As banks face compounding competition, skyrocketing customer expectations and the pressure to keep up with new technologies, they must determine the best path forward. While some have turned to banking as a service and others to open banking as ways to innovate, both options can cause friction. Banking as a service requires banks to put their charters on the line for their financial technology partners, and open banking pits banks and fintechs against each other in competition for customers’ loans and deposits.
Instead, many are starting to consider a new route, one that benefits all parties involved: banks, fintechs and customers. Collaborative banking allows institutions to connect with customer-facing fintechs in a secure, compliant marketplace. This model allows banks and fintechs to finally join forces, sharing revenue and business opportunities — all for the good of the customer.
Collaborative banking removes the regulatory risk traditionally associated with bank-fintech partnerships. The digital rails connecting banks to the marketplace anonymize and tokenize customer data, so that no personally identifiable information data is shared with fintechs. Banks can offer their customers access to technology they want, without having to go through vendor evaluations, one-to-one fintech integrations and rigorous vendor due diligence.
Consider the time and money it can take for banks to turn on just one fintech today: an average of 6 months to a year and up to $1 million. A collaborative banking framework allows quick, more affordable introduction of unlimited fintech partnerships without the liability and risk, enabling banks to strategically balance their portfolios and grow.
Banks enabling safe, private fintech partnerships will be especially important as consumers increasingly demand more control over their data. There is a need for greater control in financial services, granting consumers stronger authority over which firms can access their data and under which conditions. Plus, delivering access to a wider range of features and functionality empowers consumers and businesses to strengthen their financial wellness. Collaborative banking proactively enhances consumer choice, which ultimately strengthens relationships and creates loyalty.
The model also allows for banks to offer one-to-one personalization at scale. Currently, most institutions do not have an effective way to accurately personalize experiences for each customer they serve. People are simply too nuanced for one app to fit all. With collaborative banking, customers can go into the marketplace and download the niche apps they want. Whether this means apps for the gig economy or for teenagers to safely build credit, each consumer or business can easily download and leverage the new technology that works for them. Banks have an opportunity to sit at the center of customer financial empowerment, providing the trust, support, local presence and technology that meets customers’ specific needs, but without opening up their customers to third-party data monetization.
While many banks continue attempting to figure out how to make inherently flawed models, such as banking as a service and open banking, work, there is another way to future-proof institutions while creating opportunities for both banks and fintechs. Collaborative banking requires a notable shift in thinking, but it offers a win-win-win scenario for banks, fintechs and customers alike. It paves the way for industry growth, stronger partnerships and more control and choice for consumers and businesses.
The four decades after the internet made information readily accessible has led to inventions and innovations like smart devices, mobile apps and the ability to be constantly connected. Today, companies are focusing on harnessing technology to build smoother, richer and deeper customer experiences.
As the information age evolves to the experience age, the next digital revolution will be embedded finance. Embedded finance enables any brand, business or merchant to rapidly, and at a low cost, integrate innovative financial services into new propositions and customer experiences. Embedded finance is driven by consumers’ desire for more convenient and frictionless financial services. Several use cases that underline the demand for embedded financial experiences include:
Billing payments as part of the experience. Businesses are already using payment options, like buy now, pay later, to differentiate their offering, increase sales and empower buyers at checkout.
Growing popularity of Point-of-Sale financing. The volume of installment-based, flexible payment and instant credit options has increased significantly in the past five years, indicating a desire for instant access to short-term borrowing.
Mainstreaming of digital wallets. As more people use their mobile phones to purchase products and services, it makes sense that consumers want to access other financial services seamlessly within apps.
There is potential for embedded finance in almost every sector; in the U.S. alone, embedded finance is expected to see a tenfold revenue increase over the next five years. Financial institutions are in a position to provide branded or white-label products that non-banks can use to “embed” financial services for their customers. Banks must evolve rapidly to take advantage of this new market opportunity.
The front-runners will be institutions that can offer digital real-time payments or instant credit with minimal friction and optimum convenience to customers. But providing this requires new core technologies, cloud capabilities and flexible application programming interfaces, or APIs and other infrastructure to support new business models. Banks will also have to become much more collaborative, working closely with fintechs that may own or intermediate the customer relationship.
Embedded finance allows nonbank businesses to offer their customers additional financial services at the point of decision. Customers can seamlessly pay, redeem, finance or insure their purchase. This can look like buying, financing, and insuring a TV from a store’s shopping app, securing a mortgage through the estate agent’s website as part of a house purchase or obtaining health insurance from a fitness app. This does not mean that every retailer or e-commerce business will become a bank, but it does mean that many more will be equipped with the potential to offer more financial capabilities to customers as a way to compete, differentiate and engage more effectively.
