Commercial Customers Want Fintech Innovation Too


fintech-6-3-16.pngOnline banking, electronic bill pay, and mobile deposits are no longer seen as innovative offerings by consumers. They’re simply check boxes—a bare minimum set of tools and services that they expect their bank to offer. Despite the fact that this technology is considered table stakes in the battle to win consumers, business customers at most banks are still waiting their turn to benefit from this technology. And as the workforce skews younger and gets even more tech savvy, they’re going to get frustrated from waiting for comparable services—if they haven’t already.

Just last year, millennials surpassed Gen Xers as the largest generation in the U.S. labor force. This is the first digitally native generation that grew up with computers in their homes and came into adulthood with near ubiquitous access to the Internet, social networking, and mobile phones. As they take over the workforce, they’re going to want—and expect—the same conveniences they’ve become accustomed to in their personal lives. But when it comes to banking technology, they’re not getting it.

The stark difference between bill payment processes of accounting professionals at home and at work is just one example of how a lack of adequate technology is holding them back. A study last year by MineralTree found that 81 percent of respondents use paper checks frequently or exclusively at work, whereas almost half (48 percent) said they rarely use checks in their personal lives and 7 percent said they never use them at all.

If banks don’t start providing business customers with innovative tools to do their jobs more efficiently, they’re going to start looking elsewhere for the technology they want. As JP Morgan Chase & Co. CEO Jamie Dimon now famously noted in his 2015 annual shareholder letter, “Silicon Valley is coming.”

The Path to Business Banking Innovation
It’s not surprising that business customers have found themselves in this position. It makes sense that technology on the consumer side has paved the way for innovation in banking because it’s so much less complex to build and implement.

Take mobile deposits for example. Being able to take a picture of a check with a mobile phone and deposit it via a banking app is a significant advancement in mobile banking. But it’s much more realistic for a personal account holder to use this technology than it is for a business. For a company that might deposit hundreds of checks every day, taking photos of each of them with a mobile phone is simply not practical or efficient. Not to mention adding the complexities of a business’s need for increased security features like role-based permissions for different users, or integration with other enterprise systems.

Bill pay faces similar hurdles. On the consumer side, banks have proven capable of creating directories that include most of the vendors their customers regularly pay—companies like electric, cable TV or mortgage providers. But it would be nearly impossible for a single bank to create such a directory for all business payments because the size and scope of such a network is just too vast. And then there are complexities like supporting approval workflows, role-based permissions, and integrations.

Integration with other core enterprise systems is a major issue for business customers. Being able to seamlessly connect a bank’s bill pay technology with a company’s financial system of record—their accounting/ERP system—is a must have. But again, it’s a complex task that takes a high level of technical knowledge and expertise to achieve.

Innovations in consumer banking technology have made significant strides in moving the industry forward, but now commercial customers want their share of fintech innovation too. We’re at a tipping point where business banking technology needs to catch up, and the burden is on the banks to make it happen. They can either build the technology on their own or partner with companies who can. But if they don’t, they risk being left behind.

Preparing for the Great Wealth Transfer


wealth-transfer.png

The net worth of millennials is slated to more than double by 2020, with estimates ranging from $19 to $24 trillion, according to a report released by Deloitte Consulting. This, combined with the fact that more than two-thirds of wealth managers’ current clients are over the age of 60, means that wealth managers should be preparing for a massive wealth transfer.

In anticipation of the great wealth transfer, it is important to recognize the expectations of this younger generation. Millennials, a group that has grown accustomed to instant search results and access to on-demand advice, expect to be treated as unique individuals and value the ability to make data-driven decisions. Yet, as much as this generation embraces digital technology and on-demand services, when it comes to finances, they also want a personalized approach.

Consequently, it is no longer sufficient to place a client in a generic portfolio model, especially when the client can pay next to nothing for a similar portfolio allocation through an automated investment service online. The quality and level of service that this new generation of clients demands is higher, as they want to be involved in making informed decisions about their money and now have cheaper options for managing their wealth.

And wealth managers cannot rely on millennials to just “inherit” their services from parents or grandparents. Fifty-seven percent of millennials would change their bank relationship for a better technology platform solution, according to the Deloitte study. In order to remain profitable as client demographics shift, and to meet the demands of millennials, wealth managers should leverage technology and data analytics tools to successfully engage their clients and maximize the value of service provided.

