How Strategic Banks Use Micro-innovation to Fuel New Growth

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With digital financial experiences booming and young consumers flocking to app-focused banking, institutions are assessing which of their products and services will prove popular in the future and exploring how to ensure growth continues among a new demographic of consumers.

For the 65 million members of Generation Z in the U.S., “going to the bank” or “writing a check” are quickly becoming tasks from a bygone era. A 2021 survey underlined that 32% of these customers would prefer to do all their banking outside a physical branch, which presents banks with an opportunity for their digital products to take the lead.

If digital banking is the way of the future, why shouldn’t banks drop everything and go all-in? For most banks, that’s not feasible — or economically wise. It’s vital that banks understand the importance of solving problems while adding value for the customer. Former Apple co-founder CEO Steve Jobs explained, “when we created the iTunes music store, we did that because we thought it would be great to be able to buy music electronically, not because we had plans to redefine the music industry.” Solely focusing on innovation isn’t a practical strategy; the aim should be to make small bets that lead to big breakthroughs.

Most banks don’t need to adopt an “innovate or die” mindset toward the future to drive change. Not every bank will launch a groundbreaking app, and not every company can be Apple. Nor should there they be. Instead, leaders can look to micro-innovation: A scalable, stepwise growth model that supports agile technology integration and novel processes without a major overhaul to the bank’s core or existing infrastructure.

Flex and Expand the Core
A traditional full core conversion can take a bank five years or more to complete. The digital world won’t wait that long; it’s important that banks start implementing change now with micro-innovation. Rather than reinventing the essential processes that are working, micro-innovation allows institutions to launch services in a parallel run to test fresh ideas and offer new products. A micro-innovation approach allows core processes and revenue streams to remain intact while your institution welcomes the future.

Our partner, Holyoke, Massachusetts-based PeoplesBank, efficiently launched a compelling financial brand, ZYNLO, operating alongside its traditional offerings. The new digital bank is designed for younger customers and offers features to support financial health with tools like Zyng Roundup, Zyng matching and early access to paychecks. PeoplesBank is looking beyond the traditional realm of innovation and embrace new thinking by partnering with social media influencers to spread brand awareness and increase visibility.

Where to Begin?
The best incremental innovations are those that can be brought to market swiftly at an affordable cost. Consider leveraging your customer data to pluck low-hanging opportunities to serve groups of customers while providing valuable insights to improve their financial journey.

There’s an opportunity to start small by implementing a fresh onboarding experience. New customers are oriented to digital solutions; if it makes sense for your customers, consider building in-app account opening and educational tools to help them seamlessly engage with their financial future from their smartphone.

Get attention by testing out new product types and fine-tuning processes. Automatically rounding up transactions and deposit that change into savings, early access to paychecks with direct deposits, mobile-first initiatives and financial education tools like monthly spending reports are all popular among young consumers.

Ready to go further? By collaborating with a knowledgeable fintech partner, your institution can launch a own digital financial brand and deliver compelling hooks, such as invoice factoring, tax tools, credit builders and financial modeling, that better serve a niche group of individuals with shared financial needs and goals. Niche digital banks market to a wide range of geographically dispersed customers centered around identities (African Americans, LGBTQ), professions (doctors and lawyers), or shared life experiences and passions (individuals who have previously been incarcerated, pet owners, newly married couples).

In a time of economic uncertainty, organizations looking to win the moment should approach the future with a flexible and entrepreneurial mindset. Identify where your institutions wants to be, determine what’s required to get there and take the first steps in parallel to what’s already working. There’s no time like today.

Harness the Power of Tech to Win Business Banking

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The process for opening a consumer account at most financial institutions is pretty standard. It’s not uncommon for banks to provide a fully digital account opening experience for retail customers, while falling back on manual and fragmented processes for business accounts.

Common elements in business account opening include contact forms, days of back-and-forth communication or trips to a branch, sending documents via secure email systems that require someone to set up a whole new account and a highly manual document review process once the bank finally receives those files. This can take anywhere from days to multiple weeks for complex accounts.

Until very recently, the greatest competitor for banks in acquiring and growing business accounts was other banks. But in recent years, digital business banks have quickly emerged as a more formidable competitor. And these digital business banks empower users to open business accounts in minutes.

We researched some of the top digital business banks to learn more about how these companies are winning the business of small businesses. We discovered there are three key ways digital banks are rapidly growing by acquiring business accounts:

1. Seamless, intuitive user experiences. Business clients can instantly open accounts from a digital bank website. There’s no need to travel to a branch or pick up a phone; all documents can be submitted online.
2. Leveraging third-party technology. Digital banks aren’t building their own internal tech stacks from the ground up. They’re using best-in-class workflow tools to construct a client onboarding journey that is streamlined from end to end.
3. Modern aesthetics. Digital business banks use design and aesthetics to their advantage by featuring bright and engaging colors, clean user interfaces and exceptional branding.

