Generational Shift Complicates Shareholder Succession

A challenge facing many community banks this new decade has nothing to do with public policy, the yield curve, regulation or technology.

A growing number of banks face an aging shareholder base, concentrated ownership and limited liquidity. This can lead to shareholder succession impositions when large shareholders want to exit their ownership position or an estate settlement creates a liquidity need.

Community banks have always been owned by local centers of influence, passed down through generations and thought of as both a financial investment and philanthropic participation in the community. But the societal aspect of bank ownership is not the same as the current ownership cedes to the younger generation, many of whom have moved away from home and see banking as an increasingly more digital experience.

Banking and securities regulations do not make the situation easier. There are parameters around a bank’s ability to issue stock in the local community to attract new shareholders. Banks are cautious of giving unknown investors a seat at the table, particularly institutional or activist owners, as they may only hold the stock for a defined, shorter period before seeking liquidity themselves. The bank itself can sometimes be a source of liquidity to repurchase stock from shareholders, but regulatory capital ratios may limit that capacity. Some advice for banks struggling with these issues includes the following:

Treat shareholder succession as a business initiative: Identifying issues before they occur, or a capital need before it becomes urgent, increases a bank’s flexibility. Boards should discuss shareholder liquidity issues, as some large owners may be sitting around the board table.

Investor relations is not just for large and liquid banks: Local banks are often owned by members of the local community. The legacy of family ownership is emotional, and large owners often do not want to “upset the apple cart” and force the bank to sell. Many may not realize that how they treat their position could impact the bank’s future. Some may not be open to discussing the issue, but others might appreciate the opportunity.

Address long-term liquidity in strategic planning: Under what conditions would the bank consider listing on a more liquid exchange, commencing a traditional public offering, or raising subordinated debt as a way to address shareholder succession? The owners of many closely held banks are wary of incurring dilution to their ownership stake but want to remain independent, which limits their options. For smaller banks, even upgrading to a slightly more liquid trading medium such as OTC Market Group’s OTCQX Banks market, may open the doors to investors that understand smaller, less-liquid situations and have capital to put to work.

Plan for shareholder liquidity as you would for balance sheet liquidity: It is helpful that directors and executives understand the bank’s capacity to repurchase shares, as the bank itself is often the first line of defense for an immediate liquidity need. Small bank holding company regulation gives community banks flexibility to leverage their capital structure by issuing debt at the holding company, which can be injected into the bank subsidiary as common equity. Creating an employee stock ownership plan or dividend reinvestment plan may help to manage and retain capital and dividend policy can also be critical.

The right answer is usually a combination of all of the above: There is no silver bullet for addressing shareholder liquidity in a smaller, more closely held bank; all of the discussed initiatives will play a part. Many banks get caught flat-footed after the fact, either faced with an estate settlement or a family with a large position seeking liquidity. Dealing with an urgent liquidity need, often in tight timing, limits the bank’s flexibility and options.

If a merger or sale is the right alternative, control that dialog: Some shareholders looking to exit may find the premium in a sale attractive relative to the desire of others for independence. It’s a worthwhile exercise for boards and executives to understand the bank’s value in a sale, as well as likely partners, even if a sale is only a remote possibility. This allows your bank to identify preferred partners and ascertain their ability to pay a competitive valuation independent of any urging from shareholders. Highlight those strategic alternatives to the board on a regular basis. If an urgent shareholder need forces the bank to seek a partner, your bank has already begun addressing these issues and building those relationships.

Shareholder succession issues can drive change and create uncertainty, risk and opportunity at community banks. Careful analysis and planning can help lead to a desired outcome for all involved.

“The Best Strategic Thinker in Financial Services”


strategy-7-19-19.pngThe country’s most advanced bank is run by the industry’s smartest CEO.

Co-founder Richard Fairbank is a relentless strategist who has guided Capital One Financial Corp. on an amazing, 25-year journey that began as a novel approach to designing and marketing credit cards.

Today, Capital One—the 8th largest U.S. commercial bank with $373.2 billion in assets—has transformed itself into a highly advanced fintech company with national aspirations.

The driving force behind this protean evolution has been the 68-year-old Fairbank, an intensely private man who rarely gives interviews to the press. One investor who has known him for years—Tom Brown, CEO of the hedge fund Second Curve Capital—says that Fairbank “has become reclusive, even with me.”

