Community Banks to Fintech: We Need You


fintech-2-1-17.pngWhen Terry Earley, the chief financial officer of Yadkin Bank, a $7.5 billion asset bank in Raleigh, North Carolina, gets to work each morning, he sees an online dashboard showing him all the details of the loans in his bank’s pipeline, what is closing and when, and more. “If you don’t know the information, you can’t manage your company,’’ he says.

Upgrading from cumbersome Excel spreadsheets, he can easily see which lenders are pricing loans lower than others, and quickly react in terms of lender training and managing the bank’s loan portfolio. “A lot of times we try to manage [by] anecdote,’’ he says. “But what does the data tell you? The information is key.”

Like a lot of other community banks, Yadkin is increasingly using partnerships with technology companies to improve its operations and better meet customer needs. At Bank Director’s Acquire or Be Acquired Conference in Phoenix, Arizona, which wrapped up yesterday, Earley and other bankers talked about M&A and growth strategies, as well as how they were using technology to improve profitability and efficiency. In Yadkin’s case, the bank signed up with PrecisionLender, a pricing and profitability management platform, when it became a $1 billion bank several years ago. Then, it partnered with technology company nCino, which operates a secure cloud-based operating system, when it became a $4.5 billion bank, to get access to a quicker commercial lending origination platform. [For more on how banks are using the cloud, see Bank Director digital magazine’s Tech Issue story, “Banks Sail Straight Into the Cloud.”]

Even investors are getting excited about the plethora of off-the-shelf software available to help smaller banks become more competitive with larger institutions. Joshua Siegel, CEO of asset manager StoneCastle Partners, said he thinks banks have a lot of room to improve efficiencies with technology and take out back office costs, as well as offer better customer service. The software to do this is becoming increasingly available and affordable to do so. Siegel was happy to see banks as small as $150 million in assets offering online personal financial management tools superior to what regional banks are offering, because the regional banks are sometimes held up trying to develop their own software in-house.

While some financial technology companies are directly competing with banks for small business loans or payments, such as payments provider PayPal or online lender Kabbage, other financial technology companies want to sell their technology to banks.

Instead of only seeing the potential threats, there are reasons for the industry to see financial technology as a tool that can help them compete with bigger banks, which control most of the nation’s deposits. Small banks can use software to speed up their lending operations and the time it takes to open an account, and make the entire experience of doing business with a bank easier and simpler.

Somerset Trust Co. in Somerset, Pennsylvania, is using a fintech company called Bolts Technologies to quickly validate identities and open accounts for new customers. Radius Bank, a $1 billion asset bank in Boston, Massachusetts, is using a variety of partnerships with fintech companies to support its branchless bank, including a robo-advisor software company called Aspiration.

“From a cultural perspective, we look at whether they share our values,’’ said Radius Bank CEO Mike Butler. “It needs to be true partnership. If we’re just in it to try to make money off each other, then it’s not worth it. But if there is a benefit in terms of both of us wanting to create a better customer experience, then you have a great partnership.”

Do Bank Management Teams Need to Change?


technology-1-31-17.pngU.S. Bancorp’s retiring CEO Richard Davis said that just before walking on stage at Bank Director’s Acquire or Be Acquired Conference in Phoenix, Arizona, yesterday to give the keynote address, he had to check President Donald Trump’s twitter feed to make sure nothing had fundamentally changed about the banking landscape.

In a world when the president can change the rules of the game with a single tweet, sending a company’s stock price soaring or sinking in a single chirp, and where customer demands are changing in the face of game-changing technology, the management teams of the future may need to be nimbler than they might have imagined a decade ago.

Keeping up an environment like this is hard to do. But a growing recognition among many attending the conference was that banks were going to have to get more agile and accept changes to the way they do business.

Huntington Bancshares’ CEO Stephen Steinour said at the conference that he’s less worried about 10,000 fintech companies than by technology giants such as Apple and Google. “They have a capacity to invest at a level most of us in the industry can’t think about,’’ he said. “If we give up on payments, we have a huge challenge in the future.” Steinour said that online lenders have technology that banks can learn from. “Speed is important,’’ he said. “We are eminently capable of meeting those challenges and offering great customer service.”

