Is Relationship Banking Too Risky?

Before they failed, Silicon Valley Bank, Signature Bank and First Republic Bank were highly profitable and well known for using a relationship banking approach to attract and retain customers. But their failures demonstrate that this approach can create serious risks for an institution in an environment where technology makes it easier for customers to move money.

Peter Serene, a managing director at bank data firm Curinos, says the risks that stem from relationship banking are layered.

“Relationship banking was not the problem. The problem was the concentration,” he says. “[T]he banks that failed were very concentrated. Relationship banking is still good but you can’t be single threaded on a particular segment.”

Broadly defined, relationship banking is an approach where bankers establish long-duration affiliations with their customers, often paired with high customer service. The hope is that this closeness means customers will bring their lending, payments and deposit accounts to the bank and may be less sensitive to price.

“From the bank’s perspective, you have a pretty stable deposit base and stable, repeat customers who come back to you. It’s an opportunity to cross sell and upsell new products and offerings as the customer’s needs change throughout their life cycle,” says Elena Shtern, customer advisory lead for financial regulatory territory at SAS.

Shtern points out that relationship banking was a “big differentiator” for the three banks that failed this spring. Silicon Valley Bank served the innovation economy and First Republic Bank catered to the wealthy. Signature Bank focused on New York real estate firms; its approach paid off until 2023, given its no. 10 tie in Bank Director’s RankingBanking based on 2022 results for institutions with more than $50 billion in assets.

But relationship banking at Signature led to large deposit accounts, according to the Federal Deposit Insurance Corp.’s postmortem report. Uninsured deposit accounts totaled 90% of total deposits: around 60 clients had balances above $250 million and another 290 clients had balances above $50 million. The FDIC wrote that examiners flagged the potential volatility of an uninsured deposit concentration. Management responded that they “believed the deposit base was considerably stable” but the FDIC said those assumptions weren’t well documented or substantiated.

Relationship banking also couldn’t assuage customer concerns about bank solvency — and digital banking technology has made it easier for funds to move. Serene says the large accounts, which were often non-operational corporate funds, “moved faster than models predicted” they would in a stressed liquidity environment. He points out that under the liquidity coverage ratio rules, these types of accounts have an assumed runoff of 40% over 30 days.

“In the case of the banks that failed, the numbers were more like 40% of [those] deposits left in 30 hours. There’s some real rethinking about behaviors,” he says. “Evolution in technology has made a difference.”

But technology doesn’t have to undermine a relationship banking approach. Sioux Center, Iowa-based American State Bank is building and strengthening relationships with customers and their children through its partnership with The Postage, a fintech that helps families organize their finances far ahead of transitions such as a move into care facilities or death, create wills and leave memories and messages for each other.

Tamra Van Kalsbeek, the bank’s digital banking officer, sees The Postage as a way the bank cares for its customers, while gathering deposits and connecting with different family members. It also allows the bank to attract business without competing on price. She says the bank’s “spirit club” of customers aged 55 and older were “really receptive” to the product. It has been a way for the customer or the bank to start a conversation with an executor of an estate or will.

Going forward, institutions that use a relationship banking approach may want to closely examine naturally occurring concentrations and diversify their customers and the types of accounts they have, Shtern says. Diversification among clients can increase bank stability, since it offsets the negative impact one group of customers might have. Martin Zorn, managing director, risk research and quantitative solutions at SAS Institute, adds that directors should ensure that executives are addressing concentration risks through close monitoring, hedges and increased liquidity. Boards should also press management on the inputs and assumptions that populate risk management models, ensure that they understand the answers and hold management accountable to addressing these risks.

“How do you manage your models? What is that governance around the model management? How do you stress test, back test or validate your models?” Zorn says. “Depending on your strategy, you may not be able to avoid concentration. There’s nothing wrong with taking more risk if you have the appropriate mitigants in place.”

Governance issues like these will be covered during Bank Director’s Bank Board Training Forum in Nashville Sept. 11-12, 2023.

