When Capital One Financial Corp. launched its integration with Amazon’s Echo device in early 2016, it was the first bank to give customers the ability to ask Alexa about their finances. Just like she’s able to tell users about the daily news and weather, Alexa can immediately answer customers’ questions about their checking, savings, credit card, and home and auto loan accounts.
“Conversational interfaces are the future of how people will engage with technology,” said Jim Kresge, head of mobile payments technology at Capital One, in a blog post for Amazon. “The Capital One skill for Alexa has enabled us to serve our customers through a differentiated experience and most importantly, making it even easier to manage their money whenever and wherever they are. Using the new skill for Alexa, Capital One customers can manage their money easily (hands free) and intuitively (conversational UX).”
Capital One customers can also ask Alexa about transactions at more than 2,000 merchants, including Starbucks, Whole Foods and Amazon. Customers can ask about their spending on a specific date or through a select time period, using natural language.
American Express Co. launched its integration with Alexa in May 2017, allowing the company’s card holders to check their account information and pay bills, and also access Amex Offers, which are exclusive discounts available to customers through their American Express card. U.S. Bancorp launched its Alexa skill in September 2017, giving their customers a new way to check account balances and transaction history.
Bank of America Corp. will launch its own digital assistant, Erica, which customers can interact with inside the bank’s mobile app via voice or text message.
The era of the digital assistant Work, communication, education and finances have evolved from being managed on paper, to the computer, to now on our mobile devices. And the evolution continues as we enter the era of the digital assistant. In addition to the Amazon Echo, key players include Google Home and the Apple Homepod. Even Walmart is making the shift. The retailer partnered with Google to offer their products to shoppers using the Google Express digital shopping mall, so Walmart customers can place orders by speaking to Google Home or using the Google Assistant on Android.
Like these leading banks and retailers, the best companies are finding ways to get rid of complicated menus in their apps and create a more convenient experience for customers. According to the J.D. Power U.S. Retail Banking Satisfaction Study, JPMorgan Chase & Co. leads U.S. retail banks in customer satisfaction levels, followed by midsized banks, big banks and lastly, regional banks.
While it’s common to believe that a big bank will never be able to provide the personal customer service that a community bank can, big banks are soaring ahead with advances in technology—a leg up that is making the big banks more convenient and therefore more desired by customers.
It takes about 10 minutes to open a Capital One account online—already a score in convenience. Integration with Alexa is just as easy: Download the Amazon Alexa app and enable the Capital One skill. (“Skills” are Amazon’s name for Alexa apps.) Enter your Capital One account login information, and you’re ready to talk to Alexa about your account.
Of course, privacy concerns come into play when your bank account information is being accessed through a digital device like Alexa. In the setup process, customers can add a pin number that they’re required to tell Alexa before she shares any account information.
“Security is first and foremost in our mind as we develop any new product,” said Ken Dodelin, Capital One’s vice president of digital product management, in an interview with Mashable. The Capital One account information is encrypted, so even Amazon cannot access it, according to Dodelin.
“Our goal in developing the Alexa skill is to design for real-life conversations about money,” said Stephen Hay, head of content strategy and AI design at Capital One. “We want customers to speak naturally and feel confident we’ve got their back every time, wherever they are in life.”
Banking is being dramatically transformed by digital and mobile technologies. The widespread proliferation of smartphones, with their sophisticated cameras and mobile capture capabilities, creates a valuable opportunity for banks to shift both their retail and commercial customers from the physical banking habits of the past to new, digital channels—which can increase customer loyalty and save banks billions of dollars in operating costs. According to research by Bain & Company, branch visits are expensive for the bank, at an average cost of $4 to complete the same transaction that would cost about 40 cents if done through a mobile channel, and the branch traffic that persists today is dominated by routine transactions that could easily be transitioned to digital. As much as 8 percent of branch visits are simply to check an account balance, and a whopping 31 percent are to deposit checks.
Clearly, U.S. banks have a tremendous opportunity ahead of them if they can migrate more of their consumer and commercial customers from high-cost branches to self-service mobile channels for routine transactions. Mobile deposit technology can provide a strategic advantage by helping banks accelerate this migration. It has long been understood that mobile deposit is one of the most powerful options available to financial institutions for driving increased adoption of all mobile banking services.
Forward-thinking banks, analysts and investors are all recognizing the role that mobile deposit plays as a key indicator of a bank’s readiness for the digital future. That’s why banks like Bank of America Corp. are now reporting their mobile deposit growth rates in their quarterly earnings reports. They understand that demonstrating growing mobile deposit penetration indicates to investors that they are not only on the path to digital transformation, but that they also have the type of mobile-first customer base that every bank wants.