Joshua Siegel, CEO of asset manager StoneCastle Partners, which invests in community banks, agreed that banks are probably more resilient than many people give them credit for. But he said that many banks have been slow to adopt technology and management teams are often a barrier to making changes.

U.S. Bancorp’s Davis said boards can have a role in this transition, by keeping up with changes in the industry and holding management accountable. Small banks have traditionally lagged big banks by a few years in terms of adopting technology, but in some cases this will no longer work, he said. “You can’t be OK with catching up two to three years later,’’ Davis said. “You can’t lag anymore.”

Some banks also are looking to hire workers who are comfortable with change, who are more comfortable with technology and could propel the bank forward. “We tell them the one constant here is change,’’ said David Becker, the president and CEO of the First Internet Bank of Indiana. “If you are uncomfortable with that, don’t waste your time or ours.”

But bank management teams might need to change how they operate, too. Younger generations are more racially and ethnically diverse, and they are more focused on having a career with a purpose, and more likely to leave when don’t feel their needs are met. Young people might be more receptive to banks as employers, despite the poor reputation banks received following the financial crisis, if they feel that banks are making a positive impact on their communities. Getting better at telling the story of how banks make a positive contribution to their economies is another way that bank management teams could influence the future of their institutions, Davis said.

Aside from being comfortable with a diverse workforce, Davis said he polled the executive team of the Minneapolis-based bank in terms of what they were looking for in future C-suite executives, and they came to the conclusion that a whole different set of qualities would be needed than what had been needed nine years ago. Back then, strategic thinking skills were a major requirement. Now, his bank also needs managers who are great communicators.

If you can’t sell your story, nobody cares,’’ he said. His bank is looking for highly ethical people who are lifelong learners, and are curious. “Do you care? Do you look forward to making a difference? Or do you just accept things?’’ he asked. “Well in that case, go away, because the world is curious now.”

Combating Identity Fraud Through Biometrics


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The Know Your Customer (KYC) process, which is the identification and verification of a bank’s clients in order to understand and better manage risks, is a central requirement of the federal anti-money laundering regulations. Today, technologies such as mobile and biometrics have a strong impact on the redesign and digitization of the registration process, significantly improving operational efficiency and customer satisfaction.

A range of financial institutions have been exploring opportunities through biometrics in one capacity or another, but in most cases employ biometrics for identification and authentication purposes for existing accounts, aimed at making passwords obsolete once and all. With increasing multipurpose adoption, by 2021 the market will reach a value of $30 billion with its primary revenues shifting from the government sector to banking and consumer electronics.

Experts from M2SYS, a biometric identity management technology provider, suggest that as more banks and financial institutions begin to augment their customer identification security policies, the evaluation of using biometrics for KYC management will increase rapidly.

The use of biometric identification management technology for accurate customer identity verification has proven to deliver efficiency and convenience for organizations that have adopted it. The technology also helps comply with government regulations to prevent identity theft and money laundering. Due to inefficient KYC management, nearly 9 million Americans are victimized each year, costing consumers $5 billion, and banks and corporations $56 billion, annually.

Industry expert David Benini, vice president of marketing at Aware, a biometric software developer, wrote recently that “More than just —something we are,’ biometrics allow us to permanently bind ourselves physically to digital information; a powerful capability that enables us to not only biometrically authenticate, but also to biometrically deduplicate.” The idea behind biometric KYC management is quite simple–instead of the customer being required to present official identifying documents in person upon application, a biometric-based search can eliminate the need for a lengthy check with additional tapping into public and private records to ensure the absence of copy records.

Biometrics allow banks to be sure that a particular person does not exist in the database with different data. Benini emphasizes that the power of the idea behind biometric identity proofing rests in the ability to combat identity theft at its source by ensuring the integrity of identity data at the point of enrollment.

Given its unique properties, biometric-based KYC management in the financial services industry enables institutions to speed up the customer verification process without compromising the accuracy. Implementation of biometric KYC management solutions can ensure higher accuracy and efficiency, eliminating the risk of financial fraud and its legal and financial consequences for consumers and organizations.

