Three Tech Questions Every Community Bank Needs to Ask

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Community banks know they need to innovate, and that financial technology companies want to help. They also know that not all fintechs are the partners they claim to be.

Digitization and consolidation have reshaped the banking landscape. Smaller banks need to innovate: Over 70% of banking interactions are now digital, people of all ages are banking on their mobile devices and newer innovations like P2P payments are becoming commonplace. But not all innovations and technologies are perceived as valuable to a customer, and not all fintechs are great partners.

Community banks must be selective when investing their limited resources, distinguishing between truly transformative technologies and buzzy fads. 

As the executive vice president of digital and banking solutions for a company that’s been working closely with community banks for more than 50 years, I always implore bankers to start by asking three fundamental questions when it comes to investing in new innovations.

Does the innovation solve problems?
True innovation — innovation that changes people’s financial lives — happens when tech companies and banks work together to solve pain points experienced by banks and their customers every single day. It happens in places like the FIS Fintech Accelerator, where we put founders at the beginning of their startup’s journey in a room with community bank CTOs, so they can explain what they’re trying to solve and how they plan to do it.

Community banks don’t have the luxury of investing in innovations that aren’t proven and don’t address legitimate customer pain points. These institutions need partners who can road test new technologies to ensure that they’ll be easy to integrate and actually solve the problems they set out to address. These banks need partners who have made the investments to help them “fail fast” and allow them to introduce new ideas and paradigms in a safe, tested environment that negates risk.

Does the innovation help your bank differentiate itself in a crowded market?
In order to succeed, not every community or regional bank needs to be JPMorgan Chase & Co. or Bank of America Co. in order to succeed. But they need to identify and leverage ideas that bolster their value to their unique customer base. A bank with less than $1 billion in assets that primarily serves small, local businesses in a rural area doesn’t need the same technologies that one with $50 billion in assets and a consumer base in urban suburbs does. Community banks need to determine which innovations and technologies will differentiate their offerings and strengthen the value proposition to their key audiences.

For example, if a community bank has strong ties with local small to midsize business clients, it could look for differentiating innovations that make operations easier for small and medium businesses (SMBs), adding significant value for customers.

Banks shouldn’t think about innovation as a shiny new object and don’t need to invest in every new “disruption” brought to market. Instead, they should be hyper-focused on the services or products that will be meaningful for their customer base and prioritize only the tools that their customers want.

Does it complement your existing processes, people and practices?
When a bank evaluates a new type of technology, it needs to consider the larger framework that it will fit into. For example, if an institution’s main value proposition is delivering great customer service, a new highly automated process that depersonalizes the experience won’t be a fit.

That’s not to say that automation should be discarded and ignored by a large swath of banks that differentiate themselves by knowing their customers on a personal level; community banks just need to make sure the technology fits into their framework. Improving voice recognition technology so customers don’t have to repeat their account number or other personal information before connecting with a banker may be just the right solution for the bank’s culture and customers, compared to complete automation overhaul.

Choosing the right kinds of innovation investment starts with an outside-in perspective. Community banks already have the advantage of personal customer relationships — a critical element in choosing the right innovation investment. Ask customers what the bank could offer or adjust to make life easier. Take note of the questions customers frequently ask and consider the implications behind the top concerns or complaints your bank staff hear.

Can your bank apply its own brand of innovation to solve them? Community banks don’t need to reinvent the wheel to remain competitive, and can use innovation to their advantage. Think like your customers and give them what no one else will. And just as importantly, lean on a proven partner who understands the demands your bank faces and prioritizes your bank’s best interests.

Innovation Spotlight: Howard Bank

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innovation-10-3-17.pngScully-Mary-Ann.pngMary Ann Scully, CEO and chairman
As a lifelong banker with over 30 years of varied executive experiences, Mary Ann Scully headed the organizing team for Howard Bank of Baltimore, Maryland, and currently serves as a board member of the Baltimore Federal Reserve and a community advisory board member for the Federal Deposit Insurance Corp. Under her leadership, Howard Bank recently announced its fifth acquisition in five years, which will make it a $2.1 billion asset institution. It has maintained a commitment to high touch service throughout each integration.

When you started at Howard Bank, what did you want to do differently with innovation?
We have always viewed our differentiation as high touch expertise and advice. Therefore, we tried not to be leading edge from an innovation perspective. However, we also recognized that to attract small and medium-sized businesses that we should not and would not ask our customers to make a choice between competitive products and delivery available at larger banks and our high touch advice. So we have always had to be competitive and with a more sophisticated customer base, the bar was set higher.