It’s not just consumer banking that can benefit from shifting transactions towards mobile. The commercial side of the business has a major opportunity to increase mobile banking services with mobile deposit as well. Paper checks remain the dominant form of payment for many businesses. A full 97 percent of small businesses still rely on paper checks to make and receive B2B payments, and according to the Federal Reserve, more than 17 billion checks were circulated in 2015. Yet, too many banks continue to rely on outdated practices, providing proprietary hardware to their commercial clients for scanning checks or simply expecting businesses to visit a branch or ATM to make their deposits. By leveraging commercial mobile deposit technology, businesses can batch deposit multiple checks using a mobile device faster than they can via a typical single-feed scanner. As the research firm Celent puts it, “mobile is the new scanner.” Celent also states that banks have an opportunity for 10 percent annual revenue growth over the short term by transitioning more of their commercial customers to mobile deposit.
To help transition both consumer and commercial customers from the physical banking habits of the past to the more mobile, self-service model of the future, banks must provide a superior mobile user experience. The research firm Futurion Digital conducted a thorough analysis of the mobile deposit user experience at 15 of the top U.S. banks and discovered a direct correlation between the quality of the user experience and adoption rates for mobile banking services. Banks that want to increase customer usage of their mobile banking applications would be wise to review the best practices and recommendations identified in the report in order to better position themselves against their peers.
In short, as physical branches become less important to a bank’s consumer or business banking strategy, transitioning customers to digital channels will be critically important to ensure they still have access to the services they need. Doing so can actually help banks increase customer loyalty and save billions of dollars by moving routine transactions to lower-cost, self-service channels. As one of the most popular features among mobile banking services, mobile deposit plays a strategic role in enticing customers to adopt all mobile banking services, and a bank’s mobile deposit penetration rates serve as a key indicator of its readiness for digital transformation. By focusing on delivering a superior mobile user experience and actively engaging with customers to help them make the transition to mobile, banks will be well-positioned for the future.
Mobile technology is simplifying banking for consumers in a plethora of areas—from payments to investing. But one area that’s been a sticking point for mobile banking, and is undergoing rapid transformation, is the ability for customers to open a brand-new account using nothing else but their smartphone.
The steps required to open a new account with a new financial institution usually require customers to fill out forms, speak to a representative on the phone, or even go into a branch. However, banks and fintech companies are beginning to partner to develop mobile apps that allow new customers to set up an account via their smartphone almost instantaneously.
That’s precisely the area that Somerset Trust Co., a $1 billion asset bank headquartered in Somerset, Pennsylvania, was looking to improve when it partnered up with BOLTS Technologies to improve its mobile new account customer experience. Somerset Trust, which was started by Civil War veteran Edward Scull and his son in 1889, has 29 physical branches across Pennsylvania and Maryland dedicated to customer friendly community banking. Today, Chief Executive Officer Henry Cook, a descendent of Edward Scull, manages the business his family started more than a century ago, but with the goal of leveraging technology to better service their customers.
One of the major problems facing Somerset Trust was the its digital new account signup processes. After conducting an audit of the process, the bank realized that there were serious deficiencies in the customer experience. Somerset Trust was also struggling to grow the business and obtaining funds to invest in modern technology. Customers simply weren’t drawn to Somerset Trust’s product offerings, due in part to apparent complexities in using its digital services. So, the bank decided to partner with BOLTS, located across the state in Bethlehem, Pennsylvania, to develop a sign-up experience designed to be consistent, timely and seamless across channels and devices.
BOLTS Technologies specializes in providing software to assist banks in better meeting customer needs, particularly in new account signups via digital channels. Moreover, BOLTS has worked with community banks for a number of years, and has developed a deep understanding of issues faced by community banks and areas they typically need to improve products or services.
One of the major technologies that banks fail to implement is fingerprint recognition and login, which BOLTS helped integrate into Somerset’s processes. The introduction of fingerprint recognition software on Somerset’s mobile application not only makes account sign-up easier, but allows banking staff to complete tasks seamlessly on mobile devices or tablets.
