Finding Loans in All the Right Places

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loan-growth-11-17-16.pngPennsylvania, 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.

How Will Fintech Innovation Scale?

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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.

How Mobile’s Popularity is Disrupting the Regulators

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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.

Address Your Commercial Clients’ Technology Needs

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mobile-offerings-5-23-16.pngBy 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.

Four Ideas to Engage Millennials as Bank Customers and Investors

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

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

1. Embrace the Crowd

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

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

2. Get Tech Savvy

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

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

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

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

3. Invest in Education

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

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

4. Think Outside the Box

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

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

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

Some Banks Offer Digital Appointment Booking, But It’s Rare

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mobile-appointment-3-18-16.pngIf a customer wants a haircut, chances are that individual can go online and schedule an appointment at a local salon. But if the same person wanted to schedule online a convenient time to sit down with a banker to discuss a loan, that customer likely can’t do the same. A bank’s website should be a strong prospecting tool for banks, but despite the drive to digital, many banks don’t offer a way to go online to schedule an appointment. Shouldn’t banks offer an easy way to direct the customer from the web to the branch?

Few banks offer digital appointment booking, according to the research firm Celent. According to a Celent survey conducted in October 2014, just 36 percent of North American financial institutions above $50 billion in assets offer online appointment booking to their customers. For institutions below $50 billion, online booking is even rarer, at less than 5 percent.

Bank of America was an early adopter of online appointment booking, starting with its mortgage lenders in 2008. The bank has since expanded to allow customers to book appointments within its mobile app as well, and customers can arrange appointments for a score of products, including checking and savings accounts, credit cards, investments, financial planning, small business banking and various loans. Prospective customers just choose a product area, select an in-person or phone meeting, and type in their zip code to find a nearby branch. From there, the client can select a date and time. “We do 21,000 appointment requests a week now through either smartphone or the website,” Bank of America’s head of digital banking, Michelle Moore, told the Associated Press in February 2016.

Users of digital appointment scheduling in the U.S. include Wells Fargo & Co., Regions Financial Corp. and PNC Financial Services, and small community banks such as Santa Barbara, California-based Montecito Bank & Trust, with in $1.2 billion in assets, and $577 million asset Paducah Bank & Trust Co., based in Paducah, Kentucky.

“You’ve got to figure out how to be smarter in engaging customers, and digital appointment booking is one way to do it,” says Celent Senior Analyst Bob Meara. “Make it easy to click to call, or have an online chat with somebody or to make an appointment in a branch.” Celent reports that Bank of America’s digital appointment features were developed in-house, but vendor solutions are available that can easily tie into a bank’s current infrastructure.

“We’re in this on-demand economy,” says Gary Ambrosino, president and CEO of TimeTrade, based in Tewksbury, Massachusetts. Clients that use TimeTrade’s online appointment scheduling technology include retail banks, healthcare companies, universities and retailers.

Prompting a potential customer to make an appointment online makes that person more likely to follow through with bringing their business to the bank. A customer may be looking for a loan late at night, and want more information. “It makes sense to have a link” for scheduling a time to come in to see a banker, says Meredith Deen, president of Alpharetta, Georgia-based FMSI, a branch performance technology provider serving the banking industry.

Bank marketing teams also gain valuable data—even if that customer skips the appointment. “They just handed you their name, their phone number, [and] their email,” along with information on the products and services that the customer is interested in, says Glenn Shoosmith, CEO of BookingBug, an online booking platform based in London, with offices in the United States. “That’s the marketer’s dream set of information, and you’re getting that for free.”

Scheduling appointments online means that bankers can meet at a time that’s convenient for the customer. By doing so, branches can better schedule their day, reducing traffic at peak times and instead creating a steady flow, so ideally even walk-in customers will have a better experience. Banks can also make better, more profitable use of specialized employees that float between branches, who can now potentially see more customers within a day, says Deen. And bankers can better prepare for their day, by knowing exactly why the customer is coming in, and the product that customer is interested in.

Adoption among Montecito Bank & Trust’s customers has been slow, according to Megan Orloff, director of marketing. However, she expects that to change when the bank improves its website. To ensure the success of such appointment platforms, bank marketing teams could advertise their availability to customers, and ensure that it’s easy to find and use on the bank’s website or app. The financial institutions that offer digital appointment booking now remain in rare company—which means newcomers easily will stand out in a competitive marketplace.

A Look Ahead to 2020: How Bank Directors Can Guard Against Risk

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risk-12-11-15.pngAs banks look to the year 2020, we’ve identified five key risks that need to be actively assessed and monitored as the industry changes and adapts to consumer demands and competition. When it comes to data security and technology, regulatory risk, finding qualified personnel, profitability, and bank survival, bank directors need to ask:

  • How do we as an organization identify these risks on an ongoing basis?
  • How do they affect our organization?
  • How can we work with management to manage future risks?

Here’s a snapshot of the risk areas, what’s anticipated as we look to the future, and steps you can take to stay competitive and mitigate risk.

Data Security & Technology
It’s important to keep up with your peers and provide services as your clients demand them. More sophisticated payment platforms that make it easier to access and transfer funds will continue to gain popularity, particularly mobile platforms.

Being competitive requires innovation, which means software, bank integration, and sophisticated marketing and delivery. Third-party service providers may be the answer to help cut expenses and improve competition, but they also present their own unique risks.