In May 2021, Mambu surveyed 3,000 consumers and found the following:
81% would be interested in purchasing health insurance via an app, and almost half of these would pay a small premium.
60% would prefer to take out an education loan directly from their academic institution rather than a bank.
86% would be interested in purchasing groceries from a cashier-less store.
How these capabilities are delivered and consumed is changing constantly. Consumers want to use intuitive and fast financial services via online and mobile banking channels. Digitalization and cloud services are reinventing back-office functions, automating and streamlining processes and decision-making. At the same time, legislation, open banking and APIs are driving new ecosystems. These changing markets and increased competition make it more difficult for banks to meet evolving customer demands, prevent churn and sustain growth.
We are living in the world of the continuous next. Customers expect financial service providers to anticipate and meet their requirements — sometimes even before they know what they want — and package those services in a highly contextual and personalized way. At the same time, new digital players are setting up camp in the bank space. Tech giants are inching ever closer to the banking market, putting bank relationships and revenue pools are at risk. On an absolute basis, this could cost the industry $3.7 trillion, according to our research.
Incumbent banks need to adopt a foundation oriented toward continuous innovation to keep pace with changing customer preferences. Embracing innovations such as embedded finance is one way that banks can unlock new opportunities and raise new revenue streams.
With most banking activity taking place on mobile, banks must innovate in order to deliver the full customer experience straight to customers’ fingertips.
With more people using their phones to access banking services, banks cannot afford to miss out on the massive opportunity to go beyond transactions and offer the sales and service customers seek. A Citigroup study found that mobile banking is among the top three most-used applications on a consumers’ phone, increasing 50% from 2017 to 2018.
Many banks still have a siloed mindset, considering in-branch, mobile and online experiences as separate and distinct entities. But their customers don’t differentiate between channels; they view banking as an omni-channel experience.
Their expectations are the same, whether they go to a branch, visit their bank’s webpage at home or open an app on their phone. If they have questions, they expect the ability to ask their bank within the mobile app just as easily as they would in branch. And if they are interested in learning about savings accounts or loan rates, they expect to easily find that information within the mobile banking space.
Banks have long thrived by delivering seamless transactions, competitive and unique products and outstanding service. They have responded to the growing popularity of mobile banking by investing in technology to build out robust transactional experiences for their customers. From mobile deposit to transferring funds to bill pay, the ability to conduct fundamental banking transactions is available to and frequently used by customers.
Where bank mobile apps are lacking, however, is in providing the sales and service that they excel at delivering in their branches to the mobile devices of their customers. This is a huge opportunity many banks are missing. Based on our data, there are about 2,000 opportunities per every 25,000 accounts where a customer expresses an intent to inquire about how to do something or how to adopt a new product that is entirely uncaptured in mobile banking.
With the advent of digital transformation and more activity moving to mobile channels, the sales and service aspects of banking have gradually become more diluted. Banking has become less sales and service oriented and increasingly more transactional.
There is only one direction for banks to go: give consumers what they want and demand. Banks need to offer customers the ability to connect with them on their phone anytime, anywhere, and to receive the same level of sales and service they do at a branch. Mobile banking provides a plethora of opportunities to do just that.
Banks need to do more to provide the same support and service in their mobile channels as they do within their branches. There are three easy ways they can begin to leverage mobile banking to go beyond transactions to deliver sales and service to their customers.
1. Embed a robust help center within mobile banking. Make finding and accessing digital support a breeze. Embed support content from your website within your mobile banking application to allow customers easy access to help content like resetting passwords and fund transfers. Make sure the most frequently asked questions are answered in a manner that answers the questions, provides additional information and creates a call to action.
2. Utilize chatbot to further engage customers. Add live chat or an automated chatbot for an additional avenue to engage with your mobile customers. Banks can use chat to suggest relevant content or products and services, help point customers in the right direction and to learn more about their financial goals and needs.
It’s not uncommon for chat usage to double once it is added to mobile banking, which can put a sizeable strain on contact centers. Use support content in the form of a chatbot to allow customers the ability to self-answer common support questions, and offer live chat for more complex questions and issues.
3. Provide clear, concise product information. Customers no longer consider mobile banking to be purely transactional. They think of it as an extension of a branch, where they’ve come to expect support and sales information. Providing links to your key products within mobile banking can encourage customers to explore your offerings.
When banks fail to go beyond transactions in mobile banking, they miss out on a vast opportunity to provide sales and service through the channel customers are the most present. The consequences of not doing so can result in greater contact center volume, and missed opportunities to increase wallet share.