BOLTS spent several months working with the operations team at Somerset Trust, and early in the process identified the need to empower customer reps as such. This flexibility for branch staff was essential to the bank’s goal of securing an edge in relation to competitors’ approach to mobile technology. The result was a signup application that seamlessly moves from customers’ devices to desktops and tablets of back-end staff. The signup application was also built with a dynamic, rules-based engine that allowed the bank to more easily change and optimize steps in their account opening workflow. Auto-population features were also built in, which reduced data entry errors both from customers and branch staff. Consequently, Somerset Trust can shift its employee training efforts to more critical areas like customer service and interaction.
Somerset Trust customers are now able to start their onboarding on one digital channel, and complete the process on another. Starting an application on a laptop and coming back a day later to complete it on a mobile phone is a breeze. BOLTS also installed dynamic reporting functionality for customer service staff, allowing them to do things like follow up on hot leads and recognize their most valuable customers.
Since recently launching the BOLTS powered account opening product, Somerset Trust has been able to slash the average time it takes to open a new account. This is expected to generate an estimated savings of approximately $200,000 in year one. The new technology has also allowed the bank to expand into new markets that aren’t served by its brick-and-mortar locations, something it had struggled to do previously. Customers now have a reliable way of opening a new account 24/7 on their mobile device, without the need to visit a branch.
The partnership between Somerset and BOLTS continues to evolve, with the two companies currently developing a digital solution for loan and deposit origination utilizing the speed and convenience of tablet devices.
“BOLTS [Technology] has been a true partner to us, giving our bank access to IT talent and resources that compete with the largest of banks,” says Cook.
“Their approach allows us to focus on the customer experience, as well as break the status quo in traditional banking systems. It’s an exciting and invigorating feeling knowing that we have the resources to develop such ideas and position Somerset Trust Co. for a very promising future for our stakeholders.”
Jack Kuntz is president and CEO of American Savings Bank, with previous experience as the head of a core processing company. In this interview, Kuntz shares his thoughts about selecting providers, the benefits of investing in technology at both the employee and consumer level, and creating the bank’s most accessible customer service line—his personal cell phone number.
What investments in technology has American Savings Bank made that have added value?
Our investment in technology has been significant over the past three years and has provided a major component to our successful growth. American Savings is a multiregional bank with concentration in two areas of Ohio. One essential technology we employ is an HD video conferencing system which has saved time and money for the bank while reducing employee stress and protecting their safety by not driving two hours one way to attend a meeting. We use the system for everything from board meetings to operational meetings, and the technology is as effective on a PC or smart phone as it is on the big screens. In late 2015, we changed core processing systems, installed a new loan origination system and upgraded to a new mobile app. From a back office perspective, we have installed new and stronger vendor management and cybersecurity systems. All of these new technologies provide a benefit to the bank and our customers.
What made you decide to switch core processing systems?
Switching to a new core provider is the most significant and risky technology decision that a bank can make. Prior to becoming president of a core processor, I was in charge of support and conversions and was involved in dozens of core conversions over a span of nearly two decades. That first-hand knowledge about the costs of a conversion not only in dollars, but in employee stress, customer frustration and overall community reputation was invaluable. I believe there are three basic reasons to change core providers: you are paying too much, the current provider is lacking the products you need, or for some other reason you have lost confidence in the provider. Over the seven-year contract with the new provider, we are saving over 25 percent of our previous technology investment. That is significant as technology is the third largest expense item in our income statement, behind the cost of funding and personnel. Additionally, while having all the products of our prior provider, we were able to secure more commercial capabilities both on the loan and deposit side.
When it comes to implementing a fintech solution, would you rather buy, build or partner?
As a small community bank, building applications is cost prohibitive. In most cases we prefer to outsource major technologies to major players in the market. Our core, for example, is with D+H due to the many products the company offers. This gives our bank a single point of contact to obtain technology as we launch new and different products, as well as providing “one throat to choke” when the inevitable problems occur. When partnering or buying technology for the bank, a rigorous process is followed before a decision is made. Factors considered in our process include the financial strength of the provider, the fit of the product with our needs, viable references and accessibility to the decision makers within the provider’s company. Cost is always a factor but not the final determinant. My father used to say: “If you buy cheap, you buy twice”.
As consumer expectations in banking change, how does American Savings Bank stay connected with this audience?
We have found at American Savings that customer expectations vary in our two Ohio markets. In our metropolitan region, technology is more readily embraced, while the more rural region remains more face-to-face oriented. Having mobile, online loan applications, social media presence and other technologies are a prerequisite in today’s environment. Regardless of the region, we have created two keys to differentiating our brand. First is direct access to the CEO. All our advertising campaigns include my personal cell number. The second key is the reception you receive and the environment we create in our branch network. We provide a warm hello and fresh coffee or water in the lobby of our offices with cookies and pastries. I conveyed to my team that when a customer walks into one of our offices, I want them to feel like they walked into grandma’s house on Christmas Day.
