Are You Digitally Native or Just Digitally Naive?


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Your bank’s survival could hinge on how you answer this question.

In recent years, we’ve seen a tremendous increase in use of technology. According to a range of surveys, at least one in every three people in developed markets now carries a smartphone. And in the United States alone, smartphones account for more than half of all mobile subscriptions, meaning that at least a third of all consumers potentially will use their phones to make payments and purchases.

The digital era is here to stay and adopting a digital-first mindset is no longer a matter of preference but rather, a question of necessity. Traditional banks need to recognize the need to expand their own digital services and capabilities, and many have started innovating and investing heavily to do so.

If you’re ready to become a part of the digital revolution, that means your core banking platform needs to be up to the task of helping you establish a strong digital presence. Evolving into a more fully digital organization with the right core in place can help financial institutions deliver quicker and more reliable services, strengthen the relationship with current clients while helping to acquire new ones—all the while delivering a unique, personalized customer experience to all of their customers.

Looking into the future, a 2014 McKinsey & Co. research predicted that within a few years over two-thirds of all banking users will be fully adapted to the online world. However, a 2016 Bain & Co. study also indicates that adding channels to a customer’s experience can increase confusion and frustration. In other words, there are still some bumps in the road to a purely digital experience.

With the increasing adoption of digital channels, despite some snags, it’s easy to see an emerging trend: to succeed, financial institutions must adopt a digital-first view of how to do business (PDF).

The average customer will interact at least twice a day with their bank, checking on payments and balances, paying bills or making purchases. Because of this heightened activity, an increasing number of financial institutions are beginning to grasp the importance of the digital-first view of banking. North American banks have begun to invest heavily in apps that, when working in concert with existing core technologies, will improve the customer experience and cultivate stronger and longer-lasting relationships with their clients. These new apps allow banking clients to perform a range of financial activities while on the go, offering services more sophisticated than mere paperless customer experiences, which have been around for nearly a decade.

There is no doubt that the world is already experiencing a digital transformation. But can the inevitable change be advantageous? It can, if you’re ready with solid core technologies already in place. By some estimates, adopting digital technology could allow banks to decrease their physical footprint by 30 percent, resulting in a significant reduction in costs and corresponding improvement in profitability. Brian Moynihan, CEO of Bank of America Corp., cites the rise of digital usage among his customers as a prime driver behind significant workforce reductions in recent years.

Figures from the last few years demonstrate the success of digital banking. Online-only banks, for instance, saw more than a 30 percent rise in deposits between 2010 and 2013. Mobile banking will grow to more than 2 billion users worldwide by 2020. And according to a recent Accenture study, 20 percent of all bank customers are entirely digital users, meaning that if a bank wants to increase its customer base, catering to the needs of these new tech-savvy clients is a must.

The ability to deliver services the way customers want, including through digital channels, while not neglecting the core services that all clients demand, is increasingly crucial to establishing and maintaining long-term banking relationships. Digital change demands that financial institutions digitize their processes and drastically reset how banking staff reacts to customer needs. The adaptation of lean core banking IT systems and investment in new digital products and services that enhance and personalize customer experience will be key factors going forward.

In short, digital banking can realize astonishing improvements in earnings before interest, taxes, amortization and depreciation, while also enabling you to reach a wider set of customers through an expanded range of services. Experts estimate that a digital transformation of the financial sector and banking institutions can ensure secure transactions and minimize risks, reduce costs, ensure seamless integration with back office applications—and last but not least, streamline the customer experience.

David Mitchell is the president of Nymbus.

Shaking Up Traditional Banking


banking-strategy-2-10-17.pngUnlike some executives, David Becker likes to be told what he’s doing wrong. The chairman and chief executive officer of First Internet Bank in Fishers, Indiana, says bank interns speak to the senior leadership team at the end of their internships to discuss ways the bank could improve. He expects the same of staff throughout the organization.

“[Our hire] is the dissatisfied banker,’’ he says. “They were in an organization that had a boatload of rules and policies. We take the banker who says, ‘What if we did this?’ We want the person who questions the day-to-day operations.”

Running the bank in such a way has paid off.

The bank’s holding company, $1.8 billion asset First Internet Bancorp, grew loans 31 percent last year from the year before, to $1.3 billion. Net income grew to $12.1 million from $8.9 million in 2015. The bank’s return on average assets was 0.81 percent in the fourth quarter of 2016, and its return on average equity was 11.24 percent. First Internet has its headquarters in Fishers, a suburb of Indianapolis, and a loan production office in Tempe, Arizona, and that’s it. With a focus on digital banking, First Internet can grow its loan book nationally while keeping expenses low. One of its niches is digitally savvy investors who own properties or businesses in multiple states because the bank can accommodate lending that may take place in different parts of the country.

Investment bank Keefe, Bruyette & Woods has an outperform rating on the stock, in part based on its cheapness relative to the bank’s performance. The bank will have to continue to grow to achieve efficiencies, because internet banks have to pay slightly more for deposits than other banks do, says Michael Perito, a KBW analyst who follows the stock.

Becker feels as if the big banks are getting consumers more accustomed to digital banking, and therefore, more likely to leave for digital-only banks. When he first started the internet bank in 1999, customers had to deposit checks by sending them in the mail to the bank. Now, they can just remotely deposit them through the bank’s mobile banking app. If customers use another bank’s ATM, First Internet reimburses them for up to $10 per month in surcharges—making up for the bank’s lack of a branch network.

The bank has been growing lately in part because it is hiring seasoned bankers to tend to its loan book of mortgages, commercial real estate and consumer loans. Becker says the bank has managed to survive by building slowly and carefully in its early years, so as not to overstep its infrastructure. “The team we have on board are all folks at the senior level that worked at multistate, large, regional banks and have the expertise and the ability to help us grow to that multi-billion-dollar position,’’ Becker says. “It is all about the people. We can create computer tools and algorithms, but at the end of the day, somebody has to talk to you if there is a problem and know how to underwrite a loan.”