Brown has invested in Capital One on and off over the years, including now. He has tremendous respect for Fairbank’s acumen and considers him to be “by far, the best strategic thinker in financial services.”

I interviewed Fairbank once, in 2006, for Bank Director magazine. It was clear even then that he approaches strategy like Sun Tzu approaches war. “A strategy must begin by identifying where the market is going,” Fairbank said. “What’s the endgame and how is the company going to win?”

Fairbank said most companies are too timid in their strategic planning, and think that “it’s a bold move to change 10 percent from where they are.” Instead, he said companies should focus on how their markets are changing, how fast they’re changing, and when that transformation will be complete.

The goal is to anticipate disruptive change, rather than chase it.

“It creates a much greater sense of urgency and allows the company to make bold moves from a position of strength,” he said.

This aggressive approach to strategy can be seen throughout the company’s history, beginning in 1988 when Fairbank and a former colleague, Nigel Morris, convinced Richmond, Virginia-based Signet Financial Corp. to start a credit card division using a new, data-driven methodology. The unit grew so big so fast that it dwarfed Signet itself and was spun off in 1994 as Capital One.

The company’s evolution since then has been driven by a series of strategic acquisitions, beginning in 2005 when it bought Hibernia Corp., a regional bank headquartered in New Orleans. Back then, Capital One relied on Wall Street for its funding, and Fairbank worried that a major economic event could abruptly turn off the spigot. He sought the safety of insured deposits, which led not only to the Hibernia deal but additional regional bank acquisitions in 2006 and 2008.

Brown says those strategic moves probably insured the company’s survival when the capital markets froze up during the financial crisis. “If they hadn’t bought those banks, there are some people like myself who don’t think Capital One would be around today,” he says.

As Capital One’s credit card business continued to grow, Fairbank wanted to apply its successful data-driven strategy to other consumer loan products that were beginning to consolidate nationally. Over the last 20 years, it has become one of the largest auto lenders in the country. It has also developed a significant commercial lending business with specialties like multifamily real estate and health care.

Capital One is in the midst of another transformation, to a national digital consumer bank. The company acquired the digital banking platform ING Direct in 2011 for $9 billion and rebranded it Capital One 360. Office locations have fallen from 1,000 in 2010 to around 500, according to Sandler O’Neill, as the company refocuses its consumer banking strategy on digital.

When Fairbank assembled his regional banking franchise in the early 2000s, the U.S. deposit market was highly fragmented. In recent years, the deposit market has begun to consolidate and Capital One is well positioned to take advantage of that with its digital platform.

Today, technology is the big driver behind Capital One’s transformation. The company has moved much of its data and software development to the cloud and rebuilt its core technology platform. Indeed, it could be described as a technology company that offers financial services, including insured deposit products.

“We’ve seen enormous change in our culture and our society, but the change that took place at Capital One’s first 25 years will pale in comparison to the quarter-century that’s about to unfold,” Fairbank wrote in his 2018 shareholders letter. “And we are well positioned to thrive as technology changes everything.”

At Capital One, driving change is Fairbank’s primary job.

Outsourcing the Service, Not the Oversight


oversight-7-2-19.pngEvery bank director has heard it: You can outsource a service, but you cannot outsource the responsibility.

That sounds clear enough, but how does a board know what its role should be when an opportunity to partner with a financial technology firm, or fintech, arises? The board’s role is oversight and guidance, not day-to-day management. But oversight is not passive. So what does board oversight look like in the evolving world of bank and fintech relationships?

Consider a bank that is reviewing a proposal from a fintech. Management believes that this is a great opportunity for the institution, and presents it to the board for approval. What is the board’s role here? The board’s involvement must be flexible enough that it can react to these situations, but it should also consider some essential inquiries, such as:

Does the proposal match up with the bank’s strategic plan? The board is responsible for the strategic direction of the bank. Directors should consider if the proposal is an appropriate project for the size, resources and initiatives of the bank. They must also think about whether the proposal aligns with the bank’s strategic plan. If the proposal does not match up with the strategic plan, they may also want to consider if it is material enough that the strategic plan should be amended.

