Leveraging Technology for Growth

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Technology is playing an increasingly central role in banks’ strategic plans. Now more than ever, banks rely on technology to deliver products and services, improve processes and the customer experience, acquire new customers and grow.

When it comes to new technology, banks essentially have four options: build it, license it, partner with a third party or buy it. Traditionally, only the largest banks had the resources and inclination to build technology in house; however, some smaller banks are now dedicating resources to developing technology themselves.

Much more commonly, banks obtain technology solutions from their core processors or other vendors. Over the last several years, there has been a proliferation of banks partnering with fintech companies to deploy their technology, or for banks to provide banking services to a customer-facing fintech company. As banks become more tech-centric, more are likely to explore acquiring fintech companies or fintech business lines. Each approach carries with it unique advantages, disadvantages, risks and legal and regulatory considerations.

The federal bank regulatory agencies have been especially active in recent years in the bank/fintech partnership space. In July 2021, the agencies published proposed updated interagency guidance on managing risks associated with third-party relationships, which includes guidance on relationships with fintech companies. Later in 2021, they released a guide intended to help community banks conduct appropriate due diligence and assess risks when considering relationships with fintech companies, and the Federal Reserve Board published a white paper on how community banks can access innovation by partnering with third-party fintech companies. Prior to that, the Federal Deposit Insurance Corp. published a guide intended for fintech companies interested in partnering with banks. These pronouncements indicate that while the agencies are generally supportive of banks innovating via fintech partnerships, their expectations for how banks conduct those relationships are increasing.

As technology and the business of banking become more intertwined, banks need to remain mindful not only of regulatory guidance on these partnerships specifically, but on the full spectrum of laws and regulations that are implicated — sometimes unintentionally — by these relationships. For example, partnership models that involve banks receiving deposits through a relationship with a fintech company could implicate the brokered deposit rules, which the FDIC updated in 2020 to account for how banks use technology to gather deposits.

As another example, partnership models that involve a fintech company offering new lending products funded by the bank, or the bank lending outside of its traditional market area, can raise fair lending and Community Reinvestment Act considerations, and potentially expose the bank to a heightened risk of regulatory enforcement action. Banks must keep in mind that when offering a banking product through a fintech partnership, regulators view that product as a product of the bank, which the bank must offer and oversee in accordance with applicable law and bank regulatory guidance.

What’s Next
Although bank/fintech partnerships have been around for some time, the amount of recent regulatory activity in this area suggests the agencies believe that many more of these partnerships, involving many more banks, will develop.

As the partnership model matures, more banks may become interested in developing closer ties with their fintech partner, including by investing cash in their fintech partner. Banks may be motivated to explore an investment to make its relationship with a fintech partner stickier, allow the bank to financially share in the fintech partner’s growth or enhance the bank’s attractiveness as a prospective partner to other fintech companies.

Banks considering investing in a fintech company or a venture capital fintech fund must understand not only the regulatory expectations associated with fintech partnerships generally, but also the legal authority under which the bank or its holding company would make and hold the investment.

As some banks start to look and operate more like technology companies, more may explore acquisitions of entire fintech companies or fintech business lines or assets. In addition to the many business and legal issues associated with any M&A transaction, banks considering such an acquisition have to be especially focused on due diligence of the target fintech company, integration of the target into the bank’s regulatory environment and ensuring that the target’s activities are permissible for the bank to engage in following the transaction.

Banks need innovative technology to succeed in today’s fiercely competitive financial services marketplace. Some will build it themselves, others will hire technology vendors or partner with fintech companies to deploy it and some will obtain it through acquisition. As banking and fintech evolve together, banks must understand and pay careful attention to the advantages and disadvantages, and legal and regulatory aspects, of each of these approaches.

Giving Customers Choice, Access With Investments

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It’s time for community financial institutions to significantly upgrade their investment resources to service their clients. Retail investors want to be more educated about investing opportunities and have greater access to investment tools; in response, investment-as-a-service companies are building platforms so banks can give their clients more of what they want.

One problem with financial and investment innovation today is that there is either too much focus on gimmicks or not enough focus on innovation. Crypto-only investment companies indiscriminately pitch every token as the latest and greatest get-rich-quick scheme. Gamified investment apps promote risky options trades to retail investors, turning investing into a lottery or casino and distracting users from what investing should be: a powerful tool to maintain, protect and build wealth. Further, legacy investment institutions often make the bulk of their revenue from customers who are already wealthy via older products, with little incentive to experiment with creative new offerings.

In this unhappy mix, it is investors with the most to gain from a long-term investing strategy — younger less affluent or not yet rich investors — who lose the most. Unable to access wealth management and investing services from their trusted financial institution, they seek out third-party investment apps that don’t prioritize their long-term success and happy retirement. For community financial institutions, this interrupts the chain of familial wealth transfer and risks their next generation of customers.