The bank is acutely focused on customer service, and in its early days, it didn’t hire anyone right out of high school or in their first job. “We needed talented people who could handle anything that came in the door,’’ Becker says. There are no tellers per se, and everyone who works in customer service needs to handle multiple functions, from wire transfers to starting a new deposit account. Staffers can communicate with their customers on the phone, in online chat rooms or via email. They keep track of customer reviews on sites such as Yelp, because bad reviews can damage the company’s reputation. Software vendors are held to account, and the bank doesn’t sign any long-term contracts with vendors, Becker says.

Although the bank relies on vendors rather than developing its own software, it follows the workplace ethic of a tech company: a 24-hour gym is available, and people can show up in jeans to work every day. “We use technology to revolutionize the banking process,’’ Becker says. “There really isn’t any limit to our potential growth. Are we a drop in the bucket in the whole community of financial services? Yes. But the consumer is coming our way. We are getting better at it and we are bigger day by day.”

Disability Claims Against Bank Websites: Is Your Bank Prepared?


disability-12-19-16.pngMany will recall painful lessons learned in the wake of the 1990 passage of the Americans with Disabilities Act (ADA) as numerous claims arose alleging that bank ATMs were not accessible to the disabled. Banks were required to retrofit facilities and equipment to meet the standards adopted in 1991 by the U.S. Department of Justice requiring ATMs to be accessible. Again in 2010, the Justice Department supplemented the general accessibility rules with standards setting out extensive technical specifications for ATMs, including speech output, privacy and Braille instructions, leading to another round of claims, lawsuits and retrofits of equipment.

Today, a new target for ADA claims has surfaced: online and mobile banking. Claims brought under Title III of the ADA are growing in number, targeting financial institutions for failing to make their websites and mobile applications accessible to individuals with disabilities.

Title III of the ADA covers public accommodations and commercial facilities and provides, in pertinent part: “[n]o individual shall be discriminated against on the basis of a disability in the full and equal enjoyment of the goods, services, facilities, privileges, advantages, or accommodations of any place of public accommodation by any person who owns, leases (or leases to), or operates a place of public accommodation.” Banks fall squarely within the category of “service establishments” that qualify as public accommodations. Thus, Title III’s accommodation requirements apply to at least the physical location of a bank.

At issue in the recent influx of claims is the extent to which a bank’s website must accommodate disabled patrons. Federal courts are split on whether websites for private businesses actually constitute a public accommodation under the ADA. Federal courts generally have taken one of three approaches regarding the applicability of ADA accessibility requirements to websites: the internet is not a place of public accommodation; the internet is a place of public accommodation; or the internet is a place of public accommodation to the extent a website serves as a gateway to the full and equal enjoyment of goods and services offered in a business’s physical locations.

The Justice Department, which also enforces the ADA, has not yet issued regulations, accessibility requirements or guidance relating to whether and how commercial websites are to comply with Title III. Originally, the Department planned to issue regulations implementing Title III in the spring of 2016; however, it changed course in late 2015, announcing that the regulations would not be finalized until 2018 at the earliest, stating that it wanted to concentrate first on similar regulations for government entities and federal contractors covered by Title II.

In the meantime, the Justice Department has taken the position, at least as far as state and local governments are concerned, that Title II obligates those entities to make their websites accessible to consumers with disabilities. The Justice Department is on record asserting that “[t]he internet plays a critical role in the daily personal, professional, civic, and business life of Americans. The ADA’s expansive nondiscrimination mandate reaches goods and services provided by public accommodations and public entities using internet websites.”

As to private business, the Justice Department has entered into several consent orders under Title III in which the businesses have agreed to bring their websites and mobile applications into compliance with the Web Content Accessibility Guidelines 2.0 AA, published by the Web Accessibility Initiative of the World Wide Web Consortium.

With alleged violations of ADA Title III finding their way into claims, lawsuits and Justice Department actions, it is important for board members to be alert to emerging website and mobile application accessibility issues, to be prepared to assess their institution’s exposure and to make sure their institutions address any unmet requirements. With a new administration arriving in Washington D.C., it is important to monitor its perspective on this topic. Expert consultants and legal counsel can provide valuable guidance in structuring the assessment process as well as any needed remediation. The process should include a review of the institution’s web and mobile platforms, a review of the institution’s technical capabilities, as well as applicable vendor agreements to ensure that gaps are addressed so that the bank meets ADA requirements.

Rebuilding Trust Through Technology


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After many years in banking, we have heard every kind of criticism leveled at banks by angry consumers and politically inspired public servants. Most recently, Wells Fargo & Co.’s cross-sell scandal threw another log on the fire of contempt that many consumers have for banks. Despite a few very bad ethical lapses, it is always shocking how many banks get painted as bad actors when consumers and communities benefit directly from their business models. This benefit is not limited to the beloved stories of the community bank setting up a scholarship fund or a day of caring painting crew, or even the billions of dollars committed to Community Reinvestment Act activities by the industry. As noble as those efforts are, they pale in comparison to what banks really do.

Millions of consumers use the banking payments rails for free. Keeping a very small amount of money in a checking account can allow a consumer to reap the benefits of direct payroll deposit, free bill pay, free remote deposit capture and free ATM access in their bank’s network. Amazingly, should the consumer face a loss of funds due to hacking, the bank (which is not being paid for this service) often makes the consumer whole. The day-to-day systems that most consumers use are remarkably affordable.

Still most Americans do not trust banks. The most frequent complaints tend to fall in one of three areas: a lack of transparency; slow and difficult user experiences; and the promotion of products that do not fit the need of that particular individual. There are ways technology can combat these common complaints and even help ameliorate the ethical lapses that have tarnished banking.

Paperless application and smart data technology can make the application easier and more convenient for consumers and businesses alike. They can also speed up the time that is required for approval. It is often the credit activities that get banks tarred and feathered. It is understood that consumers and businesses turned down for requested credit will feel the sting of that rejection—particularly when the banks takes an inordinate amount of time to deliver its decision. More prompt decision making is helpful for all consumers.

