Principles to Drive Digital Banking Transformation

In the earliest moments just after midnight on January 1 each year, millions of people worldwide establish resolutions. While I won’t bore you with my resolution for 2020, I will admit that it was not to spend 11 months of the succeeding year working from a makeshift office in my bedroom or making sure my 6-year-old son was always adorned with a mask for any non-familial human interaction. Suffice to say, last year provided us all with unsuspected challenges and learning opportunities — banks squarely included.

The most impactful learning for banks wasn’t a novel way of connecting borrowers with capital or a new method of taking deposits. In fact, it wasn’t a lesson learned by banks at all, but instead by their customers. While banks have seen foot traffic into the branches decrease at a predictably steady rate, watched ATM transactions hold strong and cheered the increasing usage of online banking, every new medium they introduced to serve clients inevitably became an “and” versus an “or.” Allow me to explain: When ATMs made their way onto the scene in the 1970s, bank customers didn’t stop walking into branches. They leveraged both channels. Same for interactive voice response (IVR), digital banking and mobile banking.

The pandemic changed that. For the first time, it forced banks to close their doors; customers had to stop straddling the line between the branch and digital realms. The choice had finally been made for them. In 2020, customers learned that they can truly have a digital-only relationship with their bank.

Now, more than ever, the crunch is on for banks. Digital banking trends are consistently increasing and the competition is coming in from all sides. Between the moneycenter national banks, a seemingly endless wave of fintechs like Chime and Revolut, and the ever-looming threat of technology firms like Alphabet’s Google and Amazon.com jumping into the mix, how can banks compete? It’s time for a digital transformation.

Where to begin?
There are a number of paths to success in a digital transformation — and an untold figure that lead to failure. Whether your bank starts with the core and works its way out to the digital banking service, or vice versa,– there are a few driving principles to keep in mind.

  1. The cloud provides unparalleled economies of scale. If your bank isn’t taking advantage of a cloud-based solution to realize both the economic benefits and the cutting-edge innovation made available by the hyperscalers (architecture built to scale appropriately as demand fluctuates throughout the day), your institution risks falling further behind.
  2. Data is a bank’s most valuable asset. Unfortunately, it is also the most underutilized. A digitally transformed bank will replace the personal connection of the branch visits by being contextually relevant at the exact right moment, with the proper actionable message to each individual client. Even if they never quite get there, this is the oasis in the desert of commoditized banking relationships and should be every digital transformation journey’s North Star.
  3. Determine how much of the digital banking experience you want to own, really. Many banks strive to create a unique digital experience for their clients, but that uniqueness comes at a mighty expense in both time and money for the duration of its existence. The importance of choosing the technology partner that aligns most closely with your bank’s desired balance of technical prowess and partnered innovation can’t be overstated.
  4. Look for opportunities to leverage your institution’s banking APIs to extend its reach beyond traditional domains. Through initiatives like embedded banking, banks are able to establish mutually beneficial partnerships to empower non-banking services and leverage the functionality of their bank partner. Embedded banking is a growing way for banking services to be integrated into traditionally non-bank websites and mobile applications, like Shopify’s business account offering as part of their seller services. Embedded banking opens the door to perform simple tasks like view account balances, make payments or even originate new deposits and loans.

Even just 10 years ago, these options weren’t available to most institutions. That’s no longer the case. Banks no longer have to resign themselves to providing a mediocre, commoditized digital experience — in fact, it’s the last thing they can afford to do. While the pandemic taught us many things, the most pressing lesson for banks is that the time for a digital transformation is now.

How Banks Can Beat Big Tech at Its Own Game

For the last decade, headline after headline has predicted the demise of banks at the hands of the tech giants. Why? One word: data.

Finance is — and always has been — a data-dependent business. Providing a commercial loan relies on knowing how likely the would-be borrower is to default, a rudimentary data-processing task that is exactly the expertise that Big Tech has. These companies, which include Amazon.com, Apple, Facebook and Alphabet’s Google, can generate and leverage large-scale, granular and real-time data on their users, and have used this to build the largest and most valuable businesses in the world.