Investors desire a unified platform that offers access to a growing list of investments, ranging from physical metals to AI-driven investment models to crypto-assets to collectibles. A self-directed platform is key: Investors should be given a choice to pursue the investment strategy they feel fits best for their unique investment interests and risk profile. The platform should include all the tools they need to effortlessly pursue the “Get rich slowly” strategy: passive investing and dollar-cost averaging into a low-cost, highly diversified portfolio.

Cloud computing innovations and numerous rounds of fintech venture capital have made it possible for companies to build curated investment platforms that traditional banks can easily add and implement. Investment tools driven by application program interfaces, or APIs, allow financial services to embrace change in collaborative ways that don’t conflict with existing business, yet still appeal to the ever-changing preferences of investors.

Investing is not one-size-fits-all. Wine fans may want to invest in a portfolio of wine assets to hold or eventually redeem. Investors who collected baseball cards as a kid may now have the capital to buy collectibles with significance to them as culturally relevant assets. Individuals also may want to invest in thematic categories, like semiconductors — the foundation for all computing, from electric vehicles to computers to smartphones. These investments are not optimal for everyone, but they don’t have to be for everyone. What matters most is access.

Too many banking platforms do not take full advantage of the full range of investment tools available in the marketplace, even though their clients are looking for these. Lack of access leads to painful experiences for the average investor who wants to be both intelligent with their money and allowed to experiment and explore the ever-changing world of digitally available investment categories. Give customers a choice to pursue wealth-building strategies based on their unique insights and instincts, and made available through their existing bank.

Why Community Banks Are Investing in Startups

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Reliant Bancorp is a community bank by almost any definition of the word. It has $3 billion in assets and focuses on its Middle Tennessee community around its headquarters in Brentwood, Tennessee. It funds what community banks commonly fund: loans mostly tied to real estate, commercial and industrial loans and a small amount of consumer loans. And now, it’s funding something less common for a community bank: startups.

Reliant Bancorp is joining a group of 66 institutions, mostly community banks, who recently helped close a new $150 million fund for financial technology companies called JAM FINTOP Banktech. JAM Special Opportunity Ventures, an affiliate of New York based-bank investor Jacobs Asset Management, and Nashville-based technology investor FINTOP Capital announced the joint raise last month, which will plow Series A funding into startups that cater to community banks.

I got a chance recently to speak to Reliant’s chairman and CEO, DeVan Ard Jr., a longtime Middle Tennessee banker. He explains the logic of community banks putting their hard-earned dollars into one of the riskiest investment categories there is.

“I don’t view it as risky as much as I do giving us a window into new financial technology opportunities,” he says. Ard declines to disclose Reliant’s investment amount, but says it was small. Currently, no institution owns more than 4.4% of the fund, says John Philpott, general partner at FINTOP Capital.

The sizeable list of community banks joining the funding round shows that even fairly small institutions are investing as a way to get in on the ground floor of technological development. Ard thinks JAM FINTOP Banktech will help the bank get early access to opportunities in the tech space.

“All banks today know they can be nimble,” Ard says. “That’s the lesson we learned throughout the pandemic. You have to do business with your customers wherever and whenever they want to do business with you.”

But the fund wasn’t exclusive to community banks. A few mid-sized and large institutions joined in on the raise, including $57 billion East West Bancorp, based in Pasadena, California, and the St. Louis-based investment bank Stifel Financial Corp., according to JAM FINTOP’s website.

The investment managers billed the fund as a way for community banks to learn about the technology space, given the sheer number of financial technology companies competing for their business. “The banks [are] being shown thousands of demos,” says Adam Aspes, a general partner at Jam Special Opportunity Ventures. “It’s overwhelming. If you make the wrong decision, it can really set you back.”

In a Challenging Earnings Climate, There Is No Room for Lazy Capital

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The persistently challenging earnings environment stemming from a stubbornly flat yield curve requires bank management teams examine all avenues for maximizing earnings through active capital management.

The challenge to grow earnings per share has been a major driver behind more broadly based capital management plans and playbooks as part of larger strategic planning. Management teams have a number of levers available to manage capital. The key as to when and which lever to pull are a function of the strategic plan.

A strong plan predicated on staying disciplined also needs to retain enough nimbleness to address the unforeseen and inevitable curveballs. Effective capital management is, in large part, an exercise in identifying and understanding future risks today. Capital and strategy are tightly linked: A bank’s strategic plan is highly dependent on its capital levels and its ability to generate and manage it. In our work with clients, we discuss and model a range of capital management techniques to help them understand the costs and benefits of each strategy, the potential impact on earnings per share and capital and, ultimately, the potential impact on value creation for shareholders.