Sophisticated data and AI systems could be built into the technology that would guide bankers to a right-sized product offering in real time. They can even enable online comparisons of products that gives the consumer a better idea of the available options and how well they fit with the consumers’ long-term goals. A few rogue bank models worked better for the bank if the customer failed than if they succeeded have given consumers the right to question if the advice that is offered by their bank is in their best interest. Recently a bank CEO, off the record, compared that experience of some bank customers to his experience buying a cellular data plan for his family. “I kept on wondering it the plan [the salesman] was touting was the best for the phone company or for his commission or actually for me. Banking can’t be like that; we have to make this better.” Fortunately, there is technology that is already making it easier for banks to understand what their customers need and to serve that need more transparently.

Transparency is going to be key. Having a customer click the “I have read this box” will not work in the long term. Online tools including the use of video, chatbots and embedded quizzes can make disclosure easier for consumers.

Regulatory technology is just developing, but there is the possibility that regtech will lower compliance costs and streamline disclosure. Some of the new technologies will provide internal bumpers that can help prevent rogue behavior from an employee. What a bank has for its regulators it will also have for its internal risk management team. Detecting ethical breaches before they become systematic or catastrophic will be more possible.

Several banks are going a step further towards building consumer trust. They are using their online platforms to support their customers financial health. Bank of America Corp. just rolled out a spending aggregation tool that allows consumers to see where their money goes and budget for the future. It even allows consumers to add data from non-Bank of America accounts. It is a smart way for Bank of America to get a better understanding of their customers while providing a useful tool that requires no effort to use.

It is easy to see fintech providers as competitors. Looking at online lenders and digital investing platforms as the enemy because they compete directly with banks is a common perspective. It is also possible to think of these companies as innovators that will help us rethink how to make our customers trust us again. Many of these fintech innovators are eager to work with banks that want to provide better banking experiences. These innovations may be the way banks return to delighting their customers and building loyalty.

Somerset Trust Co. Becomes a Leader in Mobile


mobile-11-4-16.pngAfter sweeping the sidewalk, the first job G. Henry Cook had more than four decades ago at his family-owned Somerset Trust Co. in Somerset, Pennsylvania, was putting checks in alphabetical order. This was the “most mindless, frustrating and stupid job I have ever done in my life,’’ he says. “That week was when I developed a commitment to figure out how technology can make banks smarter, so we can free up our people to really take care of customers.”

Today, Cook is president, chairman and CEO of Somerset Trust Co., which is on the leading edge of community banks in terms of mobile technology. At roughly $1 billion in assets, the bank has a mobile app that allows customers to log in with a fingerprint instead of a password, turn on and off their debit cards using the app and pay their bills with their smartphone camera. Soon, the bank will make it possible for new customers to open an account using the mobile app, instead of signing up through online banking or walking into a branch. The first step is to roll out the mobile platform inside a couple of branches, so bank staff can quickly enroll new customers using an iPad. In the first quarter, the bank hopes to make mobile account opening available to customers using their own devices anywhere, says Chief Operating Officer John Gill.

Mobile account opening is so new, it’s hard to find statistics on it. Almost all the banks that allow it are larger than $50 billion in assets. But it’s increasingly talked about as an avenue to generate new customers and accounts in an age when consumers increasingly rely on their smartphones for everything.

“Most community institutions do not really have a good strategy for account opening on the phone,’’ says Jim Burson, senior director at Cornerstone Advisors, a consulting firm in Scottsdale, Arizona. “Most people have the basic functional [items such as], ‘I can make a payment, I can check my account balance.’ But the big gap that needs to be closed is the account origination and loan origination piece of mobile.”

Gill says the bank simplified a lot of its own front-end and back-end processes to make it happen, so the app, for example, will scan identification such as a driver’s license, process the identification verification and order debit cards automatically. The bank also sends disclosures electronically. The same account opening system will work online as on the mobile app. “We’re trying to make this device independent,’’ he says. “Our branches say it is so time consuming to open an account. It really makes the customer experience better.”

Somerset is using Bolts Technologies to launch the new account opening platform. It already uses Malauzai Software for its mobile platform and Fiserv as its core processor. Gill and Cook declined to provide estimates of the costs and savings associated with mobile account opening. But being a privately owned bank certainly helped justify the investment, Cook says. “An awful lot of traditional businesses [are] very afraid of taking the incremental risk because some Wall Street types are going to be on their backs: ‘What about this quarter?’ The job of the CEO is to maximize shareholder wealth over time, and somehow that has been lost.”

Only about 10.6 percent of all the banks and credit unions in the country had fingerprint authentication as of March, 2016, according to an estimate in Mobile Banking Quantified, a report by research firm Celent and FI Navigator. Fewer than 1 percent had photo bill pay and 4.1 percent had debit card on/off switches in the app.

Why does Somerset, a community bank, want to be in the league of only a few banks offering such services? In the late 90s, the bank was struggling to grow and had only about $200 million in assets. It surveyed about 10,000 people, who said they wanted to do business with a community bank, but perceived that community banks just can’t “keep up.” Cook decided that the bank, in fact, would need to keep up. “Why do people not deal with local banks? They don’t think they’re experts. What does an expert mean in this day and age? We think technology is part of that answer.”

Plaid: Friend or Foe


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Whether customers are banking online with a big bank or trading stocks on sleek mobile platforms, their expectations for a smooth and seamless experience are constantly increasing. That’s why banks and fintech startups alike need to partner with the right companies on the back-end to make sure that their digital platforms can quickly and easily access the right data when they need to.

That’s where a company like Plaid steps in. Originally born out of a financial management and recommendation tool, Plaid eventually realized the need to provide fintech developers with an open Application Program Interface (API) that marries back-end bank data with front-end systems. In short, Plaid seamlessly connects applications with their users’ financial data housed in legacy banking systems. Without such technologies, accessing banking information within a third-party application would be nearly impossible.

Plaid has been so valuable to both banks and startups that the firm recently closed a new $44 million funding round led by Goldman Sachs to help grow the platform.

But is Plaid’s open API a boon to banks, or a threat to their survival? Let’s dive in and find out.