By harnessing the availability of data analytics, wealth managers can adequately get to know their clients and identify the distinct human capital factors in their clients’ lives, enabling them to provide truly tailored financial advice and investment recommendations.

Rather than simply assessing a client’s age and income, existing technology allows wealth managers to consider other aspects such as, geography, work sector, health, family, real estate, balance sheet and time until retirement. Taking a more holistic approach to wealth management makes it possible to customize a client’s investment portfolio, designed to fit each client’s unique risks and financial situation. This approach also delivers a more interactive, consultative wealth management process for both the wealth manager and the client.

To illustrate the value of this method, consider a petroleum engineer in her thirties living in Houston, where the oil industry drives property prices. An automated investment service or a conventional approach to wealth management would likely propose a wealth portfolio that is based largely on her age and income; however, this would fail to identify the concentration in oil within her career, property and subsequently, her portfolio.

Furthermore, changing market conditions can also be challenging for even the most experienced wealth managers, but today’s technology can help wealth managers mitigate risk and market fluctuations for their clients. Digital platforms and data analytics can adjust the risk exposure of the portfolio and compare performance over various market scenarios, enabling wealth managers to propose targeted solutions in an engaging, diagnostic context.

Ultimately, wealth managers must focus on understanding the needs of their new clientele to remain profitable in an increasingly competitive market. In fact, a recent PwC survey revealed attrition rates of more than 50 percent in intergenerational transfers of wealth, highlighting the fact that the next generation relies very little on the services of their parents’ wealth manager. This means that banks and their wealth managers must expand their technological capabilities and digital offerings, while gaining a deeper understanding of their clients to successfully build a sustainable business in today’s evolving market.

The industry should recognize that this group of clients has incorporated technology into almost every aspect of their lives and they expect nothing less of the businesses and financial advisers they interact with. As the industry quickly approaches the transfer of wealth to millennials, wealth managers will have to satisfy the demands of a new generation, and technology will play a critical role in engaging those who are accustomed to the benefits and polished user experience associated with digital tools and devices.

Hot “Banking” Jobs: As Banking Changes, So Are the Job Titles


banking-jobs-5-16-16.pngBanks today must adapt to a world where “digital”, “cyber risk” and “fintech” are the new business lexicon. As the bulk of the workforce shifts from baby boomer to millennial, there is an increased need to attract talent from outside traditional financial services. Below we highlight some changing and emerging roles and a few strategies banks can use to attract top talent.

Emerging Skills and Roles

Chief Technology Officer/Chief Digital Officer
Banks today are pressured to enhance mobile capabilities and compete with fintech companies such as Lending Club, Square and Circle. These new competitors have disrupted traditional financial services offerings, which is forcing banks to adapt their product offering and service platforms to remain competitive. This new competition and technology focus have also led banks to reach outside their typical talent pool to attract candidates with new skills.

Chief Risk Officer/Chief Compliance Officer
Since the financial crisis, regulators have significantly increased the requirements for banks to manage and mitigate risk practices. Add to that the increased threats of cyber risk and it is clear that risk and compliance officers are critical members of the senior leadership team.

Chief People Officer/Chief Culture Officer
As a service related industry, people are a critical asset. And as more millennials enter the workforce, traditional banking environments may need to change. Talent development, succession planning and even culture will be differentiators and expand the traditional role of human resources.

Chief Strategy Officer/Chief Innovation Officer
Part of the transition in the banking industry involves shifts in customer profile, competitors and new products. As banks emerge from the financial crisis and focus on growth and profitability, many are turning to innovators from outside the banking industry to help find creative M&A opportunities, new products and a new customer base.

Do’s and Don’ts

Attracting and retaining non-traditional banking talent can create both challenges and opportunities.