Historically, customer convenience has always been the driving factor in choosing a bank. However, the way we define convenience is changing. Previously, it meant the proximity of bank branches to the customer’s daily route. Factors like customer service, product differentiation and knowledge were also important, but usually the more branches a bank had in convenient locations, the more customers it had. Even today, in most major cities the banks with the highest deposit share are those with the largest retail branch networks.
Times are changing and technology is a great equalizer for community banks. As consumers continue to decrease their use of cash and checks, so has the value of large branch networks for cashless customer segments like professional services. Today, customers seek technologies such as mobile banking, mobile deposit, remote deposit scanners and ACH platforms to manage their banking needs. In their mission to serve their communities, community banks should strive to meet the product needs of their customers as well. Whether your community is defined as blueberry farmers in Maine or multifamily landlords in Boston, banks can integrate technology into the daily lives of their customers to enhance their banking experience while redefining the meaning of convenience.
Founded in 2002 with $6 Million capital, Leader Bank has grown to $1.2 Billion in assets with 265 employees and seven full-service branches in the greater Boston area. Some of our more recent new product initiatives include ZRent, an electronic rent payment technology for landlords that was launched in 2015 and which automates the rent collection process. ZRent currently has 3,000 users and processes over $24 million in rent payments annually. Partner banks join the ZRent network in order to expand these rent payment capabilities to their clients and attract property owner clients. And in 2016 we introduced an automated loan notification system which updates borrowers on their loan statuses as they move through the underwriting approval process.
Over the last four years we have learned some key lessons in introducing new products within the community bank environment. These insights might be helpful to other bankers. The traditional product development cycle has an emphasis on the “great idea” and launching it in a “big way.” This approach may work well for building real estate or other things in the physical realm, but not necessarily for a financial or technology product:
We have adopted a different approach to the product innovation cycle that is more appropriate for financial products within community banks.
Identify Customer Problems by Listening
Instead of putting significant resources towards focus groups and brainstorming sessions to come up with solutions to serve our communities, we propose just listening to your customers with an open mind. “Listening” to customer problems means paying careful attention to the questions and comments that our customers mention in their day-to-day interactions with us. The key is creating a tight feedback loop between customer service, who receives the customer suggestions and the decision makers that create the solutions.
Learning and Research
Next we research each problem to determine whether it applies to our general corporate strategy and if we can offer a valuable solution. Then, instead of hiring a team to tackle the problem, we engage employees with downtime to actively contribute to research. We find that our employees are a great demographic representation of the communities we serve and can teach us a lot about the customer experience we are trying to improve.
Go Small and Go Live
If the research is positive and we have a solution, we will quickly launch a basic prototype of the solution. We call this “go small and go live.” Going small allows us to launch a basic solution without requiring a large budget. This provides great flexibility to factor in customer feedback and continuously improve the concept until it hits the mark.
We employ a concept of “stretch” to move projects forward without the need to formally request a budget for these initiatives. We do so by providing highly-motivated employees with the opportunity to take on additional projects. This type of “stretching” has multiple benefits including higher employee engagement and development of employee skills with no additional costs for the organization.
Tweak, Tweak, Tweak
At this point, feedback on your product is critical to its development to ensure that it will fully meet customer needs. Your team must place an emphasis on receiving customer feedback through any available channel, including surveys, customer phone calls and in-person meetings. From there, a tight feedback loop from the customer service people to the product managers is critical.
Scale and Automate
Once your product has received enough iterations of feedback and tweaks to validate that it meets a proven customer need, it is time to scale and automate. At this point a project manager should seek a budget for marketing, sales and the automation of time-consuming manual back-office tasks. Since the product has been thoroughly tested and used by a beta group of customers and employees, there is enough history to create a realistic return on investment pro forma that can prove to the finance team that investment dollars will not be wasted.
Finding a good idea is easy if you keep your eyes and ears open and listen carefully. Be cost efficient by using existing resources to get a minimum viable product to the market. Once you have established the value of the product and have results to support your claims on a smaller scale, you can seek additional funding to expand and scale the product’s capabilities.
