Staying Relevant in a Changing Industry

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How can community banks choose the right path to ensure that their institution stays relevant in this era of technological change? In this video, Kevin Riley, president and CEO of $12 billion asset First Interstate BancSystem, shares with Barbara Rehm of Promontory Interfinancial Network how his bank is focusing on investments in its digital platform, and how he expects the financial industry to change in the near future.

Riley discusses:

  • Building a Vision for the Future
  • Investing in Digital Delivery
  • How the Industry Will Evolve
  • Competitive Threats

Acquire or Be Acquired Perspectives: One True Thing About Banking and Finance

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strategy-4-20-18.pngLudwig, Gene.pngThis is the third in a five-part series that examines the bank M&A market from the perspective of five attendees at Bank Director’s Acquire or Be Acquired conference, which occurred in late January at the Arizona Biltmore resort in Phoenix.

Read the perspectives of other industry leaders:
John Asbury, president and CEO of Union Bankshares
Gary Bronstein, a partner at Kilpatrick Townsend & Stockton LLP
Kirk Wycoff, managing partner of Patriot Financial Partners, L.P.

If you have seen as many cycles in the bank industry as Eugene Ludwig, founder and CEO of Promontory Financial Group and a former comptroller of the currency, you know the time to be most vigilant is not when things seem bleak, but instead when things seems brilliant.

“The one thing I’m certain of is that the good times may go on for a year, two years, five years, seven years, but they will not go on forever,” says Ludwig. “Those folks that continue to be disciplined…will make it through good times and have advantages in bad times. Those that are imprudent will be gone.”

Ludwig made this point while attending Bank Director’s most recent Acquire or Be Acquired conference held earlier this year at the Arizona Biltmore resort in Phoenix. Ludwig’s perspective on banking and the M&A landscape is one of five that Bank Director has solicited from attendees at the annual conference.

“We’re obviously in good times,” says Ludwig. “The general spirit of the community banking session I popped into was upbeat and optimistic. Also, as Marshall McLuhan said, ‘The message is in the medium.’ The medium here is the size of the audience—1,100 people. Audiences tend to slim out in tough times. Having said that, I think people are sober about the challenges the banking industry faces.”

When Ludwig talks about the challenges banks confront, the first thing he talks about is technology, “both accepting new technologies and being able to utilize them effectively on one hand and also not losing customers to new entrants in the marketplace on the other hand.”

One upside for community banks, says Ludwig, is that they seem to be less vulnerable than regional and money center banks to the threat posed by the largest technology companies with the deepest pockets.

“I think Amazon and Google most likely will be more threatening to the mid- and large-sized institutions than the small ones—though still very threatening because the consumer loan business, where they will focus, is fundamentally not a community bank business or even a particularly regional bank business,” says Ludwig. “That’s a big bank business or specialty lender business.”

The same is true on the liability side of the balance sheet, says Ludwig. “The heart of community banking is core deposits and deposit-taking. As a big commercial entity, it’s still perhaps less likely that Amazon is able to get a bank charter with access to deposit insurance so it’s at a disadvantage in terms of core deposits and having a full suite of banking services the way banks do. If Amazon does get a charter, or the equivalent, then the community bank still—at least for a time—has community feel and touch and personal ties that will prove highly beneficial to it compared to other deposit gatherers.”

In addition to technology, discussions about the state of the M&A market obviously loomed large at this year’s Acquire or Be Acquired conference. Ludwig agrees with other industry observers who have characterized the current M&A activity as lukewarm.

“It is one of those promises of things to come that for a long time hasn’t come,” says Ludwig. “There is of course M&A activity, but there has been a belief among some that there would be an explosion in activity and that hasn’t happened.”

Ludwig’s comments echo those of fellow conference attendee Kirk Wycoff, managing partner of Patriot Financial Partners, a private equity firm based in Philadelphia. An average of 4 percent of banks enter into mergers or acquisitions each year, notes Wycoff in an interview with Bank Director. There is variation from year to year, but it tends to be on the margin and the absolute number of transactions should trend lower as the industry consolidates.