The critical benefits of transitioning to biometric KYC management include:

Enhanced Operational Efficiency
KYC management has traditionally been a resource-consuming process requiring time and manpower (hence, substantial financial expenditure) to verify a person’s identity, since KYC compliance involves a tedious process of verifying the customer’s original documents of proof of identity and proof of address in person, among other things. Biometric KYC cuts corners without compromising accuracy and security, as biometrics carry unique and arguably impossible-to-forge information and are permanently tied to one’s records.

Improved Cost-efficiency
There are a couple of ways biometric KYC management saves money for financial institutions: reduced time to verify information about the person, and as a result of increased accuracy, reduced expenses on fixing issues that appear as a result of inefficient KYC procedures. It takes an average of $1,173 and 175 hours to clean up one’s credit report and associated complications, and when you multiply that times the vast customer base of a medium-sized bank (not to mention much larger banks), it’s obvious that biometric KYC can become a real cost saver, facilitating a better allocation of resources.

Greater Security
Today, biometric-focused technology and software has reached a level of sophistication where providers can ensure higher levels of protection against identity fraud and all compliance consequences because of it. Behaviometrics are the last word in secure identity verification, bringing together machine learning and continuous tracking of user behavior. A separate class of companies is delivering biometric-focused anti-fraud solutions, including NuData Security, BioCatch, BehavioSec and AimBrain.

Gains in Convenience and Customer Satisfaction
The speed of identity verification affects overall customer satisfaction and is more convenient since it ensures an easier and more efficient user experience. And an enhanced customer experience translates into a better reputation and higher customer retention.

Organizations that aim to keep up with the latest technological advancements for efficient KYC management cannot miss out on the application of biometric-based solutions. Today, there is no lack in technology companies powering biometric KYC management through sophisticated software and biometrics screening technology. Recognized leaders include Daon, EyeVerify Qualcomm, with such companies as BioConnect, M2SYS, HooYu, Aware, Hoyos Labs, ID Global, Socure, physiSECURE and many more comprising an expanding list.

Departing Administration Leaves Gift of Fintech Principles


fintech-1-16-17.pngIt may strike some as odd that President Barack Obama’s National Economic Council just published a “Framework for FinTech” paper on administration policy just before departing, but having been a part of several conversations that helped to shape this policy perspective, I see it from a much different angle. Given that traditional financial institutions are increasingly investing resources in innovation along with the challenges facing many regulatory bodies to keep pace with the fast-moving fintech sector, I see this as a pragmatic attempt to provide the incoming administration with ideas upon which to build while making note of current issues. Indeed, we all must appreciate that technology isn’t just changing the financial services industry, it’s changing the way consumers and business owners relate to their finances—and the way institutions function in our financial system.

The Special Assistant to the President for Economic Policy Adrienne Harris and Alex Zerden, a presidential management fellow, wrote a blog that describes the outline of the paper.

I agree with their assertion that fintech has tremendous potential to revolutionize access to financial services, improve the functioning of the financial system, and promote economic growth. Accordingly, as the fabric of the financial industry continues to evolve, three points from this white paper strike me as especially important:

  • In order for the U.S. financial system to remain competitive in the global economy, the United States must continue to prioritize consumer protection, safety and soundness, while also continuing to lead in innovation. Such leadership requires fostering innovation in financial services, whether from incumbent institutions or fintech start-ups, while also protecting consumers and being mindful of other potential risks.
  • Fintech companies, financial institutions, and government authorities should consistently engage with one another  . . .  [indeed] close collaboration potentially could accelerate innovation and commercialization by surfacing issues sooner or highlighting problems awaiting technological solutions. Such engagement has the potential to add value for consumers, industry and the broader economy.
  • As the financial sector changes, policymakers and regulators must seek to understand the different benefits of and risks posed by fintech innovations . . .  While new and untested innovations may increase efficiency and have economic benefits, they potentially could pose risks to the existing financial infrastructure and be detrimental to financial stability if their risks are not understood and proactively managed.

A product of ongoing public-private cooperation, I see this just-released whitepaper as a potential roadmap for future collaboration. In fact, as the fintech ecosystem continues to evolve, this statement of principles could serve as a resource to guide the development of smart, pragmatic and innovative cross-sector engagement much like then-outgoing president Bill Clinton’s “Framework for Global Electronic Commerce” did for internet technology companies some 16 years ago.