THE GOOD
Plaid’s platform and tools enable developers to interact with bank accounts to build financial applications. Plaid’s customers include fintech apps like Robinhood and Betterment, which rely on Plaid to give them access to back-end bank data. These applications can then access customer account data at their bank when providing mobile and web services like budgeting, investing and lending. Plaid also facilitates tokenized ACH transfers for payment processors like Stripe.

Plaid works in direct partnership with banks to make sure their customers can utilize apps like Betterment in conjunction with their accounts. However, Plaid is open (and interested) in broadening its footprint to work with banks of any shape and size in the future. And in so doing, banks that partner with Plaid give their own developers better tools to create apps that mimic the user experience of startups like Betterment and Venmo. That’s a win for banks since Plaid opens the door to developing apps in-house that could compete with fintech startups.

THE BAD
From its inception, Plaid has been focused on helping fintech startups connect their applications with banks to power their core businesses. Currently, Plaid works with thousands of U.S. banks, spanning the largest financial institutions to credit unions, whose customers want to use some of the popular apps powered by Plaid such as Venmo and Acorns.

The bottom line is that, while Plaid’s API is powerful and forward thinking, it needs to develop a track record of success with some of its larger partners in order to gain greater adoption. Plaid also needs to make a concerted effort to reach out to smaller banks and credit unions to draw those customers into the modern fintech ecosystem, with access to many of the newer apps we’ve discussed.

OUR VERDICT: FRIEND
Plaid is up against some stiff competition in the fintech API space, but its future in relation to big banks appears to be friendly. From what we’ve seen so far, Plaid is committed to working in tandem with big banks. By providing tools and resources for application developers and big banks, and expanding the number of institutions they partner with, Plaid is showing that it’s committed to a fintech future with banks still playing a huge role. Ultimately, it’s in banks’ best interests to better serve clients with better access to data, reduced online banking friction and internal innovation. And it looks like banks that work with Plaid in the future can achieve just that.

Why Banks Are Buying Design Firms


design-1-22-16.pngWithin the past 18 months, two of the industry’s more innovative banks have made some seemingly odd acquisitions. McLean, Virginia-based Capital One Financial Corp., in October 2014, acquired Adaptive Path. The Spanish-based BBVA (Banco Bilbao Vizcaya Argentaria) acquired Spring Studio in April 2015. The common thread between these acquisitions? Both are San Francisco-based user experience and design firms.

Banks are seeing a critical need to improve customer experience, says Norm DeLuca, managing director of digital banking at Bottomline Technologies, a technology provider for commercial banks. He believes that changing consumer expectations and competition both within the industry and from fintech startups are contributing to a heightened focus on user experience. “One of the biggest differentiators that fintechs and new innovators lead with is a much simpler and [more] attractive user experience,” he says.

Customers increasingly identify their financial institution through their online experiences more than personal interactions, says Simon Mathews, chief strategy officer at San Francisco-based Extractable, a digital design agency. He believes that Capital One and BBVA found a way to more quickly improve the digital experience at their institutions. It’s a relatively new field, and good user experience designers aren’t easy to find. “What’s the quickest way to build a team? Go buy one,” says Mathews.

Design is only one piece of the puzzle. “Great design is important, but it really is only the tip of the iceberg on user experience,” says DeLuca.

A bank can’t expect to place a great design on top of outdated technology and create a good user experience, says Mathews. Data plays a key role. Customers with multiple accounts want to see their total relationship with the bank in one spot. That requires good, clean data, says Mathews.

The products and services offered by a financial institution need to be integrated. Can the customer easily manage and access separate products, such as loans and deposit accounts? Often, the process can be disjointed, and it’s a competitive disadvantage for the bank. “You might as well be buying from separate providers, if the experiences are separate,” says DeLuca.

Data analytics can also help banks personalize products and services for the customer, says Stephen Greer, an analyst with the research firm Celent. The industry is spending a lot on data analytics, “largely to craft that perfect customer experience,” he says.

While technology can be updated, organizational challenges are more difficult to overcome. Banks tend to operate within silos–deposit accounts in one area, wealth management in another and that doesn’t align with the needs of the consumer. “They don’t think, necessarily, about the total experience the user has,” says Mathews. “Users move fluidly between [delivery] channels.”

Great user experience requires “a really deep understanding of customer’s lives, and the environment they’re in, and what they’re trying to do and why,” says Jimmy Stead, executive vice president of e-commerce at Frost Bank, based in San Antonio, Texas, with $28 billion in assets.

Many banks rely on vendors for their technology needs, but “if the user experience relies on the vendors that they’re working with, and those vendors have solutions that are not customizable, then it’s really hard for them to address the customer experience,” says Alex Jimenez, a consultant and formerly senior vice president of digital and payments innovation at $7.1 billion asset Rockland Trust Co., based in Rockland, Massachusetts.

According to a June 2015 poll of banks and credit unions conducted by Celent, more than one-third rely on the user experience supplied by the bank’s vendor for online banking, mobile and tablet applications, with minimal customization. Realizing the increasing importance of the online channel, Frost Bank decided to build its own online banking platform internally in 2000, and continues to manage its user experience in-house. The bank still works with vendors, but is picky when it comes to those relationships. “How can we integrate them seamlessly into our experience?” Stead says he asks of vendors.

Today, expectations are shaped by Apple and Amazon, companies that have done a great job of defining the consumer experience. While more innovative banks like BBVA and Capital One are making user experience a priority, many financial institutions don’t provide a cohesive digital experience, or let their website and mobile app lag behind consumer expectations.

“We can’t fall too much in love with what we have today,” says Stead. “Technology moves so fast.”

How Technology is Redefining the Customer Relationship


customer-relationship-7-30-15.pngYou can visit a lot of banks and never see one that looks like this.

Located in Portland, Oregon’s trendy Pearl District, Simple is one of the leading firms at the intersection of banking and technology.

The design is consciously industrial. Bike racks crowd every nook and cranny. There’s a piano. A sunroom. A large meeting room stocked with healthy snacks. The atmosphere is casual, yet charged with energy. The employees wear t-shirts and jeans, roughly a third of them work at standing desks, and you can count the number of non-millennials on one hand.