Over the years, how has your digitization strategy changed?
We opened the doors in 2004 with online banking, online check images, hand scan safe deposit boxes—not your typical start-up community bank mix. Over time, we have become more and more committed to being leading edge in the utilization of information to inform our decisions, optimize our processes and advise our customers. Our recent project with [commercial lending platform] nCino is an example of this commitment. Our commitment to a new universal banker branch model is another.

You were once quoted as saying, “Thriving is different than survival and relevance is more than profitability.” What does it take for a bank to thrive AND stay relevant in this competitive environment?
It requires, first, great clarity of strategy: “What do you want to do, how and when, for whom?” And that requires being able to articulate the more painful, “What do you not want to do or whom are you not targeting?” The second requirement is a long-term vision because relevance requires constant investment in the business—in people and technology. It also requires access to capital, both financial and human, to facilitate those investments.

Finally, it requires flexibility because the world changes at a faster rate than ever before and it is important to be able to reallocate resources to what our customers feel is relevant for them. Our high growth trajectory requires a mindset throughout the organization that acknowledges the need for change. For example, we have attracted five teams from other banks in five years. We’ve done five acquisitions in five years, the most recent and largest just announced in August. We’ve accomplished seven capital raises in 13 years, the most recent and largest in January of this year.

After being involved in several M&A deals, what lessons have you learned about integrating technology platforms to ensure business continuity?
First, we always remember to view integration from a customer’s perspective. There is always disruption involved in a merger, some sense of “I did not ask for this,” and flowery promises do not alleviate the skepticism even when an in-market merger is perceived by a community as being positive. So we plan, plan and plan to ensure that customers never lose functionality and if possible, gain something in the process. This means being willing internally to change the “host” systems as well as the acquired bank systems. It means viewing integrations as an opportunity, not a necessary evil, to take the best of both and occasionally the best-of-breed, not just as a way to save costs and slam things together but as a way to enhance the combined systems. We have a cross-functional team who has worked together on each transaction, some who started on the acquired side who are now sitting as an acquirer and their experience and perspective are invaluable. That team always has representatives from each bank for each function. Conversions are not for amateurs or the faint of heart so constant communication between providers and users is also important for successful platform integration.

Using Culture to Drive Innovation at Your Bank

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culture-9-1-17.pngHow important is culture when it comes to changing a company’s approach to innovation and technology? Bank Director’s 2017 Technology Survey found that few bank executives and directors believe that their bank’s culture has more in common with a technology company than a traditional bank. But that doesn’t mean that cultural elements don’t play a role in creating a tech-savvy bank.

“People generally underestimate the importance of culture and innovating,” says Jimmy Stead, chief consumer banking officer at Frost Bank, headquartered in San Antonio, Texas, with $30 billion in assets.

Most financial institutions wouldn’t be comfortable operating like a technology company. Frost Bank doesn’t think like a technology company, says Stead, but the bank has adopted a cultural mindset along with practices that promote innovation. Other banks are changing their approach too. Here are four elements that financial institutions are embedding in their cultures to encourage innovation and technological change.

Make empathy a core cultural component.
Caring about the customer is a core value at Frost Bank. “If you’re going to truly innovate, you have to start with a problem that’s worth solving,” says Stead. To solve problems for customers, you have to know what problems are important to them. “You don’t do that by caring about innovation. You do it by caring about people,” he says. Improvement is a secondary element of this corporate mindset, and employees are encouraged and empowered to identify and solve customer pain points.

Require bank employees to actively use financial technology.
In his “Advice for New Bank Directors,” Bank Director Editor in Chief Jack Milligan encourages board members to use financial technology, including the bank’s mobile app and competing products such as Venmo, the person-to-person (P2P) payments app owned by PayPal. It’s sound advice that extends to bank staff as well.

When Central National Bank, in Waco, Texas, with $820 million in assets, first introduced mobile banking, Chief Information Officer Rusty Haferkamp says that employees struggled to become familiar with the technology and, by extension, support customers. Later, the bank required that staff use the P2P payments function within the bank’s mobile app, and employees are better equipped to help customers. Training staff on the latest technology is an ongoing process as new solutions continue to evolve.