By comparison, many banks still don’t fully appreciate the value of their data, and have yet to generate meaningful financial returns from it. This is because most of their data is siloed and sprawled throughout the organization across customer onboarding, marketing, financial crime and fraud and credit risk. Instead of being regarded as a valuable commodity, data is seen as a potential temptation for hackers and a cost that needs to be managed.

If banks can learn to leverage their data like these technology giants — embracing digital transformation to lend faster, smarter and more to businesses — they can beat Big Tech at its own game. Unlike Big Tech, banks have long-worked in regulated environments that require all participants to follow the same rules. As a result, they figured out how to work collaboratively with regulators at speed and at scale, and established robust processes and governance around areas such as data ethics and privacy. This has helped build consumer trust and burnished relationships.

This proved to be a powerful combination over the last 15 months as Covid-19 forced states and businesses to temporarily shut down. The government turned to banks, not Big Tech, to help support businesses, via initiatives such as the Paycheck Protection Program and the Main Street Lending Program.

West Reading, Pennsylvania-based Customers Bancorp rose to this challenge and leveraged OakNorth’s ON Credit Intelligence Suite to identify which industries in its portfolio were more stressed and which metrics it should use to determine risk profiles. Data helps banks such as Customers identify overlooked market sectors and business types that are good credits, but could be difficult for lenders to take on without the data or analytics to make an informed decision. Embracing technology to leverage data effectively allowed Customers Bancorp to provide over 100,000 loans and become the sixth-most active PPP lender in the US – a substantial feat for a bank with $18.8 billion in assets.

Regulatory know-how, proprietary data sources and specialized services offer ways for banks to compete with — or indeed, collaborate — with Big Tech. This has been demonstrated through partnerships such as Goldman Sachs Group and Apple, and JPMorgan Chase & Co. and Amazon. Leveraging data and digital transformation will empower banks to discover gaps in the market and even attract borrowers which Big Tech is unable to. After all, not every business will be keen on the idea of borrowing from the same company that helps them share goofy photos with their friends.

Tailor Innovation With Fintech, Bank Collaborations

The Covid-19 pandemic reshaped the way that community banks think about their digital products and the expectations that consumers have for them. Digital transformation is no longer an option – it is a necessity.

In fact, 52% of consumers have used their financial institution’s digital banking services more since the start of the pandemic, according to BAI Banking Outlook. However, the research also found that only 61% of consumers feel their community bank understands their digital needs, compared to that 89% of direct bank consumers and 77% of large bank consumers.

As customers’ ever-growing expectations are not being met, banking teams are also concerned that their digital tools may be missing the mark. For many, the investments into digital solutions and tools are not having as wide as an impact as expected; on occasion, they do not hold any true benefit to their current and prospective account holders.

In addition, many community banks find themselves innovating for the sake of innovating, rather than solving real problems that exist within their target market. The communities that these banks serve are distinctive and can present unique challenges and opportunities, unlike those as little as a state away. Community banks must consider practical, powerful digital tools that benefit their one-of-a-kind customer base.

Rather than a product-driven approach to development, community banks must look to the niche needs within the market to discover areas to innovate. Identifying obstacles in the financial lives of existing customers and prospects ensures that community banks are working to solve a problem that will alleviate pain points for accountholders. But, with limited time and resources, how can this be accomplished?

Fintech-Bank Partnerships
Community banks can attract new customers, expand existing relationships and improve customer experience within the specific communities that they serve by implementing fintech solutions that are  specialized to the individual market or demographic.

It makes sense. Fintech-bank partnerships can pair a bank’s distinct market opportunities with technology that can effectively unlock niche verticals. We collaborated with five community banks who were searching for a responsive web app for digital commercial escrow and subaccounting that would eliminate the manual processes that limited their ability to handle commercial escrow and subaccounting accounts. Engaging with a fintech and leveraging extensive resources that are dedicated to developing and improving upon innovative technology gave these institutions a solution built with their companies in mind.

These partnerships between fintechs and banks are also more financially feasible — many community banks are unable to develop similar solutions in-house due to understaffing or lack of resources. With the help of a fintech, the institution can implement solutions faster and reach profitable clients sooner.