What are the risks? The board is responsible for ensuring that an effective risk management program is in place at the bank, which includes the ability to fully assess risks and establish controls and oversight to mitigate those risks. It should assess the fintech proposal through its risk management process

Management should provide the board with a comprehensive risk assessment of the proposed relationship that thoroughly outlines how each identified risk will be mitigated. The board should look at that assessment critically. Was it prepared by competent and experienced personnel? Does it appear to be thorough? Does it focus on IT risks or other narrow issues, or take into account all of the compliance issues? Does it include state laws, which is especially important if the bank is state-chartered? How does the assessment address concerns about privacy and cybersecurity? What does it say about reputation risk?

Is there a negotiated contract that addresses all of the risks? The board is responsible for ensuring that all third-party relationships are documented in negotiated contracts that protect the interests of the bank. The board needs to ensure that appropriate legal counsel is engaged to negotiate the arrangement, depending on the riskiness of a proposed fintech relationship. Counsel should have a thorough understanding of the legal issues involved in the proposed program and the applicable regulatory guidelines for third-party contracts.

The actual contract negotiation should be done by management. However, the board could consider requiring a summary of the important contract provisions or a presentation by management or legal counsel about the terms, depending on the level of risk involved and materiality to the bank.

How will the board know if the program is performing? The board should receive ongoing reports relating to monitoring of the program and the fintech. These reports should be sufficient for the board to establish that the program is compliant with law, operates in accordance with the contract and meets the strategic objectives of the bank. If the program is not performing, the board should know whether appropriate action is underway to either facilitate performance or terminate the program.

A bank’s board cannot outsource its responsibility for outsourced services, even if a fintech partner seems to have a fantastic product. The board must ask enough questions to be certain that management has engaged in appropriate due diligence, identified the risks and determined how to mitigate those risks through the contract and oversight. The implementation of all of those steps is up to management. But one role in particular rests with the board: ensuring that the relationship with the fintech partner furthers the strategic goals of the bank.

A Roadmap for Productive Board Discussions


bank-board-10-11-18.pngYou can’t drive a car to a new destination without a roadmap, and a board can’t conduct a productive meeting—and ultimately, effectively oversee the organization—without a well-thought agenda that keeps meetings focused on discussing what’s important, and helping the board stay proactive on the potential opportunities and threats facing their bank. What’s placed on that agenda, and when it’s discussed, differs a bit from bank to bank. But there are several issues that should be on every agenda, and some that should be addressed regularly, albeit less frequently.

At every meeting
Bank board agendas don’t differ from a standard corporate agenda in many respects. There should be a call to order, review and approval of minutes from the previous meeting, and a review of reports.

For a bank, every meeting should include a review of financial reports, with the chief financial officer on hand to address questions and discuss items in detail. Directors will also want to review loan reports, at which point the board will typically hear from the senior loan officer. Reports from the committee chairs should also be heard at every board meeting.

New business will include updates on strategic initiatives, including milestones and progress. Actions taken by the bank to address regulatory concerns should also be addressed, though how frequently this item appears on the agenda will depend on how much hot water the bank is in with its examiners. Trends impacting the growth and financial performance of the bank should also be discussed.

Old business should also be addressed in the agenda, and it’s an area often overlooked by banks, according to Bob Brown, a managing director at Kaplan Partners and board member at $84 million asset County Savings Bank in Essington, Pennsylvania. He previously spent 40 years at PwC. If management was instructed to take a certain action, or the board decided it would circle back to an issue, those matters shouldn’t be dropped.

Regular items to address
Risk, cybersecurity and technology are top concerns for bank boards, but directors are split on how often these topics need to be discussed by the full board. Twenty-six percent of respondents to Bank Director’s 2018 Risk Survey said their board discusses cybersecurity at every meeting, compared to 37 percent who do so quarterly. Half of the respondents to the 2018 Technology Survey said their board discusses technology at every meeting, compared to 37 percent who cover the topic quarterly.

The board should discuss management and incentive compensation semiannually, advises Brown. And don’t forget the auditors: Internal auditors should address the board semiannually, and external auditors annually.

Board education should be woven into the agenda at least quarterly, and should cover a variety of topics relevant to directors’ level of expertise as well as any ongoing regulatory, economic or competitive concerns. Regularly bringing in outside experts can also stimulate productive dialogue among board members.

