What’s Working and Why

DI_mag_thingy.pngI am a big believer that many banks have immediate opportunities to expand what banking means to individual and business customers. This special supplement to Bank Director magazine highlights a number of interesting technologies that have re-shaped the fortunes of banks across the U.S.

Now, technology in the financial world encompasses a broad spectrum of tools. For most officers and directors, I’ve found conversations about technology naturally incite interest in mobile banking. This isn’t a surprise when one considers that 68 percent of American adults connect to the Internet with smartphones or mobile devices, according to the Pew Research Center. Smartphone penetration is highest among people with higher incomes, and the young. What an opportunity to engage and reshape your relationships with this audience! To show how Americans use smartphones, and how banks are offering mobile services to meet that demand, Bank Director compiled an infographic on pages 4-5.

Clearly, banks are trying to reach customers with the appropriate technology to stay relevant. But some banks are pushing themselves beyond what every other bank is doing. A story on page 6 features interviews with banking leaders about the most successful innovations or technological advances impacting banks right now. Among new ideas is Malauzai Software’s and Allied Payment Network’s PicturePay, which allows banks to pay customer bills with a photo of the bill taken on a smartphone. 

As many banks face pressure to grow revenue or reduce expenses, we take a look at some that are coming up with creative solutions to tackle that problem. For instance, Central Bancompany in Jefferson City, Missouri, turned to Ignite Sales to double the number of services the average new business customer uses at the bank from three to six or seven different products or services. 

Likewise, City National Bank in Charleston, West Virginia, found success with the help of StrategyCorps. About one-third of the bank’s customers have opted into a value-added checking account for $5 per month, even though free checking is still available. Inland Community Bank in Ontario, California, used Paladin fs to save money on its core information technology contracts during the sale of the bank, improving the value of the deal and saving $700,000 in termination expenses.

While most banks are far more efficient than they were just five years ago, there is money to be saved in banking. Some of the more ambitious companies, who want to stay relevant and solve their customers’ problems, are saving money and growing revenues through a variety of means. Banks have to make changes to stay relevant and address customer needs, and some of the more inventive banks are finding unique ways to do this while boosting the bottom line. On behalf of our team, please enjoy this special supplement, one we designed to inspire and shine a light into what’s possible.


When Free Checking Is No Longer Enough

Successful banks like City National are always looking for customer friendly ways to grow fee income, says StrategyCorps’ Dave Crook.

Giving Banks a Better Way to Cross Sell

When Central Company engaged Ignite Sales, it needed to help its front-line associates improve relationships with its business customers.

Saving Money on IT Contracts

Financial institutions are generally paying too much for information technology contracts. In many cases, those contracts could negatively affect M&A transactions in the future.

Succeeding With Mobile Bill Pay

Park Sterling Bank is increasing customer retention through mobile bill pay.

BNY Mellon: Creating a Culture of Innovation

The fabric of the banking industry is changing as new technology players continue to emerge in the marketplace.  In this short video, Declan Denehan, managing director for strategy and innovation at BNY Mellon, shares how a financial institution that is over 230 years old embraces innovation by empowering new ideas and partnering with the FinTech community.

What to Look For When Selecting a Technology Partner

With the rise of many innovative technology companies, financial institutions can find themselves overwhelmed when it comes to selecting the right technology partner for them. Four financial technology providers share some advice for bank boards selecting a third-party vendor. The video was filmed during Bank Director and NASDAQ OMX’s FinTech day in New York City.

Staying Relevant While Standing Out

During the inaugural FinTech Day sponsored jointly by Bank Director and NASDAQ OMX, Declan Denehan, BNY Mellon’s managing director for strategy and innovation, and Al Dominick, president of Bank Director, discuss innovation and technology products and services to stay relevant in today’s banking environment. The event was held in September at the NASDAQ’s MarketSite in New York’s Times Square with over 40 participants from 30 financial technology companies.

Becoming an Innovator With a Research Lab

One of the most innovative companies on the planet, Google, is allowing researchers to spend their entire days dreaming up big ideas that have little immediate connection to making a profit—like inventing driverless cars. Research is being done in a lab near headquarters called Google X with an idiosyncratic cast of characters, according to Fast Company magazine. Google X is different from a lot of innovation labs. Two of the criteria for any project are that it has to affect millions or billions of people and it can’t be an incremental improvement.

It’s a great idea, if not for the fact that few American companies bother with such basic research innovation labs. You have to spend money that is hardly justified from a shareholder perspective without any clear goal of making a profit, let alone accomplishing a result in a specific timeframe. Gone are the days of Bell Laboratories, which for decades invented things that would transform the world such as the transistor in the 1950s, which later became the basis for the computer chip, not to mention inventions that were also useful for AT&T. For proper perspective, Google X, as awesome as it clearly sounds, employs 250 people. Bell Labs during its heyday employed 15,000.