Fintech and bank collaborations are changing the way that community banks innovate. Together, they can expand the potential of a solution, both in its specialization and its capability, to better meet customer needs. Banking teams can provide the digital tools that their clients need and attract desirable clients that they hope to serve.

How Community Banks Can Drive Revenue Growth During the Pandemic

Community banks are the beating heart of the American banking system — and they’ve received a major jolt to their system.

While community banks represent only 17% of the US banking system, they are responsible for around 53% of small business loans. Lending to small businesses calls for relationship skills: Unlike lending to large firms, there is seldom detailed credit information available. Lending decisions are often based on intangible qualities of borrowers.

While community banking is relationship lending at its very best, the pandemic is forcing change. Community bankers have been caught in the eye of the Covid-19 storm, providing lifesaving financial services to small businesses. They helped fuel the success of the Paycheck Protection Program, administering around 60% of total first wave loans, according to Forbes. This was no small feat: Community banks administered more loans in four weeks than the grup had in the previous 12 months.

However, as with many businesses, they have been forced to close their doors for extended periods and move many employees to remote arrangements. Customers have been forced to move to online channels, forming new banking habits. Community banks have risen to all these challenges.

But the pandemic has also shown how technology can augment relationship banking, increase customer engagement and drive revenue growth. Many community banks are doing things differently, acknowledging the need to do things in new ways to drive new revenues.

Even before Covid-19, disruptive forces were reshaping the global banking landscape. Customers have high expectations, and have become accustomed to engaging online and through mobile services. Technology innovators have redefined what’s possible; customers now expect recommendations based on their personal data and previous behavior. Many believe that engaging with their bank should be as easy as buying a book or travel ticket.

Turn Data into Insights, Rewards
While a nimble, human approach and personal service may offset a technical shortcoming in the short run, it cannot offset a growing technology debt and lack of innovation. Data is becoming  the universal driver of banking success. Community banks need to use data and analytics to find new opportunities.

Customer data, like spending habits, can be turned into business insights that empower banks to deliver services where and when they are most needed. Banks can also harness the power of data to anticipate customer life moments, such as a student loan, wedding or a home purchase.

Data can also drive a relevant reward program that improves the customer experience and increases the bank’s brand. Rewards reinforce desired customer behavior, boost loyalty and ultimately improve margins. For example, encouraging and rewarding additional debit transaction activity can drive fee income, while increasing core deposits improves lending margins.

The pandemic also highlights the primacy of digital transformation. With branches closed, banks need to find new ways to interact with customers. Digital services and digitalization allow customers to self-serve but also create opportunities to engage further, adding value with financial wellness products through upselling and cross-selling. In recent months, some community banks launched “video tellers” to offset closed branches. Although these features required investment, they are essential to drive new business and customers will expect these services to endure.

With the right digital infrastructure, possibilities are limited only by the imagination. But it’s useful to remember that today’s competitive advantage quickly becomes tomorrow’s banking baseline. Pre-pandemic, there was limited interest in online account opening; now it’s a crucial building block of an engaging digital experience. Banking has become a technology business — but technology works best with people. Community banks must invest in technologies to augment, deepen and expand profitable relationships.

Leverage Transformative Partnership
Technology driven transformation is never easy — but it’s a lot easier with an expert partner. With their loyal customers, trusted brands and their reputation for responsiveness, community banks start from a strong position, but they need to invest in a digital future. The right partner can help community banks transform to stay relevant, agile and profitable. Modern technologies can make banking more competitive and democratic to ensure community banks continue to compete with greater customer insights, relevant rewards programs and strong digital offerings.

When combined, these build on the customer service foundation at the core of community banking.

Keeping the Digital Accelerant Going

Digital transformation and strategy are further examined as part of Bank Director’s Inspired By Acquire or Be Acquired, launched today on BankDirector.com. Click here to access the content.

The coronavirus pandemic has been an accelerant for digital bank transformations. Banks must now keep that fire going.

“There’s never been a more important time for bank executives to think strategically,” says Cornerstone Advisors cofounder Steve Williams. The pandemic accelerated digital transformation plans by about two to three years, he estimates. It will soon be up to opportunistic bankers to continue that transformation in order to better position their institutions for the future and increase shareholder value during what could be a prolonged economic recovery.