Cybersecurity Governance: How to Protect the Bank


cybersecurity-12-23-16.pngModern banking increasingly relies upon technology and the internet to manage and streamline business operations. With increased dependence on technology comes an increased risk of security threats. Kaspersky Lab reported it had detected 323,000 malware files per day using its software in 2016. This number is 4 percent higher than in 2015.

The impact of a successful cyberattack is often quite damaging: legal liabilities, brand reputation, lack of trust from customers and partners, and ultimately, revenue. The average cost of a data breach is now up to $4 million, according to a 2016 Ponemon study.

Banks are responsible for more data than ever and as data use continues to grow, banks face the challenge of properly creating strategies, frameworks and policies for keeping sensitive data secure. Meanwhile, criminals develop new and sophisticated tactics to target valuable data.

Security is, and should be, a concern for all employees. However, leadership must be responsible for establishing and maintaining a framework for information security governance. Information security governance is defined as a subset of enterprise governance that provides strategic direction, ensures objectives are achieved, and manages risks while monitoring the success or failure of the IT security program.

Whether it is the board of directors, executive management or a steering committee that is involved—or all of these—information security governance requires strategic planning and decision-making.

Best Practices
Despite the threats of cyberattacks and data breaches, banks can take proactive steps to better position themselves for successful security governance. What follows are five strategic best practices for information security governance:

1. Take a holistic approach.
Security strategy is about aligning and connecting with business and IT objectives. A holistic approach can provide leadership with more levels of control and visibility.

What data needs to be protected? Where are the risks? Take a unified view of how information security impacts your organization and how employees view security. Get early buy-in from key stakeholders, such as those in the IT, sales, marketing, operations and legal departments. Scope out what data needs to be protected and how that fits into the larger picture.

2. Increase awareness and training.
Although developed by leadership, information security governance speaks to all employees within the organization and requires continued level of awareness. Governance creates policies and assigns accountabilities, but each member is responsible for following the security standards.

Constant training and education on security best practices is vital. The cyberthreat landscape is rapidly changing and employees, and company training, must keep up. This way, if new threats emerge, you will be prepared.

3. Monitor and measure.
Information security governance should never have a “set it, then forget it” approach. It’s about ongoing assessment and measuring. Monitoring ensures that objectives are being achieved and resources are appropriately managed. What security governance policies are working? Which policies are not?

Conduct mock data breach scenarios to test the efficacy of corporate teams and company incident response plans. Test results can reveal strong and weak links—what the bank needs to concentrate on, and what security governance policies work well under pressure.

4. Foster open communication.
Stakeholders should feel they can openly communicate directly with leadership, even when sharing bad news. Open communication promotes trust and brings a higher level of visibility throughout. Engagement is key. Consider creating a steering committee comprised of executive management and key team leads (IT, marketing, finance, PR, legal, operations, etc.) to review and assess current security risks.

5. Promote agility and adaptability.
Gone are the days of monolithic, cumbersome governance; banks need to adapt quickly to meet the changing tide of security threats. IT management, which is typically concerned with making tactical decisions to mitigate security risks, might have some hands-on experience and opinions about the effectiveness of a particular security policy, but their recommendations can only go so far without C-suite support. Leadership must quickly determine how to implement suggested changes throughout the bank. And if a security governance policy is ineffective, leadership must be willing to jettison the policy.

Overall, successful information security governance involves a continuous process of learning, revising and adapting. Banks need to be proactive and strategic with their security posture. Threats and incidents are inevitable, but moving strategic security governance to the forefront of your organization can help protect valuable information.

Download the full Diligent white paper: Five Best Practices for Information Security Governance.

Fintech Action Cools in U.S., Soars Elsewhere


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Looking back over the last year, it is apparent that the fintech industry has become mainstream just as fintech investing cools. What I mean by this is that fintech has matured in the last five years, going from something that was embryonic and disruptive to something that is now mainstream and real. You only have to look at firms like Venmo and Stripe to see the change. Or you only have to consider the fact that regulators are now fully awake to the change and have deployed sandboxes and innovation programs. Or that banks are actively discussing their fintech innovation and investment programs. Or that institutions are being created around fintech like Innovate Finance or the Singapore Fintech Festival. Fintech and innovation is here to stay.