Banks are increasingly becoming technology companies—not in the eyes of investors, perhaps—but certainly in terms of meeting the expectations of their customers in a rapidly digitizing consumer marketplace. Banks have been heavy users of technology for decades, but the role of technology in virtually every corner of the bank, from operations to distribution, to product design, lending and compliance, is taking on a greater strategic importance.
It was only a few years ago that an emerging fintech sector was viewed by many bankers as a competitive threat, particularly marketplace lenders like Lending Club and SoFi, or new payments options offered by the likes of Apple Pay and Venmo, PayPal’s successful P2P product. While those competitive threats still exist, the focus of most banks today is working with fintech companies in collaborative relationships that benefit both sides. Banks are facing enormous pressure from changing consumer demographics and preferences to develop new products and services that go well beyond what they have traditionally created on their own. The new ideas include more than just new applications that enhance or expand an institution’s mobile banking capability, an area that continues to receive a lot attention. With developments in artificial intelligence (AI) and machine learning, banks are able to bring greater efficiencies and effectiveness to such disparate activities as regulatory compliance and accounts payable.
There are challenges to a partnership approach, however, beginning with the necessity to fully vet the potential fintech partner in a thorough due diligence process. Banks are conservative by nature, while many of the fintech companies developing the systems and applications that enable banks to stay abreast of the rapidly evolving digital economy are quite young and culturally different. Banks that want to work with fintech companies will have to do the necessary due diligence while also bridging the culture gap.
The benefits, and challenges, of working collaboratively with fintech companies will be the focus of Bank Director’s FinXTech Annual Summit, which will take place May 10-11 at The Phoenician resort in Scottsdale, Arizona. The agenda kicks off with back-to-back peer exchange discussions on the dynamics of fintech partnerships and changes in consumer behavior, then provides both general session presentations and case study sessions that examine such topics as innovation, AI, automation in commercial lending, vendor contract management, the digital robotic workforce and the future of the branch in an increasingly digitized world.
Also occurring at the Summit will be the announcement of Bank Director’s 2018 Best of FinXTech Awards, which will be given to banks and their fintech partners for projects where they worked together in a collaborative relationship. From a list 10 finalists, awards will be given a bank and its fintech partner in each of the following award categories: Startup Innovation, Innovative Solution of the Year and Best of FinXTech Partnership.
The banking industry saw one of the biggest technological developments of the year in June with the introduction of Zelle, a peer-to-peer (P2P) payments app now offered by over 30 of the leading U.S. financial institutions. Participating are some of the biggest names in banking, such as JPMorgan Chase & Co., Wells Fargo & Co., Bank of America Corp., Citigroup and Capital One Financial Corp., as well as many smaller banks through partnerships with leading payment processors.
The ability to make quick and easy peer-to-peer payments across banks has existed for a few years now, although most banks haven’t had this capability. In fact, PayPal’s Venmo has overwhelmingly dominated the peer-to-peer payments space. The introduction of Zelle marks the first bank-backed response to Venmo, and thus, the banking industry’s most significant attempt to capture some P2P market share from third-party technology providers.
It remains to be seen whether Zelle will be able to trump Venmo’s popularity, but in either case, its launch can teach banks a few valuable lessons about their own service offerings.
The Appeal of Venmo Venmo was launched independently in 2009 and later acquired by PayPal in 2013 after gaining considerable traction, especially among millennials. Perhaps one of the reasons it saw so much popularity with this demographic is the built-in social elements that appeal to millennials’ desire to connect with friends online and to “see and be seen.” Users can view friends’ transactions through a newsfeed, send personalized transaction messages and even integrate with Facebook so it’s easier to locate friends.
Another major reason for Venmo’s popularity is its ease of use. The app now supports text and voice control integration, seamlessly aligning with how users are already using their phones by allowing them to send or request payments simply by sending a text or dictating the command to their phone.
The Introduction of Zelle With the wild popularity of Venmo, many banks realized they were being blown out of the water when it came to peer-to-peer payments. In response, Bank of America, Wells Fargo, and JPMorgan Chase teamed up with payments technology company Early Warning to begin developing their own app that could facilitate payments between their customers.
While Zelle has the disadvantage of its network being limited to participating banks, the app introduces a few compelling benefits that make it a true contender for Venmo. Primarily, there’s a feeling of security that comes with an app associated with the bank itself, since users won’t have to submit sensitive data into a third-party platform.
With transfer between banks using Zelle, users will also be able to receive money instantly instead of having to wait a few days for the transaction to process through Venmo. They’ll also enjoy a more seamless banking experience as Zelle is accessed through the host bank’s existing mobile banking app so customers making P2P transactions can also complete other banking tasks within the same platform.