The pandemic’s impact on physical spaces like branches underscored the importance of digital channels, capabilities and products. No longer was it acceptable for institutions to tack digital offerings onto existing branch initiatives and force customers to do a cross-channel dance: Open an account or loan in the branch but service it online, for instance.

Going forward, outperformers will be the banks that successfully overhaul or transform legacy tech, expenses, buildings, organizational structures and vendor contracts into next-generation capabilities. Williams says smarter banks are led by executive teams with a focused strategy, that leverage data strategically and actively manage vendor partnerships, rather than relying on their core processors. They also attract the talent and skills that the bank will need in the future, rather than just filling the vacancies that exist today.

The first place that banks direct their energies and attention to continue their digital momentum is the legacy branch network, says Tim Reimink, a managing director at Crowe. Branches are expensive to operate, have been closed for an extended period of time and were potentially underperforming prior to the pandemic. Banks also have the data to prove that customers will continue banking with them if locations are closed, and that many are now comfortable using digital channels.

“Every single location must be evaluated,” says Crowe Senior Manager Robert Reggiannini. Executives should weigh the market opportunity, penetration and existing wallet share of small businesses and consumer customers, as well as how the branch fits in with the rest of the network. Rationalizing the network frees up capital to redeploy into digital transformation or other areas of operation that need greater investment in the post-pandemic economy.

Certainly some banks have gotten that message. It wasn’t uncommon to see banks across the country announce double-digit rationalizing efforts, often announcing they would cut 20%. In December 2020 alone, banks opened 43 branches but permanently closed 240, according to S&P Global Market Intelligence data. For the year, they opened 982 locations and closed 3,099.

Reducing the branch network will necessitate changes in how bank staff interact with customers, Reggiannini adds. Banks should not assume tellers at a branch will find the same success in the digital chat environment, call center or at in-person meetings conducted outside of the branch.

He says banks should train staff in developing the skills needed to service a customer outside of a branch and consider how they will manage and measure staff for flexibility and productivity. “Engagement with customers is going to be critical going forward,” Reggiannini says.

The branch network, and the foot traffic and relationships they used to attract, have been under pressure from digital banks, often focused on consumer and retail relationships. But Williams warns that the pandemic underlined the vulnerability of commercial relationships. Numerous fintechs competed successfully against banks in issuing Paycheck Protection Program loans from the Small Business Administration, and a number of businesses are shifting more of their relationships to payment processors like Stripe and Square.

“Disruption will come to business banking – not as fast as retail banking but it’s coming,” Williams says. “If we lose the deposit and business relationship with commercial customers, will banks be able to keep their returns? We don’t think so.”

Turning to Technology as Margins Shrink

It’s a perfect storm for bank directors and their institutions: Increasing credit risk, low interest rates and the corrosive effects of the coronavirus culminating into a squeeze on their margins.

The pressure on margins comes at the same time as directors contend with a fundamental new reality: Traditional banking, as we know it, is changing. These changes, and the speed at which they occur, mean directors are wrestling with the urgent task of helping their organizations adapt to a changing environment, or risk being left behind.

As books close on 2020 with a still-uncertain outlook, the most recent release of the Federal Deposit Insurance Corp.’s Quarterly Banking Profile underlines the substantial impact of low rates. For the second straight quarter, the average net interest margin at the nation’s banks dropped to its lowest reported level.

The data shows that larger financial institutions have felt the pain brought about by this low-rate environment first. But as those in the industry know, it is often only a matter of time until smaller institutions feel the more-profound effects of the margin contraction. The Federal Reserve, after all, has said it will likely hold rates at their current levels through 2023.

In normal times, banks would respond to such challenges by cutting expenses. But these are not normal times: Such strategies will simply not provide the same long-term economic benefits. The answer lies in technology. Making strategic investments throughout an organization can streamline operations, improve margins and give customers what they want.

Survey data bears this out. Throughout the pandemic, J.D. Power has asked consumers how they plan to act when the crisis subsides. When asked in April about how in-person interactions would look with a bank or financial services provider once the crisis was over, 46% of respondents said they would go back to pre-coronavirus behaviors. But only 36% of respondents indicated that they would go back to pre-Covid behaviors when asked the same question in September. Consumers are becoming much more likely to use digital channels, like online or mobile banking.

