilities like the biggest banks, but many are now realizing they do have the most prized collection of data about their customers.

That data can be leveraged, and it’s data that would make Bezos even more obsessed than he already is about customers.

What Your Bank Can Learn From McDonald’s

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lending-11-29-18.pngIt’s noon. You’re halfway through your road trip, miles of highway behind you and your stomach tells you its lunchtime. Your passenger asks Siri for directions to the nearest McDonald’s. From the restaurant’s mobile app, he orders two No. 3 meals, selects a pick-up time, and pays—all in less than three minutes. You exit the highway, pull up to McDonald’s and in no time are back on the road, eating lunch.

This type of digital experience—what you want when you want it—is quickly becoming the standard for consumer expectations. As a recent digital lending study reported, McDonald’s CEO Steve Easterbrook rolled out the company’s app “to embrace change to offer a better McDonald’s experience” and has also said that “it’s pretty inevitable that our customers will increasingly engage with us as a brand and as a business through their phones.”

The McDonald’s experience is relevant because that type of experience is what consumers expect from financial institutions as well. In fact, by 2021, half of adults worldwide will use a smartphone, tablet, PC or smartwatch to access financial services—up 53 percent from 2017—according to Juniper Research.

Further, the 2016 MX Consumer Survey finds that 81 percent of consumers prefer to interact with their financial institutions by desktop, laptop and/or mobile device. The same study shows that 38 percent of consumers have reduced how often they bank somewhere due to a poor digital experience.

One of the greatest growth opportunities for community banks is end-to-end digital automation of the lending process, especially for small- and medium-size business loans. Not only do these loans lend themselves to process automation, but the competition—and market potential—is growing rapidly. By 2020, some media reports suggest the market for online business loans could exceed $200 billion.

Why it Works
Today, small business lending is a labor-intensive process for which most community banks see little financial reward. The majority of community banks use the same process to underwrite loans as small as $50,000 as they do for larger multi-million dollar loans, which include paper applications and documentation and multi-level approvals.

This mostly manual process can cost as much as $3,000 per $100,000 loan, according to industry research firms, far outweighing any income to be made. While some banks have continued to make these loans even at a loss to preserve existing customer relationships, many have stopped making them altogether.

The latter is unfortunate. Historically, community financial institutions have dominated this lending space, strengthening their customer relationships through personal attention, decision speed, and loan term flexibility.

In the aftermath of the 2008 financial crisis, many community banks pulled back on small business loan approvals, which gave rise to a plethora of online lenders like OnDeck and LendingTree, that embraced digital advancements. As a result of this convergence of technology, small business lending from community banks has fallen more than 20 percent since 2008.

Digital Changes the Business Case, Customer Experience
Fortunately, the opportunity to win back this business is encouraging. Digital lending technology automates the entire lending process, enabling banks to deliver loans more efficiently, maintain their traditional underwriting, pricing and compliance practices and provide a seamless, 24/7 digital experience.

Here are some benefits to using digital lending technology:

  • Your customer’s loan journey is entirely online, from application to closing. 
  • Borrowers can sign all documentation within the app.
  • Decisions can be made within 48 hours. 
  • Additional documentation (if needed) can be uploaded within the app.
  • Loans are automatically booked and funded to your bank’s core.

Adding this capability does not require expensive development resources either. The technology is often readily available through white-label products. Industry advocacy organizations including the ABA have reported these white-label, cloud-based solutions represent “a very strong option,” that can be implemented quickly, use a pay-per-volume model and have the ability to customize. They also allow the bank to maintain its underwriting criteria and standards, and hold the loans on your own books.

As with other retail experiences, your small-business customers expect ease and convenience in the lending process. If you do not provide it, others will.

Bridging the Gap Between Digital Convenience and In-Branch Expertise

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digital-11-16-18.pngFor decades, banks needed to add new locations to grow, pushing the number of U.S. branches to a peak in 2009. Following the financial crisis, some banks started to close branches in an effort to lower their costs in the face of declining net interest margins and rising regulatory costs. Along the way, lenders realized they could maintain their deposit levels with fewer locations in a digital world where customers often prefer mobile apps and ATMs.