Do:

  • Think strategically: Assess the talent, skills and capabilities you need to execute your strategic plan (new regions, new products, new capabilities). What skill “gaps” need to be filled? Do you need to go outside or can you offer nontraditional career paths and transition current leadership into different roles? How should the leadership structure and team evolve? Create a leadership strategy that supports your business strategy.
  • Think outside the industry: Many of the roles discussed above are outside the norm for the traditional banking industry. Technology roles may be filled from start-ups or Silicon Valley firms and culture or innovation roles may be filled by ex-consultants or top talent from other industries. If you do recruit from outside of banking, you may need to access different sources of talent (e.g. recruiters) and different benchmark data than you typically use.
  • Be creative: If you fear you can’t “afford” talent from other industries, think beyond traditional compensation solutions. Compensation is only a part of a total rewards package and there are other important factors such as development and growth opportunities, as well as company culture and lifestyle. Be open to new work environments and career opportunities that will appeal to new (and current) staff.
  • Reward and retain: In the race to attract the “best” it can be tempting to offer large up-front compensation packages and buyouts of existing unvested awards to acknowledge that the executive is taking a risk to change jobs. While there are reasons to provide these usual pay components, if not designed right, they can be short-lived. A well-designed new hire package and ongoing compensation program should allow the bank to attract top talent, reward performance and create powerful retention.

Don’t:

  • Rely on compensation surveys: Many banks rely on established compensation surveys and/or peer group data to benchmark roles. However, such data for “hot jobs” is rare or far from perfect. Sample sizes may be small and data is often over a year old. Use multiple data perspectives/views and “triangulate” the information to determine fair and appropriate pay.
  • Over-focus on internal pay relationship: Respect and align with internal relationships but be flexible. In order to attract an executive in one of these “hot” areas, a bank may need to pay outside of the current compensation structure, but there should be a clear path to pay equity among the executive team over time.
  • Rush the process: It is important to undertake a thoughtful process when hiring a new executive, particularly those from other industries or non-traditional areas. The compensation committee should receive background information on the candidate(s) as well as detailed information on the compensation package, contractual arrangements and performance expectations.

Four Ideas to Engage Millennials as Bank Customers and Investors


millennials-5-11-16.pngIn my work advising community banks on capital and liquidity issues, one of the more common concerns I encounter is how to deal with a changing shareholder base. As existing shareholders age or pass away, they are bequeathing their stock to children and grandchildren, many of whom have no connection to the bank or no longer live in the same community.

Engaging and retaining these younger shareholders has become a challenge—they might sell the shares at a discounted price or fail to support the bank or subsequent capital raises. After all, as all community banks know: A bank’s best shareholders are its customers. Fortunately, there are a number of things community banks can do now to foster better relationships with the younger generation, including millennials.

1. Embrace the Crowd

The recent adoption of Regulation A+, a provision under the Jumpstart Our Business Startups (JOBS) Act, allows small companies to raise up to $50 million in crowdfunded offerings from non-accredited investors in any 12-month period. Millennials are natural crowdfunding investors. In fact, millennials’ craving for connection and desire to give back to their communities makes them more likely to participate in crowdfunding than more traditional capital raises.

That’s a benefit to community banks that are looking to raise capital under Reg A+. Already, several community banks have filed Reg A+ offerings to either issue shares in connection with a merger/acquisition or to redeem preferred stock issued from the Small Business Lending Fund, or SBLF, program. We’ll be keeping an eye on these offerings to see how they progress.

2. Get Tech Savvy

While most bank directors will remember a time before the Internet and mobile phones, today’s youth were weaned on smartphones. Millennials have seen technology transform and disrupt almost every aspect of their lives, from how they communicate, to how they consume entertainment, to how they bank.

In fact, according to a Viacom Media Networks’ survey, The Millennial Disruption Index, 68 percent of millennials believe that in five years, the way we access money will be totally different. Seventy percent believe that the way we pay for things will be completely different and 33 percent believe they won’t need a bank at all. Eek!

For community banks, that means investing in technology is critical. Online and mobile banking services are no longer optional, they are essential. Also, young and old alike are relying on web sites and electronic delivery of company reports and financial information so they can make investment decisions. To meet that demand, banks on our OTCQX market are providing news, quarterly and annual financial reports, which can be easily accessed via Yahoo! Finance and other financial portals.

Banks that don’t invest in their web presence to ensure their news travels risk being overlooked by millennials researching them online.

3. Invest in Education

Millennials grew up during the recession and are more frugal than the generation before. At the same time, they are more skeptical of traditional authority figures when it comes to managing their finances. All this has a resulted in a certain anxiety around finances. A recent study by Bank of America Corp. and USA Today found 41 percent of millennials are “chronically stressed” about money. Only one-third (34 percent) of millennials feel content about their finances, while many are anxious (2 percent) and overwhelmed (22 percent).