For me, the biggest impact has been how busy 2016 has been. Each year is busy, but this year has been amazing. A great example is that I travelled to four continents in six days recently. That’s unprecedented and, a century ago, wouldn’t have been possible. Today, it’s easy. We just jump on and off aircraft and go. What is particularly intriguing for me—and telling—is where I go. After all, as someone at the center of fintech, where I go shows where the action is. In 2016, I’ve been to Singapore, New York and, most recently, London, which are the three fintech hubs for Asia, America and Europe, respectively. But I’ve also been to Nairobi, Hong Kong, Washington and Berlin, all key fintech focal points. Nascent centers in Abu Dhabi, Dubai, Bangkok, Kuala Lumpur also are on the radar. So, too, are are Mexico City, Sao Paolo and Mumbai.

In fact, what intrigues me the most is the fact that fintech has bubbled over in 2016. The latest figures show that U.S. investing in fintech slowed in 2016, while Chinese investments went up. And that is probably the most sobering thought as we head towards the holiday season. Fintech reached its zenith in the U.S. in 2016. Prosper and Lending Club started to have to answer some hefty questions about their operations, and there is no major new digital bank in the U.S. Meanwhile, Chinese fintech investments soared in 2016, and Ant Financial, which operates the Alipay payment platform for the Chinese Alipay Group, has become one of the most talked about IPOs of the year.

In other words, China, India and Africa are where we are beginning to see the most amazing transformations through technology with finance. China has more fintech buzz than anywhere at the moment thanks in large part because of Ant Financials’ innovations. India is doing amazing things with technology, and Africa has seen the rise of mobile financial inclusion that is changing the game for everyone.

The key here is to keep your eyes and ears open to change. Too often, I encounter people—senior banking people—who believe that developments in economies they see as historically poor being irrelevant. They don’t recognize that those historically poor economies are becoming presently wealthy and future rich. They are missing a trick.

In fact, I would go as far as to propose that the economies that were historically poor are the ones that are reinventing banking and finance through technology. They have no legacy and have no constraints, so they are rethinking everything. Eventually, their ideas will become things we all use so ignore them at your peril.

Happy New Year!

How Fund Administrators Can Help Private Equity and Real Estate Funds


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Fund administrators, the independent service providers that verify the assets and valuation of investment funds, are not currently as big a presence with private equity and real estate funds as they are with hedge funds. But private equity and real estate funds should take note, because fund administrators are becoming increasingly critical to how they go to market.

Fund administrator penetration of the hedge fund market is above 80 percent, and having a fund administrator has become a requirement for hedge funds of any size.

Private equity assets have risen from $30 billion in 1995 to $4 trillion in 2015. All indications are that growth will continue to be steep, as 64 percent of limited partners (LPs) plan to increase their allocation to private equity funds, which increased from 26 percent just five years ago.

Despite this dynamic in hedge funds, fund administrators have not penetrated private equity and real estate funds in the same way. Estimates are that penetration by fund administrators of private equity and real estate fund assets under management (AUM) is only 30 percent today, and projected to increase to 45 percent by 2018.

I think this growth projection is understated, however, because many of the reasons that compelled hedge funds to begin using fund administrators also apply to private equity and real estate funds.

Here are three key reasons why hedge funds had to begin working with fund administrators and why these also apply to private equity and real estate funds:

Investor Demands for Greater Transparency
I think that this is going to be the biggest driver that will force private equity and real estate funds to use fund administrators. Investors are increasingly demanding third-party validation of AUM and Net Asset Values, as well as greater transparency in reporting.

Also, operational due diligence of a fund is occurring earlier in the request for proposal process, particularly when institutional investors are factored in. Institutional investors want to have confidence in the middle and back office capabilities of the fund, which generally means a strong accounting and reporting practice.

If these investors don’t have confidence in the management company, then they will increasingly pass on the opportunity. One recent private equity study shows that 65 percent of limited partners are increasing the level of operational due diligence that they are performing on general partners.