In fact, over the past two decades, banks have purposefully discouraged customers from visiting their lobbies. Beyond simply driving customers to automated channels such as online banking, mobile apps, and chatbots, some banks have even gone as far as charging their customers fees whenever they use tellers or lobby-related activities.

Digital tools are now being used by almost all bank customers regardless of whether they value in-person interactions or not. However, great banking still needs great relationships, especially for complicated transactions.

Today there are nearly 90,000 bank branches in the United States. Last year, according to a survey by PricewaterhouseCoopers, 46 percent of banking customers said the only way they interacted with their bank was exclusively through digital channels, up from 27 percent in 2012. How do we justify keeping 90,000 bank branches open to support the less than 50 percent of clients who still need to visit a branch for those complicated transactions?

Technology can provide the answer. There are times when banking customers need to work with someone in person, but it’s expensive staffing branches with specific experts who are often underutilized. On top of that, branches are often only open during business hours, a particularly inconvenient time for those of us who are working their day job during those exact same hours and find it difficult to sneak off to the bank.

We think the solution to this problem is a Virtual Banking Expert©—which is a physical system with a video feed and specialized work-station touch-screen that allows anyone to privately interact with an expert at almost any time. This allows customers to work with specialized tools on highly secure channels in their local branches while keeping their personal information private and not requiring that they miss valuable work hours. This also means banks can now bring the benefits of a physical branch to their customers as long as there is a secured room accessible via account-holder cards, biometric security measures, and proper physical safety.

It simply isn’t cost effective to staff physical branches with experts who are available for the occasions when customers need to leverage their specialized skills. According to research by the technology company CACI International, the typical consumer will visit a bank branch just four times a year by 2022, compared to an average of seven times today. However, through the use of new technology like the Virtual Banking Expert© kiosk solution, that highly valuable and skilled banker can service customers at multiple locations remotely, privately and securely, providing a tremendous cost savings to the bank. Even the most heavily trafficked branches with experts on staff would be able to remote-in to other branches.

The consumer financial industry is changing–and a digitally evolving customer base continues to push the limits of what banks can do with increasing demands for convenience and ease. But I don’t believe we’re anywhere close to cutting humans out of banking transactions. In fact, as the CEO of a public computing company, I can tell you that is not our goal. We just think the role of humans is going to get a little more personal and less transactional. It’s easy to make those interactions more convenient and affordable for all parties involved. And as more and more customers demand flexibility and options when it comes to how they do business—whether it’s in-person, online, over the phone or through a live chat–it’s more important than ever to get ahead of this growing trend.

Considering Conversational AI? Make Sure Your Solution Has These 3 Things

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AI-10-9-18.pngThe pace at which consumers adopt new technologies has never been faster. Whether it’s buying coffee, booking travel, or getting a ride, or a date, consumers expect immediacy, personalization, and satisfaction. Banking is no different. According to a study by Oracle, when banks fall short of their consumers’ digital expectations, a third of consumers are open to trying a non-bank provider to get what they want – and what they want, increasingly, is a digital experience that’s smart, intuitive, and easy to use.

Conversational AI—a platform that powers a virtual assistant across your mobile app, website, and messaging platforms—is core to providing the experience consumers want. Whether you choose to build or buy a conversational AI solution, it needs three key things.

Pre-packaged Banking Knowledge
A platform with deep domain expertise in banking is what gives you a head start and accelerates time to market. A solution fluent in banking and concepts such as accounts, transactions, payments, transfers, offers, FAQs, and more, is one that saves you time training it about the basics of banking. Deep domain expertise is also necessary for a virtual assistant or “bot” to hold an intelligent conversation.

Your conversational AI solution should already be deeply familiar with concepts and actions common in banking, including:

  • Information about accounts – so customers can check balances and credit card details such as available credit, minimum payment and credit limit.
  • Information about transactions – so customers can request transactions by specific accounts or account types, amount, amount range (or above, or under), check number, date or date range, category, location or vendor.
  • Information about payments – so customers can move money and make payments using their bank accounts or a payment service such as Zelle or Venmo.

