Blueprint for Operations Center Success

Architects and contractors can design and construct an operations center for a bank, but ensuring that it caters to the institution’s unique growth trajectory requires meticulous planning.

The facility’s usage must justify the investment — whether it aims to streamline operations, serve new consumers, attract top talent or achieve a combination of these objectives. That means boards and executives need to carefully consider considerations that go into planning and data-backed insights into large-scale builds.

When considering an operations center, executives should focus on three primary categories of considerations: strategy, culture and scale. In order to develop a strategy, executives should determine the growth trajectory and the sources of growth. Additionally, it’s crucial that they assess technological changes and anticipated regulatory requirements. Understanding the bank’s organizational culture informs how the workforce collaborates and interacts and should influence the design and work style of the center. And the scale of a project like this involves setting a timeline, investment and organizational impact, which helps with aligning for future needs.

It’s essential that executives evaluate the current conditions of the institution to shed light on available resources and set the foundation for the planning process. Financial considerations involve assessing affordability, including capital expenditure, additional depreciation and operating expenses, which impacts the bank’s return on assets and return on equity. Planners should map out employee conveniences, such as commute times and preferred modes of transportation. They must examine existing administrative facilities and land options to determine their potential for accommodating additional employees. Market evaluations should consider future hiring potential and the market’s ability to support the new facility’s value.

Assessing employee growth potential is a critical calculation for executives and boards that relies on historical trends and insights from department leaders. Planners should project and predict the number of administrative employees needed over an anticipated timeframe, which can provide valuable guidance. Market conditions also play a significant role in positioning the operations center: executives should consider factors such as market size, demographics, socioeconomics, traffic patterns and real estate conditions when determining the center’s location.

Banks should evaluate deployment strategies with a comprehensive understanding of their future needs and market conditions. Lease, build or purchase and renovate each have their own costs and benefits that should align with a bank’s specific criteria. Planners should evaluate the time value of money, cost versus opportunity and the market impact to compare these options and identify the best value for the organization.

Bringing a project like this to life requires addressing the most important aspects early on by aligning the planning team’s objectives with the organization’s goals. Although perfection is rare, a thorough planning process ensures a bank leverages informed decision-making and maximizes the investment’s value. Once the bank makes a deployment decision, they can shift their focus to the exciting task of designing the new space.

Planning plays a vital role in designing an operations center that supports a financial institution’s distinctive growth trajectory. Considering a bank’s strategy, culture, scale, current conditions, employee growth potential, market conditions and deployment strategies allows organizations to make informed decisions and optimize their investment. A well-planned operations center sets the stage for success and helps a bank thrive in the future.

Top Tech Trends for Financial Institutions to Turn Headwinds Into Tailwinds

Financial institutions are facing existential risks — in changing demographics, the high interest rate environment, talent shortages, and disintermediation of financial services from bank providers. With headwinds like these, some financial institution leaders might be tempted to hunker down rather than accelerate transformational change within the institution.

The ones that will thrive are pursuing technology and talent to make themselves more efficient and attractive to customers.

If the Paycheck Protection Program showed financial institutions anything, it was that being able to respond quickly yields growth and opportunity, along with the chance to better serve communities, even during the deepest recession since World War II. According to FDIC researchers, community banks that invested more in technology before 2020 saw higher increases in both loan and deposit growth than those with less investment.

Three technology trends increasingly deserve attention from financial institutions, even amid economic uncertainty. These trends address institutions’ desire to efficiently attract and maintain new business despite the short-term picture, and they will likely hold the key to success in the future.

The first trend is the increased use of APIs (application programming interfaces) and process automation. Many financial institutions are on board with automating manual tasks and have moved to digitalize some processes, such as origination. Automating the process of collecting and making decisions on loan applications has helped many of our customers cut a significant amount of time from commercial loan requests to funding. And when the origination platform is interoperable with other automated business processes, executives and leaders gain strategic insights into real-time portfolio monitoring, board reporting, etc.

RPA (robotic process automation) and increased interoperability can also help banks and credit unions with staffing challenges. Some institutions will be running on a lean staff by strategy, while others are having trouble hiring and retaining experienced talent. In either case, financial institutions that focus on RPA and interoperability make the most of their staff’s skills and time.