Encourage collaboration and partnerships.
Teamwork drives innovation at Frost Bank. “We’re fostering an environment of giving people the space to experiment some, and breaking down barriers so that they can work closely and be intensely focused on our customer,” says Stead. An open and collaborative environment helps Frost attract talent that has the technical know-how, he adds.

Relationships with the right technology vendors can drive innovation and also provide another layer of expertise. “I’ve tried through technology to help position the bank, knowing that we can’t develop it internally,” says Chip Register, chief administrative officer and CIO at Fauquier Bankshares, which has $646 million in assets in Warrenton, Virginia. Partnerships can enable this development.

Foster and reward innovative ideas.
San Antonio-based USAA, the diversified financial services parent of $81 billion asset USAA Federal Savings Bank, relies on an array of programs, including competitions, to encourage employees to come up with innovative ideas. Ninety-four percent of USAA employees participated in USAA’s innovation programs in 2016, with USAA implementing more than 1,000 employee ideas, says Lea Sims, assistant vice president of USAA Labs, which she discusses in further detail in Bank Director digital magazine’s May issue.

Frost Bank hosts an annual hackathon, a week-long event where employees collaborate on and develop technology solutions. Experimentation is encouraged—the winning team had two failed ideas before hitting on a winner—and each team has to communicate with customers about their concept. Some of these ideas are put to use at the bank. But that’s not the only goal of the event. “We want to make sure we’re giving smart people a chance to just work on something they’re passionate about,” says Stead.

Department managers at $444 million asset Franklin Savings Bank in Franklin, New Hampshire, are expected to identify efficiencies or areas for improvement in the customer experience, says Cheri Caruso, the bank’s CIO. These goals are part of each manager’s quarterly review, and these managers in turn engage their departments to uncover ideas and implement solutions.

Support for technology comes from the top. “We’re very fortunate that our board is very technology-focused,” says Caruso. She says new employees are often surprised by how much technology is in use at the bank, given its size. “It all comes from the top with the board supporting this,” she says.

Competitive to Collaborative: How Fintech Works With Banks and Not Against Them

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Over the past two decades alone, the advent of new technologies has undeniably changed the way we communicate, work, travel, invest, shop and more. This has forced traditional financial institutions to adopt more efficient and modern business models. It comes as little surprise, then, that the banking industry—long renowned for its staid, traditionalist approach to business—is ripe for disruption, operates under significant financial pressure and is subject to renewed scrutiny as a result of the liquidity spiral of 2008. Enter fintech.

Fintech has come a long way since Peter Knight, a business editor at the United Kingdom’s Sunday Times, first coined the term back in the 1980s, and since early entrant PayPal first revolutionized electronic payments. In its most current iteration (circa 2007, give or take), fintech emerged as a knight in shining armor: a disruptive force ready to save us all from those —evil’ financial institutions deemed responsible for the Great Recession.

Much has changed since 2007 and it seems that, as many predicted, banks, alternative lenders and fintech companies have come full circle in how they view each other relative to the ecosystem they occupy—from perceived partners, to “frenemies” (companies that cooperate for the mutual benefit despite competing in the same industry niche) and enemies (companies that compete in the same industry niche), then back to perceived partners. An increasing number of these actors have been adopting a more collaborative rather than adversarial approach, recognizing the overlap in business objectives in everyone’s self-interest. This can be seen as an extremely positive thing; partnerships with fintech companies can provide financial institutions with the ability to serve new segments, engage new customers and expand business with efficient technological solutions.

Bottom line, when banks and fintech companies work together, they are able to bring products to market quickly and seamlessly, all while providing a significantly enhanced client experience.

But what is behind this paradigm shift? There are three main factors driving this new wave of collaboration:

The Competitive Landscape
Beholden to prohibitively complex and cumbersome financial regulations, banks have seen significant consolidation and increasing competition over the past 40 years. They responded in large part by rebalancing their business models from a strict asset transformation approach, to blended fee-based models. Now, however, when fintech and banks collaborate, they’re able to not only leverage the resources of banks, but also leverage fintech’s nimbleness in order to effectively and expediently bring products to market. Data has exposed many previously underserved market opportunities, long overlooked due to bloated cost structures riddled with antiquated IT infrastructures and heavily layered processes, impeded further by the highly siloed nature of financial institutions’ operational structures.