“Those were the days of pure research,’’ says Bert DuMars, a former Forrester Research analyst who has gone on to become vice president of digital marketing at Bi-Lo Holdings, the grocery store company. DuMars wrote a report in December 2013 on “The Costs and Benefits of Marketing Innovation Labs.” Many large companies now run these labs, albeit with a clear financial goal and a way shorter timeline than Google X does. They might have a two-year window to implementation, not a 10-year timeline. “No business wants to create another white elephant because they become very expensive and unusable,” DuMars says.

Companies with marketing innovation labs include Wal-Mart, Comcast, Chick-fil-A, Capital One and Wells Fargo & Co. Wells Fargo has a separate space near its San Francisco headquarters that employs more than a dozen people. The company calls it “WF Digital Labs,” and says it is a test-and-learn platform for new, innovative concepts on the digital experience for customers. The mission of the lab is to spark new ideas, re-imagine existing “experiences,” and enable innovation, including developing demos and prototypes for the bank and beta testing those ideas in front of customers and Wells Fargo employees.

This year, the lab’s goals included exploring Google Glass and other smart wearables (such as Samsung Watch) as well as new forms of authenticating customers using biometrics. The lab also worked on creating seamless experiences across digital platforms for the bank, such as online and mobile banking. So unlike Google X, Wells Fargo’s lab is very much focused on improving the basic customer experience with the bank.

DuMars says that companies that succeed with these labs establish clear goals, budgets and venues, with a C-level leader responsible for their success. You have to decide if your company really has the organizational culture to foster and help innovation succeed, otherwise, don’t do it. Innovation labs require:

  • Significant investments in talent and technology. You could start with as little as 5 to 10 people, but keep in mind, the average annual cost per lab employee is about $228,515 based on an average office lease rate of $400 per square foot in Silicon Valley. Rent might be cheaper elsewhere in the country, but you still have to attract the right talent to your designated location.
  • Specific goals. Decide what they are. Most labs do not execute their innovations, although some, such as Comcast’s, do.
  • A calculated decision on whether your lab will be housed in a city known for its innovation such as Silicon Valley or co-located with your headquarters office. Chick-fil-A has two full-sized experimental restaurants where headquarters employees can go test the latest projects, such as using iPhones at the drive-through. Capital One has an innovation lab in San Francisco that allows people to walk in off the street, sip coffee made by baristas and test out new banking ideas and apps from the researchers in the lab.

Many game-changing innovations that transform the world may not be hatched in these laboratories, but they are a start to staying competitive in a changing world.

How One Large Bank Fosters Innovation

9-11-14-FinTech.jpgFrom left, Declan Denehan, managing director of strategic growth initiatives at BNY Mellon; Bank Director Publisher Kelsey Weaver; President Al Dominick; and Olivia Bajaio, BNY Mellon vice president of strategic growth initiatives, in New York City earlier this week.

Editor’s note: This article has been corrected from an earlier version.

Conventional wisdom holds that banks are not very good at innovation—and large banks, with their entrenched bureaucracies and clumsy legacy systems, are probably worst of all. It might then come as a surprise that Bank of New York Mellon Corp. has run a highly successful innovation program that has made a meaningful contribution to the bank’s profitability, and also manages to get most of the company’s 50,000 employees involved in the process.

Declan Denehan, BNY Mellon’s managing director for strategy and innovation, offered a look into the unusual program during the inaugural FinTech Day sponsored jointly by Bank Director and NASDAQ OMX. The event was held at NASDAQ’s MarketSite in New York’s Times Square and attracted over 40 participants from 30 financial technology companies.

Headquartered in New York, BNY Mellon is the 5th largest U.S. bank with approximately $370 billion in assets. Unlike most banks, however, it does relatively little lending but instead focuses on two core businesses: investment management, with $1.7 trillion assets under management, which makes it one of the 10 largest managers in the world; and investor services, a broad category that includes a variety of back office functions that banks, insurance companies and investment managers rely on to handle their customers’ accounts.

9-11-14-FinTech-2.jpgBNY Mellon’s innovation program began in 2009 when the bank’s senior leadership decided they wanted to encourage creativity and out-of-the-box thinking among the bank’s employees, Denehen said on-stage during an interview with Bank Director President Al Dominick. BNY Mellon places tremendous importance on the use of technology in all of its investment management and servicing businesses and is constantly looking for ideas that will lead to improvements in efficiency, profitability and the customer experience. After spending some time talking with senior managers in BNY Mellon’s six major business units to get their thoughts on innovation, Denehan established a pilot program to review ideas submitted by approximately 10,000 employees throughout the company.

“We found out that there was a pent up desire in those employees to get their voices heard,” he said.