Ludwig points to two reasons for what seems to be the recent and modest lull in M&A activity. First, with bank valuations at their highest level in a decade, deals continue to look expensive in many parts of the country. And on a more granular basis, Ludwig notes “there is less differentiation among valuations within the industry than one would expect” given the differences among bank franchises. “Having said that, every now and then, this can also produce profound opportunity because individual institutions hit air pockets or run out of management gas,” he says. “So there are definite opportunities in the marketplace.”

The thing to watch in this regard is the quality of a bank’s deposit franchise. “If you run bank valuations in the community banking sector, and I’ve owned a couple in my time, it’s all about the deposits,” says Ludwig.

“I think that we’re getting into an era where deposit funding will be at a premium,” Ludwig continues. “When we started Promontory Interfinancial Network in 2001, banks were crying for deposits, [unlike] the last few years. (Editor’s note: Ludwig was one of Promontory Interfinancial Network’s founders and currently serves as chairman of the board, although the companies operate independently. Ludwig sold Promontory Financial Group to IBM Corp. in 2016 and continues as its CEO.) It may not go back to that, but it could. One thing true of banking and finance is that it’s cyclical. As Mark Twain said: ‘History may not repeat itself, but it rhymes.’”

AI is Groundbreaking Technology—But What Will the Regulators Say?

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FinXTech-4-19-18.pngIn one sense, regtech—a recent word invention that stands for regulatory technology—is just a rebranding of an evolutionary process that has been going on for decades. Ever since the first IBM mainframe computers rolled off the assembly line in the 1960s, banks have been deploying technology to improve the efficiency and effectiveness of their operations and lower their costs. Of course, technology has come a long way since the dawn of the IBM mainframe—or “Big Iron” as they were sometimes called. Consider for a moment that anyone walking around today with an Apple iPhone 8 has more computer power in the palm of their hand than the Apollo 11 astronauts used on their 238,900-mile journey to the moon.

Another example—one with the potential to revolutionize the task of regulatory compliance—is artificial intelligence, or AI. “People see it as something that can solve all of your problems,” Harshad Pitkar, a partner at the consulting firm PricewaterhouseCoopers, said during a presentation at Bank Director’s The Reality of Regtech event, which took place April 18 at the Nasdaq MarketSite in New York.

While it holds great promise, Pitkar said deployment of AI in the regulatory compliance space needs time to mature, with more focus on building on “practical applications” that address specific compliance challenges within the bank. Pitkar also cautioned that like many complex technology solutions, AI projects take time and patience to get off the ground. “[They’re] not so easy to implement,” he said. “It’s not as easy as turning on a switch.”

It is still unclear however, how regulators will embrace technology-driven compliance solutions. Concepts and emerging technologies like AI in oversight of the compliance process are taken very seriously.

Regulators are by nature conservative, so it shouldn’t be surprising they may be slow to warm up to an innovative new technology solution proposed to replace a more manual, people-driven process they are very familiar with. At the same time, financial regulators are well aware of the many innovations emerging in regtech and financial technology generally—and the need for them to keep pace with this innovation. A number of regulatory agencies around the world, including a few in the United States, are establishing “reglabs” or “regulatory sandboxes” to test new ideas.

James Kim, an attorney with Ballard Spahr and a former regulator at the Consumer Financial Protection Bureau, said during a later panel discussion that banks should make a concerted effort to educate their supervisory agencies about regtech projects they have undertaken. “Educate your regulators,” Kim said. “They need to feel comfortable that your new technological systems are effective.” Speaking from experience, Kim said regulators will always be playing catch with the banking and fintech communities as the innovation tide rolls on. “They probably will always be dead last in having the expert knowledge in this area,” he said. “They need to be led.”

Sizing Up Amazon Web Services

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cloud-4-17-18.pngFintech is prominent in today’s business lexicon, having migrated from the back office to a prominent position in both consumer and commercial finance. Its core functionality on mobile devices and wide application in artificial intelligence (AI) spans blockchain, smart contracts, banking, insurance, regulation and cybersecurity. And Amazon Web Services (AWS), a major cloud player, is the go-to provider for small and mid-sized businesses.