5 Ways to Keep and Attract Commercial Clients

It’s no longer enough for banks to provide clients with standard products and services. Clients are constantly looking for differentiators when deciding which financial institution to trust with their business. Whether your clients are baby boomers preparing for retirement or millennials interested in purchasing their first home, everyone wants their bank to make them feel special.

When implementing any initiative, strategic marketing is key. Your clients need to be aware of, and excited by, your incentives — one benefit can set your institution apart from competitors. Below are five benefits for banks to consider.

1. Partner With Other Companies
Partnering with other companies like gas stations, grocery stores and retail brands gives you a way to offer rewards to clients when they purchase their essentials. Plus, your bank will enjoy free marketing and awareness as part of the collaboration. Banks can also increase their trust, credibility and relevance when they partner with businesses that clients already know and use. For example, Bank of America Corp. offers a customizable cash back credit card that offers 2% back at grocery stores and wholesale clubs.

2. Connect Clients to Capital
Often, clients are unaware of programs that can net them working capital, like the Employee Retention Credit (ERC). ERC providers are highly qualified professionals that help clients navigate the ERC process and can work with banks to help their commercial clients collect an average of $400,000. This is another example of an alliance that’s mutually beneficial: Clients gain back money they’re owed, while the bank receives referral commissions from its agreement with a trusted ERC provider. Banks can also benefit from the goodwill built between the institution and the client.

3. Offer a Loyalty Program
A loyalty program can provide clients with compelling, ongoing reasons to continue banking with your institution. Going a step further, your institution can add different tiers of rewards that incentivize clients to take advantage of each initiative. One great aspect of a loyalty program is that banks can customize it according to clients’ unique needs, creating a personalized offering that resonates with them. As an example, Kasasa Cash and Kasasa Cash Back function as a checking account, plus include monthly rewards like exclusive savings at different stores and restaurants.

4. Provide Enrollment Incentives
To encourage potential clients to sign up with your bank, consider offering exclusive rewards only available for new clients. From exclusive discounts to no sign-up fees, there are many ways banks can provide value up front to people deciding between institutions. For example, Citigroup’s Citibank is giving new clients up to $2,000 when they open a checking account by Jan. 9, 2023.

5. Implement Digital Banking
For banks with ample resources, a digital banking app is a great way to further improve your clients’ experience. Providing a more streamlined way for clients to manage their finances allows your bank to create greater value that other institutions may not be able to offer. Digital banking allows clients to interact with your bank wherever they are, at any time. Some features your bank may want to include are:

● Disposable virtual card.
● Credit card transaction disputes.
● Recurring bills.
● Chatbot support.
● Digital account opening.

Powering the Web of Partnerships to Make Innovation Easy

The right platform can help banks accelerate innovation, navigate the changing tech landscape and offer next generation solutions to customers. Public clouds are the platform to achieve these outcomes.

The cloud has moved from an ambiguous and amorphous buzzword to the platform that powers much of the innovation happening in the financial industry. Clouds, like Microsoft’s Azure, serve as the modern foundation banks, digital cores and other fintech firms use to build, develop, house and host their solutions. Participating in the cloud eco-system allows these players to seamlessly integrate with each other to expand their customer reach, take advantage of pre-built accelerators, and access third party fintech solutions. This ecosystem, with its multiple connection points, when housed on the same cloud means innovation can happen faster — at every level.

That accelerated innovation is crucial to small and mid-sized banks like Hawthorn Bank, a subsidiary of the Jefferson City, Missouri-based Hawthorn Bancshares. Banks must balance providing high-quality customer service and relevant products to customers while keeping up with nonbank and big bank competitors, but have limited staff and capacity for adding new tech projects and offerings. Hawthorn wanted to add more services and solutions for its business customers, like expedited online and in-person payments, which didn’t always fit into its traditional suite of offerings.

Hawthorn didn’t realize it at the time, but belonging to the right cloud network helped it address a number of their business customer’s pain points. The $1.7 billion bank relies on Jack Henry’s Banno digital banking platform, which now offers embedded invoicing and digital payment acceptance functionality through a partnership with Autobooks, as well as the full Autobooks small business solution as a seamless add-on to Banno platform users.