It’s too early to predict how the fintech revolution will play out, but there’s no doubt that this is the front lines of finance. And as in any commercial battle, it’s first and foremost about capturing the hearts and minds of consumers.

A growing cast of companies has emerged to meet millennials where finance and technology converge.

Simple, which teamed up with Spanish banking giant Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) at the beginning of 2014, offers a personal checking account accessible online and through its mobile app that’s designed to help people save. It does so by giving customers the ability to create compartmentalized savings goals.

Let’s say you need $50,000 for a down payment on a house in 24 months. By entering this goal into your Simple account, it will automatically deduct $68.50 ($50,000 divided by 730 days) each day from your “Safe to Spend” figure, which is essentially a person’s checking account balance less previously earmarked money.

Another technology-driven financial firm, Moven, offers a similar service. Described as the “debit account that tracks your money for you,” its home screen shows how much a person has spent during a month compared to previous months. If you typically spend $2,000 by the middle of a month, but are currently at $2,250, Moven’s app lets you know with each successive transaction.

“We create value by helping people build better money habits,” Moven’s president and managing director Alex Sion says.

A third player in the rapidly expanding fintech space, Betterment, builds customer relationships from a different angle. It offers an automated investing service. Give it your money, tell it your goals, and Betterment’s algorithms implement a strategy tailored to your financial objectives.

According to Joe Ziemer, Betterment’s business development and communications lead, it began the year with $1 billion in assets under management and now has $2.1 billion from 85,000 customers.

Finally, a growing number of Internet-based lending marketplaces connect yield-hungry investors with people and businesses in need of funding.

The best known of the group, Lending Club, offers personal loans of up to $35,000 to consolidate debt, pay off credit card balances, and make home improvements. Businesses can borrow up to $300,000 in 1- to 5-year term loans.

Funding Circle does much the same thing, though it focuses solely on small businesses. “There’s a perception out there that everyone is efficiently banked,” says Funding Circle’s Albert Periu, “but that isn’t true.”

Beyond using technology to refine the banking experience, a common set of objectives motivates these companies. The first is their missionary-like zeal for the customer experience. Their vision is to seamlessly integrate financial services into people’s lives, to proactively help them spend less, save more, invest for retirement and acquire financing.

“We created a product that allows customers to take control of their financial lives,” says Simple’s Krista Berlincourt.

This is done using elegantly designed mobile and online products that simplify and reduce friction in the relationship between a financial services provider and its customers.

To this end, a universal obsession in the industry revolves around the onboarding experience. “The onboarding experience is the moment of truth,” says Alan Steinborn, CEO of online personal finance forum Real Money.

Lending Club claims you can “apply in under five minutes” and “get funded in a few days.” Betterment’s Ziemer says that it takes less than half the time to set up an account with Betterment than it does at a traditional brokerage.

Finally, these firms compete vigorously on cost, with many forgoing account and overdraft fees entirely. In this way, they’re not only driving down the price of financial products, they’re also more closely aligning their own incentives with those of their customers.

Fueling the fintech revolution is the fact those millennials—people born between 1981 and 2000—now make up the largest living generation in the United States labor force.

Millennials see things differently. They “use technology, collaboration and entrepreneurship to create, transform and reconstruct entire industries,” explains The Millennial Disruption Index, a survey of over 10,000 members of the generation. “As consumers, their expectations are radically different than any generation before them.”

To millennials, banks come across as inefficient and antiquated. Two years ago, 48 percent of the people surveyed for Accenture’s “North America Consumer Digital Banking Survey” said they would switch banks if their closest branch closed. Today, less than 20 percent of respondents said they would do so.

This doesn’t mean that millennials will render in-person branch banking obsolete. A 2014 survey by TD Bank found that while they bank more frequently online and on their mobile devices, 52 percent still visited a branch as frequently as they did in 2013, mostly to deposit or withdraw money. “Those who do their banking in a branch feel it is more secure and enjoy the in-person service,” the survey concluded.

Wells Fargo’s recently appointed chief data officer, A. Charles Thomas, makes a similar point, citing a Harvard Business Review study that identified “customer intimacy” as one of three “value disciplines” exhibited by long-time industry-leading companies.

The net result is that the personal element of branch banking, while still relevant and necessary to build and maintain customer relationships, is nevertheless taking a back seat to digital channels. For the first time in Accenture’s research, the firm found that “consumers rank good online banking services (38 percent) as the number one reason that they stay with their bank, ahead of branch locations and low fees, both at 28 percent.”

It’s for these reasons that many observers believe the banking industry is prone to disruption. According to The Millennial Disruption Index, in fact, banking is at the highest risk of disruption of the 15 industries examined by Viacom Media Networks for the survey.

Of the millennials queried, it found that:

Sixty-eight percent believe the way we access money will be totally different five years from now.

Nearly half think tech startups will overhaul the way banks work.

And 73 percent would be more excited about a new offering in financial services from companies like Google, Amazon and Apple, among others, than from their own bank.

This isn’t to say that younger Americans don’t trust banks. In fact, just the opposite is true. According to Accenture, “86 percent of consumers trust their bank over all other institutions to securely manage their personal data.”

It boils down instead to the simple reality that millennials are “genuinely digital first,” says Forrester Research Senior Analyst Peter Wannemacher.

More than 85 percent of America’s 77 million millennials own smartphones according to Nielsen. An estimated 72 percent have used mobile banking services within the past year, says Accenture. And, based on the latter’s research, approximately 94 percent of millennials are active users of online banking.

Banks need to think about the customer experience differently. Millennials, and increasingly people in older generations, want more than physical branches to deposit money and get a loan. They want digitally tailored solutions for their financial lives.

The Innovation Game


innovation-7-30-15.pngWhat would Amazon look like if it were run by a banker?

First, you’d have to go to an Amazon branch to buy a novel. When you asked for a novel, the teller would tell you that you weren’t signed up for any novels. When you asked to buy one, they’d tell you that you had to go over to the fiction department.

