By now, most bank leadership teams understand the importance of offering well-designed digital experiences. What we’ve found is often more elusive is knowing where to start when making a significant investment in digital.
One bank that recently grappled with this was Boston-based Berkshire Hill Bancorp, the $11.6 billion parent company of Berkshire Bank.
Executives wanted to digitally transform the bank and that success would only be achievable if they unified around a core set of goals and built a robust strategic plan for reaching them. This vision allowed teams to work toward individual milestones along the way.
We recently spoke with Lucia Bellomia, EVP and head of retail banking and CIO Jason White. They gave us an inside look at what went into developing the Berkshire BEST plan for transformation, and the factors they believe will lead to their successful digital growth.
The Berkshire leadership team started by recognizing that if the plan was going to truly transform the entire bank, they needed to gather input and feedback from every department. “Executives spoke to stakeholders in every department to what milestones the bank would need to hit and what it would take to achieve those goals”, says Bellomia. They also formed groups specifically to achieve some of the components of that milestone.
Involving this many additional stakeholders extended the strategic planning phase — In Berkshire’s case, it took three months of meetings. But White felt the time spent laying a foundation of transparency and open communication will help the bank execute and fulfill the objective of the transformation.
Without some clearly defined pillars outlining your main goals, the whole process of starting the institution’s digital plan can feel chaotic and messy. White suggests that banks first investigate what it means for their institution to digitally transform, and then define the core strategic pillars from there.
Berkshire’s three core pillars were: optimize, digitize and enhance. These pillars support efforts to improve the customer experience, deliver profitable growth, enhance stakeholder value, and strengthen their community impact. Taking the time to first define core pillars that support a larger strategic plan helped Berkshire Bank recognize even greater opportunities. Rather than simply adding new digital services to their banking stack, they realized they could facilitate the evolution of their entire bank.
With the plan announced and in place, Berkshire launched into the execution phase of its transformation. Here, they were met with new challenges that required thoughtful commitments from leadership and investments in project infrastructure. One impactful early investment was developing a transformation office that was responsible for measuring, monitoring and communicating the success of the plan. Executives and sponsors worked with the office to define both date and monetary milestones.
A dedicated internal resource focused on project management helped Berkshire communicate the progress made toward each milestone through regular meetings, tracked and updated key performance indicators, and other updates.
Equally important to the success of Berkshire’s transformation plan was its commitment to scrutinizing each investment and vendor to ensure the right fit and an acceptable return on investment for the bank. The bank is a “low-code” development team with limited resources and used achievable digital goals to identify and select vendors to digitize, according to the bank’s plan.
As part of its transformation plan, the bank extended its existing fintech relationship to include digital banking platforms for consumer and small business customers. This allows the bank to innovate and digitize at an accelerated pace, without having to grow internal developer resources.
Ultimately, institutions like Berkshire Bank are realizing that developing a successful plan for digital transformation that works for both internal stakeholders and customers requires a rethinking of the way executive teams gather feedback, address challenges across departments, and monitor the success of a project.
Digital transformation at community banks is often a complicated, time-consuming and costly process.
With the right approach, however, community banks can increase the value and return on investment of their digital transformation initiatives. The key to maximizing ROI is to take a systematic approach and avoid common pitfalls that could become barriers to success.
Any technology investment that a bank makes needs to meet — rather than hinder — its business goals. Adopting a customer-centric point of view and proceeding incrementally are essential to ensure a successful outcome. Digital transformation is ultimately about future-proofing the business, so it’s critical to choose technologies that can grow, scale and evolve.
The three most common ROI killers in digital transformation are:
Doing too much, too quickly.
Failing to connect with the customer.
Not selecting a connected and experienced partner.
Doing Too Much Too Quickly The number and variety of technology solutions for the banking industry to choose from is nothing short of mind-boggling. But successful digital transformation doesn’t happen overnight. Not all features are suitable for every bank’s needs or budget — or their customers.
Resist becoming blinded by the shiny objects some vendors will flash. Buying into all the bells and whistles isn’t always necessary at the outset of a transformation initiative. If the implementation fails, it will kill any ROI and team morale, and risks overloading staff and systems with immature solutions before the bank has confirmed they work.
A better strategy is implementing features and solutions incrementally using process improvement and customer satisfaction to quantify value. Taking smaller steps improves stakeholder buy-in and allows a bank to test-drive new initiatives with customers. Taking smaller steps towards digital transformation: implementing sidecar offerings and managed services instead of ripping out and replacing cores or launching products that the bank can’t fully support. New offerings must enable value without losing quality, security or customer satisfaction. Bank executives should establish clear and measurable key performance indicators to track progress, and only move on to the next step when the first is satisfied. There are few things worse than investing in technology that is too difficult to use or doesn’t achieve promised results.