Actionable Data Insights
The second trend vital for banking success can also amplify RPA benefits — the increased use of the public cloud and advanced data analytics. Many financial institutions understand that moving key data-intensive processes to the cloud is critical for increased digitalization and efficiency.

In addition, using the cloud to build a good, actionable data and analytics platform means better information about customers or members. It allows for improved personalization while keeping human capital the same. For example, a business customer’s shrinking deposit account balances could trigger an automated email message marketing short-term loans to that customer.

Community financial institutions are built on relationships, but disconnected, legacy systems make it difficult to examine relationships in a timely manner.

Notably, the cloud and data analytics can bring the power of data to bear to move institutional workflow faster. Rather than using one technology tool for workflows and another for reporting, bringing the two together can allow data generated in the workflow to drive future workflows. That’s a shift in paradigm financial institutions need to be prepared for.

When a financial institution knows how long it takes to approve a loan and has a handle on application abandon rates, it can compare the KPIs to fintechs and other competitors to then identify roadblocks in existing processes. Another example: when a bank or credit union understands how long it takes to identify a fraud case, it can focus on reducing false positives to improve the customer experience and protect the institution.

Distributed Ledger Technology
Finally, financial institutions looking for long-term success will want to learn more about and track distributed ledger technology and products derived from it, such as stablecoins and Central Bank Digital Currencies (CBDCs).

Financial institutions should be thinking about the impact when, not if, the U.S. has a digital dollar. Again, thinking back to the PPP, consider the trouble the federal government faced distributing money to those who needed it. Consider the number of parties involved and the amount of fraud that resulted. A digital dollar would probably solve many of those challenges.

The Long Game
We tend to overestimate the impact of technology in the short run and underestimate it in the long run. Many financial institutions are using legacy core systems and legacy processes that require transformational investments. It will prove fatal for some institutions to underestimate the impact of APIs, intelligent automation, data analytics, the cloud, and these other foundational technologies.

Recession or not, the faster institutions act to throw off anchors that are slowing their progress and growth, the more they will ensure their survival — and their ability to thrive.

Tailoring Payments for Small Business Clients

Financial service firms tend to focus their products and services on large companies, ignoring the small and medium-sized businesses (SMBs) that make up 99.9% of all businesses in the US.

These businesses are significant players in the economy, driving growth and operating across all industries. While their impact is huge, the financial needs of SMBs are different from big businesses. There is a growing demand for financial institutions to deliver customized and cost-effective digital solutions for these businesses and their customers. A financial institution that succeeds in meeting SMB needs will increase customer retention, attract new clients and strengthen their reputation.

Many financial institutions serve SMB customers through business banking, savings accounts or business loans. Partnering with a vendor to offer payment processing solutions is a low-risk way that banks can provide added value for their business customers, without incurring additional costs. A payment solutions partner can provide end-to-end service — from sales to account management — while the financial institution focuses on its core business. When a customer has multiple services from one institution, that relationship elevates from a transactional one to a trusted, long-term partnership.

Additionally, a merchant services partner may enhance a financial institution’s reputation in areas such as digital technology or diversity, equity and inclusion (DEI). For example, a financial institution may highlight its own interest in supporting diverse businesses by choosing a merchant services processor with similar values, attracting new clients seeking a more progressive approach.

One of the biggest challenges faced by SMBs is keeping up with rapid technological changes to meet their own customers’ demands. This is especially true in the payment space, where many customers prefer contactless payment methods. Contactless transactions in the U.S. increased by 150% between 2019 and 2020 and is only expected to grow. Customers want convenience, speed, and choice when they buy. Even as a consumer or business client of an SMB, they are still used to the level of service they get from large companies. Barriers at the checkout level can impact customer satisfaction and loyalty. SMBs risk losing clients if there is an easier way to do business just down the street or on a competitor’s website. Customers may also expect merchants to accept mobile wallets, offer buy now, pay later or point-of-sale lending options and accept cryptocurrency as payment. Unfortunately, SMBs often lack the resources — such as capital, infrastructure, technology and staff — to offer the latest payment options to their customers and run their operations in the most efficient manner.