Traditional Customer Service Role Has Changed
Traditional banks, be they large too-big-to-fail banks or regional and community banks and credit unions, have a strong position not only from a capital perspective, but also from a customer vantage point—they have records of all of their customers’ information. This is an important distinction between traditional and well-established institutions versus new alternative finance companies—banks would have a much lower cost of customer acquisition when compared to alternative lenders that face massive marketing expenditures.

The traditional role of the bank is to take in and manage deposits, allocate that capital and service a traditional portfolio with traditional loan parameters. Banks lend, borrow and ultimately help keep money in circulation. However, unless there is commitment by senior management at these financial institutions to adapt modern technologies, success is unlikely for traditional financial institutions.

Innovation Overdue
Lastly, driven by the competitive landscape, banks seem to have recognized that they are not viewed as bastions of innovation. Many are responding accordingly by teaming up with fintech companies that are well-positioned to steer them forward into the digital age. Deals between traditional financial institutions and alternative lenders and fintech players (like JP Morgan and OnDeck or Kabbage and Santander) are illustrative of the complementary and mutually beneficial qualities that players in banking and fintech bring to the table.

These factors, in combination, will likely result in an ecosystem of fintech companies assuming 25-30 percent, if not more, of the current banking system’s value chain. Catering to both traditional and alternative financial institutions, fintech companies enable banks to focus on their individual core competencies by offering expanding toolkits of services from origination (customer acquisition and digital onboarding) to underwriting and portfolio management (know your customer, otherwise known as KYC, anti-money laundering compliance, predictive data analytics and loan management).

The financial ecosystem is changing regardless of how market participants feel. Change is the only certainty, after all. Survivors will adapt by leveraging technological innovation through fintech partnerships, creating significant value for customers and the company itself. Those that don’t will quickly be left behind and ultimately perish.

Innovation Spotlight: Citizens Bank of Edmond

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Castilla-Jill.pngJill Castilla, President, CEO and Vice Chairman
Citizens Bank of Edmond is a $252 million asset community bank with a rich history spanning 116 years. In 2009, the bank transformed its operations by making critical investments in technology instead of branches. At the helm of this resurgence is Jill Castilla, president, CEO and vice chairman, and also a fourth generation leader and banker at Citizens Bank of Edmond. Castilla is known as an active user of social media, turning critics into brand advocates by staying transparent about changes at the bank and consistently engaging the community for its feedback.

What technology does Citizens Bank of Edmond utilize that youwouldn’t expect at a small community bank?
We strive to be at the forefront of technology to ensure that the bank is relevant today and is positioned to be relevant 116 years from now. We’ve embraced the concept of remote banking: our retail team uses secure Wi-Fi to connect remotely to TellerCapture (a system that enables the imaging and posting of checks at the teller window) and our cash recycler. In 2013, we developed an interactive teller at our ATMs, making us the first bank in Oklahoma to deploy this technology.

One of the biggest changes under your leadership was reducingthe number of branches in the community to just one core branch. As you were conceptualizing this renovation, what technological improvements were a priority?What type of research did you undertake?
We knew we wanted to make Citizens Bank comfortable, approachable and accessible with all of our staff located on the first floor. We also invested in technology infrastructure to handle mobile workstations and utilize a range of products including highly advanced touchscreen kiosks. The bank has collaborative workspaces that allow our team to work easily together in groups or for the community to gather informally. We provide public Wi-Fi for our customers and secure Wi-Fi for our team. Inspiration for our newly renovated lobby sprung from visits to numerous progressive banks across the country as well as hospitality industries, such as hotels and restaurants.

One-third of your bank is owned by the employees. How does that ownership help drive the innovation strategy?
It’s the entrepreneurial spirit. Our team knows that to remain independent for another 116 years we have to stay relevant to our customers and team members. Rewards for employment at Citizens Bank reach far beyond a paycheck—it’s building a legacy that’s accomplished through having premier products, services and customer relationships. It’s about standing the test of time, and improving and maintaining a high level of efficiency in everything we do. Ownership increases peer accountability, and the way we have collaborative work stations allows for the sharpening of the saw. Ideas don’t result from a bureaucratic process, but from teams collaborating to be the best for our customers, shareholders and community.

Bold Leadership Required: Innovating From the Outside In

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In this video, Thomas Jankovich, a principal at Deloitte Consulting LLP, outlines four aspects of a successful approach to innovation, including bold leaders who can make the decisions required to transform the bank and shepherd the organization through the process. He also explains the key mistake that institutions too often make.