Both Autobooks and Jack Henry reside in Microsoft Azure, which made it easy for Banno to incorporate Autobooks as an additional service, as well as for Hawthorn to flip a switch to enable the service. And Autobooks proved to be a complementary, revenue-generating solution that Hawthorn Bank could bring to its business customers.

Examples like this show how coexisting in a cloud ecosystem can remove friction at all levels of development, deployment and integration. This has several benefits for banks and the end user. Being in the same cloud means that fintechs like Autobooks and service providers like Jack Henry can roll out new features and updates to their banks faster. It also helps banks control their third-, fourth- and fifth-party risks, which regulators have highlighted as a way to manage operational and cyber risk.

Selecting that cloud provider, however, starts with trusting the tech company as a secure partner who can meet regulatory expectations. Azure’s developers engage with more than 200 global financial regulators to meet compliance and security requirements, including hosting an annual summit to discuss new regulations and threats. Microsoft also accompanies regulators during audits at financial institutions. And Microsoft works with banks at the platform level to help them navigate projects with other partners, including audit, analytics and other digital banking overhauls and core integrations.

A relationship that close requires shared values — and increasingly, banks are noticing that some of their vendors may not be true partners. A number of large tech firms providing cloud, analytics and platform services to banks are also developing financial products on the side that could compete directly for the bank’s customers. Banks may find that their big-tech cloud provider doesn’t share their values or definition of partnership or compliance; they may treat private customer data differently. The ultimate risk for banks is that they partner with a firm that could one day become a competitor. Banks should look for cloud providers with a proven track record of staying focused on delivering value to the institution.

Community banks like Hawthorn are constantly looking for ways to serve customers better through innovative products and services, while keeping a close eye on costs and managing employee workloads. The right digital platform, powering their service providers and fintech partners alike, is key to unlocking and accelerating their digital transformation.

Filling the Gap of Wealth Management Offerings to Grow Wallet Share

Americans need personalized financial and wealth management advice more than ever, but don’t know where to look.

The coronavirus pandemic negatively impacted personal finances for more than 60% of Americans, according to recent data from GOBankingRates. Many of these Americans have relationships with regional and community banks that could be a trusted partner when it comes to investing and planning for the future, but these institutions often lack adequate financial advisory resources and options. This drives customers to social media and other providers, such as fintechs or large national institutions, for wealth management needs — when they actually would prefer a personal, professional relationship with their bank.

The current need for stronger wealth management offerigns, coupled with advances in easy-to-deploy technology, means that community banks can now offer more holistic, lifecycle financial advice. These offerings have the potential to create new revenue streams, engage people earlier in their wealth-building and financial planning journey, deepen and fortify existing customer relationships and make financial advice more accessible.

But while many banks have a strong depositor base and a customer base that trusts them, the majority don’t have the expertise, resources or digital engagement tools to offer these services. Modern technology can help fill this gap, empowering institutions to offer more robust financial advisory services.

Banks should meet customers where they spend the majority of their time — within digital channels. Intuitive, self-service digital options presents a valuable way to engage customers in a way that’s not complex or requires additional staff in branches. First steps can include a digital calculator within the bank’s mobile app so individuals can compute their financial wellness score, or presenting simple options to customers to invest a nominal sum of money, then adding a way to monitor its progress or dips. It can also include a digital planning discovery tool to help customers organize their accounts online.

More meaningful success lies in leveraging customer behavior data to understand changes and designing processes so that individual can seamlessly move to the next phase of the financial advice lifecycle. This might include flagging when a customer opens additional accounts, when someone has a high cash balance and frequent deposits, or when a younger individual accrues more wealth that simply sits. If banks fail to proactively monitor this activity and reach out with relevant hooks, offers and insights, that individual is almost guaranteed to look elsewhere — taking their money and loyalty with them.