This critique comes from JP Nicols, formerly the chief private banking officer at U.S. Bancorp, now a management consultant. He was up at midnight in Hong Kong recently after a business meeting, Skyping and talking about innovation in banking, a passionate topic for him.

“The world is moving faster and faster, and the banking industry is not moving that fast,’’ says Nicols, the chief operating officer of Menlo Park, California-based Innosect. When bankers tell him that they are “fast followers” when it comes to technology, he tells them, “You’re only half right. There is nothing fast about what you’re doing.”

It’s a biting retort for an industry increasingly attuned to the threats and opportunities afforded by financial technology companies, most of them nonbanks. The giants, such as Apple, Facebook and Google, along with startups such as online lenders and peer-to-peer payment processors, may not make banks irrelevant, but they may certainly put many of them out of business. Some banks are realizing that they have to change to keep up, and are trying to shift their organizational structure and culture to become more innovative, and more focused on what customers want and expect in an increasingly digital age.

Some of the biggest banks have introduced innovation labs in the last few years to experiment and develop software programs and solutions that benefit customers. Some banks are buying tech startups, or investing in them. Banco Bilbao Vizcaya Argentaria Group(BBVA), possibly the most innovative big bank doing business in the United States, is revamping its entire organizational structure to get rid of silos inside the bank that create friction for customers. U.S. Bancorp has 25 people working in an innovation lab in Minneapolis experimenting with new ideas and technologies, and working closely with the bank’s management team to bring new products to fruition. The biggest banks such as BBVA and U.S. Bank obviously have the money to invest, but some smaller banks are trying to get into the game as well. For example, a mutual with less than $10 billion in assets near Boston is spending 1 percent of revenues, or $4 million this year, on research and development with the intent of spinning off technology-related companies for profit. They are all trying to make their banks more innovative, and in the end, keep themselves in business.

But what is innovation, and why does it matter? There is no one definition of innovation. For Nicols, it means putting new ideas into action that move the organization forward. It may mean coming up with a completely new business model, or introducing a product or service that no one has tried before. It may mean solving a problem in a completely new way. Banks are used to identifying, monitoring and mitigating risks, more so than they are adept at innovating. But an argument gaining increasing weight is the notion that banks really are technology companies and need to think more like a technology company. Terms such as “disruptive innovation,” popularized by Harvard Business School Professor Clayton Christensen, have become mainstream, and they portray companies as vulnerable to lower-margin startups with innovative business models that begin taking market share at the bottom of the market and eventually displace established competitors.

Companies such as Amazon don’t worry about “disrupting” themselves, as Amazon did when it introduced its e-book product, the Kindle, even though it would cannibalize its existing print book business. The idea is that companies have to focus on what customers want and expect, not the business’ legacy systems and products.

Investors outside banking are so excited about “disrupters” stealing market share from banks and other financial companies that global investment in financial technology startups jumped 201 percent between 2013 and 2014 to more than $12 billion, across 730 deals, according to New York-based data research firm CB Insights.

Banks have been busy making sure they meet regulatory guidelines and laws, says Somesh Khanna, a senior banking partner at McKinsey & Co. “Meanwhile, their customers’ preferences have changed dramatically, and nonbanks are offering very simple solutions.” There are payment processors who are essentially money transmitters and there are tech companies offering loans, and regulators may eventually catch up to them in the same way they already regulate banks. But according to Kenny Smith, vice chairman and U.S. banking and securities leader at consulting firm Deloitte, the nonbanks will adapt to regulations, and it won’t be as difficult for them because they are more niche-oriented than the banks are. Banks are trying to react by investing in startups and creating innovation labs. They are collaborating in many cases with the “disrupters,” such as online lender The Lending Club and Apple, in an effort not to get left behind. Banks are trying to adjust to the new environment by becoming more innovative, giving people the title “chief innovation officer,” and hiring from tech companies such as Yahoo, Amazon or Google.

Spanish-based BBVA purchased a design firm and a variety of startups, including online banking services provider Simple, whose founders promised it was nothing like a bank. BBVA Ventures makes small investments in startups and introduces them to BBVA management across the globe. The company’s commitment to innovation really comes from the top. Earlier this year, the BBVA board announced it had reorganized to focus on technology in the company, and appointed D. Carlos Torres Vila as president and chief operating officer, a man who had been global head of digital banking and has an electrical engineering degree from the Massachusetts Institute of Technology.

“You’ve got enough bankers in banking. We don’t need more bankers,’’ says Brett King, the author of the books Bank 2.0 and Bank 3.0, and the founder of Moven, a mobile phone application that allows you to track your savings and offers you credit for purchases. “BBVA will be more tech than banking,’’ King says. “[Chairman and CEO Francisco Gonzales] realizes that. They are trying different models. They aren’t married to one way.” Just like a tech company, “they are trying different things and seeing what works.”

Already, the company had tinkered with its organizational structure to get rid of banking silos between departments, silos that didn’t really benefit customers. Jeff Dennes, the chief digital banking officer for BBVA Compass Bancshares Inc., the U.S.-based bank, is charged with digital integration of the bank’s products and services, including online banking, mobile banking, payments, a good portion of information technology and data analytics. He says the bank is “totally committed to investing in digital capabilities” that allow clients to have easier access to money, along with real time advice that helps them make sound decisions with their money.

The $85.5 billion asset BBVA Compass has a development center that employs 500 people in Birmingham, Alabama, according to Dennes. The company renovated an existing operations center into an 80,000-square-feet, open-floor office space that employs teams of five to nine people. They work in two week sprints to develop working software, compared to a more typical timeframe of six to nine months for software development. The compressed time frame creates a different environment. “The energy is off the charts compared to any other area of the bank,’’ Dennes says. “Every day, developers have to stand up and say what they were going to do yesterday, whether they got it done, and what they intend to do that day. It has a way of focusing you,’’ he says. But innovation is also transforming the rest of the bank as well. Even risk management needs to get creative, Dennes says. The vision of creating a digital bank “requires everyone to think differently,’’ he says. “If that was just one guy saying it, it would be tough. But you have senior leadership talking about it, and people tend to get on board.”

