The process for opening a consumer account at most financial institutions is pretty standard. It’s not uncommon for banks to provide a fully digital account opening experience for retail customers, while falling back on manual and fragmented processes for business accounts.
Common elements in business account opening include contact forms, days of back-and-forth communication or trips to a branch, sending documents via secure email systems that require someone to set up a whole new account and a highly manual document review process once the bank finally receives those files. This can take anywhere from days to multiple weeks for complex accounts.
Until very recently, the greatest competitor for banks in acquiring and growing business accounts was other banks. But in recent years, digital business banks have quickly emerged as a more formidable competitor. And these digital business banks empower users to open business accounts in minutes.
We researched some of the top digital business banks to learn more about how these companies are winning the business of small businesses. We discovered there are three key ways digital banks are rapidly growing by acquiring business accounts:
1. Seamless, intuitive user experiences. Business clients can instantly open accounts from a digital bank website. There’s no need to travel to a branch or pick up a phone; all documents can be submitted online.
2. Leveraging third-party technology. Digital banks aren’t building their own internal tech stacks from the ground up. They’re using best-in-class workflow tools to construct a client onboarding journey that is streamlined from end to end.
3. Modern aesthetics. Digital business banks use design and aesthetics to their advantage by featuring bright and engaging colors, clean user interfaces and exceptional branding.
The result? Digital banks are pushing their more traditional counterparts to grow and innovate in ways never before experienced in financial services.
Understanding what small businesses need from your bank
A business account is a must-have for any small business. But a flashy brand and a great user experience aren’t key to opening an account. Small businesses are really looking for the right tools to help them run their business.
While digital banks offer a seamless online experience, community banks shouldn’t sell themselves short. Traditional banks have robust product offerings and the unique ability to deal with more complex needs, which many businesses require. Some of the ways businesses need their financial institutions to help include:
- Banking and accounting administration.
- Financing, especially when it comes to invoices and loan repayment.
- Rewards programs based on their unique needs.
- Payments, specifically accepting more forms of payment without fees.
It’s important to keep in mind that your bank can’t be all things to all clients. Your expertise in your particular geography, industry or offerings plays a huge role in defining your niche in business banking. It’s what a lot of fintechs — including most digital banks — do: identify a specific niche audience and need, solve the need with technology, and let it go viral.
While digital banks might snap up basic small and medium businesses, the bar to compete in the greater market is not as high as perceived — especially when it comes to differentiated, high-risk complex entities. But it requires a shift in thinking, and the overlaying the right tech on top of the power of a community based financial institution.
It’s important that community bank executives adopt a smart, agile approach when choosing technology partners. To avoid vendor lock-in, explore technologies with integration layers that can seamlessly plug new software into your bank’s core, loan origination system, digital banking treasury management system and all other platforms and services. This means your bank can adopt whatever new tech is best for your business, without letting legacy vendors effectively dictate what you can or can’t do.
Your level of success in winning at digital banking comes down to keeping the client in focus and providing the best experiences for their ongoing needs with the right technology. While the account itself might be a commodity, the journeys, services and offerings your bank provides to small businesses are critical to growing and nurturing your client base.
Traditional credit scores may be a proven component of a bank’s lending operations, but the unprecedented nature of the coronavirus pandemic has their many shortcomings.
Credit scores, it turns out, aren’t very effective at reacting to historically unprecedented events. The Federal Reserve Bank of New York even went so far as to claim that credit scores may have actually gotten “less reliable” during the pandemic.
Evidence of this is perhaps best illustrated by the fact that Americans’ credit scores, for the most part, improved during the pandemic. This should be good news for bankers looking to grow their lending portfolios. The challenge, however, is that the reasons driving this increases should merit more scrutiny if bankers are accurately evaluate borrowers to make more informed loan decisions in a post-pandemic economy.