For community banks, that presents a tremendous opportunity for education. Chicago-area Liberty Bank for Savings has held free workshops on reducing student debt, even bringing in a debt specialist. Virginia Beach, Virginia’s Bank @tlantic holds regular “lunch and learn” sessions with guest speakers on everything from first-time home buying to cybersecurity for small businesses.

4. Think Outside the Box

Heads buried in their smartphones and tablets, millennials have gained a reputation that they care only about themselves. But that’s just not true. In truth, millennials care deeply about their local communities and the world around them. They want to know that what they do makes a difference. That presents a significant opportunity for community banks which are already deeply embedded in the communities they serve.

But it also means thinking about your community involvement differently. Instead of simply donating to local organizations, organize events where millennials can get involved. Liberty Bank for Savings partnered with a local news site to sponsor a Saturday night “taco crawl” to five local taco restaurants. Other banks have had success inviting their millennial customers to exclusive events they might not otherwise be able to attend like high-profile fashion shows and sporting events.

Think outside the box and you’ll find other ways to engage today’s youth as customers and shareholders.

2016 Compensation Survey: Where Are The Lenders?


compensation-survey-5-10-16.pngThe demise of training programs at the nation’s biggest banks, coupled with an aging Baby Boomer population, is resulting in what could be a mini-crisis for the banking industry. There aren’t enough commercial lenders, according to the bank executives and directors responding to Bank Director’s 2016 Compensation Survey. Without skilled lenders, financial institutions will be hard-pressed to grow their revenue, since lending is still how many banks make most of their money.

Forty percent of survey respondents say that recruiting commercial lenders is a top challenge for 2016. When asked to describe their bank’s efforts to attract and retain commercial lenders, 43 percent say there aren’t enough talented commercial lenders. The same number say they’re willing to pay highly to fill these valuable roles within their organization.

Bank Director’s 2016 Compensation Survey is sponsored by Compensation Advisors, a Gulf Breeze, Florida-based member of Meyer-Chatfield Group. In March, Bank Director surveyed online 262 bank directors, chief executive officers, human resources officers and other senior executives. Fiscal year 2015 compensation data for CEOs and directors was also collected from the proxy statements of 105 publicly traded banks.

Twenty-three percent of respondents say that recruiting younger talent is a key challenge this year. Thirty-four percent say they’re actively seeking talented millennial employees, between the ages of 18 and 34 years, but have trouble attracting them. Of these, 60 percent say that millennials aren’t interested in working for a bank. Fifty-four percent consider their bank’s culture to be too traditional.

One-third have a satisfactory plan in place to attract millennials. The majority of these, at 71 percent, credit a culture that millennials feel comfortable in as the reason for their bank’s success, as well as a clear path for advancement (59 percent) and reputation (55 percent).

The remaining third say hiring millennials is not currently a focus for their institution.

Other key findings:

  • Tying compensation to performance remains the top challenge identified by respondents, at 46 percent.
  • Sixty percent expect the bank’s CEO and/or other senior executives to retire within the next five years. Forty-five percent have both a long-term and emergency succession plan in place for the CEO and all senior executives.
  • Respondent opinions are mixed on the value of equity. More than half of executives, at fifty-four percent, indicate that equity is highly valued as part of their own compensation package, but just 36 percent of all respondents say equity on its own, in the form of stock options or grants, is an effective tool to tie executive interests to that of shareholders. Fifty-three percent of CEOs received equity grants in 2015.
  • Forty-five percent of respondents indicate that their board most recently raised director pay in 2015 or 2016.
  • Almost half of respondents indicate that three or more board members will retire from their position in the next five years.
  • Sixty-seven percent indicate their bank has a plan in place to identify prospective new directors.
  • Sixty-three percent say their bank will actively seek to create a more diverse board in the next two years.

To view the full results to the survey, click here.

Talent Management at the Top


U.S. Bancorp emerged from the financial crisis as a desirable workplace for talented employees, enabling the bank to better attract and retain talented employees. In this presentation, Jennie Carlson, executive vice president of human resources, outlines U.S. Bancorp’s transparent and analytical process to identify, reward and engage top employees. Millennials are changing how banks groom the next level of executive talent, which includes an increased commitment to diversity. 