Banks should provide options for customers to reach out for guidance or questions around next steps — including knowledgeable financial advisors at the ready. While people are increasingly comfortable with (and establishing a preference toward) managing money and investments digitally, there is still a critical need for direct and quick access to a live human. Banks can integrating matching capabilities and staffing regional centers or branches with designated experts, but there should also be options for customers to contact advisors remotely through video or chat. This allows individuals to receive relevant advice and support from anywhere, anytime.

But building the infrastructure that can properly serve and support clients throughout every stage and situation can be prohibitive and cumbersome for most community and regional institutions. Fortunately, there are strategic technology partners that can offer a modern, end-to-end platform that spans the entire advisory lifecycle and offers integrated digital enablement right out of the box.

A platform, in lieu of a collection of bespoke software features from multiple vendors, can act as a single point of truth and provides a centralized ecosystem for customers to receive a holistic snapshot of their financial situations and plan. Look for platforms with open APIs to facilitate seamless integration to complement and maintain the front, middle and back office while offering a full range of functionality for bank customers. Plus, having one platform that can accommodate every stage of the financial advisory lifecycle makes interactions easier and more efficient for the institution, and more familiar and friendly for the customer.

Community and regional institutions have always served as a beacon of trust and support for their communities and customers. They don’t have to experience customer attrition over wealth management options and functions. Those that do so will be able to form even stickier, more profitable relationships, while helping customers broaden their opportunities and improve their overall financial wellness.

Why Soccer And Restaurant Reviews Are Becoming Part of Digital Banking


fintech-9-27-18.pngFor years banks have looked to fintechs to make their digital offerings more convenient, an area where legacy core systems have been slow to develop. That remains a primary goal for some institutions that have been slower to adopt modern digital capabilities.

Banks attending Finovate Fall Sept. 24-26 in New York City were looking for fintech partners that could help them bolster their main value proposition: deep customer relationships and personalized customer service. Several companies are serving up unique capabilities such as providing restaurant recommendations or basing savings goals on how well your favorite soccer team performs.

Dan Latimore, senior vice president of banking at the research firm Celent, tweeted that customer experience was the leading topic of discussion at this year’s fintech-heavy U.S. conference, but it’s not just the conveniences of a robust mobile app that banks are rolling out. Some banks are working with fintechs to build unusual but highly personalized capabilities in their digital experience to drive human interaction and improve the quality of their customer relationships.

Three unique examples of bringing the bank and its customers closer together involve recommendations from the bank through its fintech partner.

Tinkoff Bank – Tinkoff Bank, a branchless Russian bank with $278 billion in assets according to its most recent disclosure, bills itself as a “digital ecosystem of financial and lifestyle products.” The bank’s mobile app goes beyond traditional banking services to provide things like restaurant recommendations, user tips and troubleshooting advice. Tinkoff engages its user base of about 7 million customers through stories that are similar to those used in popular social media apps like Instagram.

Meniga – This London-based fintech’s transaction categorization engine helps banks personalize their digital channels. Meniga presented at the conference with client Tangerine Bank, a Canadian direct bank and subsidiary of Toronto-based Scotiabank with $38 billion in total assets. The bank’s app recommends personalized savings goals.

For example, Tangerine’s app will notice if a user is a fan of a particular soccer team based on their purchasing history. The app can then automate a savings challenge for the user that will move money from their checking account to savings every time the team scores a goal.

Bond.AI – One of several chatbots in attendance at Finovate, Bond brands itself as an “empathy engine” that understands the context of financial data. In addition to answering basic banking inquiries, Bond proactively recommends behaviors users should take and products that fit their lifestyle.

Meniga and Bond.AI were both awarded Best in Show by conference attendees. They represent an emerging focus on understanding a customer’s lifestyle through transaction data and then making helpful recommendations to them based on that information, which are often described as artificial intelligence or machine learning. This is the latest stage in the innovation of fintech capabilities, which began by making the bank’s digital experience more convenient and friendly to mobile users.

These capabilities have been popular topics at national conferences, including Bank Director’s FinXTech Summit, held in May at The Phoenician in Phoenix, Arizona.