These responses should not come as a surprise. The longer consumers and businesses live and operate in this environment, the more likely their behaviors will change, and how banks will need to interact with them.

Bank directors need to assess how their organizations will balance profitability with long-term investments to ensure that the persistent low-rate environment doesn’t become a drag on revenue that creates a more-difficult operating situation in the future.

The path forward may be long and difficult, but one thing is certain: Banks that aren’t evaluating digital and innovative options will fall behind. Here are three key areas that we’ve identified as areas of focus.

  • Technology that streamlines the back office. Simply reducing headcount solves one issue in cost management, which is why strategic investments in streamlining, innovating and enhancing back-office processes and operations will become critical to any bank’s long-term success.
  • Technology that improves top-line revenues. Top-line revenue does not grow simply by making investments in back-office technologies, which is why executives must consider solutions that maximize efforts to grow revenues. These include leveraging data to make decisions and improving the customer experience in a way that allows banks to rely less on branches for growth.
  • Technology that promotes a new working environment. As banks pivoted to a remote environment, the adoption of these technologies will lead to a radically different working environment that makes remote or alternative working arrangements an option.

While we do not expect branch banking to disappear, we do expect it to change. And while all three technology investment alternatives are reasonable options for banks to adapt and survive in tomorrow’s next normal, it is important to know that failing to appropriately invest will lead to challenges that may be far greater than what are being experienced today.

Strategic Insights from Leading Bankers: WSFS Financial Corp.

RankingBanking will be further examined as part of Bank Director’s Inspired By Acquire or Be Acquired, featured on BankDirector.com, which will include a discussion with WSFS CEO Rodger Levenson and Al Dominick, CEO of Bank Director, about weaving together technology and strategy. Click here to access the content.

Digital transformation in the banking industry has become an important factor driving deal activity, evidenced by recent acquisition announcements involving First Citizens BancShares, PNC Financial Services Group and Huntington Bancshares. A more tech-forward future also drove $13.8 billion WSFS Financial Corp.’s August 2018 acquisition of $5.8 billion Beneficial Bancorp, expanding its presence around Philadelphia and putting it well over the $10 billion asset threshold. Importantly, it provided the scale WSFS needed to make a $32 million, five-year investment in digital delivery initiatives.

The Wilmington, Delaware-based bank’s long-term focus on strategic growth, particularly in executing on its digital initiatives, led to a fourth-place finish in Bank Director’s 2021 RankingBanking study, comprised of the industry’s top performers based on 20-year total shareholder return. Crowe LLP sponsored the study. Bank Director Vice President of Research Emily McCormick further explores the bank’s digital transformation in this conversation with WSFS Chairman and CEO Rodger Levenson. The interview, conducted on Oct. 27, 2020, has been edited for brevity, clarity and flow.

BD: How does WSFS strategically approach strong, long-term performance?

RL: It comes from the top. The board has always managed this company with the goal of sustainable long-term performance, high performance. Every discussion, every decision and every strategic plan that we put together is looked [at] through that lens. And I would point to the most recent decision around the Beneficial acquisition as an opportunity for us to invest in [the] long term while recognizing that we’d have some short-term negative impact. And by that I mean, if you look back over the last decade or so, coming out [of] ’09, 2010 — WSFS had been on a fairly consistent, nicely upward-sloping trajectory of high performance. … But what the board said as part of our strategic planning process and the conversation with Beneficial was that we could only continue down that path for so long if we didn’t address a couple of important issues.

One was, if you look at that growth, it was primarily centered on our physical presence, mostly in Delaware. It’s our home market, but it’s a pretty small market, less than a million people. A very nice economy, but certainly not as robust as we grew to the size that we had grown to support that. We needed to get into a larger market, particularly into Philadelphia, [which is] very robust demographically, very large to give us that opportunity to continue to grow at above-peer levels.

The second thing as part of that process is like everybody else — and this was obviously all pre-pandemic — we were analyzing and watching our customers shift how they interacted with us to more digital interaction and less physical interaction. And we said, for us to keep up we’re going to have to start shifting some of that long-term investment, that we’ve historically [put] into building branches, into funding our technology initiatives.