Failing to Connect with the Customer Misaligning technology choices with customer preference and digital banking needs sets up almost any initiative for failure before it’s out of the starting gate.
Banks typically cater to a broad demographic, making research and strategic planning critical at the procurement stage. Focusing implementations on tools favored by one specific group but not by others limits an organization’s capabilities and alienating others in the process. Customers groups have their own particular concerns and preferences, and it can be challenging to apply a single strategy that pleases everyone.
To avoid this pitfall, executives need to research, strategize, plan and focus to launch products that their customers truly want and need. Open dialogue with customers is the key to success, as priorities will differ vastly in every community. It’s not enough to emulate competitors, although that is a helpful benchmark. Ideally, banks should seek customer feedback through surveys, direct market research and speaking with them when they interact with the branch or brand to understand their priorities.
Not Selecting a Connected and Experienced Partner Finding technology companies to support digital transformation isn’t difficult. It’s estimated that companies in the United States waste up to 40% of their technology spend on poorly-made decisions, like investing in technology based on a pitch from a sales professional that does not understand or have expertise in the institution’s particular needs.
Community banks have unique needs, concerns and customers, and should seek technology providers that speak their language, with solutions and insights to advance their goals. Select providers with experience in your niche — one that understands the particular challenges of community banking in the post-pandemic world. They should be experts that are well-versed in the banking industry, provide all technical documentation, satisfy regulatory and compliance need, and offer technology solutions that create excellent user experiences while being flexible, scalable and within budget.
Banks should be positioning themselves to be trusted partners for entrepreneurs, helping their businesses run smoothy, from account onboarding and beyond.
Too often however, what many business owners experience are complex, inefficient processes that require a litany of repetitive details and data points that can take days — or even weeks — to complete. In many cases, small and medium business owners have been forced to look to other institutions as a result of slow, manual process at their existing bank. The industry has seen how those institutions that invested in automation and better business banking experiences actually grew in terms of customers during the pandemic. But the growing number of banks that recognize the need to offer better experiences through enhanced user interfaces and automation must overcome the main hurdle of how best to implement it.
Today’s business owners expect the same quick and simple banking experiences they receive from their personal accounts from their business accounts. Banks that recognize this need often still fail to close the gaps. A major issue is that most of the process is still driven by paper forms. By automating some of these more manual and tedious steps, banks can speed up and streamline the process. Allowing the customer to directly fill out the necessary information online, all at once, rather than have them complete PDFs that need to be rekeyed by a bank employee later can save vast amounts of time.
Even once the account is live, business banking can still often be a clunky and complicated experience, especially on the back-end where each function lives on a different platform or service hosted by different vendors. Electing these options may take the user out of the bank’s system, with an environment that may look and function very differently than the initial account interface. Banks want systems that are attractive, transparent and user-friendly on the front-end, but still have all the functionality and capabilities users need.
The truth is that there is no single platform currently available that can check every box and solve every issue. However, banks should focus on the full end-to-end experience and look for solutions that can support their most current, important needs and offer the flexibility to adapt as the bank grows. Banks need to build architecture that reflects a more modern, app store that keeps the user in its cultivated experience without an obvious and often jarring transition between functions or screens, creating an overall better experience for the business banking user. Solutions and platforms that are flexible and scalable mean that banks can adjust these looks and functions as both the technologies and user needs shift, changing and controlling the experience to match it.
While some banks would prefer to develop their solutions in house, they may lack the dedicated talent and resources to do so, but “off-the-shelf” solutions may not have the necessary flexibility and scalability. For many community banks, this has increased interested in partnering with fintechs. Banks considering this option must ensure the fintech can meet all their functionality needs, as well as their risk and regulatory requirements — no small feat. A good place to start is by evaluating how a fintech’s level of compatibility with the bank’s existing core system.
Fortunately, there are a growing number of “core agnostic” fintechs that can work effectively with a variety of technology platforms and organizations, offering malleable products that can match the individual rules and procedures of each bank. Banks can then control the user experience and tailor it to their specific client demographic. From a cost-effectiveness standpoint, recent “low-code” or “no-code” solutions from an innovative fintechs give banks the ability to handle these changes in-house, without an extensive IT team. These solutions can bring greater efficiencies for banks that are now able to manage and shape their technology systems to solve complications that once required advanced technology experts.
Building and strengthening the relationships with business account holders is becoming a bigger priority for all banks. Banks that prioritize their needs and expectations by focusing on the end-to-end user experience and offering their business customers a better, faster and seamless experience will be positioned to meet their demands, possibly changing the road map of its technology future.
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.