What Banks Can Learn Ultimately, the launch of Zelle isn’t just a lesson for banks to offer innovative technology. More importantly, it’s a reminder for them to keep an eye on technology companies and the way they’ve influenced bank customers, or else they may be missing out on valuable business opportunities.
So why did banks wait so long to present a competitive solution to Venmo? Even though many noted the popularity of Venmo years ago, they might have waited because there was no straightforward way to generate profit in the P2P space.
However, providing a relevant, convenient and user-friendly experience is of the utmost importance for banks, as that’s what continues to attract and drive business—and ultimately, does generate a profit. Given how prevalent technology has become to consumers’ daily lives, building technology into this experience is not only essential but expected.
Regardless of whether or not Zelle comes out on top, its launch is only a positive for banks. The innovations Venmo and similar companies have introduced have forced banks to reprioritize and modernize their services, focusing more on building deeper, more valuable relationships with their customers than simply on profits. And with those relationships, profits will come.
Of all the most difficult issues that bank boards must deal with, technology may be at the top of the list. Banks have long been reliant on technology (think IBM mainframes and ATMs) to run their operations, but in recent years technology has become a primary driver of retail and small business banking strategy. This change can be tied to the growing ubiquity of digital commerce, the integration of the mobile phone into the fabric of our everyday lives, the birth of social media and its adoption as an important business and commercial channel, and the ascendency of the millennial cohort as a major factor in our economy. Technology is everywhere, it’s in everything, and that trend is only going to become more pronounced in the future.
Why do bank directors as a group struggle so much with technology? Are they just a bunch of Luddites? In all fairness, most directors are not career technologists and therefore bring only limited professional knowledge of technology to the task of board governance. But demographics are clearly a factor as well. The average age for most bank boards ranges between the early 60s to the mid-70s, and baby boomers often find themselves overwhelmed by all of the technology-driven changes they see occurring around them. And while there may be an understandable tendency to resist adapting to new technologies in their personal lives, bank directors simply must understand how technology is changing their industry, and how it is impacting their institutions.
Christa Steele is the former president and CEO of Mechanics Bank, a $3.4 billion asset bank in Richmond, California, and more recently the founder and CEO of Boardroom Consulting LLC in San Francisco, where she works closely with bank CEOs and their boards. Steele doesn’t mince words—directors must educate themselves about the changes in financial technology that are transforming their industry—and she offers some suggestions about how this can be done. The following interview has been edited for length and clarity.
BD: Why do most directors at community banks struggle so much with the topic of technology? Scope of knowledge and lack of diversity in the boardroom. This diversity does not stop at gender, age and ethnicity. Typically, community bank boardrooms are filled with childhood friends and family. This served a purpose early on, especially when those banks were formed. However, as a bank grows and evolves, it’s important to bring in new perspectives. It’s no secret that the majority of community bank revenue models are derived from the net interest margin. Fee revenue is virtually obsolete relative to the overall operating income for most of these institutions.
So how does a bank make up for this shortfall of diversified revenue streams? Management teams and their bank boards need to take a serious look at their digital strategy and internal infrastructure. If they do not assimilate to the changes occurring in what I call this vortex of technology, they’re going to get left behind.
Fixing this starts with succession planning for the institution. We have a lot of community banks where the management teams are close to or at retirement age. Many of these leaders do not want to make necessary changes because of the threat of internal disruption, time commitment, costs and maintaining a short-term horizon. Boards are similar. Most bank boards are tired. I feel boards in general have done an exceptional job getting their arms around compliance and safety and soundness issues in the last 10 years. However, they’ve taken their eye off of the ball when it comes to marketing, digital strategy and technology initiatives. I remember hearing about a Bank Director survey a few years ago in which board members were polled and asked how many of them used their cell phones to transact. It was staggering to learn that nearly half of the respondents didn’t use their bank’s mobile channel. How are these board members supposed to understand technology trends and its impact on the financial sector and their own banks?
BD: What can directors do to become more comfortable with technology? Get educated beyond compliance training. Attend Bank Director conferences, ask questions, talk to folks involved in financial technology, follow automation. Pay attention to what’s trending. Get connected to social media. Join LinkedIn and gain perspective on what’s going on in the United States and abroad pertaining to technology in the financial sector. See what other people are doing outside of your own market.