There’s no doubt that the challenges of partnering with fintechs was a much different proposition than when fintech firms were stood up some 10 years ago. Now, more than a decade into some fintech life cycles, the firms have matured.

Fintechs have learned to work within the regulatory framework, core system capabilities and other legacy issues banks have long been familiar with. Banks, on the other hand, have become more open to partnership with smaller, nimble tech companies.

The technology banks need to engage customers on a meaningful level has arrived. Fintechs have established themselves as viable business partners. Consumers are demanding more convenient digital experiences and many banks are progressing in meeting those demands, but those who don’t continue to lose ground in being able to grow or remain competitive.

Have MVB and BillGO Reached True Financial Symbiosis?


payments-7-18-18.pngSometimes a fintech partnership doesn’t result in a new product or service for the bank but can still result in new opportunities for both organizations. The relationship between BillGO, a real-time payments provider based in Fort Collins, Colorado, and MVB Financial Corp., a $1.6 billion asset financial holding company headquartered in Fairmont, West Virginia, isn’t your typical partnership story. Instead, it’s an example of true symbiosis between a bank and a fintech firm, with MVB gaining deposits and fee income while helping BillGO scale its real-time payments solution to more than 5,000 banks and credit unions. Less than a year ago, the company worked with just 200 institutions. It plans to go live with another 3,000 in the next few months.

The two companies were recognized as finalists for the Best of FinXTech Partnership at Bank Director’s 2018 Best of FinXTech Awards.

MVB supports BillGO’s growth in a number of ways. The bank processes its payments, resulting in fee income for MVB. The bank also holds deposits for the company and its B2B clients in connection with their transactions. And the bank’s compliance expertise is another key benefit. “We keep them out of trouble, so to speak,” says MVB CEO Larry Mazza.

This growing understanding of the fintech industry’s needs, gained in part due to its relationship with BillGO, is quietly turning MVB into a bank of choice for fintech firms.

“We’re meeting other, more mature fintech companies that allow us to help them in different ways,” Mazza says. “It’s really started to be very positive for us, in learning fintech [and] in profitability, deposits as well as fee income.”

“They don’t really advertise it, but they do have a specialty with fintech because of their compliance [expertise], because of their ability with payments and their ability with partnerships to deliver some unique offerings that fintech companies can’t normally do by themselves,” says BillGO CEO Dan Holt.

Before partnering with MVB, BillGO worked with a larger bank, but Holt says MVB is a Goldilocks-style bank for the company: Big enough to help the company scale, but small enough to make decisions quickly and develop an in-depth relationship with his company. Holt adds that his company has access to MVB’s executive team, unlike his previous banking provider.

And MVB is an investor in BillGO. “I felt this would be a really good [way] for us to start the process of investing in fintech,” says Mazza. “Once you invest money in it, it definitely piques your interest.” He describes the bank as an active investor, and Mazza has served on the company’s board since January 2017.

This expertise has been invaluable for BillGO, given Mazza’s financial background and his ability to shed light on the needs of the banking industry, says Holt.

Just as the BillGO relationship is a strong reputation-builder for MVB with other fintech firms, Holt says that MVB’s investment in BillGO speaks volumes about his company’s reputation to potential bank clients. New customers feel more comfortable knowing a traditional financial institution is an investor and has completed the associated due diligence.

Holt joined the MVB board late last year as an extension of the partnership between the two organizations, and Mazza says his background has been highly beneficial to the bank. “[Holt] has intimate knowledge into the industry and payment processing,” says Mazza, and his expertise enhances board discussions about technology trends and opportunities. “Our board members could see the difference.”

Many bank boards struggle to add tech-savvy directors, with 44 percent of bank directors and executives in Bank Director’s 2018 Compensation Survey citing this as a key challenge.

“Banks are more traditional. They really honor regulation,” says Mazza. “It’s our lifeblood, and we have taken regulation extremely seriously. We see regulation as a competitive advantage, if we do it right.” But partnering with BillGO, and adding Holt to the board, is helping MVB think like a startup as well. “That has changed our lives,” he says. “BillGO has helped us think more innovatively [and be] more forward-thinking.”