Pennsylvania, Ohio, and New York might not offer the same growth opportunities as some other parts of the country, but that didn’t prevent Bank Services member S&T Bancorp from reporting record earnings in the third quarter of this year. Well managed institutions usually find a way to perform even when the conditions are less than optimal, or they’re located in slower growing markets. With $6.7 billion in assets, S&T is headquartered in Indiana, Pennsylvania, a small college town located about 50 miles northwest of Pittsburgh. It is an area that depends on manufacturing, service companies and Indiana University of Pennsylvania—the community’s largest employer—for jobs. Natural gas exploration in the Marcellus Shale formation, which runs through the region, also has been an ascending industry.
In recent years, S&T has expanded its lending activities into Ohio and Western New York, while also expanding its branch network west to the outer rim of Pittsburgh and east to Lancaster, Pennsylvania. Todd D. Brice, who has served as president and chief executive officer since 2008, talked recently with Bank Director Editor in Chief Jack Milligan about a range of issues, including loan growth in S&T’s three-state region.
What’s happening in the loan market in your three-state area? Brice: I think it’s pretty steady. We’ve made some pretty significant investments over the last four years or so to diversify the company. Our roots are in Western Pennsylvania, but in 2012, we opened up a loan production office in Akron, Ohio, and in ’14 we jumped down to Columbus, Ohio, with another team of bankers. Last year we acquired Integrity Bank in the Harrisburg/Lancaster market, which was about an $800 million institution. That got us into the Central Pennsylvania market. We also opened up a loan production office in Rochester, New York.
What we’re finding out is that each market provides different opportunities, and it gives us the ability to shift. If you’re seeing a softness in one market, you can focus attention in another market. I think one of the hallmarks of our company has been our ability to grow organically over our history, and then augment that with select M&A.
Were these lending teams recruited away from other organizations? Brice: Yes. In Akron, we originally had three people; today we have eight people in that office. In Columbus we started out with four people and we have eight. Western New York is a market that we’ve been lending into probably for 15 years. Our philosophy is not so much just to get into a market, but get into it with the right people. We were finally able to land a gentleman to lead the team up there, and then he was able to go out and recruit other high caliber bankers to the organization. All the bankers that we brought on board have very extensive experience in their respective markets.
In markets like Columbus and Akron, would it be logical to follow up those loan production offices with acquisitions at some point, if you found something that made sense? Brice: We just haven’t found the right fit for us. I think if you look at our history, we’ve been pretty disciplined, and try and stick to a model that has seemed to work for us, but we’ll continue to keep our eyes open.
In Akron, we haven’t been able to find the right partner so we decided to open a full-service branch that will use a private banking-type model.
Are you worried about a recession? Brice: I think you’re always worried about a slowdown. That’s why we’ve made significant investments over the last six years on the risk management side of the business. We monitor the loan portfolio in a number of different ways to try and keep an eye on concentrations, by product type or by markets, so if there is a downturn we can weather it a little better than some of the other folks.
The consumer financial services market is increasingly becoming mobile in its focus. Does that present challenges for S&T, or do you feel like that doesn’t really impact you because you’re [more of a commercial] bank? Brice: Mobile is an important distribution channel for us. I won’t say we’re going to be the first to market with a new technology, but we have a good partner in FIS and they get us up to speed pretty quickly, so we feel we have a pretty competitive suite of products. We just did an analysis on how we rank in different categories, whether it be online, mobile, bill pay, online account openings on deposit side and loan side, online financial management tools, text alerts, mobile deposit, remote deposit capture. We think that we compare favorably with our competitors, but it’s something we definitely need to keep an eye on going forward because while commercial banking gets a lot of the spotlight, consumer has been a very strong line of business for us for many years. We’re a 114-year-old company and we’ve built up a nice little franchise over that period of time.
Is the demand for mobile-based products, or mobile-based services, as strong in a smaller market like Indiana, Pennsylvania, as it would be in a larger urban area? Brice: Some of the things you’re seeing in the metropolitan markets, like branches that rely more on technology than people, I would say some of the rural markets we’re in are probably not quite ready for that. We are looking at taking that approach in some of our urban markets. Everybody has a mobile phone and they want to stay connected, so it’s important for us to make sure that we have those products to offer them. Fifty percent of our customer base use our online baking product, and another 15 percent also use our mobile banking product, which compares favorable to the utilization rates of our competitors.