AWS delivers internet-based, on-demand computing, servers, storage, remote computing, mobile development and security, and a host of other information technology (IT) resources, all on a pay-as-you-go basis. Companies can gain unfettered, rapid access to low-cost, flexible services, with no up-front investment in hardware, software consulting and design, or expensive-to-maintain data centers. Companies can operate faster, more securely and less expensively, preserving their most valuable resources: time and money. And it is user-friendly—the AWS Management Console is simple, intuitive and accessible on the web or through the AWS Console mobile app. Wide adoption means lower costs from economies of scale.

AWS has mushroomed since its introduction a decade ago—posting $5.1 billion in revenue for fourth quarter 2017 and a 44.6 percent increase in year-over-year sales. AWS’ business model enables financial services firms and banks to scale up and down with increasing speed and agility. They can target new market segments, such as millennials—the fastest-growing consumer base—instantly, and easily offer an uncomplicated, compelling and accessible banking experience, appealing to a broad range of customers anywhere in the world.

Users’ traditional security concerns are assuaged with the AWS infrastructure, which aligns with best security practices, including SOC 1 and SOC 2 assurances. Third-party attestations and helpful white papers are available at its AWS Security Center at aws.amazon.com. AWS’ reliable development environment supports establishing a firewall via separate accounts for development and production. Thus, companies can try new features, conduct product experiments and perform user acceptance testing (UAT) without compromising the integrity of existing applications or disrupting active operations.

Although AWS offers quick, easy and simple solutions, users need assurance of adequate controls to protect the underlying database. Company decision makers must clarify who controls the data and how security is managed before migrating their data. Minimum precautionary measures include encrypting data, limiting the amount of data stored and insisting on multifactor authentication. Data ownership is a murky issue with AWS, and companies’ data could be mined to gain a competitive advantage.

AWS fintech customers should understand that segregation of duties is paramount. Oftentimes, small organizations have a chief technology officer who is also responsible for development, design and support. These multiple duties can create a control issue. Additionally, fintech companies may not have clearly defined production schedules, so they often make changes during the day. Segregating the production from the development environment mitigates the risk of unauthorized changes.

The overarching issue of regulation is major. The Financial Stability Board, an international body that monitors the global financial system, highlights 10 issues that supervisors and regulators must heed, and three have top priority. First is an oversight structure to govern third-party service providers, including cloud computing and data services. Second is mitigating cyber risks by maintaining contingency plans for cyberattacks and focusing on cybersecurity when designing IT systems. Third is monitoring macro financial risks against undue concentration and large and unstable funding flows.

These top issues have particular application to fintech, where traditional risk management functions may not suffice. Blockchain and robotics technologies demand a risk management framework that examines underlying assumptions, revises risk tolerance levels and acceptable risks, and increases stress testing and simulations.

AWS has earned a solid reputation in the marketplace—it is more than 10 times the size of its nearest competitor—and its prominence will increase. Small and medium-sized businesses have championed its ease of use, cost savings and scalability. However, they must protect data and avert potential operational risk.

Digitization Inside and Out of the Boardroom

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digitization-4-16-18.pngAs global businesses and markets are caught in a seemingly perpetual cycle of disruption and adjustment, company leadership and directors are tasked with finding new, innovative ways of communicating and working with shareholders in an increasingly complex and fragmented landscape. This is even more important given the massive technological advancements within the last decade, which have not only shifted the ways in which companies operate, but the means in which businesses and investors convey and share information.

Recent advancements in technology have transformed everyday business processes through digitization, which, in turn, has made cybersecurity a top priority. Moreover, they have made the world a much more connected place, facilitating business at a faster pace than ever before. To help company leadership adjust, new technologies have been developed to help directors and leadership teams improve collaboration and workflow.

Digitization
Today’s boards are going paperless, and the reality has become indisputable: directors are turning away from printed documents in favor of digital information that is easy to share and accessible on mobile platforms, like board portals.

Through digitization, directors are now accustomed to heightened levels of speed and efficiency across all business processes. With board portals, corporate secretaries and meeting managers are able to streamline board book creation and tighten information security. The benefits to this technology are clear: easy access to digital meeting information with user-friendly tools for assigning tasks, approvals, consent votes and secure messaging.

We have also observed a growing trend driving increased global demand for board portal solutions: the need to collaborate and share confidential information and documents across internal and external teams in a highly secured environment. The C-suite executives who already use our board portal tools for director-level collaboration are now expanding that capability across their organizations, all through a single sign-on service.