Increasing Regulatory and Compliance Pressures
This started to materialize in the aftermath of the Bernie Madoff scandal, with acronyms like KYC/AML, FATCA and others fast becoming part of the lexicon. Conventional wisdom holds that regulatory and compliance pressures aren’t the same for private equity and real estate funds because the level of activity is less frequent. I find this argument to be short-sighted because some of these regulations already apply to fund types beyond just hedge funds.

Technology as a Requirement
Technology is already a means of differentiation among progressive private equity and real estate fund managers. My feeling is that technology should be a requirement for all of these fund managers.

Technology can provide an effective means to address the first two points, but how to best employ technology can be tricky. When it comes to technology, there are two typical approaches. The first is often for the management company to try handling it on its own, including attempting to build out the required technology itself. The second approach (often after having been unsuccessful in the first step) is for the management company to retain an external technology vendor to handle it. Either way, the experience often ends up with the same result: Managing technology on their own takes more time, personnel, and money than the fund expects.

Private equity and real estate fund managers should instead look to fund administrators to implement and manage technology that they need. Fund administrators are better suited to adopt and manage technology given that it is required by all of their fund manager clients. This is also a more cost effective solution for fund managers, because fund administrators are better suited to spread the cost of technology across their clients.

Private equity and real estate fund managers that still think they can go it alone without the help of fund administrators are going to quickly fall behind, and lose out on opportunities.

One Bank’s Digital Transformation Journey


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Last week Chris Skinner, a FinXTech advisor and fellow contributor, talked about the difficulties of banks shifting to digital, and shared the following: “It is radically different thinking, and is a cultural outlook, rather than a tech project.”

As the head of Radius Bank’s Virtual Bank, I work with a team that has been through the digital transformation process. And I can attest to the above statement: The shift to digital is far more than a project. It’s a total reconstruction of a bank’s culture, organization and systems. It is no easy task but the upside opportunity is big.

Digital transformation is perhaps the most important challenge facing banks at the moment. The penetration of the financial services industry by financial technology and the proliferation of alternative banking solutions presents the stalwarts with a choice: change, or else. Banks are realizing that the adoption of sophisticated, personalized technologies is no longer a “nice to have,” but rather a “need to have.” Never before has the customer experience been more critical to a bank’s success than it is today. I feel lucky that the Radius Bank team understood this early on, and set on a course aligned with this new way of banking.

When I first joined Radius Bank at the end of 2008, we were a small, commercial-focused community bank with six branches in Boston and New York. Mike Butler, the Bank’s CEO and president (and a member of the FinXTech Advisory Board), asked me to join him to help build the virtual bank. We recognized that the traditional model wouldn’t be able to address changing consumer demands. In light of that, we set out to build a bank focused on the future rather than the past.

Over the past several years, our Virtual Bank has actually become our primary retail banking strategy. While we’ve maintained one flagship financial center in Boston, our focus on customer experience, product development and technology offerings all starts with and focuses on the digital channel. We’ve made significant investments in technology to build a forward-thinking and responsive virtual banking platform that has allowed us to onboard and serve many new customers from across the country without the need to visit a branch.

We also realized a while back the importance of fintech partnerships. Let’s face it: Consumers today have more choices in terms of managing their finances than ever before, and many of them are choosing to put their trust in nonbanks. For us it has been about finding the right fintech firms to work with, and over the last three-plus years we’ve launched strategic partnerships with fintechs in areas such as mobile payments, investment management, student loans and alternative lending.

We’re proud of what we’ve been able to accomplish, but the transformation to a digital bank is a journey that’s never complete. It requires ongoing support from top leadership, including our board of directors and management team, and a creative, nimble team that brings marketing, sales, risk and IT together to build an infrastructure focused on security and scalability.

I’m eager to share some of the knowledge I’ve gained throughout our digital transformation process. I’m also eager to learn from my peers in banking and fintech about what’s next. FinXTech asked me to participate to represent the banking perspective, but as I’ve outlined above we’re not your traditional community bank. We sit at the intersection of financial institutions and technology companies—an increasingly productive cradle of innovation and disruption.

I look forward to engaging in these important conversations with you.