FinXTech Advisory Group Weighs in on Partnerships Inside and Outside Your Bank

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Tasked with providing the most relevant information affecting the financial industry, the FinXTech Advisory Group is comprised of a select number of technology startup founders, established technology providers, innovation leaders in banking, investors and government, and non-government policy leaders. As financial institutions work to find the best technology solutions, we asked them to weigh in on how banks can evaluate their internal resources to maximize opportunity for innovation. When they cannot address these challenges in-house, our advisors also share how fintechs can best approach a bank to make their case guided by a careful understanding of the existing system that is in place.

How can banks create an organizational culture that prioritizes technology initiatives?

  1. Focus on Challenges: The entire organization needs to be in sync with the challenges it is looking to address.
  2. Reward Innovative Thinking: BNY Mellon hosts —innovation jams’ while U.S. Bank holds —Pitch Factory’ competitions to promote innovative thinking. Rewarding innovation will ensure organizations are open to using new technology.
  3. Continue Reinventing: The key to promoting technology initiatives is to ensure there is no dependence on one particular system or technology. Be open to adopt new and better ways of doing things.

Ensure that executive and senior leadership teams have participants that are invested in understanding the potential of applied technology to address the operating and growth needs of the institution. Additionally, the institution should have the appropriate access to customer and market information, along with the analytical capabilities on staff to assess and understand what that data shows. The institution should make appropriate investments to secure its own technical future, not just outsourced to a vendor or processor.

Preaching A but rewarding B has been the modus operandi of too many financial institutions. If a bank truly wants to prioritize technology initiatives, it can reward those that embrace such initiatives 100 percent, regardless of whether or not those initiatives yield near-term results. A bank should also look to make sure that its board includes professionals with a technology background. A board that only includes technology “spectators” and not practitioners will have difficulty in promoting a tech-driven culture.

How can fintech companies begin to work with banks?

I believe it’s highly dependent on the work that is being contemplated. The legacy factors inside banks are what have given rise to fintech companies in many cases. The legacy environment in banks is something that fintech companies have to appreciate and work with, due to the structure, regulatory requirements and other parameters that exist in highly regulated environments.

I get 10-20 calls or emails from vendors daily trying to get a meeting. I would not try to work through the IT departments at community banks. I believe you need to find the “business” or “product” owners. They have an interest in learning more about the potential benefits of the solutions. I am much more open to meeting vendors at conferences or through their FinXTech relationships than through cold calls. If FinXTech or one of the reputable trade groups refers one of the vendors, I would take the call or meeting to try to help them network or provide advice.

Fintech companies need to look at the big picture and the individual needs at the same time. It is important for them to be self-aware: no matter how cool the fintech proposition, you will be one of the few hundred vendors with a small “v”—so deal with that reality dispassionately! Spend time with people at all levels in the organization. Understand the big and small pain points. Give it enough time. Most importantly, especially for small banks, don’t expect them to spend additional resources on integration with other third parties: try to provide a complete solution. Finally, put things in perspective: You may be the best, but you may not win.

The Innovator’s Imperative

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I’ve seen enough to believe there are no barriers to innovation in banking. Certainly, there are speed bumps, gate crossings and rumble strips that banks will encounter on the road to innovation, but nothing that flat out prevents you from getting there. Indeed, there are a growing number of banks, including community banks, that have made important achievements that serve as good examples of innovation. (For a great list, see the Best of FinXTech Award Winners announced at Nasdaq this week.) Some innovation projects have been quite ambitious, others more modest, but they all spring from the same source—a recognition that banks need to begin simplifying and speeding up various aspects of their businesses to keep pace with (or at least, not fall too far behind) where the customer is heading.

Where is the pressure to innovate coming from? The popular boogeymen are fintech companies that compete with banks in payments, lending and personal financial management. But companies in that space are simply reacting to a much deeper trend, which is the profound way that technology is changing our lives. Banks must do the same, and a growing number of you seem to realize it.

On April 26, Bank Director hosted the FinXTech Annual Summit at the Nasdaq MarketSite in New York. The event brought together 200-plus bank executives, directors and fintech executives to explore how technology is changing the industry. Underlying themes were innovation, the opportunities for partnership between banks and fintech companies, and how banks can move forward.