Human-like Conversations
Most conversational AI systems answer a question, but then leave it up to the customer as to what they should do next. Few conversational AI systems go beyond answering basic questions and helping customers accomplish one simple goal at a time, and that’s sure to disappoint some customers.

A conversational AI platform should be able to track goals and intents so bots and virtual assistants can do more for consumers. It should go beyond basic Natural Language Understanding and combine deep-domain expertise with the ability to reason and interpret context. This is what gives it the ability to help customers achieve multiple goals in a fluid conversation – creating a “human-like” conversation that not only understands what the customer is texting or saying but tracks what the customer is trying to do, even when the conversation jumps between multiple topics.

Platform Tools
Under the hood of every Conversational AI platform are the deep-learning tools. Effective analysis of data is at the core of every good conversational AI platform—understand how it collects and federates, builds, trains, customizes and integrates data. This will have a huge impact on the accuracy and performance of the virtual assistant or bot.

After you deploy the system, you want to be empowered to take full control of the future of your conversational AI platform and not be trapped in a professional services cycle. Make sure you have a full suite of tools that allow you to customize, maintain and grow the conversational experiences across your channels. You’ll need to measure engagement and continually train the virtual assistant to respond to ever-changing business goals, so you’ll want an easy way to manage content and add new features and services, channels, and markets.

Above all – is it Proven in Production?
There is a huge difference between a proof of concept or internal pilot with a few hundred employees to a full deployment with a virtual assistant or bot engaging with customers at scale in multiple channels. A conversational AI platform is not truly tested until it’s crossed this chasm, and from there can improve and grow with additional use cases, products and services and new markets.

During the evaluation, ask for customer engagement metrics, AI training stats, and business KPIs based on production deployments. Delve into timelines related to integration – are the APIs integrating with your backend systems fully tested in production? Understand how the system is trained to extend and do more. What did it take to roll out new features with a system already deployed?

If the platform has been deployed in production several times with several different financial institutions, you know it has been optimized and tested for performance, scalability, security and compliance. You can have confidence the solution was designed to work with your back-end and front-end ecosystem, channels and infrastructure. Only then has it been truly validated and proven to integrate and adhere to many leading banks’ rigorous and challenging regulatory, IT and architecture standards and technologies.

There’s just no way to underscore the value of production deployments as a way to separate the enterprise-ready from the merely POC-tested solutions.

What’s At Stake In A Tech-Driven World

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technology-10-2-18.pngTechnology is driving a wave of disruption across the entire financial services landscape. Financial services companies are increasingly finding themselves both competing with and working alongside more agile, highly entrepreneurial technology-based entities in a new and evolving ecosystem.

There are a number of global trends creating opportunities for financial services companies:

  • China’s population is growing at about 7 percent annually, roughly the equivalent of creating a country the size of Mexico every year.
  • At the same time, China and other emerging, fast-growing economies are raising many of their people above the poverty line, creating a new class of financial services consumer.
  • In more developed countries, people are retiring later and living longer.

These trends are driving a growing need for financial services. However, the story does not end with demographics and economics. Changes in technology are reshaping the ways these services are being delivered and consumed.

Consumers expect simplicity and mobility. Smartphones provide a wide range of financial services at our fingertips. With the rapid growth in artificial intelligence and machine learning applications, savvy financial services companies are adapting to the new ecosystem of digital service delivery and customer relationship providers. Gone are the days when customers have to visit the local bank branch to get most of the services and products they needed. The shakeup in providers will make for a vastly different landscape for competing financial services organizations in the near future.

While the adoption of blockchain technology is still in its infancy, it will potentially reshape the financial services landscape. Much of the transaction processing, matching, reconciliation and the movement of information between different parties will be a thing of the past. Once regulation has caught up, blockchain, or distributed ledger technology, will become ubiquitous.

Financial services companies need to understand where they fit in this digitally fueled, rapidly evolving environment. They need to decide how to take advantage of digital transformation. Many are starting to use robotic process automation to reduce their costs. But the reality is the spread of automation will soon level the playing field in terms of cost, and these companies will once again need to look for competitive advantage, either in the products and services they offer or the way they can leverage their relationships with customers and partners.