Cybersecurity
As businesses shift to digital platforms, data security plays a much bigger role. Companies must closely scrutinize how sensitive information is handled due to the risk of breaches. Cyberattacks are common and can result in significant financial and reputational damage; cybercrime damage costs are expected to total $6 trillion annually by 2021, according to CSO. This makes it especially important for boards and company leadership to take a strategic approach to data protection. Information is being shared in more rapid and innovative formats, and the methods in which boards communicate with shareholders will need to prioritize safety along with accessibility.

Protecting sensitive information should be at the top of a company’s concerns. This is why solutions should comply with strict encryption standards, multi-factor authentication and a completely cloud-less data storage system. Companies can also leverage machine learning and artificial intelligence (AI) to navigate and secure large volumes of data. These technologies can monitor and detect network anomalies that signal potential attacks and prevent further access before data is compromised.

Globalization
Due to the digitization of communication channels, we are now able to connect and do business in seconds with people halfway across the world. As technology brings us closer together, it breaks barriers to information accessibility. This ease of information exchange has impacted investing by virtually removing any impediments that once stood in the way of certain markets.

Increased ease of access to information around the world means companies, and particularly company leadership, should ensure key information is digestible for all stakeholders. That’s why being equipped with full translation services for common languages can be advantageous.

Moreover, as globalization continues to facilitate business and investing opportunities, shareholder bases are broader and more diverse than ever before. With the rise of passive investing, companies lack a level of transparency that allows them to know who their stakeholders are. For this reason, it is necessary to take advantage of tools and technologies that provide actionable insights into passive investment data and provide a more comprehensive picture of shareholders.

Looking Ahead
As technology continues to augment the ways in which companies operate, boards need to keep pace, ensuring they are communicating with their shareholders in the most efficient and preferred methods possible.

What Leaders Say It Takes to Compete Today

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strategy-4-5-18.pngIf it weren’t for the occasions when his kids need to borrow some cash, Frank Sorrentino says they’d never set foot in a bank branch.

Sorrentino, the CEO of $4.7 billion asset ConnectOne Bancorp in Union, New Jersey, was one of several senior bank executives who joked about millennials’ tech-savvy lifestyle during a roundtable session, sponsored by Promontory Interfinanical Network (a partner to thousands of banks), at Bank Director’s 2018 Acquire or Be Acquired conference. But the habits of younger consumers and the challenges they present, including how they affect the race for deposits, are among the top concerns of today’s bank leaders.

Technology is a disruptive force that has permeated the banking industry, affecting operations and decisions for directors at all levels. “Today, to me it appears that things are changing right beneath our feet,” Sorrentino says. “The speed of adoption, speed of change, is just something that’s breathtaking.”

An 800-pound gorilla NOT named Amazon
The threat posed by big banks that are competing aggressively for consumers is very real for regional and smaller community banks—though some do see bright spots.

The ability of the largest banks to chart their own courses with technology could hurt regional and community banks, especially if that technology were to become proprietary or exclusive.

“They can decide to turn up or turn down product almost at whim, and very quickly put pressure on anyone in this room in…a very negative way,” Sorrentino says. “I’m not so sure the next-generation 800-pound gorilla is going to be thinking the same way.”

Sorrentino pointed to the widespread adoption of Zelle, a peer-to-peer (P2P) payments product that is currently being offered by 58 banks and credit unions, including ConnectOne. That type of product is helpful, he says, and works as long as banks of all sizes have access to it.

But the disrupting factors of the future may be the tech giants like Amazon or could just be the direction technology is leading customers—which is to say, far away from traditional banks.

Convenience in banking has trumped much of the traditional channels, which are largely based on in-person relationships. “That same experience now has to come through those interactions over the [smart] phone,” says Chuck Shaffer, chief financial officer and head of strategy at Seacoast Bank Corp. in Stuart, Florida, which has $6 billion in assets.

“When my own children, who live in New York City, say that they went and opened up an account at Chase because that’s where they can transact their Venmo [a competing P2P service offered by PayPal] without having to pay a fee, it’s very concerning,” says David Provost, president and CEO of Chemical Financial Corp., a $20 billion-asset institution headquartered in Midland, Michigan.