Bank acquisitions. M&A continues to offer banks the most significant strategic and financial use of capital. As internal growth slows, external growth via acquisitions has the ability to leverage capital and significantly improve the pro forma company’s earnings stream. While materially improved earnings per share should help drive stock valuation, it is important to note that the market’s reaction to transactions over the last several years has been much more focused on the pro forma impact to capital, as represented by the reported dilution to tangible book value per share and the estimate of recapturing that dilution over time, alternatively known as the “earnback period”.

Share repurchases. Share repurchases are an effective and tax-efficient way to return excess capital to shareholders, compared to cash dividends. Repurchases generally lift the value of a stock through the reduction in shares outstanding, which should increase earnings per share and the stock price. They’re generally favored by institutional owners, and can make tremendous sense for broadly held and liquid stocks. They can also be very effective capital management tools for more thinly traded community banks with growing capital levels, limited growth prospects and attractive stock valuations.

Cash dividends. Returning capital to shareholders in the form of cash dividends is generally viewed very positively both by the industry and by investors. Banks historically have been known as cash dividend paying entities, and the ability and willingness to pay them is often perceived as a mark of a healthy and stable company. Cash dividends are often viewed as more attractive to individual shareholders, where quarterly income can be a more meaningful objective in managing their returns.

Business line investment. Community banking at its core is a spread dependent business. The ability to diversify the revenue stream through development or acquisition of a fee generating business can be an effective and worthwhile use of capital. Common areas of investment include mortgage banking, wealth management, investment products and services, insurance and the lift out of lending teams. A recent development for some is investing in technology as an offensive play rather than a defensive measure.

Capital Markets Access. Effective capital management plans also consider the ability to access the capital markets. In the community banking space, accessing capital is not always a foregone conclusion.  Community banks need to remain alert to market conditions and investor appetite. Over the past couple of years, the most common forms of capital available have been preferred equity and subordinated debt. It’s our view that for banks of a certain size and market cap, it’s a prudent capital management strategy to file a shelf registration, or Form S-3. The optionality provided by having a shelf registration far outweighs the concern that the shelf itself suggests a shareholder dilutive activity is on the horizon.

There are a couple of guidelines that managements should bear in mind as they develop their capital management plans. First, the plan needs to be realistic and achievable; there is limited value in building a plan around an outcome that is unrealistic. Second, don’t look a gift horse in the mouth. If there is credible information from trusted sources indicating that capital is available, get it.

It’s important to note that these capital management activities can be utilized individually or in combination. An acquisition may necessitate the need to access the capital markets. Or given the relative inexpensiveness of sub debt, raising some for the purpose of a share repurchase could make sense. A strong capital management plan can position a company to manage through the good times and maybe, more importantly, the challenging times.

Choosing BOLI as a Long-Term Asset

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The keys to a bank’s success include its understanding of risk management, its approach to long-term planning and the lifelong relationships it develops with customers. 

A vital consideration for bank management teams when selecting financial products and services is a like-minded alignment and shared approach to planning for risks that span decades, not quarters. As bankers diligently work with borrowers and customers, these turbulent times reaffirm a bank’s decision to acquire a valuable long-term asset: bank-owned life insurance, or BOLI.


Many bank executives and directors view BOLI as an asset that remains on their balance sheet for decades. It’s a sizable asset for many banks. While the average BOLI contract at MassMutual is around $3 million, we work with many clients with larger policies. 

And because it’s a long-term decision, selecting a competitively priced product from a financially strong carrier helps ensure asset quality. This can provide bank boards with the assurance that their BOLI product is stable and that their carrier has the financial strength necessary to pay a market-competitive crediting rate at a time when banks need it most.

Demonstrated Commitment

Stability in the BOLI business is a strength; banks need their insurance carriers’ commitment to the BOLI market to be unwavering. During volatile economic times, the long-term commitment and stability of your BOLI provider can be a key asset for your bank.

As bank management evaluates which companies to work with, some of the considerations should include:

Longevity: How long has the insurer been continuously active in this space and across market cycles?

Service commitment: What types of servicing protocols are in place for existing clients, and how are advisor relationships supported?

Values: Does the insurer share similar values as the bank, and how does it demonstrate those values through community involvement and investment?

Investment Philosophy Underpins Stability

Boards have an obligation to govern and supervise their BOLI holdings, as well as the insurers with which they do business. Selecting a BOLI carrier is a vote of confidence in that firm’s long-term portfolio management and risk management philosophy.  It is incumbent that boards focus on their BOLI insurer’s approach to underwriting and its underlying long-term investment philosophy.

We believe the mutual company structure naturally gives MassMutual a long-term perspective when it comes to planning and investing, as we focus on economic value and not short-term stock prices.