Every year, the board should review board and committee charters, as well as key policies and loan loss reserves. The makeup of the board should also be assessed annually, using a board matrix or evaluation, or both. A board matrix is a grid that lists all the directors on one axis, and the skill sets and attributes needed on the board on the other. This check-the-box-style exercise can be an easy way to identify gaps where additional expertise is needed.

Strategic planning should occur annually and will drive the agenda by setting the priorities that the board will want to follow up on throughout the year. “That then drives what senior management does,” says Jim McAlpin, a partner and leader of the financial services client service group at the law firm Bryan Cave Leighton Paisner. Does the bank need to renew its contract with its core vendor, or seek another solution? Does it make sense to build a new branch? These decisions should be fueled by the strategic plan. “It’s good to take stock, set direction and plan, and then over the course of the next year refer back to that plan and refer back to the priorities when engaging with the CEO,” he says.

McAlpin recommends that strategic planning take place off site if possible, with the board spending a half day or day talking about the bank’s strategic direction.

The board chairman—or the lead director, if the chairman is not independent—often develops the agenda, with input from the chief executive. Committee chairmen should also weigh in to ensure those areas are addressed. Individual directors should feel welcome to contribute to the agenda, and there should be room to speak up during meetings. “A good agenda should include a line item in which the chair asks if there are any additional matters the directors think should be addressed,” says McAlpin.

An annual discussion that sets the agenda for the year—tied to the strategic planning session—can help boards better drive what’s on the agenda, says Brown. The governance and nominating committee can then take that conversation and finetune the scope of the board’s agenda for the year, with input from the board before it’s finalized.

Getting the right input
It’s important to hear from other members of the management team and ask questions directly of the heads of the respective areas of the organization, rather than relying on one source—the CEO—for that information. Ideally, the board should hear from the CFO at every board meeting to address financial matters. The heads of legal, compliance, human resources and information technology should also be available to address their areas of expertise, when needed. McAlpin recommends asking open-ended questions to gain their perspectives and address any of the board’s concerns. “If I were a board member, I’d rather [their answers] be unfiltered,” rather than through the CEO, he says.

Brown also recommends that the board hear from business line leaders at least annually, to better understand these important areas of the business.

Aside from better understanding the bank, it’s important for the board to understand the depth of the management team. “Perhaps the most important role a board has is selecting and evaluating the CEO,” says Brown. “Succession planning is a key responsibility, and understanding the management team’s depth, strengths and weaknesses of management team members, and having the chance to see them in action … is really important.”

Independent directors should also make time to discuss issues without management present, in an executive session, advises Brown.

Facilitating effective discussions
The board agenda will structure the discussion, but it’s on the board to ensure those discussions are fruitful. First and foremost, materials should be provided in advance, so directors have time to prepare.

Remote participation has become more common as technological solutions like web conferencing make this option easier and can be a good way to attract younger candidates with diverse backgrounds, who may still be building their careers, to the board, says Dottie Schindlinger, vice president at Diligent. But make sure discussions are secure. Don’t reuse the same conference call number and passcode every time—this can easily be accessed by a disgruntled ex-employee, for example, who then gains access to sensitive conversations. And directors shouldn’t use their personal emails to discuss board matters. Web portals, such as that offered by Diligent, can help boards store and access information, and communicate safely.

Remote attendance can have its disadvantages, and there are always directors who tend to dominate a discussion. An effective facilitator—usually the chairman or lead director—will overcome these hurdles and ensure everyone’s voice is heard. Pointed, open-ended questions can help engage introverted board members. Making sure one director speaks at a time cuts out crosstalk and helps remote directors understand what’s discussed.

McAlpin emphasizes that it’s important to have an actual discussion—not just directors passively listening to what the CEO has to say, or other members of management, or the committee chairs. And this underscores the need to assemble a strong board. “Some of the most effective CEOs, I’ve found, are those who purposefully build a strong board—a board consisting of board members with a range of strong experience, good insight and a willingness to share feedback and make suggestions,” he says.

Three Strategic Considerations for Bank Boards About Fintech Charters


strategy-10-4-18.pngStrategic planning is one of the most important roles of a financial institution’s board of directors. Since the 2008 financial crisis, financial institution boards have dealt with the emergence of fintechs as a primary consideration in developing their strategic plans. A few large financial institutions have opted to build fintech capabilities, but the majority of financial institutions have determined that the best strategy is either to invest in or partner with a fintech firm through an outsourcing process.

