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.

How Umpqua Bank Is Navigating the Digital Transformation

Writers look for interesting paradoxes to explore. That’s what creates tension in a story, which engages readers.

These qualities can be hard to find in banking, a homogenous industry where individuality is often viewed skeptically by regulators.

But there are exceptions. One of them is Umpqua Holdings Co., the biggest bank based in the Pacific Northwest.

What’s unique about Umpqua is the ubiquity of its reputation. Ask just about anyone who has been around banking for a while and they’re likely to have heard of the $29 billion bank based in Portland, Oregon.

This isn’t because of Umpqua’s size or historic performance. It’s a product, instead, of its branch and marketing strategies under former CEO Ray Davis, who grew it over 23 years from a small community bank into a leading regional institution.

Umpqua’s branches were particularly unique. The company viewed them not exclusively as places to conduct banking business, but instead as places for people to congregate more generally.

That strategy may seem naïve nowadays, given the popularity of digital banking. But it’s worth observing that other banks continue to follow its lead.

Here’s how Capital One Financial Corp. describes its cafes: “Our Cafés are inviting places where you can bank, plan your financial journey, engage with your community, and enjoy Peet’s Coffee. You don’t have to be a customer.”

Nevertheless, as digital banking replaces branch visits, Umpqua has had to shift its strategy — you could even say its identity — under Davis’ successor, Cort O’Haver.

The biggest asset at O’Haver’s disposal is Umpqua’s culture, which it has long prioritized. And the key to its culture is the way it balances stakeholders.

For decades, corporations adhered to the doctrine of shareholder primacy — the idea that corporations exist principally to serve shareholders. The doctrine was even formally endorsed in 1997 as a principle of corporate governance by the Business Roundtable, an organization made up of CEOs of major U.S. companies.

Umpqua, on the other hand, has focused over the years on optimizing rewards to all its stakeholders — employees, customers, community and shareholders — as opposed to maximizing the rewards to just one group of them.

“We’re not the most profitable or highest total shareholder return bank in the country,” O’Haver says. “We have to give some of that up because of the things we do. If we’re going to innovate, if we’re going to have programs that give back to our employees and our communities, it costs money to do that. But we think that’s the right thing to do. It attracts customers and great quality associates who bring passion to what they do.”

The downside to this approach, as O’Haver points out, are lower shareholder returns. But the upside, particularly now, is that this philosophy seeded a collaborative culture that can be leveraged to help navigate the digital transformation.

Offering digital distribution channels isn’t hard. Any bank can pay third-party partners to build a mobile application. What’s hard is seamlessly blending these channels into a legacy ecosystem once dominated by branches and in-person service.

“How are you going to get your people to actually embrace new technology and use it? How are they going to sell it if they don’t feel like it’s valuable for them?” O’Haver says. “Yeah, it’s valuable for your shareholders because it’s cheaper. But if you’re not counterbalancing that, how are you going to get your associates to embrace it and sell it to customers? That’s more important than the product itself, even in financial terms. If they don’t embrace it, you will fail.”

This, again, may seem like a trite way to approach business. Yet, Umpqua’s more balanced philosophy towards stakeholders has proven to be prescient.

Last year, the Business Roundtable redefined the purpose of a corporation. No longer is it merely to maximize shareholder value; its purpose now is to fulfill a fundamental commitment to all its stakeholders.

Leading institutional investors are following suit. The CEOs of BlackRock and State Street Global Capital Advisors, the two biggest institutional investors in the country, are mandating that companies jettison shareholder primacy in favor of so-called stakeholder capitalism.

In short, while Umpqua’s decades-long emphasis on branches may seem like a liability in the modern age of banking, the culture underlying that emphasis may prove to be its greatest asset if leveraged, as opposed to lost, in the process of bridging the digital divide.

What Does Digital Transformation Mean Today?


transformation-4-17-19.pngFaced with macro-economic pressures, technology adoption decisions and quickly shifting customer expectations, banks are challenged in how to respond. Or if a response is even necessary.

But why?

For hundreds of years banks have existed to facilitate commerce, serving as a gateway to exchange and store value. Customers historically have chosen their bank for a combination of two factors: trust and convenience.

Financial institutions thrived by putting themselves at the heart of communities and centers of commerce. Branch networks expanded to be close to their customers, serving communities with products tailored to their customer footprint.

Then came the internet in the 1990s, and banks began launching online banking. By 2006, 80 percent of banks offered internet banking. Many banks believed they could begin to close bank branches, transitioning from fixed-cost distribution centers to low-cost digital channels.

But when it came to financial advice and large transactions, consumers still prefer branch locations. Instead of replacing costly branches with low-cost digital channels, banks are now faced with the upkeep of ever-changing customer expectations across multiple channels.

Pressure From Fintechs
The problem right now is traditional revenue from interest rate spreads are being strained by specialist digital providers. Instead of offering a breadth of services to customers, fintechs develop one product and continuously refine the single product to the user’s needs.