Change up the boardroom. Board appointment should be strategic in nature and no longer be about bringing your childhood friend or local jeweler down the street on your board. Bring in a fresh perspective. Evaluate board terms and board limits. A board that is a strategic asset to its bank should consist of expertise in marketing, cybersecurity, digital/e-commerce, financial and risk. Each of these appointments should be from outside your institution. Do not be opposed to bringing in someone younger in their 30s or 40s. By bringing in somebody younger, you bring in someone who is engaged in social media. Social media is where it’s at. We have banks that are interacting and partnering with Facebook. Bank of America just started letting customers transact through a universal login with Facebook where their customers can pay their mortgage payments, they can transfer money between accounts, they can do a variety of things through Facebook. The remainder of your director appointments should be former or current CEOs who provide a macro-level mindset to the ongoing challenges facing the institution.
BD: What are some of the barriers to innovation, particularly in the community bank space, around financial technology? Lack of understanding the competitive landscape (it’s no longer just the community bank down the street), time, cost and willingness to embark upon a digital transformation. It’s a lot of heavy lifting for management, and oftentimes the board does not understand the complexities and costs associated with this endeavor. Many banks do not fully understand the technology contracts they have in place with their core providers and other technology vendors. Those contracts have them locked in for a duration of time, typically three to seven years. That is the number one barrier to making any changes. It is costly to exit existing contracts.
Many community banks are under utilizing the capability of their existing vendors. At Mechanics Bank, we went through and evaluated every vendor contract. We cut $3.5 million dollars out of our budget in a single calendar year through renegotiating, exiting and forming new relationships with vendors. We found we were paying for services we did not need and paying for services we weren’t using but should be using. This is the first step in embarking upon a new digital strategy.
I highly encourage bank boards to have a refresher course on how a bank operates using a bank simulation model. Each board member picks a role of CEO, CFO, senior credit officer, etc. and has to manage a bank’s funding, pricing, growth, capital requirements, loan loss provisions and so on. This is not only a great team-building exercise and will provide for a greater appreciation of the day-to-day management team of the bank, it will also set a solid foundation for discussing what is needed in the way of technology innovation to run the bank going forward.
Evaluate what you have, get educated on what’s trending, then decide what you need. Do not be the retailer that gets eaten alive by Amazon Prime. Be proactive instead of reactive to the changing needs of your customer base.
BD: Are the major cores an impediment to innovation? I wouldn’t say impediment. There is no doubt that the big three core technology providers have a stronghold. But they are looking to innovate as well. Their biggest attribute is size and scale. Their biggest downfall is they are a slow-moving ship coming in and out of port. The long and the short of it is, you’re not going to get rid of your core provider. I feel it’s become increasingly important to be better partners with your core. When banks push for some kind of innovation, the cores typically say they’re planning on doing that two years from now. That is when the banks get irritated and push for needing it now but do not want to have to pay for a custom project. That is the frustrating part for the bankers, but the bankers need to help the core understand their needs. I am a firm believer in more outsourcing and in banks becoming nimble. This takes time but is achievable and necessary in this day and age.
BD: When we think about the technology challenges that banks face today and how the board should engage in finding solutions, does it really boil down to a people issue? Yes, it is that simple. There are a lot of community banks that just refuse to think that financial technology innovation is impacting them. CEOs and directors need to have an open mind and be willing to learn something new. If you understand your digital strategy, you understand your technology strategy and you understand what’s going on around you—guess what, all of the sudden your board is engaged, and it’s going to make your company perform better.
Many will recall painful lessons learned in the wake of the 1990 passage of the Americans with Disabilities Act (ADA) as numerous claims arose alleging that bank ATMs were not accessible to the disabled. Banks were required to retrofit facilities and equipment to meet the standards adopted in 1991 by the U.S. Department of Justice requiring ATMs to be accessible. Again in 2010, the Justice Department supplemented the general accessibility rules with standards setting out extensive technical specifications for ATMs, including speech output, privacy and Braille instructions, leading to another round of claims, lawsuits and retrofits of equipment.
Today, a new target for ADA claims has surfaced: online and mobile banking. Claims brought under Title III of the ADA are growing in number, targeting financial institutions for failing to make their websites and mobile applications accessible to individuals with disabilities.
Title III of the ADA covers public accommodations and commercial facilities and provides, in pertinent part: “[n]o individual shall be discriminated against on the basis of a disability in the full and equal enjoyment of the goods, services, facilities, privileges, advantages, or accommodations of any place of public accommodation by any person who owns, leases (or leases to), or operates a place of public accommodation.” Banks fall squarely within the category of “service establishments” that qualify as public accommodations. Thus, Title III’s accommodation requirements apply to at least the physical location of a bank.