On July 31, 2018, the Office of the Comptroller of the Currency announced it would begin accepting applications filed by fintech firms for “special purpose” federal bank charters. While not unexpected given the conversations around this topic in recent years, the announcement garnered immediate and passionate responses from the interested constituents. Whichever strategy has been adopted and implemented in their firm, financial institution boards should consider the impact a “special purpose national bank charter” may have on their relationship with a fintech firm, or how newly chartered fintechs may change their strategic plan.

First: Re-evaluate Your Strategy
Financial institution boards should first consider if their strategy should change based on an assumption that fintech firms would become chartered special purpose banks. Applying the standard SWOT (strengths, weaknesses, opportunities, threats) approach to their strategic planning, the board might determine that what once was a strength for a financial institution (direct access to customers, ability to accept deposits) could become a threat as chartered fintechs obtain bank powers, while weaknesses (stricter regulatory oversight and related infrastructure expense) become strengths or opportunities. This shift in the playing field for fintech and financial firms should become a basis for deciding if the build, invest or partner strategy is still the best fit for the financial institution.

Second: Evaluate Your Options
Whether the board determines that their current strategy is appropriate or needs to be reconsidered, their decision will be influenced by the ability to and cost of change. The board should review the existing relationships that are in place and determine the feasibility of changing strategy. While building may be the best answer, the cost of building fintech expertise may not be a valid strategic option, given the expertise required and the size of investment. Likewise, finding a new vendor or outsourcing partner may be relatively easy, but exiting a current contract may be difficult or costly if there isn’t a valid contractual reason for termination.

Third: Focus on Execution
In their review of options the board should have been exposed to any shortcomings or important factors in executing the adopted strategy. Once the strategic approach has been decided, the basis of that decision must be taken into account in the execution. The possibility of a fintech firm obtaining a bank charter should be the cornerstone of execution. Directors should ask themselves whether getting a bank charter should be a basis for terminating a financial institution’s relationship with a fintech firm. If so, the terms should be clearly stated including financial outcomes and operational details. For example, any fintech investments or contracts should make it clear the financial institution will maintain the customer relationships and the related data. In addition, the arrangement should have appropriate non-solicitation and non-competition clauses to protect the financial institution in the event the fintech becomes a competitor. If the fintech firm can terminate the relationship, the financial institution should ensure there is an adequate conversion process that will allow it to pursue a different strategy or to migrate to a new strategic partner with minimal interruption to its customers.

It is not expected that fintech firms will rush to obtain charters or that charters will be granted to fintech firms in the near future. Significant barriers still remain for fintech firms to obtain charters. The application, review and examination process for obtaining a new (or de novo) charter is arduous and time consuming. In addition, newly chartered special purpose banks would need to build extensive regulatory infrastructure and would be subject to additional oversight and supervision during their early existence. Nevertheless, the OCC’s announcement will provide fintech firms with additional strategic options and a foothold for bringing further disruption to the financial services industry. Financial institution boards should be prepared to strategically respond to that challenge.

The Avoidable Mistakes that Acquirers Make


acquisition-9-17-18.pngFor many bank boards of directors and senior management teams, an acquisition will be the most important deal they ever make. Unfortunately, even experienced acquirers make mistakes that can have a negative—and sometimes even disastrous—impact on the outcome. And they are all avoidable.

Be Able To Say Why
One of the most common missteps is to pull the trigger on a deal without having a clear rationale for why a particular acquisition target—as opposed to other possible candidates—is the best strategic fit. “Some acquirers tend to be more opportunistic and try to assess on the fly whether or not the deal is a good fit, as opposed to knowing before hand that they really want to acquire institutions that have certain parameters,” says Rick Childs, a partner at the consulting firm Crowe LLP. “It may be that they make a certain level of money, or do a certain type of lending, or operate in a desirable geography.”

In almost every instance, doing no deal is better than doing the wrong deal. Says Childs: “My dad used to tell me a long time ago, when I would say that something was on sale, ‘Son, a bargain isn’t a bargain if you don’t need it,’ which is to say if it doesn’t really fit, you’re better to walk away from that and focus on… opportunities that would really advance your cause as an organization and produce the returns you need for your shareholders.”