When companies leverage technology and data to achieve their business goals in this new environment, they also introduce new risks. Cybersecurity and data governance are two areas where financial services companies continue to struggle. The safety of an ecosystem will be dependent on its weakest link. For instance, if unauthorized breaches occur in one entrepreneurial technology company with less mature controls, those breaches can put all connected institutions and their customer information at risk. Further, automation can result in decisions based solely on data and algorithms. Without solid data governance, and basic change controls, mistakes can rapidly propagate and spiral before they can be detected, with dramatic consequences for customer trust, regulatory penalty and shareholder value.

Strategically, financial services companies will need to decide if they want to be curators of services from various providers—and focus on developing strong customer relationships—or if they want to provide the best product curated and offered by others. Investing in one of these strategies will be a key to success.

Your Digital Transformation Is Not Just About Technology

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technology-9-3-18.pngFor an increasing number of consumers, the primary means of interacting with their financial institution is the mobile banking app on their smartphone. This number will continue to grow, as will the number of ways they want to use digital devices to interact with their financial institutions. Though oft-criticized for their risk-averse natures, especially when it comes to new technology, banks understand and are responding.

The success of their initiatives will depend on how well each can navigate the complexity associated with effectively closing the digital gap. Establishing competitive parity in the digital race requires more than simply selecting a new digital banking platform to replace the legacy, disparate system. Banks must navigate the digital challenge holistically. To achieve the goals desired, digital transformation must encompass many aspects of an institution’s operations.

Shift the Org Chart From Vertical to Horizontal
Technology is an important part of any digital transformation, but too often banks rush to make a choice in this area before considering basic elements in their own operations that play a profound role in in its success or failure. For example, the organizational charts of most banks is built on a vertical, “line of business” model. Technology, however, especially that which inspires a digital transformation, is horizontal in its role and impact.

This difference between how a bank is structured organizationally and how digital technology should be used within an institution means bank’s leadership must have a horizontal mindset about technology. The manner in which a midsized regional bank addressed this challenge is a good example. The bank converted a digital banking team of four, working in the retail side of the business, into a department of more than 30 that included each person who has or will directly contribute to the digital strategy of the bank. To ensure communication and ideas flowed as freely as possible, the bank housed all the people on this digital team in the same area of their headquarters using an open-office concept.

Adjust Budgeting From Project-Based to Forward-Based
Another area to consider during the early stages of any digital transformation is an institution’s budgeting process. Many banks use a project-based budgeting process where the senior executive responsible for a project works with others to build a business case, project plan, and budget that goes through several approvals before reaching the board of directors. Given the material levels of investment of many projects within a bank’s operation, this vetting process seems justified.

However, because the project-based model is optimized to minimize risk, progress can be painfully slow and take a very long time. It is therefore ill-suited for any organization that wants to maintain parity in the digital marketplace where the only things that change faster than technology are the expectations of the customer. To respond to this rate of change, banks must be able to move quickly. In the case of one bank, this was achieved by implementing a “forward-based” budgeting model that designated a specific investment level for digital at the start of the year. The digital leadership of the bank was given the authority to use this money marked for digital in whatever way deemed necessary for the institution to respond to evolving customer demands and technological innovation.

This Isn’t Your Grandparents’ Technology
When an institution does turn its focus to determining what third-party solutions and services will best support its digital aspirations, there are non-negotiable qualities from vendors that should be part of the evaluation process. These qualities are not typically on the list of “must-haves,” and can typically decrease both cost and complexity.

In the case of three regional banks going through a digital transformation, the non-negotiable item was control. Each felt it was essential that the vendors with which they would build their digital future delivered a product that gave the banks control over their own digital future at the solution level. In other words, does the solution allow a bank to make changes at a branch level, only be exposed to customers in that branch’s area, without needing the assistance of the vendor? This is important as many banks have had limited ability because the solutions required vendor intervention for even the smallest change.

Digital transformation is about more than choosing the right replacement for legacy, disparate, online and mobile banking systems. It should touch every aspect of an institution. This is an undertaking not for the faint of heart. Many institutions will insist they are different and can win without changing the way they operate. Unfortunately, such evaluations are why the billions of dollars of investments made collectively by financial institutions will not delay how quickly they become irrelevant to the customers.