But a payment partnership allows banks to offer a slew of services to help business customers optimize their time, save money and improve customer satisfaction. For example, SMBs can benefit from an all-in-one, point-of-sale system that accepts multiple payment types, such as contactless, and includes features such as digital invoicing, inventory management, online ordering, gift cards, staffing, reporting and more. It can also give business customers access to real-time payments, seven days a week, that can improve their cash flow efficiency and avoid cash-flow lags — a major concern for many SMBs.

Small and medium businesses represent an untapped market for many financial institutions. If a financial institution starts to offer tailored payment solutions and services that help SMBs overcome their unique challenges, they can unlock significant, new opportunities in the small business segment.

Methods to Create Effective Customer Journeys for Your Bank

In recent years, there has been an increase in the number of job positions for chief customer experience officers across financial institutions (FI) of all sizes. Those roles were created to help an FI focus outwardly and represent the customers’ points of view. Stated differently, people filling those roles ask the “why” question while most FIs tend to focus only on the “how.”

Marrying the How and the Why
A recent example of an unrealized opportunity to rewrite the customer journey involved branch-initiated loan applications. The process required a customer to come into a branch, sign a piece of paper which was then scanned and sent to the back office for processing. After processing, it was stamped “complete” and sent along for further scanning and indexing.

The staff was asked to improve the process, and they recommended switching the ink used to stamp “complete” from oil-based ink to water-based. By doing so, the ink did not bleed through the document, which was causing it to be scanned as two images. While the process was indeed improved incrementally, the FI did not go far enough, missing an opportunity to fundamentally improve the whole customer journey and realize more benefits for both customers and employees.

Customer journey maps marry the “how” and the “why” into one document. The how is expressed as a simple workflow document, showing the touchpoints of any process. Once the current process is documented, the why questions begin. Why do FIs need a wet signature on this document? Why do the customers need to scan their drivers’ licenses? Why should a customer have to stop into a branch to complete the application?

While having a CCEO is a great start, the most successful FIs focus on creating multiple customer experience advocates, all of whom use customer journey maps to document the hows and ask the whys. FIs that position multiple customer experience advocates across the institution have more desirable outcomes than those that have one person. The trick is getting started.

While there are many tools available to assist in generating customer journey maps, PRI suggests that FIs can be quite effective with a simple white board and some post-it notes.

Don’t become burdened with unfamiliar tools until you’ve built a few maps. Involve staff from all areas, especially those areas that are customer-facing. Create a dashboard or a scorecard and keep track of the improvements. And celebrate successes as you go.

Creating a journey map places the customer at the beginning of the process and requires the FI to think like a customer. For example, customers often find it unacceptable to wait 10 days for their debit card to arrive in the mail after opening a new account. Rather than justifying the process by explaining it, the FI can create a journey map with a goal in mind that helps them reach the next level of service. Asking why at every step along the journey is far more critical than asking how.

How to get started:

  • Choose a process known to create customer frustration.
  • Establish a goal for the customer journey map exercise.
  • Put on the “customer hat” or even experience the journey as a customer yourself.
  • Document all touchpoints.
  • Review each touchpoint and ask why it works the way it does.
  • Research best practice models.
  • Attack the touchpoints, seeking to remove friction and working toward the goal of better customer service.

Customer journey mapping has been proven to be highly beneficial to financial institutions and their bottom line. FIs should teach customer experience advocates to create effective customer journey maps for all significant touchpoints.

The process does not have to be formal. It can be simple. Marrying the how and the why will allow the FI to take advantage of the many benefits and opportunities inherent in customer journey mapping.

The Intersection of Paying and Playing in Online Video Gaming

Video gaming is a vast, fast-growing global industry touching various sectors, including payments.

The global revenue for 2021 was estimated at $175.8 billion, which, represents a compound annual growth rate of 8.7% between 2020 and 2024, according to a Boston Consulting Group analysis. This is a clear opportunity for banks to take advantage of growing card usage and enhance consumer engagement in online video gaming.

The global community of online gamers is set to exceed 3 billion people in 2022, nearly a third of the world’s population, according to the 2021 Global Games Market Report. That’s a lot of goals scored, hazards avoided and quests completed. This community now includes consumers from nearly all demographic segments; with that comes a closer correlation between paying and playing in the online universe.