The bank reported record third quarter earnings in October. What were the two or three things that helped drive that performance? Brice: We had a lot of things go our way. We were up 20 percent over the second quarter and another 9 percent over the third quarter of last year. Our average loan book was up about $100 million for the quarter. That helped to grow [net] interest income by about $1.7 million. Another area that we focus on pretty extensively is expense management. We were down approximately $400,000 quarter over quarter. We had a recovery on a prior loan that helped us out, but also our data processing costs are down about $600,000 a quarter. We renegotiated a contract which was effective July 1.
Then we had a nice little lift on fee income which was up about a $1 million quarter over quarter. Some of that was driven by mortgage activity and also increased debit card income. Credit costs were down about $2.3 million quarter over quarter. We had a little bit of a spike in the first quarter in credit losses, but we’re seeing that kind of come back into line.
How does the fourth quarter look? Brice: I like how we’re positioned. I think we’ve demonstrated that we have a good team of bankers that is able to go out and grow the business organically. I like the markets that we’re in; they are going to provide varying degrees of opportunity. I think long-term, we’ll keep our eyes open. We don’t feel we have to go out and do anything immediately on the M&A side. If the right opportunity pops up, we’ll certainly take a look, but we’re going to be disciplined on how we evaluate it.
What do you expect from your board? How can the board be helpful to you? Brice: When you look at the makeup of the board, we have three former bank CEOs. All of them have extensive knowledge of the industry, so they are great mentors, great sounding boards, and they give me a different perspective on how I would evaluate things from time to time. Our other board members who are not former bankers bring different skill sets, whether it’s specific industry knowledge or an understanding of the markets we operate in. I think we have a very effective board. They challenge management, but at the same time, they support us to make sure our management team is doing a good job for our shareholders.
Last question: What is your dream vacation? Brice: I like to spend some time in the Del Mar, California, area. You get down by the beach in August and it’s 75 degrees in the afternoon and 65 at night. It’s just a nice little quiet getaway. My wife and I and the kids like to get out there from time to time.
You’ll have to do an acquisition in Southern California so you have a reason to go there. Brice: (laughs) If I did that, then I’d have to go out there and work! That’s why I like to get out there and get away.
There is a lively debate in the fintech ecosystem about which firms will be able to scale fintech innovation and how they will do that. Will fintechs scale through organic growth and acquisitions or will they partner with more established providers? Three models are currently being discussed when pundits and the companies themselves attempt to predict how this will take place.
The Go It Alone Model
Those who think that fintech companies should go it alone believe that companies themselves will rise and beat incumbents by providing superior digital experiences and highly intuitive products to their customers. Supporters of this model point to three significant supporting facts. Disruption has happened in every other sector. Just as Amazon and Uber have changed the landscape when it comes to books and ground transportation, companies that grow quickly and join PayPal and Intuit will offer financial services beyond those provided by traditional banks.
These go it alone supporters point out that unlike most banks, fintechs are not built on top of clumsy legacy systems and therefore can offer cheaper and faster products. Those who believe that fintechs can grow organically see banks as being too slow to provide the innovation that consumers want and too stubborn to pay the appropriate multiples to buy fintechs that have a proven record of success. Unfortunately, there is a small but growing list of investors that refuse to back fintech startups that plan to distribute through banks. Early forays into distribution through banks have been sufficiently difficult to repel some investors.
Many in the ecosystem think the go it alone supporters are missing key points. They argue that the cost of customer acquisition is very high for these independent fintech companies. Getting to 80,000 users seems doable, but getting to 250,000 will be extremely difficult for most fintechs, in part because the cost of funding is much higher without bank deposits. Most fintechs rely on the capital markets and other institutional sources of money, including private equity investors, for their funding. Go it alone skeptics also believe that regulators will eventually demand expensive and complex compliance from fintechs that will increase their costs while decreasing their nimbleness. They are concerned that many of these companies are growing by subsidizing the cost of their products, and also lack business models that would make them independently profitable.
Financial Service Incumbents as Innovation Partners Model
A significant number of thought leaders believe incumbent financial services players such as banks and insurance companies will build platforms for best-in-class fintech partnerships. They believe this will be necessary because customers, having seen and heard the promise of new innovation, will demand better products. Supporters of this point of view emphasize that banks do not have the high customer acquisition costs of fintechs, are already familiar with regulatory expectations and have a much lower cost of funds. They argue that such competitive advantages will give them time to partner with or acquire any innovations that they will need. There may come a time when financial service incumbents build their own fintech products. However, at least in the near term, the sheer number of potential innovation needs—ranging from from machine learning tools and data analytics to natural language voice interface–will mean they will need to partner in order to keep up.