Cultural Compatibility
Having a well-developed a well-defined set of criteria in advance enables the acquirer to then assess critical elements such as the target’s culture—which is important because misaligned cultures can lead to significant problems after the deal has closed and the banks need to be integrated. “I find that many times buyers don’t take the time to learn whether the organizations are compatible,” says Gary Bronstein, a partner at the law firm Kilpatrick Townsend. “And this is especially important when the seller will become a significant part of the merged organization. Too often, says Bronstein, buyers fail to focus on this issue until the integration process begins. “And it becomes [apparent] that perhaps the cultures of the two organizations in terms of how hard they work, how customers are treated, what the philosophies are in terms of how they operate, might not be compatible and it makes it very difficult to integrate under those circumstances.”

Clear, Consistent Communication
Bronstein also finds that acquirers sometimes fail to place a high enough emphasis on the importance on effective and honest communication with people at the acquired bank. “That is particularly [true] among CEOs of the two organizations,” he says. “I’ve seen many deals fall apart or deteriorate pretty quickly due to bad communication, or lack of thoughtful communication.” Candor is an especially important element of the communication process, Bronstein says. “I’ve seen situations where a buyer CEO will say one thing but then do another thing, and that just alienates people in the process. And it’s critically important to develop a… rapport early, because if things deteriorate early it’s hard to get back,” he cautions.

Consider The People
Many acquirers also tend to wait too long to make critical people decisions that can impact the outcome of a merger. Bronstein divides these important people decisions into three categories. “Category number one is, who do you need long term, and [in] what positions?” he explains. “Who do I need for this larger organization, and what positions can I spot them in? The second category is, who do I need short term to get me through the transition? The common timeline for transition is the technology conversion, which will usually happen somewhere between three and six months after the transaction is closed. And the final thing is, who are the people that are closest to the customers that I really need to lock up with a non-compete so they don’t go next door and compete with me?”

Childs also stresses the importance of communicating these important personnel decisions throughout both organizations. Staffers at either bank who ultimately will not be part of the combined organization once the integration process has been completed should be informed “as quickly and as compassionately as you can,” he says. It’s equally important that employees who will be going forward with the new bank know that their jobs are secure. “Uncertainty breeds angst and anxiety that is going to affect how people treat their day-to-day job, and taking that away and reassuring them is really job number one for the CEO and the management teams.”

Seven Costly Mistakes Banks Make With Their Small Business Loan Applications


lending-10-30-17.pngAll aspects of banking are going through a remarkable technological evolution. Customers are clamoring for all things digital, from making deposits to easily paying the babysitter. Small business owners are not immune. They are now starting to demand that their bank embrace technology after seeing the benefits that come from an accessible, digitized lending experience online, thanks in part to the technology being utilized by modern banks and alternative lenders.

Here are seven costly mistakes banks make with their current loan applications:

1. Your loan application process takes too much time.
Does this sound familiar? Your potential borrower drives to a branch to pick up a paper application, fills it in, realizes he or she doesn’t have all the information and leaves the bank, returning the application to the branch days or weeks later. Your team looks it over, and there are still missing documents, so the whole process from beginning to end can take weeks and sometimes months.

It’s a universal struggle in lending. With the correct technology, the documents your staff needs can be uploaded easily online, automatic reminders can be sent to the borrower for missing documents, and when terms are offered the technology will automatically request the documents your bankers need. It’s amazing how much time technology can and will save your team.

2. Your applications are still only on paper.
It’s a risky business when your prospective borrower goes to your website to apply for a loan only to be met with a prompt to “contact us to apply.” Your most eager customers will call but who knows where everyone else will go? Are you losing business to alternative lenders? That’s a possibility.

3. You need to reduce the workload for your team.
Let’s be honest. Your staff wears many hats in today’s modern bank branch. More and more branch managers are having to chase after documents for small business loans. Take the burden off the team and let technology do the hard work. Look for technology to utilize automation to request missing documents via a secure portal and let your managers get back to what really matters: providing great customer service.