Visa Consulting & Analytics has outlined the key characteristics of the online video gaming market, including its customer base, revenue models, integration of payments, pain points and opportunities for today’s payments businesses.

Understanding the Value Chain, Revenue Models
In online gaming, there are generally four primary stakeholders and four broad gamer segments, shown below.

There are multiple revenue models in online gaming — all of which can be lucrative for stakeholders. One such revenue model is in-game micro-transactions, which has become a core driver of transaction volume across platforms. Although there is overlap among them, gaming revenue models can generally be codified as follows:

  • Buy-to-play: The gamer buys the game and can play indefinitely. However, the game continues to be supported by the developer or publisher (such as providing downloadable content), which the gamer may need to pay to access.
  • Free-to-play: The gamer does not need to purchase the title to play, but access to some features and content may require a subscription or micro-transactions.
  • Freemium games: These are free to start but are limited in terms of how far the gamer can progress before they must purchase the game.
  • Subscription: The game is typically free to play to entice new gamers, but they must pay a regular subscription to maintain access to all parts of a game.
  • Ad-supported games: These are typically free to play, with the developer or publisher earning revenue from advertisements that the gamer needs to watch periodically to continue playing.
  • Play-to-earn games: These typically incorporate blockchain elements such as non-fungible tokens, or NFTs. Gamers are incentivized to use NFTs to improve their value or to create new NFTs. Gamers may need to pay an upfront fee to participate, but are paid for their contribution to new and/or upgraded NFTs.

How Payments Fit Into Gaming
With the appearance of new revenue models, the gaming ecosystem has become increasingly more complex, with many parties and a myriad of payment flows. There’s business-to-business (B2B) and consumer-to-business (C2B); with the emergence of play-to-earn gaming, there’s also the potential for business-to-consumer (B2C) and consumer-to-consumer (C2C).

The predominance of digital delivery and the rapid growth of freemium models and in-game purchases means there is considerable potential for publishers and marketplaces to influence “top-of-wallet” payment behaviors. This is due to the closed-loop nature of the marketing channels on the platforms, which limits a financial institution’s ability to influence payment behaviors.

Maximizing Profitability Potential Via Push Notifications

Implementing digital fintech solutions is critical for banks seeking to grow their customer base and maximize profitability in today’s increasingly competitive industry.

To engage account holders, banks must explore digital-first communication strategies and mobile-friendly fintech products. Push notifications are an often overlooked, yet powerful, tool that enables financial institutions to proactively deliver important messages to account holders that earn higher engagement rates than traditional communication methods.

Push notifications are delivered directly through a banking app and sent to account holders’ mobile devices and can provide timely alerts from a financial provider. While push notifications can act as a marketing tool, they can also convey critical security alerts via a trusted communication channel — as opposed to mediums that are vulnerable to hacks or spoofing, such as email or SMS texts. Push notifications can be used for personalized promotional offers or reminders about other financial services, such as bill pay or remote check deposit, transaction and application status updates, financial education and support messaging, local branch and community updates and more.

Banks can also segment push notifications using geo-location technology, as long as customers get permission, to alert account holders at a time, place and setting that is best suited to their needs. Banks can customize these notifications to ensure account holders receive messages notifying them of services that are most relevant to their financial needs.

When leveraged effectively, push notifications are more than simple mobile alerts; they’re crucial tools that can significantly increase account holder engagement by nearly 90%. Push notifications can be more effective in reaching account holders compared to traditional marketing methods like email or phone calls and receive engagement rates that are seven times higher.

Boosting customer engagement can ultimately have a significant impact on a bank’s profitability. Studies show that fully engaged retail banking customers bring in 37% more annual revenue to their bank than disengaged customers. Enhancing ease of use while offering greater on-demand banking services that consumers want, banks can leverage push notifications to encourage the use of their banking apps. Enabling push notifications can result in a 61% app retention rate, as opposed to a rate of 28% when financial providers do not leverage push notifications.

Bank push notifications come at a time when consumer expectations for streamlined access to digital banking services have greatly accelerated. In a study, mobile and online access to bank accounts was cited by more than 95% of respondents as a prioritized banking feature.