The pilot generated a lot of suggestions that weren’t necessarily aimed at improving the company’s profitability, so Denehan realized pretty quickly that going forward he would have to provide the bank’s employees with more guidance in terms of what he was looking for. “You know the old saying that’s there’s no such thing as a bad idea? Not true!” he laughed. Denehan ended up receiving some 1,000 ideas and it took some time to review them all and select those with merit. The program found enough winners that it generated about $165 million in pretax profit for the bank that first year.

The innovation program has expanded steadily since the 2009—all BNY Mellon employees are encouraged to participate—and looks for ideas that are capable of becoming large scale projects and make a significant contribution to the bank’s bottom line. It culminates in an eight-week contest called “ACE” that proceeds throughout several elimination rounds, with the finalists giving a five minute pitch to a panel of judges in New York. The winning team is selected at this final judging and its members receive what Denehan described as a substantial cash award and are given the opportunity to leave their current positions and join a company-run incubator where they will develop their idea and make it operational. The program also provides for feedback so employees who do not win will not lose motivation to participate. Since its inception in 2009, the program has generated over 13,000 innovation ideas.

Denehan cautioned the audience that the search for innovation in a corporate setting is an evolutionary process. To be successful, it requires the engagement of senior management so that everyone understands that the undertaking is important. The ideas also need to be things that fit comfortably with the culture of your company, which is why it’s so important the ideas come from employees who understand that culture and have been shaped by it. And whatever process you establish to foster innovation in your company has to respect that imperative.

“You have to build [a process] that can create ideas that can survive in the DNA of your organization,” said Denehan. “You have to build for your culture. Culture is everything.”

Personal Financial Management Tools Help Customers Help Themselves

personal-finance.pngPersonal financial management (PFM) has a dual personality these days. On one side are Quicken-like planning packages that simplify budgeting and other financial tasks, but still require a certain amount of regular care and attention from users. For years—decades even—this type of “traditional PFM” has attracted about one in five consumers. “That market is steady, though its future is dimming,” says Mark Schwanhausser, director of omni-channel financial services at San Francisco, California-based technology consulting firm Javelin Strategy & Research.

Exploding in number, on the other hand, are web and mobile apps that provide quick bursts of financial information and activity for people making on-the-go financial decisions. The apps run the gamut, helping users get rewards, avoid late fees, pay bills, save on taxes, and a whole lot more, all through the slick interfaces common to today’s mobile devices. “PFM in the future goes so far beyond what it is today,” Schwanhausser says. “We’ll see PFM thrust in front of consumers every time they log on.”

Perhaps no company better exhibits PFM’s split personality than D3 Technology Inc. of Omaha, Nebraska. Founded in 2007, it adds its PFM tool to the online banking software of various providers, most notably Jack Henry & Associates of Monett, Missouri. More than 220 banks have signed up for the popular service.

But Chief Executive Officer Mark Vipond is not overly optimistic that the software will move PFM usage much beyond the long-standing rate of 20 percent, noting that the banks are mostly deploying PFM as a separate tab from online banking, creating yet another silo to support as well as a distinct user experience, mostly for “money hawks” who want to dive into their finances. “The adoption levels mimic those we’ve seen elsewhere,” he notes.

While the company plans to continue supporting PFM as a separate add-on to online banking, hope for much higher adoption lies in a version of the software D3 has been working on for the past two and a half years. The new digital platform provides equal support for PFM and online banking (as well as money movement). Burdensome PFM tasks like budgeting and expense categorization occur automatically, based on transaction history, right within the online banking interface. Only half in jest, Vipond said he expected usage to reach 100 percent since the PFM analytics will take place as a standard part of the online banking experience, without users having to log in elsewhere or do anything to set up the PFM functionality.

Just as important, the integrated platform will give banks access to a single, comprehensive view of all customer transactions and data, allowing banks to create a personalized, Amazon-like user experience in which they can predict a user’s cash flow and recommend products and services accordingly. “This re-establishes the bank as the primary financial services provider, using the customer’s own data to personalize the experience,’’ Vipond says.

Increasingly, that experience will be far more dynamic than the spreadsheets and budget trackers of the past. Star Financial Bank of Fort Wayne, Indiana, for example, depicts expenses in the form of bubble graphs, using software from MoneyDesktop Inc., of Provo, Utah, deployed as both a mobile app and an integrated part of its online banking product. “It’s incredibly interactive,” says Kristin Marcuccilli, chief operating officer of the $1.7-billion asset bank.

Since rolling out the service in January 2013, all of Star Financial’s customers have access to the PFM functionality through online banking, and about 20 percent so far have downloaded it to their smart phones or tablets. “We’ve had customers tell our bankers that they’ve never cared about their finances before, but now they’re following their bubbles, and they’ve got it right in their pocket. The tool makes it much more fun,” says Marcuccilli.