4. Your bank needs to conform to the Americans with Disabilities Act (ADA).
Is your current application accessible to the blind or those who have low vision? An interactive pdf that your borrower can fill out and send via email will no longer be acceptable as those forms are often not accessible to blind people who use screen readers. Your bank needs technology that has created software that exceeds current standards and requirements for accessibility.

5. Reporting and analytics take too much time.
You and your team need a transparent workflow. When your team has the analytics and the ability to track how many people are viewing, starting, and completing your application, your team can do a better job of forecasting the week ahead along with creating targeted marketing campaigns.

6. Your bank struggles with data.
Creating, storing, and using data will become more and more important as new regulations are created. Use technology to your advantage and gain a significant competitive edge through automatic reminders to complete applications and the ability to gather data for retarget marketing.

In addition, reduce risk and time spent rekeying information by having a central location for data. Your goal should be to have the borrower enter their information when they are ready. No longer would your staff have to waste valuable time rekeying information from paper.

7. Communication within the bank is less than stellar.
You are ready to make internal collaboration easier and knowing where each loan is in the process gives visibility so everyone on your team can stay on track and know what’s coming their way, helping facilitate cross departmental communication to accelerate the loan’s end-to-end time.

Increased efficiency, profitability, productivity and enhanced customer experience are all reasons why digitizing your loan application should be a top priority for next year. For example, in most banks, the administrative and overhead costs to underwrite a $50,000 loan and a $1 million loan are essentially the same, making $50,00 loans less attractive to the bank. Simplifying the process and achieving greater efficiency may grow your loan volume as well. It’s time to make the shift from traditional applications and revolutionize the lending experience for your borrower.

What to Know: The Yield Curve is Squeezing Banks, and Other Topics


governance-9-28-17.pngOne of the biggest challenges of serving as a bank director is understanding all of the changes that are occurring in a very complex and highly regulated industry. Most independent directors do not have a career background in banking, and while they usually bring an experienced and thoughtful perspective to their board service, they still have to learn about the industry and stay abreast of the many changes that are occurring.

This week Bank Director held the 2017 Bank Board Training Forum in at The Ritz-Carlton Buckhead in Atlanta, where 225 attendees comprised of independent directors, chairmen, lead directors and chief executive officers met for a day and a half to hear presentations on the latest industry developments, discuss their common problems in peer collaboration sessions and network at refreshment breaks throughout the day and at the Monday evening reception. This is the fourth year that we have held this event and the attendance has more than doubled over that period of time, which I think is a strong indication that directors view professional education as an important process. The agenda included presentations and panel discussions on audit, compensation, risk and technology, as well as the industry’s recent performance.

This year we also invited chairmen, lead directors and CEOs to meet separately on the first day in small group peer exchanges where they were able to share their experiences, discuss a variety of issues they have in common and learn from each other.

Some of the topics under discussion included the disappointing trajectory of interest rates, and proposed Federal Reserve supervisory guidance that will clarify the role of the bank board.

In the opening presentation, John Freechak, a principal at the investment banking firm Piper Jaffray Companies, reported on how a flattening yield curve in recent months is a sign that the industry’s margin pressure from low interest rates might not be easing any time soon. Freechak explained that interest rate spreads had widened following the victory by Donald Trump in the 2016 presidential election. Early market optimism that the Trump Administration would be able to achieve meaningful regulatory reform and tax cuts helped maintain those spreads into early spring, but the well documented legislative struggles by the administration and Republican-controlled Congress has led to an erosion of confidence. The Federal Reserve has said it intends to gradually raise rates, but long-term rates have yet to move appreciably. “The dwindling spread has hurt the profitability of banks as they reach for yield in a low interest rate environment,” said Freechak.

And proposed guidance on supervisory expectations for bank boards of directors, released by the Federal Reserve Board in August and intended to pertain only to banks with assets of $50 billion or more, could end up having a wider application, according to Jim McAlpin, a partner at the law firm Bryan Cave, in a presentation on board culture. “While initially applicable only to the largest banks, application of these expectations would likely spread to all banks,” McAlpin said. One of the core board responsibilities defined in the proposed guidance is to oversee the development of the bank’s strategy. “Much of what passes for strategic planning in banks is actually operational planning and budgeting,” McAlpin said. “High performance boards have a strong sense of ‘we,’ coupled with an expectation of success. This leads them to become more proactive and assertive in the strategic planning process.” Bank Director digital magazine’s November issue will discuss this issue in greater depth.