Say Goodbye to ‘All Work, No Play’


Many banks today struggle with two concerns related to loyalty, both among customers and employees. Attracting and retaining talented employees, particularly among the younger and tech savvy set, remains difficult for many banks. Commanding customer loyalty is another key issue. What’s known as “gamification,” properly used, can help financial companies address these problems.

In practice, gamification uses techniques learned from video games to reward specific behaviors. Microsoft Corp.’s Xbox console has long rewarded players for their achievements, whether it’s completing a level in the popular Halo series or constructing a sword on Minecraft. A 2007 study by Electronic Entertainment Design and Research, a video game research firm, found that game titles with a greater number of possible achievements sold more copies. It’s a tactic that can work for the banking industry, particularly those desperate to attract millennial employees and customers.

“‘Gamification’ is ultimately a very powerful methodology for increasing customer engagement and ‘stickiness’ to that institution,” says Michael Yeo, a Singapore-based senior market analyst with IDC Financial Insights.

USAA.pngSan Antonio, Texas-based USAA is one financial services company that seems to have gone all-in. The bank’s Savings Coach app rewards members, who earn points and medals for completing challenges, like skipping trips to Starbucks, and transfers the money that would have been spent into a USAA savings account. The standalone app uses voice command technology, and features an animated eagle named Ace, which ties to the company’s logo and military membership. Ace provides bits of financial advice to users. “He’s sort of a stern-sounding dude who scans your transactions” to identify ways to save money, says Neff Hudson, vice president, emerging channels at USAA. Members have saved $400,000 so far through the app, which was introduced in July. In the near future, Hudson says members could earn rewards by using other USAA services, such as financial planning, that establish a more sound financial future for the customer.

Perhaps it’s no surprise that other examples from the world of video games abound in the fintech sector. New York City-based online investing platform Kapitall makes investing a game, where users can earn points by completing educational quests, participating in tournaments or playing investment-related games. These points can be redeemed for items in Kapitall’s online store. LendUp, an online lender based in San Francisco, rewards the good behavior of lessees that make payments on time or take education courses. Points earned by climbing “The LendUp Ladder” translate into a better rate for the borrower.

PaySwag.pngSimilar to LendUp, mobile payment app PaySwag rewards good behavior among a consumer base that may lack good credit and has a greater need for financial education. PaySwag was developed by Reno, Nevada-based Customer Engagement Technologies. “What we’re trying to do is completely change the concept of collections, and build that around a combination of rewards, ‘gamification’ and…education, to help really minimize defaults and get rid of the negativity around collections,” says Max Haynes, the company’s CEO. Intended for high-risk borrowers who may struggle to make payments on time, the white label app partners with lenders and other entities involved in collecting debt.  Users can earn points by watching educational videos or making payments on time. Those points translate into small rewards, like a $5 Amazon gift card. The program also allows some flexibility for the borrower to make changes to their payment plan. By using PaySwag, these organizations aim to establish good financial habits that help users avoid delinquencies—meaning PaySwag’s partners are paid on time. One auto lender saw serious delinquencies of more than 30 days drop by 50 percent over a one-year period, says Haynes.

USAA works with Badgeville, a Redwood City, California-based “gamification” solution provider. In addition to adding savings games for customers, USAA is in the early stages of using similar methods to better engage and motivate employees.

According to Karen Hsu, Badgeville’s vice president of marketing, the purpose is “to change behavior and motivate, really motivate people, and it’s to motivate to perform better year after year.” She says video game techniques can help speed up the onboarding process for new employees, and continue training and education efforts. Employees can provide each other with positive encouragement and real-time feedback, and earn points for answering a coworker’s question or sharing educational materials, like an article. “It’s hard to physically give everybody the time they need, and being able to give that instant feedback is really important,” says Hsu. Employees can also be encouraged to develop skills and expertise in certain areas, or to meet specific criteria that help the institution’s efforts to cross-sell products and services.

USAA has five projects in the works using video game methods, and more on the drawing board. “I really think we need to look at this as a set of tactics that can make the products that we offer our members and consumers better,” says Hudson. As expectations change to meet the demands of younger generations, “gamification” could provide a strategic advantage to banks creative enough to use it.