Data-fueled growth strategies
Other executives have similar assessments of the competition, though some remain optimistic about the potential for growth through more conventional means and using technology for that purpose, as well.

“I think customers come to you first; [it] doesn’t mean they don’t get better offers. It doesn’t mean that you don’t have to maybe match offers that normally you might not, but I think that there is still a degree of loyalty,” says Sally Steele, chairman of the board at Community Bank Systems, a $10 billion-asset bank based in Dewitt, New York. “But on the other hand, as the Zelles of the world roll through the banking industry, we’re all going to be beneficiaries of that.”

Nearly two-thirds of directors and CEOs surveyed for Bank Director’s 2018 M&A Survey say they are planning to grow organically, rather than through acquisitions, using strategies rooted in modern technology.

Shaffer’s 90-year-old bank has been around long enough to be familiar with the days before the internet, but Seacoast has been deliberate in investment and integration of data-backed strategies, both internally and purchased. “We operate in one data platform. We built a SAS database over top of that, then built automated marketing over top of that,” he says.

This data-driven approach has generated customized service and marketing pitches tailored to any demographic group and is now yielding significant revenue. “Three years later, we’re doing over $300 million; this year we’ll do around $400 million largely because we’re making the right offer at the right moment to the right customer,” Shaffer says. “We’ve been explosive in building exponential growth in the organization.”

2018 L. William Seidman CEO Panel

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Former FDIC chairman and Bank Director’s publisher, the late L. William Seidman, advocated for a strong and healthy U.S. banking market. In this panel discussion led by Bank Director CEO Al Dominick, three CEOs—Greg Carmichael of Fifth Third Bancorp, Gilles Gade of Cross River Bank and Greg Steffens of Southern Missouri Bancorp—share their views on the opportunities and threats facing banks today.

Highlights from this video:

  • Reaching Today’s Consumer
  • Front and Back-Office Technologies That Matter
  • Competitive Threats Facing the Industry
  • The Future of Community Banking

 

RegTech: A New Name for an Old Friend

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regtech-3-20-18.pngWith all of the buzz around regtech, it’s easy to forget that banks have leveraged technology for compliance and reporting for decades. But thanks to recent developments in data architecture, artificial intelligence and more, regtech is on the rise, and it’s evolving into something a lot more sophisticated.

The definition of regtech is simple. According to New-York-based analytics firm CB Insights, regtech is “technology that addresses regulatory challenges and facilitates the delivery of compliance requirements.” Regtech can be as simple as using an Excel spreadsheet for financial reporting or as complex as using adaptive algorithms to monitor markets. By studying the evolution of regtech, banks can begin to decipher which technologies are aspirational and which ones are crucial to navigating today’s demanding regulatory regime.

Regtech has and is evolving in three key phases, according to the CFA Institute Research Foundation, a nonprofit research group in Charlottesville, Virginia. The first phase was focused on quantifying and monitoring credit and market risks. A powerful illustration of the forces driving this initial phase can be seen in the Basel II accord, which was published in 2004. Basel II focused on three pillars: minimum capital requirements, supervisory review by regulators and disclosure requirements meant to enhance market discipline.

Despite the enhanced regulatory requirements of Basel II, the global financial crisis of 2008 exposed serious deficiencies in capital requirements that spurred the second and current phase of regtech’s evolution. New anti-money laundering (AML) and Know Your Customer (KYC) laws have drastically increased compliance costs. According to Medici, a financial media company, financial institutions spend more than $70 billion annually on compliance. In addition, increased fines for banks, new capital requirements and stress testing have resulted in a heavily burdened banking system. With increased regulatory requirements, we have seen a corresponding increase in technology solutions poised to meet them. The following are a few key areas banks should explore:

  • Modeling and Forecasting: Even if your bank is not subject to the Dodd-Frank Act Stress Test (DFAST) or Comprehensive Capital Analysis and Review (CCAR), it should still be able to leverage modeling and forecasting tools to manage liquidity, meet CECL (current expected credit loss) accounting standards and monitor important trends.
  • KYC/AML: Regulatory requirements that require your financial institution to “know your customer” when you onboard them often rely heavily on paper-based processes and duplicative tasks. In addition, the Bank Secrecy Act requires banks to perform intense transaction monitoring to help prevent fraud. Both of these obligations can be curtailed through the use of technology, and solutions are available to digitize client onboarding and use AI to monitor transactions.
  • Monitoring Regulations: Rules and regulations are being promulgated and revised at a rapid pace. Instead of hiring a cadre of attorneys to keep up, banks can use regtech to monitor requirements and recommend actions to keep the bank in compliance.