With innovation comes opportunity: attacks on data security will increase, making the safeguarding of data a high priority for banks. While technology is an important element to this issue, the primary cause of breaches is human error. To this end, it’s essential for management to set the example from the top while promoting security awareness and training.

Regulatory Risk
Expectations from the Consumer Financial Protection Bureau regarding consumer protection will intensify. Anticipate some added expenditure to hire and retain technical experts to manage these expectations. Regulations are on the way for small business and minority lending reporting, as well as the structure of overdraft protection and deposit product add-ons, among others. Directors and management need to evaluate:

  • Compliance management infrastructure
  • Staffing needs and costs
  • Impact of proposed regulatory change to the bottom line

Qualified Personnel
For instance, baby boomers are retiring at a rate faster than Generation X can replenish, making it more difficult and costly to attract and retain skilled people. Meanwhile, the shrinking availability of skilled labor in this country is costing organizations throughout the United States billions of dollars a year in lost productivity, increased training and longer integration times.

A bank’s succession plan for its people should:

  • Identify key roles and technical abilities in your organization
  • Assess projected employee tenure
  • Develop a comprehensive employee replacement strategy
  • Prioritize training and apprentice programs

Profitability
The bottom line at traditional banks will continue to be stressed as momentum builds for institutions to reduce product and service-related fees. Overhead expenses also will continue to increase as banks boost spending for IT infrastructure to support demands by customers for mobile technology and technical innovation and finding and retaining qualified personnel to manage complex regulatory requirements. Responses to these trends are already underway. Some institutions are:

  • Divesting of consumer-related products laden with heavy regulatory requirements
  • Sharpening strategic focus on holistic customer relationships with professional and small business customers to increase relationship-driven revenue
  • Exploring new or more complex commercial lending products and partnerships designed to increase interest income to attract customers in new markets

Banks will need to closely monitor the impact of regulatory initiatives on future earnings from fees and alternative revenue sources.

Bank Survival
Here are some proactive steps to consider as your bank prepares for 2020:

  • Develop an ongoing strategy for mergers and acquisitions to expand capital
  • Consider charter conversions to lend flexibility in expanded product and service offerings or a change in regulatory expectations or intensity
  • Evaluate the impact of higher regulatory expectations

To help identify and manage risk, management should plan regular discussions in the form of annual strategic planning meetings, regular board meeting agendas, and targeted meetings for specific events. The focus should extend beyond known institutional risks, such as credit, interest rate and operational, but should also look at key strategic risks.

If your institution can innovate with the times to stay ahead of risk and competition with a systematic approach, then the path to 2020 will be less fraught with difficulties.

Will Cardless Cash Catch On?

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mobile-technology-8-7-15.pngApple Pay, where consumers can pay for products using their iPhone, is widely known but not widely used. Will cardless cash do any better?

Six banks in the United States have begun offering a way for customers to get cash from an ATM using their smartphones, according to Doug Brown, senior vice president and general manager at FIS Mobile, a division of the core processing vendor FIS. Twenty-five more are working on rolling out the product, which is part of FIS’ mobile banking platform. The service lets customers use their smartphones to get cash from an ATM, which is billed as a way to increase convenience and security. So far, no adoption figures are being disclosed, Brown says.

“[The banks] are all pleased because adoption is far above what they expected,’’ he says. However, only about 39 percent of smartphone users with a bank account actually use their banks’ mobile banking app, according to a March survey by the Federal Reserve. It’s available. It’s free. And not even half are using it.

But Brown says he expects mobile banking usage to pick up in general, and that tens of thousands of users in the Chicago area have tried out the cashless card service, to rave reviews. BMO Harris Bank, which has $98 billion in assets, and $20 billion asset Wintrust Financial Corp., are offering the service and both are based in the Chicago market.

BMO Harris calls it mobile cash, and it works after you log into your mobile banking app on your phone. You can order up an ATM withdrawal at any of 900 of the bank’s ATMs and your phone communicates with the ATM near you, which flashes a QR code (a machine readable label) that you can scan into your phone. The ATM delivers your cash and a receipt is delivered electronically. You never touch the ATM screen.

All of this is done in about 15 seconds, versus 45 seconds on average for an ATM transaction, Brown says. BMO Harris, which launched mobile cash in March, also launched Touch ID for the iPhone in late July, where you can save even more time by not using a log in and password to access your mobile account—you just use your fingerprint. A PIN can also be used in lieu of a log in and password to save time. The fingerprint ID is available, for now, using the iPhone 5s and newer versions, with a similar Android service available soon.

Brown says cardless cash is secure because each transaction is tokenized, so no data from the transaction is stored on your phone. A secure cloud houses the QR code, Brown says. Fraud is always a possibility, but “it really minimizes the exposure compared to the magnetic stripe world,’’ he said.

Skimming, where fraudsters put cameras on ATMs to record card and PINs, is not possible with this service. “The security that is commonly used at ATMs is over 30 years old,’’ says Douglas Peacock, vice president of mobile banking for BMO Harris, which is a subsidiary of $633 billion asset Toronto-based BMO Financial Group. “It’s been that way since cards were introduced.”

The biggest challenge so far? Marketing.  BMO has a video tutorial for customers who log into online or mobile banking. Wintrust used social media, billboards and TV ads and the Chicago Cubs’ mascot to promote the service. “Like anything that’s brand new, it takes a little bit of learning,” Peacock says.