At issue in the recent influx of claims is the extent to which a bank’s website must accommodate disabled patrons. Federal courts are split on whether websites for private businesses actually constitute a public accommodation under the ADA. Federal courts generally have taken one of three approaches regarding the applicability of ADA accessibility requirements to websites: the internet is not a place of public accommodation; the internet is a place of public accommodation; or the internet is a place of public accommodation to the extent a website serves as a gateway to the full and equal enjoyment of goods and services offered in a business’s physical locations.
The Justice Department, which also enforces the ADA, has not yet issued regulations, accessibility requirements or guidance relating to whether and how commercial websites are to comply with Title III. Originally, the Department planned to issue regulations implementing Title III in the spring of 2016; however, it changed course in late 2015, announcing that the regulations would not be finalized until 2018 at the earliest, stating that it wanted to concentrate first on similar regulations for government entities and federal contractors covered by Title II.
In the meantime, the Justice Department has taken the position, at least as far as state and local governments are concerned, that Title II obligates those entities to make their websites accessible to consumers with disabilities. The Justice Department is on record asserting that “[t]he internet plays a critical role in the daily personal, professional, civic, and business life of Americans. The ADA’s expansive nondiscrimination mandate reaches goods and services provided by public accommodations and public entities using internet websites.”
As to private business, the Justice Department has entered into several consent orders under Title III in which the businesses have agreed to bring their websites and mobile applications into compliance with the Web Content Accessibility Guidelines 2.0 AA, published by the Web Accessibility Initiative of the World Wide Web Consortium.
With alleged violations of ADA Title III finding their way into claims, lawsuits and Justice Department actions, it is important for board members to be alert to emerging website and mobile application accessibility issues, to be prepared to assess their institution’s exposure and to make sure their institutions address any unmet requirements. With a new administration arriving in Washington D.C., it is important to monitor its perspective on this topic. Expert consultants and legal counsel can provide valuable guidance in structuring the assessment process as well as any needed remediation. The process should include a review of the institution’s web and mobile platforms, a review of the institution’s technical capabilities, as well as applicable vendor agreements to ensure that gaps are addressed so that the bank meets ADA requirements.
As consumers continue to embrace online and mobile banking channels, financial institutions are reevaluating the branch’s role in modern banking. Historically, branches have served at the forefront of the financial institution and customer relationship. Even though digital account solutions provide new levels of convenience and flexibility, the branch remains a vital channel facilitating interpersonal interactions between financial institution and customer, and fosters greater in-depth communication between the two.
Instant issuance is establishing itself as a proven program to attract more customers to the branch. Instant issuance systems allow financial institutions to print credit and debit cards on-demand inside the branch, for new customers or when an existing customer needs a replacement card. When branches enable on-demand printing of credit and debit cards, both issuers and customers win. Banks that take the additional step in providing permanent payment cards on the spot realize a much stronger return on investment in terms of customer acquisition, satisfaction and loyalty.
New programs, like instant issuance, draw customers, especially millennials, because it reduces the wait time in receiving access to their funds. Contrary to common perception, cash is a large draw for millennials. According to a GoBanking Rates survey released in 2016, 60 percent of millennials still prefer to be paid in cash, which means the millennial reliance on debit cards will remain strong, presenting a natural opportunity to actively engage millennials more effectively in their branches.
While millennials may appear to operate much differently than prior generations, their core expectations are much the same. They seek convenience and want their financial institutions to provide new and innovative technologies that keep pace with the technologically driven world in which they live.
In today’s world, where bank customers are subject to card data breaches with alarming regularity, protecting customer data is paramount to the success of any financial institution initiative. Instant issuance provides an opportunity for financial institutions to lead the conversation around EMV® integration and security. EMV provides heightened security by embedding microprocessors inside debit and credit cards, replacing the magnetic stripe card.
Financial institutions that implement scalable, cost-effective solutions that are EMV-enabled are better able to educate customers on changes to the transaction process. As EMV adoption has been a source of uncertainty and concern for financial institutions, retailers and consumers alike, instant issuance provides a convenient method for providing much-needed knowledge around the shift.
Instant issuance proves to be a secure and affordable way for financial institutions to realize the value of their branch investment. By drawing customers into the branch and getting credit and debit cards to market quicker, issuers are keeping payment cards top-of-wallet and increasing interchange revenue.
As the branch continues to reassert itself as a strategically important banking channel, financial institutions that leverage instant issuance as a strategic differentiator and recognize its role in driving customer activity within their branches will be better positioned to exceed customer expectations.
What does the future hold? As I referenced in an earlier article, I gave a presentation about the future of banking at Bank Director’s third annual Bank Board Training Forum in Chicago Sept. 29-30, and promised that I would share some of my thoughts with you after the conference. I might end up being completely wrong, of course, but here are my predictions and I’m sticking with them.