I believe that most bankers understand the imperative to innovate around key aspects of their business, whether it’s payments, mobile in all its many permutations, lending, new account onboarding or data. What many of you lack is a roadmap for how to innovate. Actually, a “roadmap” is probably the wrong metaphor to describe what you need because innovation is really a process rather than a destination—something you do rather than a place that you go. So maybe you need something like a yoga chant (Om!) to help focus your energy as you practice innovation.

There are several issues that need to be dealt with, starting with a vision of what projects to undertake. You can’t change everything at once, so where do you start? What are the greatest friction points within your most important businesses? Where are you seeing the greatest competition, and how would digitalization tilt the competitive balance more in your favor? What has the greatest potential to positively impact your profitability?

Innovation costs money, so you will have to budget for it. Based on my conversations with bankers that have begun to automate key parts of their operations, expect your innovation projects to cost more and take longer than their original estimate. Innovation can be messy, so perseverance and patience are important. You also have to make sure that your bank’s culture will embrace change. When I say “culture,” I really mean people. You must ensure that your employees are open to new ways of doing things, because innovation will change job descriptions, processes and work habits, and many of your staff will feel threatened by this. It’s not enough that your executive management team and board commit to a large project like a new automated underwriting platform for small business lending and allocate the necessary resources to make that happen. You will also have to sell this change to people in your organization whose buy-in is critical.

For most banks—and particularly community banks with a finite amount of money to spend—innovation isn’t something they can do by themselves, so you will have to work in partnership with a fintech company that can help you achieve your objective. This is more complicated than it sounds, because banks and fintech companies have very different perspectives when it comes to how they do business. Banking is a highly regulated industry, so you need a partner who knows how to work within a prescriptive environment that has lots of rules. Fintech companies that have experience working with banks understand this and have learned how to manage change in an ecosystem that tends to discourage it.

The innovation imperative is real, and banks must act upon it. Your world is changing faster than you think, and the longer you wait to embrace that change, the further behind you will fall.

Can Small Banks Play the Innovation Game?

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innovation-4-27-17.pngWhen it comes to innovation, community banks generally don’t have the resources—either financial or people—to compete with the country’s largest banks—where the technical staff focused just on innovation alone is probably several times larger than a smaller institution’s entire workforce.

Of course, no one expects smaller banks to compete with a megabank like Wells Fargo & Co., but there are smaller institutions that are playing the innovation game very well.

One of those is Radius Bank, a Boston-based bank that has approximately $1 billion in assets and four years ago made the radical decision to close all of its branches except for one, and convert its local brick-and-mortar retail operation to a digital platform that operates nationally. President and CEO Michael Butler, who appeared on a panel of like minded bankers at Bank Director’s FinXTech Annual Summit in New York on April 26, said that one of the more challenging aspects of that decision was changing Radius’ culture to support its new business strategy. Not all of the bank’s employees were happy about the change in strategy, and Butler said there has been approximately a 50 percent turnover in the bank’s workforce over the last four years. Many of the older employees who resisted the change have been replaced by younger, more tech savvy employees who normally would choose to work at a tech company rather than a bank. Butler said the company has spent a lot of time trying to create the kind of “vibe” that will attract those kind of individuals. “It’s a lot about the people you bring into your organization,” said Butler. At 57, Butler has the background of a traditional banker even though he has led the charge towards digitalization. “My job as the grey hair is to not let them kill themselves,” he joked about some of the bank’s younger staff members.

Another panel member—Jay Tuli, senior vice president for retail banking and residential lending at Leader Bank, a $1 billion bank located in Arlington, Massachusetts—was instrumental in creating ZRent, an online portal that the bank launched in January 2015. It enables landlords to automatically collect rent payments via ACH transactions. ZRent has been a successful customer acquisition tool for Leader Bank, and it is now licensing the software to other banks that want to use it.

Radius and Leader Bank are both located in the Boston area (Arlington is just six miles northwest of the city), so they have the advantage of taping a deep talent pool in one of the country’s most attractive locations, with a number of highly regarded universities in their backyard. Like Radius, Leader Bank has seen a big turnover in its staff over the last eight years. Tuli said that the average age of its 300 or so employees is 31. “There’s a lot of young talent in Boston, and we’ve benefited from that,” he said.

So, if being located in a large urban market is a key element in the innovation game, how to account for the success of Somerset Trust Co., a $1 billion bank headquartered in Somerset, Pennsylvania, a small community situated about 80 miles southeast of Pittsburgh? Somerset had just 6,277 residents according to the 2010 census. A third panelist, Chief Operating Officer John C. Gill, said the bank has always placed a very high premium on having excellent technology, and sees this as a critical component of its organic growth strategy. Only about 19 percent of its consumer banking transactions occur in the branch today. It sees innovation as an imperative despite its rural location.