2018 Technology Survey: Enhancing Board Know-How

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tech-survey-8-27-18.pngTechnology and strategy are inextricably linked in today’s evolving digital economy. Unfortunately, bank boards—tasked with the oversight of the bank, including its long-term performance in a changing competitive environment—continue to struggle to wrap their hands around technological change and its implications. Seventy-nine percent of directors and executives say their board needs to enhance its level of technological expertise, according to the 2018 Technology Survey, sponsored by CDW.

Sixty-three percent indicate the board should better understand how to tie technology to bank strategy, and 60 percent say the board should better understand how the bank should invest in technology—a key concern, given rising budgets and an increasing number of technology vendors working with banks.

But the survey also indicates that directors have made strides in their focus on technology, both personally and as a board. Half say the board focuses on technology at every board meeting, up from 42 percent two years ago.

And the directors and executives participating in the survey indicate that they’re better users of their bank’s technology. More than three-quarters say they personally use their bank’s mobile and online channels, compared to 51 percent three years ago. With the onus on banks to enhance customers’ digital experience in the age of Amazon, a better understanding of digital through personal experience can only serve to improve these banks’ strategic direction.

The 2018 Technology Survey is comprised of the responses of 161 directors, chief executive officers, high-level technology executives and other senior executives at banks above $250 million in assets.

Additional Findings:

  • Sixty-five percent believe their bank has the products, services and delivery methods to meet the needs and demands of today’s customers.
  • Eighty-three percent say improving the user experience on digital channels is a goal for their bank over the next two years, followed by improving account onboarding (73 percent) and adding more features to the bank’s mobile app (71 percent).
  • Despite the buzz around Amazon’s Alexa, just 21 percent say integrating with that or a similar external platform is a near-term goal.
  • Forty-five percent say they plan to add more branches that will be smaller in size. Thirty-seven percent plan no changes to their bank’s branch footprint. More than half plan to update technology used in branches over the next two years, and 47 percent plan to add more technology in the branch. One-third plan to upgrade ATMs.
  • At least half of respondents indicate a need for significant improvement in their bank’s use of data analytics and business process automation.
  • Sixty percent indicate their bank has been increasing the number of staff focused on technology and innovation, and 55 percent have a high-level executive focused on innovation.
  • Sixty percent say their management team and board are open to working with newer technology startups. The typical bank, according to the survey, works with a median of seven technology vendors, including its core processor.
  • Sixty-one percent say their board has brought in relevant bank staff to better educate itself about technology. Twenty-nine percent have a board-level technology committee that regularly presents to the board.
  • Cybersecurity remains the top issue focused on by the board, at 93 percent.

To view the full results to the survey, click here.

Aligning Risk With Strategic Growth

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The banking industry is experiencing change like it never has before. Digital delivery channels will have a profound effect on the typical bank’s business model, and further change is coming through regulatory relief. Both can offer new opportunities and new risks. KPMG’s David Reavy details what you need to know about these changes and how boards should focus on today’s risks.

  • The Future Bank Business Model
  • Regulation and Industry Change
  • Expectations for Boards

How Switching to a Boutique Core Enhanced CNB’s Customer Experience

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technology-8-15-18.pngThe bulk of the banking industry may work with the big three core providers—FIS, Fiserv or Jack Henry & Associates—but some banks are finding that smaller, boutique providers can be the better fit. That’s the case for $3 billion asset CNB Financial Corp., based in Clearfield, Pennsylvania, which made the switch from its big core provider a little more than two years ago to one that’s smaller, nimbler and more willing to collaborate with its client banks.

“We’re not a change agent by any means, but we’re constantly changing and evolving to what we believe the clients need and what our markets want, and when we talked with our prior provider, they didn’t have that same impetus,” says CNB CEO Joe Bower. “Customer experience wasn’t their focus.”

So the bank began a long and exhaustive search, spending 18 months exploring 11 different core providers, including the big three. COCC, a client-owned, cooperative core platform in Southington, Connecticut, won the contract.