“While PFM in the past put the onus on users to be proactive, PFM in the future will put banks in the driver’s seat, enabling them to ping customers with recommended actions,” says Wade Satterfield, the director of digital service systems at Arvest Bank. The $14-billion asset institution, based in Lowell, Arkansas, is working on a PFM system that it will roll out sometime in 2015.

Like online banking or bill payment, PFM is a service for which banks generally do not charge. So how do the investments in PFM make sense for a bank’s own budget? For Marcuccilli, the return comes from increased levels of customer engagement, leading to stronger loyalty and longevity. Satterfield says banks need to keep up with the digital experiences customers are getting from other service providers. “We really don’t have a choice.”

Q&A with Brett King: How Innovators are Rebooting Banking

8-1-14-BKing-article.pngBrett King, who founded the bank alternative called Moven, made a name for himself with his book, Bank 2.0, which pushed banks to think about how they needed to transform themselves in the digital age. In his latest book, “Breaking Banks: The Innovators, Rogues and Strategists Rebooting Banking,” King offers up interviews with the disruptors and the people trying to keep banks from losing their shirts to the disruptors. Executives from the likes of PayPal, Google, USAA, the Bitcoin Foundation and peer-to-peer lending networks such as Lenddo make an appearance in this book.

How did you choose the title, “Breaking Banks,” for your book? Do you think banks ought to be broken?
The final chapter is called, ‘We’re not breaking banking; we’re rebooting and rebuilding it.” We are realizing that the way we used to bank, it’s not translating into the way we live right now. A classic example is if you are a Generation Y [graduate] getting your first job and going to a bank, the first thing the bank is going to try to give you is a checkbook, which makes absolutely no sense.

In your book, many expect mobile phones to transform the industry. In what ways does the banking industry get this wrong?
The key problem is that we’ve thought of mobile as another channel for the bank. We’ve either tried to get Internet banking on a small screen, or let’s stick a debit card in a mobile wallet so we don’t have to carry plastic. Those two things just mimic existing things. The really interesting thing is that we can do something completely different.

What is an example of that?
In the ‘60s and ‘70s, when you went to the bank to withdraw cash, you knew exactly how much money you had to spend. When you ran out of money, you didn’t buy anything. Now, we are having a resurgence in awareness and control coming through mobile. The most important question a bank can answer today is: Can I afford to buy this? The bank doesn’t see that as a useful engagement with a customer. But from the customer’s perspective, in terms of my money, that’s the most consistent and most important question you can answer for me. When you go into an Apple store, you would like to buy a phone, the first question is: Do I have enough money? Yes. Can I afford to buy this? Let’s say the answer is no. You have rent coming due. But the bank can say: You could buy it if we do this for you, which is in-store financing. Banks right now are having the epiphany that mobile and the Internet can be a revenue channel, but they have the issue of cannibalizing revenue from the branch, and how do we get the compliance and risk guys to agree to let us fulfill this revenue digitally in real time? This is an industry issue that we have to solve over the next few years. This is where the neo-banks [such as Moven and Simple] and the new players [such as peer-to-peer lending platforms] have an advantage, because they don’t have those hang-ups about what we have done in the past.

How much of a threat are these alternatives?
There are threats and opportunities. Ten years ago, the biggest sellers of books were Borders and Barnes & Noble. Now, it’s Amazon. If the traditional players can’t adapt their distribution method, then someone else comes in and fills that gap. A few traditional players survive. Some of the record labels still survive, for example, and the larger book publishers still survive, but the smaller book stores have tended to disappear.

I want to inject some skepticism into this, because does it really matter that most banks are not as good at selling online as Amazon? How much of a threat are these neo-banks given that regulators heavily regulate the banking system, and start-up capital is high?
The reality is that you are going to have a bit of a mix. You are going to have the bigger banks make that transition first, and downsize the number of branches and shrink the bank branches. For the smaller banks, unfortunately, there is going to be a lot of consolidation. As these alternatives [to banking, such as neo-banks] come in, they will work with the big banks who will offer FDIC insurance and compliance on the back end. It’s not going to be a wholesale reboot and all the banks disappear. It’s going to be a case where probably the larger banks survive and some banks will become a wholesale provider. It’s likely the fastest growing financial institutions in the United States or the world in the next decade will not be traditional banks.

I often hear people say that branches can be transformed to offer advice rather than transactions. But you say advice in the branch is no longer a differentiator, and you also are critical of attempts to give advice in the branch because the customer can view that as an attempt to upsell them.
If you think about what will build a strong relationship with the bank, it’s the bank’s ability to solve your problem or answer your questions. Once you are competing inside a branch against a [mobile] platform that can give you advice every day, you just can’t give advice enough or advice that is useful enough. That dramatically changes the economics of the branch. In five years’ time, it’s not going to be like the branch we have today. It might be like a small coffee shop or an Apple store where you have your Geniuses [to help solve problems]. It won’t be a heavy selling environment.