Somerset has learned to play the innovation game by partnering up with fintech companies. A couple of years ago, Somerset teamed up with Malauzai Software in Austin, Texas, to develop a mobile banking solution that allows Somerset’s retail banking customers to securely check balances, use picture bill pay and remotely deposit checks from any location or device. There are banks much larger in size that are still working on delivering these capabilities to their retail customers. Working with another fintech company, Bethlehem, Pennsylvania-based BOLTS Technologies, Somerset has also launched a new mobile account opening platform that has greatly reduced the time it takes to open a new account, and is expected to save the bank approximately $200,000 a year. Somerset and BOLTS were finalists in the 2017 Best of FinXTech Awards, which were announced at the event.

Gill said that Somerset is very comfortable partnering with fintech companies to develop product capabilities that it would not be able to develop on its own. “Banks have the customers and low cost funding,” he said. “Fintech companies bring innovation.”

Banks Face the Imperative to Innovate

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I’ve seen enough to believe there are no barriers to innovation in banking. Certainly, there are speed bumps, gate crossings and rumble strips that banks will encounter on the road to innovation, but nothing that flat out prevents them from getting there. Indeed, there are a growing number of banks, including community banks, that have made important achievements that serve as good examples of innovation. (For a great list, see the Best of FinXTech Award Winners announced at Nasdaq this week.) Some innovation projects have been quite ambitious, others more modest, but they all spring from the same source—a recognition that banks need to begin simplifying and speeding up various aspects of their businesses to keep pace with (or at least, not fall too far behind) where the customer is heading.

Where is the pressure to innovate coming from? The popular boogeymen are fintech companies that compete with banks in payments, lending and personal financial management. But companies in that space are simply reacting to a much deeper trend, which is the profound way that technology is changing our lives. Banks must do the same, and a growing number of them seem to realize it.

On April 26, Bank Director hosted the FinXTech Annual Summit at the Nasdaq MarketSite in New York. The event brought together 200-plus bank executives, directors and fintech executives to explore how technology is changing the industry. Underlying themes were innovation, the opportunities for partnership between banks and fintech companies, and how banks can move forward.

I believe that most bankers understand the imperative to innovate around key aspects of their business, whether it’s payments, mobile in all its many permutations, lending, new account onboarding or data. What many of them lack is a roadmap for how to innovate. Actually, a “roadmap” is probably the wrong metaphor to describe what they need because innovation is really a process rather than a destination—something you do rather than a place that you go. So maybe bankers need something like a yoga chant (Om!) to help focus their energy as they stretch to innovate.

There are several issues that need to be dealt with, starting with a vision of what projects to undertake. They can’t change everything at once, so where should they start? Here are a couple of questions they should ask. What are the greatest friction points within their most important businesses? Where are they seeing the greatest competition, and how would digitalization tilt the competitive balance more in their favor? What has the greatest potential to positively impact their profitability?

Innovation costs money, so they will have to budget for it. Based on my conversations with bankers that have begun to automate key parts of their operations, they should expect their innovation projects to cost more and take longer than originally estimated. Innovation can be messy, so perseverance and patience are important. They also have to make sure that their bank’s culture will embrace change. When I say “culture,” I really mean people. Banks must ensure that their employees are open to new ways of doing things, because innovation will change job descriptions, processes and work habits, and many of their staff will feel threatened by this. It’s not enough that executive management teams and boards commit to a large project like a new automated underwriting platform for small business lending and allocate the necessary resources to make that happen. They will also have to sell this change to people in their organization whose buy-in is critical.

For most banks—and particularly community banks with a finite amount of money to spend—innovation isn’t something they can do by themselves, so banks will have to work in partnership with fintech companies that can help achieve their objectives. This is more complicated than it sounds, because banks and fintech companies have very different perspectives when it comes to how they do business. Banking is a highly regulated industry, so they need a partner who knows how to work within a prescriptive environment that has lots of rules. Fintech companies that have experience working with banks understand this and have learned how to manage change in an ecosystem that tends to discourage it.

The innovation imperative is real, and banks must act upon it. Their world is changing faster than they realize, and the longer they wait to embrace that change, the further behind they will fall.