This focus forces financial institutions to explore fintech solutions that will elevate their customers’ digital experience. Traditional institutions that fail to innovate risk a loss of market or wallet share as customers migrate to technologically savvy competitors. U.S. account holders at digital-only neobanks is expected to surge, from a current 29.8 million to 53.7 million by 2025.

Banks should consider adding effective mobile fintech tools to drive brand loyalty and reduce the threat of lost business. Push notifications are a unique opportunity for banks to connect with their audience at the right moments through relevant messaging that meets individual account holder needs.

Real-time and place push notifications can also be a way for banks to strengthen their cross-selling strategies with account holders. They can be personalized in a predictive way for account holders so that they only offer applicable products and services that fit within a specific audience’s needs. This customization strategy can drive revenue while fostering account holder trust.

To gain insight on account holders’ financial habits and goals, institutions can track user-level data and use third-party services to tailor push notifications about available banking services for each account holder. Institutions can maximize the engagement potential of each offer they send by distributing contextually relevant messaging on services or products that are pertinent to account holder’s financial needs and interests.

Push notifications are one way banks are moving toward digital-first communication strategies. Not only do push notifications offer a proactive way to connect with account holders, they also provide financial institutions with a compelling strategic differentiator within the banking market. Forward-looking financial institutions can use mobile alerts to strengthen account holder relationships, effectively compete, grow their customer base and, ultimately, maximize profitability.

How Engagement, Not Experience, Unlocks Customer Loyalty

In casual conversations, “customer engagement” and “customer experience” are often used interchangeably. But from a customer relationship perspective, they are absolutely not synonymous and it’s critical to understand the differences. Here’s how we define them:

Customer experience (CX) is the perception of an individual interaction, or set of interactions, delivered across various touch points via different channels. The customer interprets the experience as a “moment in time” feeling, based on the channel and that specific, or set of specific, interactions. A visit to an ATM is a customer experience, as is the wait time in a branch lobby on a Saturday morning or the experience of signing up for online banking.

Customer engagement, on the other hand, is the sum of all interactions that a customer has throughout their financial lifecycle: direct, indirect, online and offline interactions, face-to-face meetings, online account opening and financial consulting. Engagement with a customer over time and repeatedly through dozens of interactions should ideally build trust, loyalty and confidence. It should ultimately lead to a greater investment of the customers’ money in the bank’s product and service offerings.

Why the Difference Matters
As customers demanded and used self-service and digital banking capabilities, bank executives focused on the user experience (UX); however, that is merely a subset of CX and a poor substitute for actual customer engagement. Moreover, the promise of digital-first often doesn’t meet adoption and usage goals, worsening the customer experiences while underutilizing the technology. The addition of digital-first channels can also cause confusion, frustration and dead-ends — resulting in an even worse CX than before.

Take for example the experience of using an ATM. If the ATM is not operational, this singular transaction — occurring at one specific point in time — is unsatisfactory. The customer is unable to fulfill their transaction. However, it is doubtful that after this one experience the customer will move their accounts to another institution. But if these negative experiences compound — if the customer encounters multiple instances in which they are unable to complete their desired transactions, cannot reach the appropriate representative when additional assistance and expertise is needed or is not provided with the most up-to-date information to quickly resolve the issue — they are going to be more willing to move to a competitor.

When banks focus on experience, they tend to only look at point interactions in a customer’s journey and make channel-specific investments — missing the big picture of customer engagement. This myopic focus can produce negative outcomes for the institution. Consider the addition of a new loan origination system that produces unsustainable abandonment rates. Or introducing live chat, only to turn it off because the contact center cannot support the additional chat volume and its subsequent doubling of handle times. These are prime examples of how an investment in a one channel, and not the entire engagement experience, can backfire.

While banks often look at point interactions, or a customer’s experiences, to assess operational performance, bank customers themselves judge their bank based on the entire engagement. Engagement spans all customer interactions and touch points, from self-service to the employee-assisted and hyper personalized. Now is the time for bankers to consider things from the customers’ perspectives.

Instead, banks should prioritize engagement as being critical to their long-term success with customers. Great things happen when banks engage with their customers. Engagement strengthens emotional, ongoing banking relationships and fosters better individual customer experiences over account holders’ full financial lifecycle.