The two of those things came together for Beneficial, [which] obviously gave us the larger market; it also gave us the scale to attack that transition from physical to digital. We knew it would impact earnings for a couple of years while we put that together and prepared for the next decade or so of growth. The board had a very robust dialogue around the trade-offs that were involved, and clearly said that we need to manage the company for the long term.

This is a great opportunity to invest in the long term; we’ll take the short-term knock on performance because of where we’re ultimately headed. We saw that with the reaction of the Street to our stock price, but that didn’t change or waiver the long-term vision. … Our board principles and guidelines [have] been ingrained in us all the way down through management: If you want to provide the best long-term value for your shareholders, you have to not get tied up in quarter-to-quarter or year-to-year performance. You have to look at it over longer horizons and make decisions that support that.

BD: How are you strategically approaching technology investment?

RL: It was really a decision to follow our customers. … There’s nothing we can do to try and compete with [the] big guys. You know the stats. You know how many billions of dollars they’re spending on technology. We’re not trying to catch up to them or be like them. We want to have a digital product offering that allows us to be very flexible and have optionality so that when new products and services come along that our customers want, we can move quickly toward offering those products and services, and have an offering that is competitive with the big guys, but maybe not the bleeding edge. We’re marrying it with the traditional community bank model of access to decision-making, local market knowledge [and] a high level of associate engagement, which translates into what we think is world-class service. Our vision is to have a product offering that we can marry up with those other things that will allow us to compete effectively against the big guys.

Most of what the big guys spend their money on is R&D. They have teams and teams of technology people, data [scientists and] all those other things, because they’re building their proprietary products and services. Our view is we don’t have to do that R&D, because that R&D is getting done in the fintech space for us.

BD: WSFS has brought on board some high-level talent around digital transformation; you’ve also got expertise on the board. You’re working to recruit more in the data space, as well as building your in-house technology expertise. In addition to building relationships with fintechs, why is that internal expertise important, and how are you leveraging that?

RL: When we got started on this, we had almost nobody focused on it in the company. We realized for us to be as effective as we felt we needed to be, we needed to have some teams that were fully involved in this as a day-to-day job. In terms of funding it, obviously we closed or divested a quarter of our branches with Beneficial after the deal. When you do that, you not only have the cost savings from the savings in the lease expense, but there’s people expense as well. Fortunately, even though net/net, our positions in our retail network decreased by about 150 from those closures or divestitures, nobody lost their job. We were able to absorb that through natural attrition or in the one case, we sold six of our branches in New Jersey, and all those people were guaranteed a job as part of that deal.

This was a process that occurred over the course of a year. It was methodically laid out, leading up to the conversion of the brand and the systems in August 2019. Over that year, our teams did a fabulous job [of] managing people and the normal attrition that goes on in that business. That gave us the ability to fund not only some of the technology that we’re buying, but also some of these other positions internally. It’s exactly aligned with shifting that investment that we made in branches — which is not just the bricks and mortar; it’s the people, it’s the technology, it’s everything else — shifting a chunk of that into digital. This is a part of that whole process.

EM: How did the pandemic impact your strategy?

RL: The pandemic confirmed and accelerated everything that we’ve seen over the last few years, and reinforced our desire to [respond] as quickly as we can to the acceleration of these trends. Clearly, 2020 has been a totally different year because of remote work and all those things, but the longer-term trends have been validated and reinforced the strategic direction that we embarked upon before the pandemic. At some point, we will start moving back to a more normal environment, and we feel like we’re uniquely positioned.

It feels like there’s not a week that goes by with a bank that’s announcing some big branch reduction program and shifting that money into digital. We’re not trying to pat ourselves on the back, but I do think we happened to have that opportunity with Beneficial. It provided us the forum for attacking that issue sooner rather than later, so we’ve got somewhat of a head start down that road. This is just a confirmation of everything we saw when we did that analysis.

Digital Transformation Defined

Many banks know they need to undergo a digital transformation to set their institution up for future success. But what do most bankers mean when they talk about digital transformation?