For greater context, the consumers experiencing the greatest increases in credit score were those with the lowest credit scores — below 600 — prior to the pandemic. As credit card utilization dropped during the pandemic, so too did credit card debt loads for many consumers, bolstering their credit scores. In some instances, government-backed stimulus measures, including eviction and foreclosure moratoriums to student loan payment deferrals, have also helped boost scores. With many of these programs expiring or set to retire, some of the gains made in score are likely to be lost.
How can a bank loan officer accurately interpret a borrower’s credit score? Is this someone whose credit score benefitted from federal relief programs but may have struggled to pay rent or bills on time prior to the pandemic and may not once these program expire? Compared to a business owner whose income and ability to remain current on their bills was negatively affected during the pandemic, but was a safe credit risk before?
There are also an increasing number of factors and valuable data points that are simply excluded from traditional credit scores: rent rolls, utility bills and mobile phone payment data, which are all excellent indicators of a consumer’s likelihood to pay over time. And as more consumers utilize buy now, pay later (BNPL) programs instead of credit cards, that payment data too often falls outside of the scope of traditional credit scoring, yet can provide quantitative evidence of a borrower’s payment behavior and ability.
So should bankers abandon credit scores? Absolutely not; they are a historically proven, foundational resource for lenders. But increasingly, there is a need for bankers to augment the credit score and expand the scope of borrower data they can use to better evaluate the disjointed, inaccurate credit profiles for many borrowers today. Leveraging borrower-permissioned data — like rent payments, mobile phone payments, paycheck and income verification or bank statements —creates a more accurate, up-to-date picture of a borrower’s credit. Doing so can help banks more safely lend to all borrowers — especially to “near prime” borrowers — without taking undue risk. In many cases, the overlay of these additional data sources can even help move a “near prime” borrower into “prime” status.
While the pandemic’s impact will continue reverberating for some time, bankers looking to acquire new customers, protect existing customer relationships and grow their loan portfolios will need the right and complete information at their disposal in an increasingly complex lending environment. Institutions that expand their thinking beyond traditional credit scoring will be best positioned to effectively grow loans and relationships in a risk-responsible way.
To compete today, banks need to proactively meet the needs of their commercial clients. That not only requires building strong relationships but also improving the digital experience by automating the commercial lending process. Joe Ehrhardt, CEO and founder of Teslar Software, shares how bank leaders should think through enhancing lending processes and how they should consider selecting the best tools to meet their strategic goals.
- Shifting Client Expectations
- Processes Banks Should Automate Next
- Specific Technologies to Adopt
- Selecting Providers
Many community bankers and their boards are entering the post-pandemic world blindfolded. The pandemic had an uneven impact on industries within their geographic footprints, and there is no historical precedent for how recovery will take shape. Government intervention propped up many small businesses, disguising their paths forward.
Federal Reserve monetary policies have hindered the pro forma clarity that bank management and boards require to create and evaluate strategic plans. Yet these plans are more vital than ever, especially as M&A activity increases.
“The pandemic and challenging economic conditions could contribute to renewed consolidation and merger activity in the near term, particularly for banks already facing significant earnings pressure from low interest rates and a potential increase in credit losses,” the Federal Deposit Insurance Corp. warned in its 2021 risk review.
Bank management and boards must be able to understand shareholder value in the expected bearish economy, along with the financial markets that will accompany increased M&A activity. They need to understand how much their bank is worth at any time, and what market trends and economic scenarios will affect that valuation.
As the Office of the Comptroller of the Currency noted in its November 2020 Director’s Book, “information requirements should evolve as the bank grows in size and complexity and as the bank’s environment or strategic goals change.”
Clearly, the economic environment has changed. Legacy financial statements that rely on loan categories instead of industries will not serve bank management or boards of directors well in assessing risks and opportunities. Forecasting loan growth and credit quality will depend on industry behavior.
This is an extraordinary opportunity for bank management to exploit the knowledge of their directors and get them truly involved in the strategic direction of their banks. Most community bank directors are not bankers, but local industry leaders. Their expertise can be vital to directly and accurately link historical and pro forma information to industry segments.