The result? Digital banks are pushing their more traditional counterparts to grow and innovate in ways never before experienced in financial services.

Understanding what small businesses need from your bank
A business account is a must-have for any small business. But a flashy brand and a great user experience aren’t key to opening an account. Small businesses are really looking for the right tools to help them run their business.

While digital banks offer a seamless online experience, community banks shouldn’t sell themselves short. Traditional banks have robust product offerings and the unique ability to deal with more complex needs, which many businesses require. Some of the ways businesses need their financial institutions to help include:

  • Banking and accounting administration.
  • Financing, especially when it comes to invoices and loan repayment.
  • Rewards programs based on their unique needs.
  • Payments, specifically accepting more forms of payment without fees.

It’s important to keep in mind that your bank can’t be all things to all clients. Your expertise in your particular geography, industry or offerings plays a huge role in defining your niche in business banking. It’s what a lot of fintechs — including most digital banks — do: identify a specific niche audience and need, solve the need with technology, and let it go viral.

While digital banks might snap up basic small and medium businesses, the bar to compete in the greater market is not as high as perceived — especially when it comes to differentiated, high-risk complex entities. But it requires a shift in thinking, and the overlaying the right tech on top of the power of a community based financial institution.

It’s important that community bank executives adopt a smart, agile approach when choosing technology partners. To avoid vendor lock-in, explore technologies with integration layers that can seamlessly plug new software into your bank’s core, loan origination system, digital banking treasury management system and all other platforms and services. This means your bank can adopt whatever new tech is best for your business, without letting legacy vendors effectively dictate what you can or can’t do.

Your level of success in winning at digital banking comes down to keeping the client in focus and providing the best experiences for their ongoing needs with the right technology. While the account itself might be a commodity, the journeys, services and offerings your bank provides to small businesses are critical to growing and nurturing your client base.

Pursuing the Pole Position in Digital Banking

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digital-banking-11-3-17.pngBanks with unique strategies tend to perform well in the marketplace, and a $1.2 billion asset bank in Wausau, Wisconsin, is proving that formula through a digital platform and a strategy focused on lending to a niche community.

IncredibleBank serves customers nationwide as the digital division of River Valley Bank, a 15-branch community bank serving Wisconsin and the Upper Peninsula of Michigan. The division was established in 2009, when the bank was seeking to grow deposits and looked at the new online banks in the marketplace at the time, such as ING Direct (now Capital One 360). Then, the bank relied more on wholesale funding to fuel loan growth, but growing core deposits was a challenge, says Todd Nagel, River Valley Bank’s chief executive officer. “We started the online bank to create larger distribution in our regional footprint for deposits, and it was a way to replace our wholesale funding. We never dreamed that it would take off the way it did.”

River Valley Bank’s net interest margin, at 4.13 percent per the Federal Deposit Insurance Corp., performs better than its peers, according to BankRegData. So does the bank’s return on assets (1.43 percent) and return on equity (15 percent).

These days, an online banking division focused on deposit gathering isn’t necessarily innovative. The management team has since expanded IncredibleBank’s focus to address the bank’s concentration in commercial real estate loans through a unique niche: motor coach loans. Motor coaches are one of Nagel’s passions, and he has one of his own, says Kathy Strasser, the bank’s chief operating officer. These vehicles aren’t the stereotypical cramped family RV, and the cost of these luxury homes on wheels range from $100,000 to $2 million or more. High-end motor homes are unique, with custom features that make it difficult to pinpoint their value. “That’s the hard part about financing them,” says Nagel. Two loan officers are dedicated entirely to this specialty niche, and these lenders visit motor coach manufacturers regularly to build their expertise in the area. Motor coach financing accounts for roughly 10 percent of River Valley’s overall business, according to Nagel.

In looking for a unique way to market IncredibleBank, Nagel and his team turned to another one of his passions: NASCAR. “There’s 150, 200 motor homes that go to every race, all over the country,” says Nagel. The bank sponsors NASCAR drivers Kyle Busch and Matt DiBenedetto, and brings the bank’s own motor home to entertain customers during meet-and-greets with the drivers at NASCAR races. A promotion around account openings offered a chance for customers to win a VIP pass at Watkins Glen International, a racetrack in Watkins Glen, New York, that hosts NASCAR events.