“If you look at the technical definition of digital, it means using a computer. Congratulations, we can all go home because we all use computers to do everything in banking today,” jokes Nathan Snell, chief innovation officer at nCino during a presentation at Bank Director’s BankBEYOND 2020 experience.

Of course, a digital transformation requires technology, Snell says, but he argues that the integration or adoption of this technology should change how a bank operates and delivers value. Going beyond that, it should be accompanied by a cultural shift to continually challenge the status quo — otherwise this attempt at change may fall short of innovation and transformation.

You can access Snell’s complete presentation and all of the BankBEYOND 2020 sessions by registering here.

How Digital Transformation is Driving Bank M&A

Three large bank acquisitions announced in the closing quarter of 2020 may signal a fundamental shift in how a growing number of regional banks envision the future.

While each deal is its own distinct story, there is a common thread that ties them together: the growing demand for scale in an industry undergoing a technological transformation that accelerated during the pandemic. Even large regional banks are hard pressed to afford the kind of technology investments that will help them keep pace with mega-banks like JPMorgan Chase & Co. and Bank of America Corp., which spend billions of dollars a year between them on their own digital transformation.

In October, First Citizens BancShares acquired New York-based CIT Group. Valued at $2.2 billion, the deal will create a top 20 U.S. bank with over $100 billion in assets, and combines the Raleigh, North Carolina-based bank’s low-cost retail funding base with CIT’s national commercial lending platform.

The two companies are a good strategic fit, according to H. Rodgin Cohen, the senior chair at Sullivan & Cromwell, who represented CIT. “If you look at it from CIT’s perspective, you can finance your loans at a much-cheaper cost,” says Cohen in an interview. “From a First Citizen perspective, you have the ability to use that incredible funding base for new categories of relatively higher-yielding loans.”

But digital transformation of banking was an underlying factor in this deal, as increasing numbers of customers shift their transactions to online and mobile channels. The fact that the pandemic forced most banks to close their branches for significant periods of 2020 only accelerated that trend.

“There is enormous pressure to migrate to a more digital technology-driven approach — in society as a whole — but particularly in banking,” Cohen says. “The key is to be able to spread that technology cost, that transformational cost, across the broadest possible customer base.  It doesn’t take a lot of direct savings on technology, simply by leveraging a broader customer base, to make a transaction of size really meaningful.”

A second scale-driven deal is PNC Financial Services Group’s $11.6 billion acquisition of BBVA USA, the U.S. arm of the Spanish bank Banco Bilbao Vizcaya Argentaria. Announced in mid-November, the deal will extend Pittsburgh-based PNC’s retail and middle-market commercial franchise — now based in the Mid-Atlantic, South and Midwest — to Colorado, New Mexico, Arizona and California, with overlapping locations in Texas, Alabama and Florida. In a statement, PNC Chairman and CEO William Demchak said the acquisition provided the bank with the opportunity to “bring our industry-leading technology and innovative products and services to new markets and clients.”

The deal will create the fifth-largest U.S. bank, with assets of approximately $566 billion. But Demchak has made it clear in past statements that PNC needs to grow larger to compete in a consolidating industry dominated by the likes of JPMorgan and Bank of America.

Lastly, in a $6 billion deal announced in mid-December, Columbus, Ohio-based Huntington Bancshares is acquiring Detroit-based TCF Financial Corp. to form the tenth largest U.S. bank, with assets of approximately $170 billion. Chairman and CEO Stephen Steinour says the two companies are an excellent fit with similar cultures and strategies.

“It’s a terrific bank,” Steinour says in an interview. “I’ve known their chairman for a couple of decades. Many of our colleagues have friends there, or family members. We compete against them. We see how they operate. There’s a lot to like about what they’ve built.”

The acquisition will extend Huntington’s retail footprint to Minnesota, Colorado, Wisconsin and South Dakota, while deepening its presence in the large Chicago market. And with extensive overlapping operations in Michigan, Huntington expects the deal to yield approximately $490 million in cost saves, which is equivalent to 37% of TCF’s noninterest expense.

But this deal is predicated on much more than just anticipated cost saves, according to Steinour.