Innovation is essential when it comes to providing boards with the critical information they need to fulfill their fiduciary duties. Bank CEOs must reinvent their strategic planning processes, finding ways to give their boards an ever-changing snapshot of the bank, its earnings potential, its risks and its opportunities. If bank management teams do not change how they view strategic planning, and what kind of data to provide the board, directors will remain in the dark and miss unique opportunities for growth that the bank’s competitors will seize.
The OCC recommends that boards consider these types of questions as part of their oversight of strategic planning:
- Where are we now? Where do we want to be, and how do we get there? And how do we measure our progress along the way?
- Is our plan consistent with the bank’s risk appetite, capital plan and liquidity requirements? The OCC advises banks to use stress testing to “adjust strategies, and appropriately plan for and maintain adequate capital levels.” Done right, stress testing can show banks the real-word risk as certain industries contract due to pandemic shifts and Fed actions.
- Has management performed a “retrospective review” of M&A deals to see if they actually performed as predicted? A recent McKinsey & Co. review found that 70% of recentbank acquisitions failed to create value for the buyer.
Linking loan-level data to industry performance within a bank’s footprint allows banks to increase their forecasting capability, especially if they incorporate national and regional growth scenarios. This can provide a blueprint of how, when and where to grow — answering the key questions that regulators expect in a strategic plan. Such information is also vital to ensure that any merger or acquisition is successful.
Culture is fundamental to the success of the deal, so it’s top of mind for bank leadership teams working with Richard Hall, managing director for banking and financial services at BKM Marketing. In this video, he explains why transparent, candid communication is key to retaining customers and employees, and shares his advice for post-pandemic strategic planning.
- Ensuring a Successful Integration
- Retaining Customers and Employees
- Formulating a Strategy for 2021
We are all in survival mode.
While the health and safety of one’s constituents takes top billing, keeping a business relevant — and viable — during these times should top the shortlist of any board’s agenda.
And while nobody has a compass to navigate these times, we at least have the means to aggregate an incredible amount of information and insight, vis-a-vis BankBEYOND.
With many fatigued from virtual conferences, we challenged ourselves to bring concise, novel ideas to a hugely influential audience. We followed Steve Jobs’ principle of design, working backward from the user’s experience to present board-level issues in new ways on BankDirector.com.
Our North Star in crafting the BankBEYOND agenda and experience: Respecting viewers’ time while surfacing issues that are both specific and relevant to their interests and responsibilities. Hence, our focus on issues that are strategic, risky and potentially expensive.
Since March, the industry has witnessed — and undergone — a rapid evolution of financial services. As a result, officers and directors must now assess the potential of their bank’s business in a post Covid-19 world. Growing a bank prudently and profitably took center stage at our Acquire or Be Acquired Conference in January; today, I suspect many boards and executives today emphasize efficiency to protect their franchise’s value. Indeed, a 50% efficiency ratio used to be the stretch goal for many banks; now, that might be closer to 35%.
Banks across the country are grappling with the tough choices they will need to make to rapidly bring those ratios down while delivering consistent service across physical and digital channels. We appreciate how so many institutions quickly embraced new technologies to solve specific business challenges, like the rollout of the Small Business Administration’s Paycheck Protection Program. In recent merger announcements, the drive to leverage technologies proved a primary catalyst for striking a deal. In fact, that’s where many efficiency gains come from.
However, boards realize that many of these technology additions can be expensive, which is why economies of scale becomes critical. We have seen how mergers can become the most expeditious way to generate meaningful economies of scale. But of course, much of the bank space is stuck in neutral at the moment when it comes to bank M&A.
We know that BankBEYOND’s audience has the responsibility for finding answers, rather than identifying barriers. We are tackling issues like:
- Setting high-priority, short-term goals;
- Keeping optimism and a sense of purpose alive; and
- Weaving the best of the past eight months into everything the bank does going forward.
These are only three of the topics we’ll address with the help of various advisors and executives. Unlike a digital conference, with specific dates and watch times, we release families of videos and presentations at 8 a.m. CST. Beginning Monday, Nov. 9, we explore strategic and governance issues. The next day, we add information geared to the audit committee and risk committee. We conclude on Wednesday, Nov. 11, by sharing content developed for the compensation and nominating/governance committees.