2015 Growth Strategy Survey: Are Banks Missing Out on Millennials?


bank-growth-8-31-15.pngTraditional banks, which are typically run by baby boomers and older Gen X’ers, are still trying to figure out the next big generation of consumers.

Sixty percent of bank CEOs and directors responding to Bank Director’s 2015 Growth Strategy Survey, which was sponsored by the Vernon Hills, Illinois-based technology firm CDW, indicate that their bank may not be ready to serve millennials, which this year surpassed baby boomers as the largest segment of the population, according to the U.S. Census Bureau.  As digital use increases among an increasingly younger customer base, truly understanding and planning for the digital needs and wants of consumers seems to continue to elude bank boards: Seventy percent of bank directors admit that they don’t even use their own bank’s mobile channel.

Bank Director contacted chief executive officers, chairmen, independent directors and senior executives of U.S. banks with more than $250 million in assets, to examine industry trends regarding growth, profitability and technology. Responses were collected online and through the mail in May, June and July, from 168 bankers and board members.

Instead of millennials, banks have been finding most of their growth in loans to businesses and commercial real estate, which is their primary focus today. Loan volume was the primary driver of profitability over the past 12 months for the institutions of 88 percent of respondents, and the majority, at 82 percent, expect organic loan originations to drive future growth at their institutions over the next year. Eighty-five percent see opportunities for growth in commercial real estate lending, and 56 percent in commercial & industrial (C&I) lending. Total loans and leases for the nation’s banks grew 5.4 percent year over year, to $8.4 trillion in the first quarter 2015, according to the Federal Deposit Insurance Corp. 

Despite the rise of nonbank competitors like Lending Club and Prosper in the consumer lending space, just 35 percent of respondents express concern that these startup companies will syphon loans from traditional banks. Just 6 percent see an opportunity to partner with these firms, and even fewer, 1 percent, currently partner with P2P lenders to expand their bank’s portfolio. Few respondents—13 percent—see consumer lending as a leading avenue for loan growth.

Other key findings:

  • Forty percent of respondents worry about potential competition from Apple. Just 18 percent indicate their bank offers Apple Pay, with 63 percent adding that they “don’t think our bank is ready” to offer the feature to their customers.
  • More boards are putting technology on their agendas. Forty-five percent indicate their board discusses technology at every board meeting, up 50 percent since last year’s survey. Almost half of respondents say their board has at least one member with a technology background or expertise.
  • More than three-quarters indicate plans to invest more in technology within their bank’s branch network.
  • More than 80 percent of respondents indicate that their bank’s mobile offering includes bill pay, remote deposit capture and account history. Less common are features such as peer-to-peer payments, 28 percent, or merchant discounts and deals, 9 percent, which are increasingly offered by nonbank competitors.
  • For 76 percent of respondents, regulatory compliance causes the greatest concern relative to the growth and profitability of their institutions, and 64 percent say the high cost of regulatory compliance had a negative impact on their bank’s profitability over the past 12 months. Low interest rates, for 70 percent, were also a key impediment to profitability.

Download the summary results in PDF format.

Should Community Bankers Worry About Digital Transformation?


fintech-8-28-15.pngI was sitting in a group discussion at Bank Director’s Chairman/CEO Peer Exchange earlier this year when the subject of the fast growing financial technology sector came up. That morning, we had all heard a presentation by Halle Benett, a managing director at the investment bank Keefe, Bruyette & Woods in New York. The gist of Benett’s remarks was that conventional banks such as those in attendance had better pay attention to the swarm of fintech companies that are targeting some of their traditional product sectors like small business and debt consolidation loans.

The people in the room with me were mostly bank CEOs and non-executive board chairmen at community banks that had approximately $1 billion in assets, give or take a hundred million dollars. And I would sum up their reaction as something like this: “What, me worry?”

In one sense I could understand where they were coming from. Most of the participants represented banks that are focused on a core set of customers who look and act a lot like them, which is to say small business owners and professionals in their late forties, fifties and sixties. The great majority of community banks have branches, which means they also have retail customers, but their meat and potatoes are small business loans, often secured by commercial real estate, and real estate development and construction loans. I suspect there’s a common dynamic here that is shared across the community banking sector, where baby boomer and older Gen X bankers are doing business with other boomers and Gen X’ers, and for the most part they relate to each other pretty well.