Skeptics of this model believe banks make bad partners when partnering with fintechs seeking scale. They insist banks are slow and generally do not do a good job of selling their customers on products they do not own or control. There are also concerns about the cost of partnering with banks. Some fintechs see integration with legacy solutions as a long and clumsy process and believe that meeting vendor risk management standards and other bank regulatory mandates as unnecessarily expensive and time consuming.
The Other Incumbents Model
Another relatively new view is that fintech innovation will scale through other incumbents. This approach often arises as an alternative in conversations concerning the flaws inherent in the other two models. Three types of incumbents are mentioned:
Retail: Proponents suggest that retailers or wholesalers will enter the financial services arena by partnering with fintechs and using a bank as a utility. These outlets have existing customer bases and some already offer various forms of financing. For specific niches it is easy to see the connection. If Home Depot offered financial tools to manage a contractor’s business, it would help their core business.
Employers and Payroll Providers: One of the most successful savings programs of all time is employer sponsored 401(k) plans. Recent talk of rolling in student debt payoff plans and financial health programs through employers have some fintechs wondering if they can scale through employers. Earned wage management tools are advancing earned money to employees outside of a normal pay cycle to help employees avoid payday lenders. Saving tools for goals other than retirement could be offered by employers.
Telecoms: Telecom providers are functioning as financial service providers in developing countries where there is limited financial infrastructure. Supporters argue that many fintechs are mobile-first technologies and data suggests that mobile is the preferred banking channel for a significant–and growing–percentage of consumers.
Most of the other incumbent models recognize that there has to be a bank involved but relegates its role to one of a utility. This position tends to spark another round of debate. Will banks become utilities if they don’t learn to be better partners?
Common to all of these conversations is the growing expectation that innovation will alter how we interact with financial service providers. Whether the provider is a bank, fintech or employer, all agree that consumers and businesses expect innovative solutions and that the best solutions will scale or be widely imitated. No matter how these innovations scale, there is little doubt that significant change is coming and much of the innovation will be driven by technology.
The world is going mobile and dragging banking along with it kicking and screaming. I am something of an anachronism as I still go into the branch once in a while and still worry about using my phone to deposit a check. My adult children, on the other hand, use their phone for everything, including all of their banking. They bounce from store to store paying for everything from Starbucks to bar tabs using their phones without a second thought. Banks that want to capture and hold their business will have to be very good at mobile banking and mobile payments.
One of the biggest hurdles bankers face is that as unprepared as they were, the regulators were equally unprepared and are now playing catch up with regards to mobile payments. The regulatory picture today is fairly muddled with a mishmash of state and federal agencies offering guidance and opinions to mobile payment providers and consumers. There are gaps in the current laws where no regulations apply to parts of the process—and other situations where two or more rules apply to the same part of the process. As mobile banking and payments continue to grow, the regulators will be looking to create a more coherent regulatory structure and coordinate their inter-agency efforts to protect consumers at every stage of the process.
At a forum held by the Office of the Comptroller of the Currency in late June, Jo Ann Barefoot, a senior fellow at Harvard University, outlined the current regulatory situation. She told the packed room at the meeting that “Agencies are going to have to develop ways to work together, to be faster, to be flexible, to be collaborative with the industry. The disruption of the financial industry is going to disrupt the regulators, too. This is the most pervasively regulated industry to face tech-driven disruption. The regulators are going to be forced to change because of it.”
In a white paper released at the forum, “Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective,” the OCC noted that “Supervision of the financial services industry involves regulatory authorities at the state, federal, and international levels. Exchanging ideas and discussing innovation with other regulators are important to promote a common understanding and consistent application of laws, regulations, and guidance. Such collaborative supervision can support responsible innovation in the financial services industry.”
While the OCC has noted the massive potential benefits that mobile payments and other fintech innovations can offer to consumers, particularly those who were unbanked prior to the widespread development of mobile banking and payment programs, Comptroller Thomas Curry has cautioned against what he called “unnecessary risk for dubious benefit,” and called for responsible innovation that does not increase risks for customers or the banking system itself. Mobile payments programs that target the unbanked are particularly ripe for abuse and unnecessary risk.
The Consumer Financial Protection Bureau is also heavily involved in overseeing and regulating the mobile payments industry. The bureau noted that 87 to 90 percent of the adult population in the United States has a mobile phone and approximately 62 to 64 percent of consumers own smartphones. In 2014, 52 percent of consumers with a mobile phone used it to conduct banking or payment services. The number of users is continuing to grow at a rapid rate and the CFPB is concerned about the security of user data as well as the growing potential for discrimination and fraud.