Banking is, by necessity, a risk-averse industry. As such, taking a leap with companies that will touch bank data, gather information from back-office software or deploy AI can seem like a scary proposition. Some regtech providers on the marketplace today are new, but some were forged through the fires of the financial crisis, and others are time-tested vendors that have been around for decades. Whether a regtech partner is established or emerging, banks can (and should) hedge their bets by communicating with their regulators and forming a plan to monitor the new technology.

The CFA Institute Research Foundation posits that we are on the precipice of phase three in the evolution of regtech. This future state will be marked by a need for regulators to develop a means of processing the large amounts of data that regtech solutions generate. In addition, regtech has the potential to enable real-time monitoring. Both advancements will require a rethinking of the regulatory framework, and more openness between banks and regulators.

Despite the portmanteau (which is usually reserved for new or unfamiliar concepts), regtech is an old friend to the banking industry. Its future may hold the keys to a new conceptualization of what oversight means. For now, though, regtech represents an opportunity for banks to leverage technology for what it was intended to do: Save humans time, labor and money.

2018 Risk Survey: Technology’s Impact on Compliance

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regtech-3-19-18.pngIn addition to better meeting the needs of consumers, technology’s promise often revolves around efficiency. Banks are clamoring to make the compliance function—a significant burden on the business that doesn’t directly drive revenue—less expensive. But the jury’s out on whether financial institutions are seeing greater profitability as a result of regtech solutions.

In Bank Director’s 2018 Risk Survey, 55 percent of directors, chief executive officers, chief risk officers and other senior executives of U.S. banks above $250 million in assets say that the introduction of technology to improve the compliance function has increased the bank’s compliance costs, forcing them to budget for higher expenses. Just 5 percent say that technology has decreased the compliance budget.

Regtech solutions to comply with the Bank Secrecy Act, vendor management and Know Your Customer rules are widely used, according to survey respondents.

Accounting and consulting firm Moss Adams LLP sponsored the 2018 Risk Survey, which was conducted in January 2018 and completed by 224 executives and board members. The survey examines the risk landscape for the banking industry, including cybersecurity, credit risk and the impact of rising interest rates.

Fifty-eight percent say that the fiscal year 2018 budget increased by less than 10 percent from the previous year, and 26 percent say the budget increased between 10 and 25 percent. Respondents report a median compliance budget in FY 2018 of $350,000.

Additional Findings

  • Cybersecurity remains a top risk concern, for 84 percent of executives and directors, followed by compliance risk (49 percent) and strategic risk (38 percent).
  • Respondents report that banks budgeted a median of $200,000 for cybersecurity expenses, including personnel and technology.
  • Seventy-one percent say their bank employs a full-time chief information security officer.
  • Sixty-nine percent say the bank has an adequate level of in-house expertise to address cybersecurity.
  • All respondents say that their bank has an incident response plan in place to address a cyber incident, but 37 percent are unsure if that plan is effective. Sixty-nine percent say the bank conducted a table top exercise—essentially, a simulated cyberattack—in 2017.
  • If the Federal Reserve’s Federal Open Market Committee raises interest rates significantly—defined in the survey as a rise of 1 to 3 points—45 percent expect to lose some deposits, but don’t believe this will significantly affect the bank.
  • If rates rise significantly, 45 percent say their bank will be able to reprice between 25 and 50 percent of the loan portfolio. Twenty-eight percent indicate that the bank will be able to reprice less than 25 percent of its loan portfolio.
  • One-quarter of respondents are concerned that the bank’s loan portfolio is overly concentrated in certain types of loans, with 71 percent of those respondents concerned about commercial real estate concentrations.

To view the full results to the survey, click here.