Engagement enables revenue growth, as new customers open accounts and existing consumers expand their relationship. Banks can also experience increased productivity and efficiency as each interaction yields better results. Improving customer engagement will naturally increase the satisfaction of individual customer experiences as well.

The distinction between customer engagement and customer experience is central to the concept of relationship banking. Rather than providing services that aim to simply fulfill customer needs, banks must consider a more holistic customer engagement strategy that connects individual experiences into a larger partnership — one that delights account holders and inspires long-term loyalty with each interaction.

Risk Practices For Today’s Economy

Organizations’ ability to strategically navigate change proved crucial during the Covid-19 pandemic, which required financial institutions to respond to a health and economic crisis. The resiliency of bank teams proved to be a silver lining in 2020, but banks can’t take their eye off the ball just yet.

Bank Director’s 2021 Risk Survey, sponsored by Moss Adams LLP,  focuses on the key risks facing banks today and how the industry will emerge from the pandemic environment. In this video, Craig Sanders, a partner in the financial services practice at Moss Adams, shares his perspective and expertise on these issues.

  • Managing Credit Uncertainty
  • More Eyes on Business Continuity
  • Cybersecurity Today

Highlights From CECL Adoption

On Jan. 1, 2020, approximately 100 SEC financial institutions with less than $50 billion in assets across the country adopted Accounting Standards Update 2016-13, Financial Instruments—Credit Losses (Topic 326) Measurement of Credit Losses on Financial Statements.

More commonly referred to as “CECL,” the standard requires banks to estimate the credit losses for the estimated life of its loans — essentially estimating lifetime losses for loans at origination. Not all banks adopted the standard, however. While calendar-year SEC filers that are not considered to be smaller reporting companies or emerging growth companies were set to implement the standard at the start of 2020, the Coronavirus Aid, Relief, and Economic Security Act and subsequent Consolidated Appropriations Act, 2021, allowed them to delay CECL implementation through the first day of the fiscal year following the termination of the Covid-19 national emergency or Jan. 1, 2022. Of the publicly traded institutions below $50 billion in assets that were previously required to adopt the standard, approximately 25% elected to delay.

Highlights from the banks that adopted the standard could prove very useful to other community banks, as many work toward their January 2023 effective date. A few of the relevant highlights include:

  • Unfunded commitments had significant effects. It is important that your institution understands the potential effect of unfunded commitments when it adopts CECL. The new standard has caused significant increases in reserves recorded for these commitments. At institutions that have already adopted the standard, approximately 20% had a more significant effect from unfunded commitments than they did from funded loans.
  • Certain loan types were correlated with higher reserves. When comparing the reserves to loan concentrations at CECL adopters with less than $50 billion in assets, institutions with high levels of commercial and commercial real estate/multifamily loans experienced larger increases in reserves as a percentage of total loans for the period ended March 31, 2020.
  • Certain models were more prevalent in banks with less than $50 billion in assets. Approximately 60% of the banks with less than $50 billion in assets indicated they used the probability of default/loss given default model in some way. Other commonly used models were the discounted cash flow model and loss rate models. Less than 10% of adopters so far have disclosed using the weighted-average remaining maturity (WARM) model.
  • One to 2 years were the most commonly used forecast periods. The new standard requires banks to use a reasonable and supportable economic forecast to guage loss potential, which demands a significant amount of judgment and estimation from management. Of the banks that adopted, more than half used 1 year, and approximately a quarter used 2 years.
  • Acquisitions impacted the additional reserves recorded at adoption. Of the 10 CECL adopters with the most significant increases in reserves as a percentage of loans, nine had completed an acquisition in the previous year. This is due to the significant changes in the accounting around acquisitions as a part of the CECL standard. The new standard requires reserves to be recorded on purchased loans at acquisition; the old standard largely did not.
  • Reserves increased. Focusing on banks that adopted CECL in the first quarter that have less than $5 billion in assets (21 institutions), all but one experienced an increase in reserves as a percentage of loans. Approximately 70% of those institutions had an increase of between 30% and 100%.

The CECL standard allows management teams to customize the calculation method they use, even among different types of loans within the portfolio. Because of that and because each bank’s asset pool will look a little different, there will be variations in the CECL effects at each institution. However, the general themes seen in these first adopters can provide useful insight to help community banks make strides toward implementation.