Technology Going forward, I think we will begin to see the ascendancy of digital distribution channels in retail banking. Driving this change will be the continued digitalization across the entire economy, combined with the integration of millennials into the world of work, mortgages and parenthood at an accelerating rate. We occasionally refer to millennials as “digital natives” since they grew up on video games, cell phones and the Internet, and banks will have to provide a robust digital option if they want to keep them as customers. The bank branch isn’t dead, but I see it becoming increasingly less important over the next decade.
Disruption The long-term future of the website lenders is unclear to me since they rely primarily on private equity investors and the capital markets for their funding, which is much less reliable over the course of an entire economic cycle than bank deposits. The question for them is whether they can take an economic punch in a recession. The payments competitors are here to stay because what they really want isn’t a banking relationship with customers so much as access to their data, including their financial data, because it enables them to bombard those customers with highly differentiated and customized offers on merchandise. And much of the technology of web site lenders and payments competitors will eventually be adopted by the banking industry. This is certainly true in the mobile space, but also in areas like commercial loan underwriting, which remains a laborious, people-intensive process. In this sense, the future of traditional banking is fintech.
Economy This is probably one of the safer predictions that I made: There will be at least one recession between now and 2026. We are now in the seventh year of an economic expansion which, believe it or not, is the fourth longest going back to 1945. Nothing in this world lasts forever, and the current expansion won’t either.
Consolidation This is probably my boldest (or craziest) prediction: There will be 4,558 banks as of December 30, 2026. Here’s how I got to that number. The annual consolidation rate over the last couple of years has been approximately 3 percent. There are a little over 6,000 banks today, and if you assume the industry will continue to consolidate at that rate for the rest of the decade, you get close to that 4,558 number. However, I factored in one more variable—one year in which a recession resulted in a consolidation rate closer to 5 percent to account for a spike on bank failures, assisted transactions through the Federal Deposit Insurance Corp. and relatively healthy banks hedging their bets by pairing up with a stronger merger partner. I’m sure I will be wrong about the exact number for banks in 2026, but there’s no question that there will be significantly fewer of them.
Demographics By 2026, the last of the baby boomers will be heading towards retirement, most of the banks will have Gen X CEOs (the oldest of whom will be in their late 50s to very early 60s) and millennials will be moving into senior management positions. Gen X’ers and millennials are much more intuitive when it comes to digitalization issues generally, and I expect that their ascendance will only accelerate the digitalization of banking and personal finance. And of course, millennials will also be the single largest consumer demographic by 2026, so they will be eating their own cooking when it comes to digital banking.
Finally, I anticipate that something no one expects to occur (and therefore won’t predict) will end up having a huge impact on the industry. We had already seen the emergence of smart phones in 2006, but the ubiquitous iPhone wouldn’t be introduced until 2007, and 10 years ago how many people expected the mobile phone to revolutionize banking?
Anyone who thinks that community banks won’t be able to adapt to an evolving marketplace where digital and mobile channels are becoming increasingly important probably hasn’t heard of Radius Bank. In 2014, the management team and board at Boston-based Radius made the transformational decision to close all of its branches save one, as required by federal law, and adopt a digital-only consumer banking platform.
While it might have seemed as though $790 million asset Radius was making a bold bet on a strategy that most banks are embracing far more cautiously, President and Chief Executive Officer Michael A. Butler doesn’t see it that way. “I’d rather be where the future is than the past, and I’d rather take a chance on trying to build the organization for what I thought the future was going to be like,” Butler says. From his perspective, important financial decisions, like getting a car loan or home mortgage, are increasingly being executed in digital space. “I am not that technologically savvy, but if I want a car loan, I am going to the internet,” Butler says. “If I want a mortgage loan, I am going to the internet. That’s where clients are shopping, right?”
As one might expect, adopting a digital-only consumer banking strategy was a controversial decision inside the organization. “It wasn’t easy,” Butler says. “We had a board of directors that wasn’t necessarily on board. We had old school retail banking people who thought that branches were the way to go and that we should build new stores.” But that’s not the future the 57-year-old Butler, a baby boomer whose career experience is firmly grounded in a very traditional approach to banking, had in mind.
“We really believe that the organization we are building is going to be a blueprint for the future of community banking,” he says.
Let’s begin with some background on how Radius came to be in the position of essentially reinventing itself in the first place. Formed in 1987 as First Trade Union Bancorp, the federally chartered thrift was originally owned by two union pension funds. First Trade ended up running afoul of the Dodd-Frank Act’s Volcker Rule, which barred the institution from proprietary trading. The bank changed its name to Radius in 2014 as it was beginning to execute its strategic makeover, and its acquisition in 2015 by a group of private equity investors solved the regulatory issue.