U.S. Bancorp’s approach is slightly different, but it has spent a long time making its bank forward-thinking. It has had an innovation group for more than eight years, with the original intent to look at long-term trends in the payments business. The bank realized early on that innovation was happening, and competition was coming from nonbank competitors, says Dominic Venturo, executive vice president and chief innovation officer for the Minneapolis-based bank with $403 billion in assets.

“It’s difficult to run a business as well as our business leaders do today, and at the same time focus on [the] long term and try to decide what’s important,’’ he says.

Nicols, who worked at U.S. Bancorp, says CEO Richard Davis decided shortly after becoming CEO in 2006 that he needed to make the bank more innovative. “Richard drew a line in the sand and said, ‘We’re going to be an innovative bank.’’’ Davis decided to invest heavily in the payments business. As a result, U.S. Bancorp was one of the first to introduce mobile photo bill pay, in early 2013. It signed up early for Apple Pay and Android Pay, Google’s rival to Apple’s phone-based payments service. U.S. Bancorp is consistently recognized as a leader in mobile banking for the variety of services it provides. The innovation lab has experimented with Google Glass and augmented reality, the concept that reality can be enhanced by computer inputs, such as images or information displayed in your glasses. Two years ago, Venturo published a paper on the privacy implications of the Internet of Things, which involves connecting everything mechanical, including such things as cars, TVs and refrigerators, to the Internet. The bank created a mobile shopping app called Peri that partners, such as retailers, could use to help people shop and compare prices using their smartphones.

But the innovation team isn’t cut off from the bank’s goals. Twenty-five people work on the team in the bank’s headquarters offices. Staff meets regularly with the heads of the four major business groups: wholesale and commercial banking, commercial real estate, trust and wealth management, and payments and consumer banking, which tell the innovation team what their problems are and their customers’ problems. The innovation team then works on solving them collaboratively with the bank’s management team. The team also brings in customers to the lab to collaboratively develop software that meets their needs.

Unlike BBVA, the bank doesn’t have a venture capital arm, and although it does partner with other companies or hire vendors to jointly create solutions, it doesn’t tend to invest in them or buy a lot of startups. Venturo himself has a banking background, having worked 15 years for U.S. Bancorp. Before that, he was with Bank of America Corp., and has worked stints in payments and as a commercial banker. He tends to promote from within U.S. Bancorp.

“One of the misconceptions about innovation is you have to go bring in a bunch of disrupters who don’t know anything about your business to think differently, but I think it’s more helpful to bring in deep domain expertise and give them permission to think differently,’’ Venturo says. “They are more likely to come up with an idea you can actually do.”

Community and regional banks may have a tough time affording an innovation lab, whether they come from in-house or the technology industry. Many of them already struggle with attracting and retaining talented people, and will largely have to rely on vendors to provide many of their technological platforms and services. Just because small banks often are focused on commercial clients, that doesn’t mean they don’t need to stay relevant to those commercial customers. “Those who want to be innovative have to have a plan in place that is executable, to make sure their technology presence is relevant and stays relevant, even if the business line focus is commercial,’’ says Ryan Rackley, a director at Cornerstone Advisors in Scottsdale, Arizona. Moven’s King advises banks to be very careful about picking a core platform vendor, and any technology vendors that they use on top of that. Since they are so dependent on vendors, they must choose wisely.

But a few banks are going beyond picking vendors and are experimenting with in-house innovation as well. After a merger in 2007, Eastern Bank Corp. president Bob Rivers noticed a huge drop-off in branch traffic, which has continued to this day. (The mutual’s busiest branch did 60,000 transactions per month back then, and it’s now half of that.) Rivers began to think, ”The world is changing radically, and if we don’t do something quickly, we are going to be left behind.”

With the support of management and the board, Rivers began networking around Cambridge, near the bank’s headquarters, where there was plenty of technology talent surrounding the Massachusetts Institute of Technology. “We knew we needed to make investments in new technology,’’ Rivers says. Rivers ended up recruiting the former executives of PerkStreet Financial, an online financial services provider with a rewards checking account tailored to each individual’s spending habits. The business ceased to operate after it failed to raise new capital. One of Eastern Bank’s recruits was Dan O’Malley, the enthusiastic, nobody-is-doing-what-we’re-doing co-founder of PerkStreet and now, chief digital officer at Eastern Bank with a team of about 20 to 25 innovators.

About a year ago, the bank put O’Malley and his team in charge of the customer call center, gave them access to a mass of data on the bank’s customers, and let them “build cool stuff, buy cool stuff and change our culture,” according to Rivers. The team’s goal is to spin off technology companies that make the bank a profit. Rivers said Eastern Bank’s directors didn’t need to be sold on the idea. “I would have to say, the board was more enthusiastic about it than management was here, by and large,’’ he says. Last year, when two members reached the retirement age of 70, the board brought in new expertise, including Joe Chung, a venture capitalist, and Bari Harlam, an executive vice president at BJ’s Wholesale Club in charge of membership, marketing and analytics. With such support from the top, the bank already has rolled out voice recognition software for the call center, so customers don’t have to answer a series of maddening questions to verify their identities. “The amount of friction we took out was huge,’’ O’Malley says.

Not all banks would have shareholders supporting long-term investments in research and development. But as a mutual, Eastern Bank doesn’t have the same pressure to meet quarterly earnings estimates that public banks have, and has more ability to invest, O’Malley says. Recruiting talent is always an issue, but O’Malley thinks the bank does have a leg up compared to a startup. The bank has a trove of data that can be harnessed to improve services and build new products. It already has a huge number of customers. It’s not trying to build capital and customers. It already has them. O’Malley is bringing in developers who have never worked for a bank. The head of the data center is an MIT-trained scientist who has been published in Science and Nature magazines. “You need people who know how to build stuff,’’ O’Malley says.

He feels strongly that banks need to adapt or they will lose business. “If we don’t do this right, we are going to lose chunks of our business. There are online lenders who will lend to small businesses within a day. Our traditional process takes a month, and they’re doing it in a day.” He thinks for many banks in the country, the situation is dire.