The 2018 Bank Board Training Forum will be held September 10-11 at the Four Seasons Hotel in Chicago.

Facing Strategic Anxiety Head On



Banks need to be more agile to face the challenges in today’s marketplace, and boards and management teams need to focus on strategy more frequently. Brian Stephens of KPMG outlines the strategic issues impacting banks and how they should be addressed by bank leaders.

  • How Shareholder Expectations Have Changed
  • Questions to Ask About the Customer Experience
  • A New Approach to Strategic Planning

Coming Out of the Shadows: Why Big Banks Are Partnering With Fintech Firms


fintech-8-4-17.pngEver since the introduction of the ATM machine in the 1960s, which several inventors have claimed credit for, banking’s technology has often come from outside the industry. Community and some regional banks across the country almost exclusively rely on vendors for everything from check processing to their core banking systems, and they have done so for decades.

Some banks don’t even count their own money. Counting machines developed by vendors do that, as well.

But banks in general have preferred to keep vendors hidden in the background so customers didn’t know they were there, and big banks have sought to develop much of their own technology in-house. Last year, when I interviewed Fifth Third Bancorp CEO Greg Carmichael for the third quarter 2016 issue of Bank Director magazine, the bank was proud to have developed and spun-off payment processor Vantiv and was planning to hire 120 technology staffers so it would have roughly 1,000 people working in information technology at the end of that year. Bigger banks have even larger crews.

Some of the biggest banks continue to invest in innovation laboratories and pump out new technologies with little to no help from outside vendors, and do an excellent job with it. But there is evidence that even some of the largest banks are warming to the idea that great technology really is coming from startup fintech firms, and that partnerships will speed up the process of innovation and give banks access to sizeable talent outside the banking sector.

The market is changing way too fast for banks to do all the things in-house they’ve done in the past,’’ says Michael Diamond, general manager of payments for mobile banking and identification vendor Mitek, which sells its products to several of the biggest banks. “They know that.”

Aite Group researcher Christine Barry describes it this way. Historically, most large banks have promoted the technologies they have built themselves and kept the names of any technology partners undisclosed. “They did not view such partnerships as a strength and rarely allowed technology partners to reveal their names,’’ she and David Albertazzi wrote in a recent research report, “Large Banks and Technology Buying: An Evolving Mindset.” “That mindset has begun to change, given the increased attention many fintech companies are now enjoying in the marketplace.”

Nowadays, fintech partnerships are viewed as a leg up for a financial institution, and even the biggest banking players are proudly announcing their affiliations with a multitude of small firms.

USAA, long an innovator in its own right, partnered in 2015 with Nuance to offer virtual assistants to customers, and later, a savings app. TD Bank last year partnered with Moven to offer a money management app for consumers. This year, Capital One Financial Corp. joined other big banks in offering Bill.com to small- and medium-sized businesses, a platform for managing invoices and bill payment on a mobile device.

About 92 percent of banks plan to collaborate with fintech companies, according to a 2017 survey by information technology consulting firm Capgemini Global Financial Services.

In the past, technology might have helped improve back-office efficiency or reduced wait times in the branch. Nowadays, it’s at the forefront of strategic planning and the way banks plan to offer a competitive edge, Barry says.

It’s not just attitude that’s changed. The technology itself is developing rapidly. New ways of interacting with customers using artificial intelligence or virtual reality will be harder to banks to develop themselves, and easier to obtain through partnerships. Amazon’s Alexa, the voice service that powers the Echo, already is transforming consumers’ expectations for shopping, because they can now talk with a robot and order what they want online through voice commands. (For more on what banks are doing about AI, see Bank Director digital magazine’s Fintech issue.)

APIs, or application programming interfaces, will make it easier for banks to offer their customers a variety of technology solutions, by opening up their systems to technology vendors, as described in a recent issue of Bank Director digital magazine.

One of their biggest obstacles for banks is to monitor every vendor for compliance with regulations and security concerns. Smaller banks just prefer to do business with established vendors they trust. But already, they have begun to tap into the benefits of a wave of new fintech technologies, too, by asking core processors such as FIS and Fiserv to connect them with best of breed products, Diamond says. “They need the outsourcers to outsource themselves,’’ he says.