Today, Radius’ product lineup includes Radius Hybrid, which pays up to 1 percent interest on balances of $2,500 and above and includes free ATM usage worldwide. The bank also offers a high yield savings account that pays up to 1 percent interest on balances of $2,500 or greater; online and mobile banking capabilities with bill pay; and three personal payments apps including Apple Pay and a person-to-person payments option called Radius Pay A Friend. (The bank has said it will roll out Samsung Pay and Android Pay later this year.)
Butler says that his team has worked hard to elevate the customer experience at Radius, which includes giving customers the products they want—and products that work well. A good example is the ability to open a Radius checking account online without ever touching a piece of paper. Butler wanted a process that was fully automated and could be accomplished quickly and easily. “Our products are good, but we have to make it easy for people to do business with us,” he says.
One of the frustrations that community bank executives often voice about adding a new digital product to their consumer lineup is the poor support they sometimes receive from their core processor. When Radius decided it wanted to offer a mobile payments app developed by a third-party technology company, Butler went to the bank’s core processor and asked for its technical support. “They came back and said, ‘Well, we don’t have the resources to dedicate to it. Oh, by the way, we are going to have a mobile payment product, too. We would like you to just wait for ours to roll out.’ We hung up the phone and said, ‘Well, that was crummy customer service.’” That conversation occurred in 2012 and according to Butler, the core processor in question still hasn’t released the mobile payments product that it asked Radius to wait for. Radius, on the other hand, released its Radius Pay mobile app—which uses an app developed by the Boston-based technology firm LevelUp—in 2013.
Rather than try to create its own development shop, Radius has learned how to work closely with third-party developers like LevelUp. “We agreed that we cannot be the victim of a larger vendor’s decision on how to work with us, but at the same we also agreed that we couldn’t have a thousand programmers running around here,” Butler says. Radius spends a lot of time on due diligence before it agrees to work with a small vendor. In the case of LevelUp, “We made sure we were culturally aligned,” Butler explains. In addition to LevelUp, Radius works with Bottomline Technologies on its digital account opening process, Q2 Holdings on its online and mobile banking capabilities, and Apple on its payments product.
While Radius hasn’t tried to build its own development staff, Butler still has had to surround himself with people who understand the digital world—and most of them are much younger than he is. “If you’re going to build a bank that’s based on a virtual platform, you’ve got to have people who are aligned with that,” Butler says. “You can’t have a [virtual] technology strategy with a bunch of old school bankers. You have to bring in the right people.”
Even though it is just a few years removed from being a very traditional brick-and-mortar thrift that focused on the Boston market, Radius now pursues a national strategy in terms on retail client acquisition and deposit gathering through its virtual channel. The largest number of Radius retail customers are located in Boston because “this is where we’ve been for 28 years, but we have pockets of customers in all parts of the country,” says Chris Tremont, executive vice president for virtual banking. “We don’t look at [customer demographics] just by age and location and income. We take more of a psychographic approach around attracting people who are interested in banking virtually.”
Three years ago, the bank also stopped marketing through traditional channels like billboards, newspaper ads and direct marketing via the postal service. “We are bigger fans of what I would call conversion marketing than brand marketing,” says Butler. “We want to make sure that we are out there measuring the effects of our marketing. We shifted from that concept into the direct to consumer side and that’s where we work with companies like Google Analytics and we use digital marketing to try and put our brand in places where consumers are shopping.”
The one area where Radius does not rely on a virtual strategy is the asset side of the balance sheet. The bank originates C&I and commercial real estate loans through its own relationship management team that focuses primarily on Massachusetts and other parts of New England. It is also an active Small Business Administration lender and announced in May that it had recruited a team to spearhead a national push into that sector. And it has developed a niche in the yacht financing market. Radius does not originate consumer loans, although it has partnered with the marketplace lender Prosper to offer loans from $2,000 to $35,000.
“We are predominately a virtual retail bank on a deposit gathering side, but we are not in a place where we believe we can deliver a superior [digital] product on the loan side,” says Butler. “We will partner with companies like Prosper for referrals but we are not doing any balance sheet lending in the virtual space at this point. We really don’t believe that any consumer loan product is efficient for a community bank to deliver.”
Still, by adopting a virtual strategy for its retail banking business, Radius has placed itself among the forefront of institutions in an era when branch distribution is giving way to the online and mobile channels. All it took was a can-do attitude and a determination, says Butler, “to think more like Apple and less like Bank of America.”