There are two trends today that bear watching by every bank board, beginning with the emergence of financial technology companies in both the payments and lending spaces. The latter is the subject of an extensive special section in the current issue of Bank Director magazine. I believe the fintech trend is being driven in part by a growing acceptance—if not an outright preference—for doing business with companies—including banks and nonbank financial companies—in digital and mobile space. The fintech upstarts do business with their customers almost exclusively through a technical interface. There is no warm and fuzzy, face-to-face human interaction. Today, good customer service is as likely to be defined by smoothly functioning technology as by a smiling face on the other side of the counter.

The other trend that all banks need to pay attention to is the entry of millennials—those people who were born roughly between the early 1980s and early 2000s—into the economy. Millennials can be characterized by a number of characteristics and behaviors: they are ethnically diverse, burdened with school debt, late bloomers from a career/marriage/home ownership perspective and they generally are social media junkies. They are also digital natives who grew up with technology at the center of so many of their life experiences and are therefore quite comfortable with it. In fact, they may very well have a preference for digital and mobile channels over branches and ATMs. Although digital and mobile commerce have found widespread acceptance across a wide demographic spectrum, I would expect that the digital instincts of millennials will accelerate their popularity like the afterburner on a jet fighter.

Although they now outnumber boomers in the U.S. population, millennials are not yet a significant customer segment for most community banks. And the universe of fintech lenders is still too small to pose a serious market share threat to the banking industry. But both of these trends bear watching, especially as they become more intertwined in the future. The youngest boomers are in their early fifties. The cohort that follows, the Gen X’ers, is much smaller. Who will bankers be doing business with 10 years from now? Millennials, you say? But will millennials want to do business with bankers then if an increasing number of them are developing relationships with a wide variety of fintech companies now?

A board of directors has an obligation to govern its company not only for today, but for tomorrow as well. And these two trends, particularly in combination, have the potential to greatly impact the banking industry. Learning how to market to millennials today by focusing on their financial needs, and studying the fintech companies to see how community banks can adapt their technological advancements, is one way to prepare for a future that is already beginning to arrive.

For research on millennials and growth in banking, see Bank Director’s 2015 Growth Strategy Survey.

How Technology is Redefining the Customer Relationship


customer-relationship-7-30-15.pngYou can visit a lot of banks and never see one that looks like this.

Located in Portland, Oregon’s trendy Pearl District, Simple is one of the leading firms at the intersection of banking and technology.

The design is consciously industrial. Bike racks crowd every nook and cranny. There’s a piano. A sunroom. A large meeting room stocked with healthy snacks. The atmosphere is casual, yet charged with energy. The employees wear t-shirts and jeans, roughly a third of them work at standing desks, and you can count the number of non-millennials on one hand.

It’s too early to predict how the fintech revolution will play out, but there’s no doubt that this is the front lines of finance. And as in any commercial battle, it’s first and foremost about capturing the hearts and minds of consumers.

A growing cast of companies has emerged to meet millennials where finance and technology converge.

Simple, which teamed up with Spanish banking giant Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) at the beginning of 2014, offers a personal checking account accessible online and through its mobile app that’s designed to help people save. It does so by giving customers the ability to create compartmentalized savings goals.

Let’s say you need $50,000 for a down payment on a house in 24 months. By entering this goal into your Simple account, it will automatically deduct $68.50 ($50,000 divided by 730 days) each day from your “Safe to Spend” figure, which is essentially a person’s checking account balance less previously earmarked money.

Another technology-driven financial firm, Moven, offers a similar service. Described as the “debit account that tracks your money for you,” its home screen shows how much a person has spent during a month compared to previous months. If you typically spend $2,000 by the middle of a month, but are currently at $2,250, Moven’s app lets you know with each successive transaction.

“We create value by helping people build better money habits,” Moven’s president and managing director Alex Sion says.

A third player in the rapidly expanding fintech space, Betterment, builds customer relationships from a different angle. It offers an automated investing service. Give it your money, tell it your goals, and Betterment’s algorithms implement a strategy tailored to your financial objectives.

According to Joe Ziemer, Betterment’s business development and communications lead, it began the year with $1 billion in assets under management and now has $2.1 billion from 85,000 customers.