The uncertainty caused by the coronavirus pandemic provides insight into how an insurer’s investment strategy performs in a volatile market. When it comes to due diligence on BOLI carriers, credit ratings are a great place to start. But directors should also look at the insurer’s capital levels, liquidity and financial cushion. 

To meet long-term commitments, insurers must follow an appropriate asset-liability matching program, while achieving attractive portfolio returns to back customer obligations. An insurer’s general investment account should be well diversified and managed with a long-term view that withstands short-term fluctuations in asset values.  Even in the most volatile market conditions, your bank’s BOLI provider should be positioned to meet the needs of those who rely on them. 

In view of today’s economic uncertainty, we understand BOLI may not be top of mind for directors and banks.  However, it’s important to understand the differences and nuances when it comes to BOLI management and investment. 

Evaluating and aligning with companies that share a similar approach to risk management, long-term commitment and sound investment philosophy have proven to pay dividends over the long term. While post-pandemic planning may be hard to conceptualize, banks operate and run for the long term, and should consider relationships with companies that feel the same.

Insurance products issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001. 

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A Common Trait Shared by Elite Bankers

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investment-8-2-19.pngIf you talk to enough executives at top-performing banks, one thing you may notice is that not all of them see themselves as bankers. Many of them identify instead as investors who run banks.

It’s a subtle nuance. But it’s an important one that may help explain the extraordinary success of their institutions.

This came up in a conversation I had last week with the president and chief operating officer of a $2.6 billion asset bank based in New England. (I’d share the bank’s name, but they prefer to keep a low profile.)

His bank is among the most profitable in the country and is a regular fixture atop industry rankings, including our latest Bank Performance Scorecard.

Its profitability and earnings growth are consistently at the top of its peer group each year. More importantly, its total shareholder return (dividends plus share price appreciation) ranks in the top 3% of all publicly traded banks since the current leadership team gained control in 1993.

The distinction between investors and bankers seems to lay in how they prioritize operations and capital allocation.

For many bankers, capital allocation plays a supporting role to operations. It’s a pressure release valve that purges a bank’s balance sheet of the excess capital generated by operations. As capital builds up on the balance sheet, it impairs return on equity, which can foster the illusion that a bank isn’t earning its cost of capital.

To investors, the relationship between operating a bank and allocating its capital is inverted: The operations are the source of capital, while the efficient allocation of that capital is the ultimate objective.

Bankers who identify as investors also tend to be agnostic about banking. If a different industry offered better returns on their capital, they’d go elsewhere. They’ve gravitated to banking only because it’s a peculiarly profitable endeavor. In no other industry are businesses leveraged by a factor of 10 to 1 and financed with government-insured funds.

There are plenty of other bankers that fall into this categorization. The recently retired chairman of Citigroup, Michael O’Neill, is one of them. He said this when I interviewed him recently for a profile to be published in the upcoming issue of Bank Director magazine.

O’Neill’s time as chairman and CEO of Bank of Hawaii bears this out. A major objective of his, after refocusing its geographic footprint, was reducing the bank’s outstanding share count.

Bank of Hawaii had 80 million shares outstanding when O’Neill became CEO in 2000. When he left 4 years later, that had declined by 38% to only 55 million outstanding shares. This helped the bank’s stock price more than triple over the same stretch.

Another example is the Turner family, which has run Great Southern Bancorp for almost half a century. Since going public in 1991, Great Southern has repurchased nearly 40% of its original outstanding share count. A $2 million investment during the initial public offering would have been worth $140 million last year.

The Turners never said this when I talked with them last year, but it seems safe to infer that they view banking in a similar way. They’re not trying to build a banking empire for the sake of running a big bank. Instead, they’re focused on creating superior long-term value.

This philosophical approach coupled with meaningful skin in the game insulates a bank’s executives from external pressures to chase short-term growth and profitability at the expense of long-term solvency and performance.

“Having a big investment in the company … gives you credibility with institutional investors,” Great Southern CEO Joe Turner told me last year. “When we tell them we’re thinking long term, they believe us. We never meet with an investor that our family doesn’t own at least twice as much stock in the bank as they do.”

M&T Bank Corp. offers yet another textbook example of this. Of the largest 100 banks operating in 1983, when its current leadership team took over, only 23 remain today. Among those, M&T ranks first when it comes to stock price growth

I once asked its chairman and CEO René Jones what has enabled the bank to create so much value. One of the main reasons, he told me, was that they could gather 60% of the voting interests in the bank around the coffee table in his predecessor’s office.

And the bank in New England that I mentioned at the top of this article is the same way. The family that runs it, along with its directors, collectively hold 40% of the bank’s stock.

The moral of the story is that it’s tempting to think that capital allocation should play second fiddle to a bank’s operations. But many of the country’s best bankers see things the other way around.