CFPB Director Richard Cordray addressed these concerns recently when announcing fines and regulatory action against mobile payment provider Dwolla. “Consumers entrust digital payment companies with significant amounts of sensitive personal information,” Cordray said. “With data breaches becoming commonplace and more consumers using these online payment systems, the risk to consumers is growing. It is crucial that companies put systems in place to protect this information and accurately inform consumers about their data security practices.”
The regulators, like the banks themselves, are latecomers to the mobile payments game. I fully expect them to catch up very quickly. The biggest challenge is going to be coordinating the various agencies that oversee elements of the regulatory process, and it looks as though the OCC is auditioning for that role following the June forum on mobile payments. Cyber security systems to keep customers data and personal information safe and secure is going to be a major focus of the regulatory process in the early stages of the coordinated regulatory efforts.
I also expect the CFPB to focus heavily on those mobile payment providers that were formerly unbanked. These tend to be lower income, less financially aware consumers that are more susceptible to fraud and abuse than those already in the banking system, and the bureau will aggressively monitor the marketing and sales practices of mobile payment providers marketing to these individuals.
The regulatory agencies are starting to catch up with the new world of banking and the mobile payment process will be more tightly controlled going forward.
By now, practically every traditional bank or credit union understands that they have to find ways to either compete with or embrace financial technology to attract and keep customers.
But it’s not just about retail customers, or millennials in particular, who have been raised to expect that technology should put just about every need at their fingertips. Fintech firms also have their eye on business customers, including a plethora of alternative financial services startups backed by investors and venture capitalists, lending money to small businesses that traditional institutions turn down–small businesses who then leave those institutions for good.
A 2015 World Economic Forum report estimates that marketplace lenders granted $12 billion to U.S. small and medium-sized businesses by the end of 2015. By 2020, annual U.S. volume could reach $47 billion, according to Morgan Stanley and Goldman Sachs.
How can a traditional bank or credit union compete? It can compete by providing products and services to make commercial customers’ lives easier, particularly using the mobile channel. This not only means offering mobile merchant services and treasury management solutions, such as remote cash deposit services, Check 21 compliant check images, expedited payments and interconnected vaults at merchant locations, but also an increasing array of cloud-based solutions.
Traditional banks and credit unions can even capitalize on the alternative lending movement. You name it, institutions can leverage any fintech solution that a business customer could possibly need. But how can institutions below the top 30 money center banks and large regionals—institutions with limited resources—offer solutions like that?
Let’s just look at one example at how challenging adopting fintech solutions on a piecemeal basis can be for one of those institutions: offering a mobile app for remote deposit capture. It’s seemingly a relatively simple app to offer, but to get that solution to market, an institution typically has to rely on its core processor to allow a third-party app developer to connect its solution to the core system. However, most core vendors do not want to open up their systems in real time for posting those deposits because they don’t want the third-party accessing the core—that’s a problem.
Then an institution has to figure out how to handle potential security issues that remote deposit capture poses. For example, a fraudster could take a picture of a fake check, or take a picture and deposit a real check remotely, but then immediately try to cash the check at the institution’s branch or at another institution. That’s another challenge. Working with a third-party app provider presents other problems as well. There could be issues importing images, and not getting upgrades delivered. On top of that, an institution has so much already on its plate that it can’t even imagine also handling sales and marketing of these third-party apps.
This example pales in comparison with what a bank or credit union has to do to provide its own solutions to commercial customers. While an institution’s niche may be primarily banking merchants and corporate entities, its focus may be just on commercial lending. However, to increase the stickiness of commercial customers, institutions should strongly consider offering a much fuller array of non-lending products, and those solutions must be cloud-based and easily accessible via mobile.
Therein lies the most daunting challenge of all: Contending with the financial industry’s own version of the Four Horsemen of the Apocalypse— operations, compliance, IT and sales. Banks and credit unions have options how to best overcome these challenges. They could invest in technologies to launch fintech solutions on their own and pay for the required expertise to appropriately manage those Four Horsemen themselves. They could also choose to partner with fintech vendors for each separate solution and try to coordinate management of the various operations, compliance, IT and sales duties that come with each solution. Alternatively, they could work with “concierge” partners that have wider menus of fintech solutions, as well as the expertise to help institutions manage the entire process.
Whichever approach banks and credit unions choose to compete in the new world, one thing is certain: They ignore fintech at their peril, as they risk losing business customers altogether.
In 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.