Finally, a growing number of Internet-based lending marketplaces connect yield-hungry investors with people and businesses in need of funding.

The best known of the group, Lending Club, offers personal loans of up to $35,000 to consolidate debt, pay off credit card balances, and make home improvements. Businesses can borrow up to $300,000 in 1- to 5-year term loans.

Funding Circle does much the same thing, though it focuses solely on small businesses. “There’s a perception out there that everyone is efficiently banked,” says Funding Circle’s Albert Periu, “but that isn’t true.”

Beyond using technology to refine the banking experience, a common set of objectives motivates these companies. The first is their missionary-like zeal for the customer experience. Their vision is to seamlessly integrate financial services into people’s lives, to proactively help them spend less, save more, invest for retirement and acquire financing.

“We created a product that allows customers to take control of their financial lives,” says Simple’s Krista Berlincourt.

This is done using elegantly designed mobile and online products that simplify and reduce friction in the relationship between a financial services provider and its customers.

To this end, a universal obsession in the industry revolves around the onboarding experience. “The onboarding experience is the moment of truth,” says Alan Steinborn, CEO of online personal finance forum Real Money.

Lending Club claims you can “apply in under five minutes” and “get funded in a few days.” Betterment’s Ziemer says that it takes less than half the time to set up an account with Betterment than it does at a traditional brokerage.

Finally, these firms compete vigorously on cost, with many forgoing account and overdraft fees entirely. In this way, they’re not only driving down the price of financial products, they’re also more closely aligning their own incentives with those of their customers.

Fueling the fintech revolution is the fact those millennials—people born between 1981 and 2000—now make up the largest living generation in the United States labor force.

Millennials see things differently. They “use technology, collaboration and entrepreneurship to create, transform and reconstruct entire industries,” explains The Millennial Disruption Index, a survey of over 10,000 members of the generation. “As consumers, their expectations are radically different than any generation before them.”

To millennials, banks come across as inefficient and antiquated. Two years ago, 48 percent of the people surveyed for Accenture’s “North America Consumer Digital Banking Survey” said they would switch banks if their closest branch closed. Today, less than 20 percent of respondents said they would do so.

This doesn’t mean that millennials will render in-person branch banking obsolete. A 2014 survey by TD Bank found that while they bank more frequently online and on their mobile devices, 52 percent still visited a branch as frequently as they did in 2013, mostly to deposit or withdraw money. “Those who do their banking in a branch feel it is more secure and enjoy the in-person service,” the survey concluded.

Wells Fargo’s recently appointed chief data officer, A. Charles Thomas, makes a similar point, citing a Harvard Business Review study that identified “customer intimacy” as one of three “value disciplines” exhibited by long-time industry-leading companies.

The net result is that the personal element of branch banking, while still relevant and necessary to build and maintain customer relationships, is nevertheless taking a back seat to digital channels. For the first time in Accenture’s research, the firm found that “consumers rank good online banking services (38 percent) as the number one reason that they stay with their bank, ahead of branch locations and low fees, both at 28 percent.”

It’s for these reasons that many observers believe the banking industry is prone to disruption. According to The Millennial Disruption Index, in fact, banking is at the highest risk of disruption of the 15 industries examined by Viacom Media Networks for the survey.

Of the millennials queried, it found that:

Sixty-eight percent believe the way we access money will be totally different five years from now.

Nearly half think tech startups will overhaul the way banks work.

And 73 percent would be more excited about a new offering in financial services from companies like Google, Amazon and Apple, among others, than from their own bank.

This isn’t to say that younger Americans don’t trust banks. In fact, just the opposite is true. According to Accenture, “86 percent of consumers trust their bank over all other institutions to securely manage their personal data.”

It boils down instead to the simple reality that millennials are “genuinely digital first,” says Forrester Research Senior Analyst Peter Wannemacher.

More than 85 percent of America’s 77 million millennials own smartphones according to Nielsen. An estimated 72 percent have used mobile banking services within the past year, says Accenture. And, based on the latter’s research, approximately 94 percent of millennials are active users of online banking.

Banks need to think about the customer experience differently. Millennials, and increasingly people in older generations, want more than physical branches to deposit money and get a loan. They want digitally tailored solutions for their financial lives.