But how can a bank compete and offer the services customers want with the specialization fintechs can deliver across multiple channels?

The answer is open banking—a collaborative model in which banking data is shared with third-party services across an ecosystem of trusted providers.

As commentator and consultant Chris Skinner states in his book, “Digital Human,” “A bank that is truly into their digital journey would never build anything, but would curate everything.”

A digital transformation begins with extending bank capabilities through APIs (application programming interfaces), which open up an opportunity for banks and their customers to partner with fintechs.

But customers don’t want to vet hundreds of fintech startups. Instead, they’re looking for trust and convenience in their bank, which is the bank’s biggest advantage. While not immediately visible to customers, an important aspect of trust is the bank’s continuing role in ensuring third-party solutions handle their data securely and are in compliance with regulations.

Financial data is the currency of the next generation of banks, and the value of that currency is unlocked when segments are broken down and replaced with a platform. Only at a platform level can you extract the intelligence to deliver actionable, contextualized experiences for your customer.

In many ways, banks are already platforms, with multiple product lines around deposits, lending and insurance. APIs allow these platforms to interconnect, combining data to provide a complete financial picture of their customer. Even with the rise of technology, consumer surveys have shown they trust their banks more than Google and Amazon combined.

Customers want their bank to be at the center of their financial decisions.

The late Walter Wriston, former chairman and CEO of Citicorp said in the 1970s, “Information about money is as valuable as the money itself.”

Measuring Long-Term Success
Long-term success will be measured by the ability to refocus away from transactions in favor of becoming a trusted advisor. Banks that invest in gaining a deeper understanding of their customers’ financial lifestyle through rich data analytics can begin providing personalized, contextual advice to their customers—a valuable service customers will pay for.

Banks don’t have to embark on this journey alone. Institutions should look to technology partners equipped to allow them to think bigger by offering a customizable solution.

The bank of the future looks very similar to the bank of today—focused on core values of trust and convenience.

The Biggest Changes in Banking Since 1993


acquire-1-25-19.pngWhen Bank Director hosted its first Acquire or Be Acquired Conference 25 years ago, Whitney Houston’s “I Will Always Love You” held the top spot on Billboard’s Top 40 chart.

Boston Celtics legend, Larry Bird, was about to retire.

Readers flocked to bookstores for the latest New York Times best seller: “The Bridges of Madison County.”

Bill Clinton had just been sworn in as president of the United States.

And the internet wasn’t yet on the public radar, nor was Sarbanes Oxley, the financial crisis, the Dodd-Frank Act, Occupy Wall Street or the #MeToo movement.

It was 1993, and buzzwords like “digital transformation” were more intriguing to science-fiction fans than to officers and directors at financial institutions.

My, how times have changed.

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When we introduced Acquire or Be Acquired to bank CEOs and leadership teams a quarter century ago, there were nearly 11,000 banks in the country. Federal laws prohibited interstate banking at the time, leaving it up to the states to decide if a bank holding company in one state would be allowed to acquire a bank in another state. And commercial and investment banks were still largely kept separate.

Today, there are fewer than half as many commercial banks—of the 10 banks with the largest markets caps in 1993, only five still exist as independent entities.

It’s not only the number of banks that has changed, either; the competitive dynamics of our industry have changed, too.

Three banks are so big that they’re prohibited from buying other banks. These behemoths—JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp.—each control more than 10 percent of total domestic deposits.

Some people see this as an evolutionary process, where the biggest and strongest players consume the weakest, painting a pessimistic, Darwinian picture of the industry.

Yet, this past year was the most profitable for banks in history.

Net income in the industry reached a record level in 2018, thanks to rising interest rates and the corporate tax cut.

Profitability benchmarks in place since the 1950s had to be raised. Return on assets jumped from 1 percent to 1.2 percent, return on equity climbed from 10 percent to 12 percent.

Nonetheless, ominous threats remain on the horizon, some drawing ever nearer.

  • Interest rates are rising, which could spark a recession and influence the allocation of deposits between big and little banks.
  • Digital banking is here. Three quarters of Bank of America’s deposits are completed digitally, with roughly the same percentage of mortgage applications at U.S. Bancorp completed on mobile devices.
  • Innovation will only accelerate, as banks continue investing in technology initiatives.
  • Credit quality is pristine now, but the cycle will turn. We are, after all, 40 quarters into what is now the second-longest economic expansion in U.S. history.
  • Consolidation will continue, though no one knows at what rate.

But it shouldn’t be lost that certain things haven’t changed. Chief among these is the fact that bankers and the institutions they run remain at the center of our communities, fueling this great country’s growth.

That’s why it’s been such an honor for us to host this prestigious event each year for the past quarter century.

For those joining us at the JW Marriott Desert Ridge outside Phoenix, Arizona, you’re in for a three-day treat. Can’t make it? Don’t despair: We intend to share updates from the conference via BankDirector.com and over social media platforms, including Twitter and LinkedIn, where we’ll be using the hashtag #AOBA19.