Judd Caplain, a banking advisory industry leader for the consulting firm KPMG, agrees that banks that don’t make changes will lose business. “As long as banks reinvent themselves, they will continue to exist,’’ he says. “Those that do not risk becoming dinosaurs.” Of course, banks have heard that before. The Internet was supposed to mean the death of branches, and yet they are still a powerful new customer acquisition tool, and a place to solidify a presence in the community. But Brett King has noticed a change. Bankers two years ago downplayed his predictions about a revolution in mobile banking, and countered that the Internet didn’t kill branches. Now, he doesn’t hear that anymore. “Banks are saying, ‘You’re right, it is changing, and we’ve got to do something now,’’’ he says. “It’s real this time.”

The Role of the Board in Technology


role-of-the-board-in-technology-white-paper.pngFor most bank boards, technology is a black hole of knowledge. Although they might be perfectly capable of programing their digital televisions or surfing the Internet with their tablets, bank directors generally don’t understand technology in the broader context of how it impacts their institution’s performance and profitability. And they’re not alone, which only compounds the problem. “It’s hard for the bank’s executives to keep up with technology let alone the board,” says Terence Roche, a principal at Cornerstone Advisors in Scottsdale, Arizona.

Unfortunately, the banking industry is changing so rapidly—and technology in many cases is actually driving that change—that directors need to engage in strategic discussion around technology and make that a priority at their regular board meetings. “You can’t have a discussion about banking without having a discussion about technology,” says Bruce A. Livesay, executive vice president and chief information officer for First Horizon National Corp. in Memphis, Tennessee.

Increased Spending
Certainly directors need to have an appreciation of where their banks are making significant technology investments. Celent, a New York-based research and advisory firm, released a forecast in January 2014 that total information technology spending for North American banks, including both U.S. and Canadian institutions, would increase approximately 4.5 percent in 2014 and 4.6 percent in 2015. And what will that money be spent on? Much of it will go towards the maintenance of existing systems and operations, although Celent was encouraged that new investment spending will rise an estimated 11 percent in 2014, which means that a proportionally larger share of every dollar of technology spending will go towards new systems, applications and operational capabilities.

Retail banking initiatives like application enhancements for smart phones and tablets, and the next generation of online applications, are expected to capture some of that increased investment spending, as are commercial banking initiatives like upgrades to existing cash management and treasury solutions as many larger institutions look to deepen their relationship with core business customers. A more demanding regulatory environment, particularly in critical areas like anti-money laundering, will also lead many banks to invest in various compliance-based solutions.

Making Decisions about Technology
Not only do boards need to understand where the technology expenditures are going, they also need to have an in-depth understanding of how technology either facilitates—or impedes—the bank’s overall strategy. Livesay offers this example: The increased cost of regulatory compliance is causing some boards and management teams to consider whether they need to grow larger so they can spread those costs over a wider base. But the decision to grow larger can’t be made in a vacuum. There are other issues that must be taken into consideration, including whether the bank’s current technology platform can support a larger bank. “Can it scale to where we want to go?” says Livesay. If not, the bank could be facing a costly investment to build out its technology infrastructure to support a larger operation.

Another example of where corporate strategy and technology are beginning to intersect is the exploding popularity of smart phones and tablets and the impact this is having on retail delivery systems. In order to remain competitive, most institutions are going to have to make significant investments over the next three to five years to build out their mobile and online retail banking applications, and this also might require more scale to make those investments cost effective. If the board anticipates that it might sell the bank in that time frame, it probably won’t make those investments. But if the board is committed to growing the bank and maintaining its independence for the next three to five years, those new spending initiatives on retail delivery need to be made now so it doesn’t fall behind. “The board needs to look forward and decide where it’s going and what the bank’s technology needs are,” says Cornerstone Senior Director Sam Kilmer.

How a Bank’s Board Handles Technology
At $28-billion asset First Horizon, which has significant activities in retail and commercial banking, mortgage lending, capital markets and wealth management, the board is particularly focused on information security—or as Livesay puts it, “keeping the bank off of the front page of the newspapers.” Protecting the security of customer data is so important that it has become a board level concern at the company. “Cyber-attacks are becoming more frequent and more destructive and that’s not going to slow down, but will intensify,” he says.

The First Horizon board also pays close attention to customer preferences in the digital space and how the growing demand for “anywhere, anytime, any device” capability is forcing the company to alter its retail delivery strategy. While banking is still a relationship-focused business, the retail model is beginning to change as an increasing number of customers make greater use of remote channels like mobile. This migration from branches to mobile has placed new demands on the bank’s technology, requiring that it invest capital resources to keep pace with demand. What does the board worry about? “Where do we place our bets on innovation?” says Livesay.

If the board at First Horizon is comfortable having high level discussions that involve technology, it might be in part because in 2007 it recruited a director—Robert B. Carter, chief information officer at FedEx Corporate Services—who knows something about it. Livesay, who is a member of First Horizon’s executive management committee and reports to the company’s chief executive officer, also makes a presentation at every regularly scheduled board meeting on some aspect of technology. “Every board meeting I am on the agenda,” he says.

Most boards do not become overly involved with technology decisions that are purely tactical, but increasingly they have become very engaged in decisions that are strategic in nature, or could pose a significant risk to the bank if not executed properly. For example, when First Horizon made a decision four years ago to in-source its data center after having used a third-party processor for a number of years, the board was very engaged because of the operational and strategic risks that undertaking entailed. The fact that building a new data center was the second largest capital expenditure in the company’s history also captured the board’s attention, Livesay says. “It was a big data project,” he laughs.

With the exception of Carter, none of the directors on First Horizon’s board is an expert on technology, but they still make it an important aspect of critical board discussions about strategy. And perhaps because they do understand the importance of technology in the overall scheme of things, they also make sure that Livesay has the necessary resources to do his job.

“When I go in with a technology issue, they’ll ask, ‘Do you have what you need?’” he says. “I don’t think that is the case in every company.”

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