IncredibleBank accounts for 10 to 15 percent of the bank’s deposits, according to Nagel, and that, along with the division’s digital-only footprint, gives management some leeway to use it as something of an incubator for new technology. Nagel says the management team is working to examine every product offered by the overall organization—including all the necessary documentation—to explore whether it can be offered digitally. If that’s not possible, then “we may not offer it in the future,” he says. “We believe that everyone’s looking for an Amazon-like experience. I don’t want to be like Amazon, but I’d like to replicate the experience with banking.”

Seeing a future where Amazon is beating traditional retailers, Strasser says that River Valley Bank will continue as a traditional community bank in its markets, but won’t grow beyond a 15-branch footprint. The bank has been adding talent without traditional backgrounds—Strasser herself was an executive vice president at a company that is now a subsidiary of Deluxe Corp., which serves the financial industry with website design, customized checks and email marketing, among others. And good relationships with vendors are integral to innovation. The bank has worked closely with its core provider Jack Henry & Associates’ mobile division, Banno, which built IncredibleBank’s mobile banking app.

Still, the industry and its vendors aren’t moving fast enough for Nagel. He has high expectations for digital delivery. “Our greatest challenge is getting our partners in the industry to think like we’re thinking,” says Nagel. “You should be able to open a $1,000 checking account in two minutes. That’s my expectation.”

The Little Bank That Could

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strategy-9-23-16.pngSoon after Josh Rowland’s family bought Lead Bank in Garden City, Kansas, in 2005, the small financial institution felt the full impact of the financial crisis. The loan portfolio was in bad shape. Several employees lost their jobs. The entire experience lead to a lot of soul searching.

“It was really existential,’’ Vice Chairman Rowland says. “What do we survive for? What’s the point of a community bank? The situation was that dire. We had to really decide whether we should give it up.”

After much discussion, the family decided to hire Bill Bryant as the chief executive officer to help clean up the bank, now with $164 million in assets, and really focus on its niche: small business owners. A lot of community banks say they are serving small business owners, but Lead Bank decided to go a step further. In 2011, it launched a business advisory division for the purpose of coaching small business owners on cash flows, provide part-time or interim chief financial officers, and advice on strategic planning and even mergers and acquisitions. Rowland says a lot of small businesses could use advisory services, especially if they can’t afford to hire a full-time CFO. Lead Business Advisors has senior managing director Patrick Chesterman, a former energy executive for a large propane company and Jacquie Ward, a trainee analyst. The bank overall made a profit of $500,000 in the first six months of the year and saw assets grow 30 percent in the last year and a half, according to Federal Deposit Insurance Corp. data.

But the investment in advisory services is not a quick payback. Rowland says the division is not profitable yet. The challenges include marketing the program to a business community more accustomed to relying on trusted accountants or lawyers for such advice. Banks naturally have a lot of financial information and expertise, but they fail to provide it to their clients. “We ought to be figuring out every possible way to deliver that kind of financial expertise to Main Street business,” he says.

The tactic is an unusual one for community banks, which might have a wealth management division but not a business advisory division per se. And it’s expensive. Baker Boyer, a $571 million bank in Walla Walla, Washington, has been offering business advisory services as part of its wealth management division for years. But it has taken some 15 years to restructure the bank to offer such services, says Mark Kajita, president and chief executive officer. The average personnel expense per employee for the bank is roughly $80,000 annually with six lawyers on staff and the bank’s efficiency ratio is 73 percent, higher than the peer average of 66 percent.

However, the bank made $2.5 million in profits during the first half of 2016, with half of that coming from the wealth and business advisory division. Kajita says what made it possible was the fact that the bank is family owned and can invest in the long term without worrying about reporting quarterly financial results to pubic shareholders.

“Community banks of that size have a real need to create a niche,’’ says Jim McAlpin, a partner at Bryan Cave in Atlanta who advises banks. “Historically, community banks have been focused on the small businesses of America, and to offer services to those small businesses is a great strategy.”

Joel Pruis, a senior director at Cornerstone Advisors in Phoenix, says banks have done themselves a disservice by relinquishing advisory services to CPAs and attorneys. “In terms of empowering lenders, in terms of providing more advice, we definitely need more of that,’’ he says. “Bankers need to be seen as a resource and an expert in the financial arena instead of just application takers.”

For Rowland, rethinking the role of the community bank is fundamental to its survival. “I don’t know how we expect to keep doing the same things and expect different results,’’ he says. People don’t feel their bank is adding any value for them, he says. “If that’s our industry’s problem that we haven’t given them an experience, that’s our fault,’’ Rowland says. “We have taught them over years and years that our services are so cheap, they ought to be free.”