How Wells Fargo Targets Its Innovation Investments

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innovation-3-9-18.pngGlobal investment in fintech startups hit $16.6 billion in 2017, according to the analytics firm CB Insights, based in New York. And the biggest banks in the U.S. are among the investors in the space. These investments indicate a few things about the nation’s largest banks, according to Lex Sokolin, global director of fintech strategy and a partner at London-based Autonomous Research. First, the bank’s investment indicates that it believes the technology holds promise, and that the company’s performance indicates it will be successful in delivering that technology. Also, “it may be a way for the bank to pre-acquire a company, by getting visibility through the board and incremental control of ownership,” he says, with the bank acquiring the company outright later on, or continuing to watch the company and replicate the product.

This second approach appears to be most similar to the strategy so far for Wells Fargo & Co., which came in as the second most innovative bank in Bank Director’s 2018 Ranking Banking study, released in November 2017. At the time, Bank Director cited the bank’s direct work with startup companies, including its accelerator program. Wells Fargo has continued to invest in fintech firms, with an eye to improving the capabilities of the organization. These investments include R3—the New York-based blockchain consortium that last year attracted a $106 million investment from 43 companies—and the data analytics firm Kensho, in Cambridge, Massachusetts, which last year received $50 million from nine investors, including six U.S. banks, in a Series B round. In early March, S&P Global, which was among Kensho’s investors, announced that it would acquire the startup for $550 million.

At Wells Fargo, innovation investment occurs at two different levels within its corporate structure. While both are focused on emerging technologies that will ultimately improve the customer experience, the two areas differ when it comes to tactics.

Wells Fargo Securities houses the fintech investment arm that participates in larger investments. “We want to partner with relevant, emerging technologies, and then invest in the appropriate fintech and enterprise IT companies whereby we can serve our clients better,” says Tom Richardson, managing director and head of market structure and electronic trading services. “Our primary mandate is that it’s strategic—that the target is a company we’ll have a commercial relationship with and where our investment dollars can facilitate deeper partnership.”

Richardson’s unit has more skin in the game, so it’s seeking a closer relationship with the companies it invests in, which could include board representation and more C-suite interaction. Due to this high level of interaction, “we’re more selective,” says Richardson.

The investments made by Wells Fargo’s innovation group are limited to the low- to mid-six figures, and its goals differ. Bipin Sahni, the group’s head of head of innovation R&D, says his performance is judged on finding and working with budding innovative companies, and bringing those solutions into the fold—not on a financial or strategic return. “The landscape for our customers is changing. They’re looking for better solutions and seamless experiences from a bank of our size, [so it’s] a perfect time to collaborate and partner with these startups,” says Sahni. Wells Fargo brings with it a sizeable customer base to work with, and the startups provide the innovative solutions.

To help identify these companies, Sahni says he has regular conversations with venture capital firms. It’s a collaborative discussion—he wants to know which companies venture capitalists are interested in, and he also shares his knowledge of promising startups.

A potential partner that Wells’ innovation group might invest in has to have a few key traits. First, Sahni says that he’s seeking a strong management team with a vision—he wants to know that the company can execute on the technology. He also wants to ensure that the startup understands Wells Fargo’s needs, as well as those of the consumer. “The whole premise for us to invest in these companies is … to use these products and services in our road map,” says Sahni. “That’s a big win for us and for them.”

He says he’s seeing some “cool stuff” coming out of the startup world, citing newer forms of customer authentication, including various forms of biometrics. Wells Fargo also sees promise in blockchain’s potential to create efficiencies, and has deep interest in data analytics and artificial intelligence. Two specific startups, Kensho and H2O.ai, another Wells Fargo investment based in Mountain View, California, offer developments in predictive analytics and better understanding of behaviors.

Sahni believes that the digital evolution is still in relatively early stages, and there’s still too much paper used in the industry. “From a trends perspective, paper to electronic—we have not completed the journey yet.” Advancements in wearable technology, like the Apple Watch, and smart home assistants like Amazon’s Alexa, continue to change consumer interactions, and their expectations for the seamless delivery of products and services. Truly smart technology should predict behaviors and do what consumers want automatically, without being asked, but the technology isn’t there yet, says Sahni. Wells Fargo’s continued investment in and monitoring of the startup space will help the company find these up-and-coming innovators.