BankBEYOND tees up the topics that allow for proactive — not reactive — change. By placing a premium on complex issues that all directors must address, we strengthen the knowledge of a bank’s board. And we rarely find a strong board at anything but a strong bank.
Looming new capital rules are an opportunity for banks to improve strategic planning and data management as they strengthen their compliance and reporting processes.
The coronavirus pandemic has delayed deadlines for complying with the latest round of capital guidelines dictated by Basel IV. Still, financial institutions should not lose sight of the importance of preparing for Basel IV, the difficulties it will create along the way and the ways they can leverage it as a potential asset. Compliance and implementation may be a significant expenditure for your bank. Starting now will lengthen your institution’s path to greater productivity and profitability to become a better bank, not just a more compliant one.
At Wolters Kluwer, we broke down the task — and opportunity — at hand for banks as they approach Basel IV compliance in our new whitepaper “Basel IV – Your Path to a more Profitable Business.” Here are some of the highlights for your bank:
Making Basel IV For Business
Where there is a will — along with the right tools — there’s a way to leverage the work required to comply with Basel IV for other commercial objectives. The new capital rules emphasize using forward-looking analysis, a holistic, collaborative organizational structure and data management capabilities for compliance and reporting purposes. These tools can all be leveraged for strategic planning and other commercial objectives, reducing or controlling long-term expenses while enhancing efficiency.
Central to this approach, however, is adopting the right attitude and approach. Executives should view Basel IV compliance as a potential asset, not just a liability, and be willing to make changes to the structure of operations and supporting data management systems.
A Familiar Approach
Basel IV is not a monolithic set of edicts; instead, it’s a package of regulatory regimens through which the Basel Committee on Banking Supervision’s guidelines will be put into practice. These measures are actually the final version of the Basel III guidelines issued in 2010 but were seen as such an expansion of what came before as to be thought of as an entirely new program. It contains elements that encourage and even require banks to act in ways that enhance business practices, not just compliance.
One element is the mandate for a holistic, collaborative approach to compliance. All functions within an institution must work in concert with one another, to create a data-driven, dynamic, three-dimensional view of the world. Another point of emphasis is the importance of prospective thinking: anticipating events from a range of alternatives, instead of accumulating and analyzing data that shows only the present state of play.
“What now?” to “What if?”
Banks can use Basel’s compliance and reporting data for business intelligence and strategic planning. Compliance efforts that have been satisfactorily implemented and disseminated allow executives to create dynamic simulations displaying prospective outcomes under a range of scenarios.
The possibilities of leveraging Basel IV for business extends to the individual deal level. Calculations and analysis used for compliance can be easily repurposed to forecast the rewards and risks of a deal under a range of financial and economic scenarios whose probabilities themselves can be approximated. And because a firm’s risk models already will have been vetted in meeting Basel IV compliance standards, bankers can be confident that the results produced in the deal evaluation will be robust and reliable.
Another big-picture use of Basel IV for business is balance sheet optimization: forecasting the best balance sheet size for a given risk appetite. This can show the board opportunities that increase risk slightly but obtain far more profit, or sacrifice a bit of income to substantially reduce risk.
To turn Basel IV’s potential for business into practice requires openness and communication from senior executives to the key personnel who will have to work together to bring the plan to fruition. It will mean adopting a mindset that considers each decision, from the details of individual deals to strategic planning, along with its likely impact. Staff must also be supported by similarly structured data management architecture.
The emphasis on forward-looking analysis and a holistic, collaborative organizational structure for compliance and reporting purposes, supported by data management capabilities designed along the same lines, can be leveraged for strategic planning and other commercial objectives. Success in streamlining operations and maximizing productivity and profit potential, and any edge gained over the competition, can reap especially great long-term rewards when achieved at times like these. Leaders of financial institutions have a lot on their minds these days, but there is a persuasive case to be made right now for seizing the opportunity presented by Basel IV for business.
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 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.