The ability for CNB to be part-owners of COCC played a role in that decision: As owners, the provider’s clients have a larger voice, so advocating for a new feature is an easier process than CNB experienced with its former provider, which would demand money up front and put the request in a queue. Research and development on new features was charged by the hour. The process was slow and expensive. Enhancements to CNB’s mobile banking platform were expected to be a two-year project with the old core provider, for example.

Now, “action begins to take place almost immediately,” says Bower.

This isn’t because CNB is a bigger fish for COCC—Bower says the core provider is just as responsive to smaller client institutions with good ideas. And any new feature is then available to all COCC users, so everyone benefits.

And Bower says COCC’s proactive approach to innovation and the deployment of new technology played a role in its selection as CNB’s core. “We were looking for somebody [that] wasn’t stuck in their ways or too large to make major changes within their structure,” he says.

Perhaps because of this, COCC is open to working with startup technology providers and is nimble enough to vet them quickly. COCC directly partners with startups, and along with COCC’s own capabilities, it helps CNB get new features to market more quickly. For a technology company that’s not one of COCC’s partners, but rather the bank’s vendor, the core still coordinates integration efforts. CNB has experienced at least two fairly large integrations with outside technology firms—a commercial underwriting platform and a new peer-to-peer (P2P) payments solution.

“When new ideas surface—whether it’s from us or a small fintech startup—they’re nimble enough to take a look at it, review it and within months, as opposed to years, if we all feel like it’s a direction we ought to take, it happens, it comes aboard,” says Bowers.

Converting to COCC from its older core was more challenging in today’s 24/7 economy. CNB started fresh, converting everything—including its online and mobile banking platform—and timing this to ensure minimal disruption to customers was difficult. The core conversion began on a Friday in May 2016, and the bank and COCC only had until the following Monday to work out any major bugs. While the initial conversion went off without a hitch, dealing with smaller issues impacting a small percentage of customers at a time—problems with money transfers, incorrect statement descriptions, misapplied fees—kept bank staff busy long after the initial implementation.

“I would estimate close to 12 full months where your eye comes off the ball a bit in regards to new client acquisition, continuing to grow your assets—some of that has to take a back seat for a while,” says Bower.

Despite the conversion headaches, all-in-all Bowers says it was worth the hassle. “We’re a much better company today than we were before the transition,” he says. “Because of our ability to offer more programs, have better say in what happens with our core processor, and what services and what our client actually sees is something we [now] have some control [over].”

And the improvements aren’t just due to working with a core provider more suited to CNB’s business and strategy. Providing a better customer experience was a key driver in its decision to move to COCC, but the bank did some soul searching and realized that like its former core provider, it wasn’t thinking through the customer journey, either. So, roughly four years ago, Bowers put an executive in charge of the customer experience, promoting Leanne Kassab, who has a background in marketing, to a new position as executive vice president of customer experience and marketing. It’s position more commonly referred to as a customer experience officer, or CXO. In her role, she maps out every experience a customer could have with the bank to identify where to improve each process. She also oversees internal and external communications, and is in charge of the bank’s marketing department and call center.

Kassab also established employee task force groups to focus on different areas of the customer experience—the bank’s branches, commercial banking, new customers and existing clients—as well as employee training. These groups have been so successful that the bank’s human resources head borrowed the idea to create groups focused on the employee experience.

The bank has also changed its training programs to focus more on the client, rather than solely on operations. “We want the employees to understand the first onus on us is customer satisfaction,” says Bowers.

Bowers admits that better communication could have improved the relationship with its former provider, and his team actively works to keep the communication lines open with COCC. The bank participates in a commercial-banking roundtable to weigh in on future projects and frequently participates in user group meetings. Bowers has biannual conversations with COCC executives.

But perhaps most importantly, CNB chose to focus a junior executive on fostering a direct relationship through weekly communication with COCC. She’s newer to banking, and Bower says this fresh perspective is a benefit. She runs the bank’s e-solutions, managing what the customer sees online. Because of this, Bowers believes her perspective on new products, services and ideas inherently includes what the customer reaction could be—and she can communicate that to COCC.

Putting more effort into communicating with its core provider has created a more fruitful relationship, says Bower. “They understand where we want to be, and they understand where we think they ought to be in the world of banking today.”