What Apple and Google and Amazon are doing is teaching people how to become digitally literate and creating expectations,” he says. “And our industry is going to have to follow that in terms of matching those capabilities. This combination is an opportunity to accelerate and substantially increase our digital investment. We have to do more, and we have to go faster, because our customers are going to expect it.”

Steinour hedges on if these recent deals also signal that banking is entering a new phase of consolidation, in which regionals pair off to get bigger in a new environment where scale matters. But last year’s $66 billion merger of BB&T Corp. and SunTrust Banks Inc. to form Truist Financial Corp. — currently the fifth-largest U.S. bank, although the post-merger PNC will drop it down a peg — was also driven by a perceived need for more scale. Senior executives at both companies said the primary impetus behind the deal was the ability to spread technology costs over a wider base.

But clearly, the need for scale was a factor for Huntington as well. “We’re investing heavily in this opportunity to combine two good companies, get a lot stronger, accelerate our investments and spread that over a much bigger customer base,” he says. “That makes eminent sense to us.”

As Steinour comments later, “We’ll be stronger together.”

Three Steps to Mastering Digital Connection

Before the coronavirus crisis, I heard bank leaders talk about “becoming digital,” but less than 15% considered themselves digital transformation leaders.

The pandemic has pushed banks to close the digital experience gap. Executives must take a hard look at what their customers expect and what digital tools (and products) they need to weather this crisis.

Digital transformation can’t happen without mastering the art of digital connection, which requires both technology and authentic human connection. To do this, banks must harness the power of data, technology, and their people to create customers for life. Here are three steps to help your bank master the art of digital connection.

Maximize Customers Data to Transform the Experience
If a customer walked into a branch for a typical transaction, the teller would have immediate visibility into their entire relationship and recent interactions — and would be empowered to recommend additional, relevant bank products or services. They would feel known and well-served by your teller.

Your digital infrastructure should provide the same humanized experience through email, customer service and other interactions with your bank. But unorganized, siloed data causes problems and impedes creating this experience. To maximize your customers’ data, you’ll need to:

  • Consolidate your view of each customer.
  • Ensure that teams have access to a high-level view of customer data and activity, from marketing to customer service.
  • Group them by segments in order to deliver relevant information about products and services. This step requires a solid understanding of your customer, their financial needs and their goals.

Invest in Technology That Reaches Customers Today
To inform, educate and engage your customers during this time of transition, you need sophisticated, best-in-class banking technology. Many banks have already come to this conclusion and are looking for help modernizing their banking experience.

A key component in meeting your customers where they are is quite literal. While some of your customers are well-versed in online banking, others have exclusively used their branch for their financial needs. The information these two audiences will need during this transition will look different, based on their previous interactions. Compared to customers who are already familiar with digital banking, those who have never done it before will need more specific, useful instructions to help them navigate their financial options and a clear pathway to 1-on-1 assistance. This kind of segmentation requires modern marketing technology that works in tandem with banking and lending tools.

Amplify Human Connections to Build Trust
Many banks have trouble letting go of the branch experience; customers have had the same reservations. In an Accenture survey of financial services, 59% of customers said it was important to have a real person available to give in-person advice about more complex products.

Now that going into a branch is not an option, your bank must find a way to use technology to amplify the human connections between your customers and staff. Especially now, sending meaningful, humanized communications will position your bank as a trusted financial partner. To transform your digital experience, and keep people at the center of every interaction, you must:

  • Personalize your messages — beyond just putting a customer’s name in the salutation. Data allows emails to be very specific to segments or even individuals. Don’t send out generic emails that contain irrelevant product offers.
  • Humanize your customer experience. Communicate that you know who you’re talking to each time a customer picks up the phone or contacts your help line.
  • Support a seamless omnichannel experience. Provide customers with clear avenues to get advice from your staff, whether that’s by email, phone or text.

Investment in innovation comes from the top down. Your bank must buy into this opportunity to transform your customer experience from leadership to all lines of your business. The opportunity is here now; this shift toward digital interactions is here to stay.

There’s no longer a question of whether a fully digital banking experience is necessary. Banks must leverage modern technology and the human connections their customers know them for to improve their overall customer experience. Excellent customer experience comes from delivering value at every touchpoint. This is the new bar all banks must meet.