This article is for general information purposes only and is not to be considered as legal advice. This information was written by qualified, experienced BKD professionals, but applying this information to your particular situation requires careful consideration of your specific facts and circumstances. Consult your BKD advisor or legal counsel before acting on any matter covered in this update.

What’s a Bank? History Offers a Guide

For as long as there have been banks, there has been competition from nonbanks that provide some of the same services.

In the early 1980s, E. Gerald Corrigan, a former president of both the Federal Reserve banks in Minneapolis and New York and a managing director at Goldman Sachs & Co., articulated the essential problem in his well-known essay “Are Banks Special?”

Corrigan published his essay in part due to the encroachment of thrift companies, money market mutual funds and insurance companies that wanted to compete with some aspect of commercial banking. The question he posed became more pertinent by the end of the millennium, as the Gramm-Leach-Bliley Act tore down the walls dividing investment banks, securities companies, insurers and commercial banks. That lead to the development of the moneycenter banks and other global financial institutions we know today. But the question of what qualifies as a bank is particularly important as financial technology companies encroach on the space normally reserved for commercial banks and thrifts.

Corrigan attributed the specialness of banks to three distinct characteristics:

  1. Banks offer transaction accounts.
  2. Banks are the backup source of liquidity for all other institutions.
  3. Banks are the transmission belt for monetary policy.

Merely lending, he wrote, did not make a company a bank.

“[T]here is nothing unique or special about the asset side of a banks’ balance sheet,” Corrigan wrote. “Concerns about the nature and risk characteristics of bank assets arise in the context of the unique nature of bank liabilities, the need to preserve the integrity of the deposit-taking function, and the special trusteeship growing out of that function.”

These characteristics do give banks “special and unique functions,” he wrote — in short, that banks are special. The specialness of banks means it does matter which companies get to hold bank charters and the privileges and regulations that entails.

The questions reverberate two decades later, as financial technology companies make in-roads into the financial services space through charter applications and by buying bank charters. It underpinned interviews I conducted for my second-quarter 2021 story in Bank Director magazine. I believe the industry will continue grappling with these questions as more companies eye bank charters: What is a bank, and are banks special?

Below are the answers I gleaned from several financial technology companies that now have bank charters and from Thomas Curry, the former Comptroller of the Currency, who played an instrumental role in laying the groundwork for fintech bank charters. Their answers have been edited for clarity and length.

What’s a bank?

Banking is evolutionary. You don’t want to define banking in a way that doesn’t allow it to expand or adapt to technology. That was the theory behind the OCC’s responsible innovation whitepapers, that banking needs to adapt. That was part of the thinking of why we should provide an opportunity for fintechs to enter into the bank space.
former Comptroller of the Currency Thomas Curry, a partner at Nutter McClennen & Fish.

A bank used to be a noun — it was a physical place with columns and very ornate lobbies. Now it’s a verb. It’s no longer a physical location as much as a thing you do.

LendingClub is absolutely a bank. But we’re a new type of bank; the business model brings together the benefits of a bank with the benefits of the marketplace’s asset generating capability. In the same way that Airbnb didn’t replicate hotels, they created something new, using the technology as the launch pad to put a whole new spin on the industry.
Anuj Nayar, chief communications officer for LendingClub Corp., which bought Radius Bancorp and acquired its bank charter

I think the bank of the future should be [a place] where your money really is, you know it is there and it never fails. This is how the public thinks about it: The money is at the bank and the bank is safe. The word “bank” usually implies storage, like a vault. Jiko is a company that offers exactly that: the reality of what people think a bank is.
— Stephane Lintner, CEO and co-founder of Jiko Group, which doesn’t lend and acquired a bank charter in its acquisition of Mid-Central National Bank

Varo is new type of bank, in the sense that our focus is on our purpose: helping the consumer and not trying to make money by charging a lot of fees. So many traditional banks have not focused on the consumer segments that [Varo is] trying to help. Not only are we providing financial services, but we’re doing it in a way that we think supports the dignity and the opportunity of the consumer.
— Maria Gracias, general counsel at Varo Money, which received OCC approval for a de novo bank charter