Five Predictions About Banking’s Future


techonology-10-7-16.pngWhat does the future hold? As I referenced in an earlier article, I gave a presentation about the future of banking at Bank Director’s third annual Bank Board Training Forum in Chicago Sept. 29-30, and promised that I would share some of my thoughts with you after the conference. I might end up being completely wrong, of course, but here are my predictions and I’m sticking with them.

Technology
Going forward, I think we will begin to see the ascendancy of digital distribution channels in retail banking. Driving this change will be the continued digitalization across the entire economy, combined with the integration of millennials into the world of work, mortgages and parenthood at an accelerating rate. We occasionally refer to millennials as “digital natives” since they grew up on video games, cell phones and the Internet, and banks will have to provide a robust digital option if they want to keep them as customers. The bank branch isn’t dead, but I see it becoming increasingly less important over the next decade.

Disruption
The long-term future of the website lenders is unclear to me since they rely primarily on private equity investors and the capital markets for their funding, which is much less reliable over the course of an entire economic cycle than bank deposits. The question for them is whether they can take an economic punch in a recession. The payments competitors are here to stay because what they really want isn’t a banking relationship with customers so much as access to their data, including their financial data, because it enables them to bombard those customers with highly differentiated and customized offers on merchandise. And much of the technology of web site lenders and payments competitors will eventually be adopted by the banking industry. This is certainly true in the mobile space, but also in areas like commercial loan underwriting, which remains a laborious, people-intensive process. In this sense, the future of traditional banking is fintech.

Economy
This is probably one of the safer predictions that I made: There will be at least one recession between now and 2026. We are now in the seventh year of an economic expansion which, believe it or not, is the fourth longest going back to 1945. Nothing in this world lasts forever, and the current expansion won’t either.

Consolidation
This is probably my boldest (or craziest) prediction: There will be 4,558 banks as of December 30, 2026. Here’s how I got to that number. The annual consolidation rate over the last couple of years has been approximately 3 percent. There are a little over 6,000 banks today, and if you assume the industry will continue to consolidate at that rate for the rest of the decade, you get close to that 4,558 number. However, I factored in one more variable—one year in which a recession resulted in a consolidation rate closer to 5 percent to account for a spike on bank failures, assisted transactions through the Federal Deposit Insurance Corp. and relatively healthy banks hedging their bets by pairing up with a stronger merger partner. I’m sure I will be wrong about the exact number for banks in 2026, but there’s no question that there will be significantly fewer of them.

Demographics
By 2026, the last of the baby boomers will be heading towards retirement, most of the banks will have Gen X CEOs (the oldest of whom will be in their late 50s to very early 60s) and millennials will be moving into senior management positions. Gen X’ers and millennials are much more intuitive when it comes to digitalization issues generally, and I expect that their ascendance will only accelerate the digitalization of banking and personal finance. And of course, millennials will also be the single largest consumer demographic by 2026, so they will be eating their own cooking when it comes to digital banking.

Finally, I anticipate that something no one expects to occur (and therefore won’t predict) will end up having a huge impact on the industry. We had already seen the emergence of smart phones in 2006, but the ubiquitous iPhone wouldn’t be introduced until 2007, and 10 years ago how many people expected the mobile phone to revolutionize banking?

What do you think the next big thing will be?

Joining the FinXTech.com Advisory Team


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Greetings from the United Kingdom. I’m part of the FinXTech Advisory Group and will be writing brief updates here from time to time. You may not know me and so you can find out what I get up to over here and on my blog. In case you don’t want to do that, one of the advisors to President Obama called me “the most authoritative voice” in fintech anywhere, which is why I guess the guys at FinXTech asked me to come on board.

Conversely, why have I joined the FinXTech Advisory Board?Mainly because its membership is comprised of many of the fintech leaders that I respect in the United States from the largest financial institutions, leading investment firms, technology companies, service providers and government entities. FinXTech is not just another media company—it’s a platform for connection via the FinXTech.com website, conferences for networking and interactive brainstorming sessions for real world application.

FinXTech’s mission is simple: to connect those who are truly shaping the future of financial services. The fintech ecosystem consists of five distinct groups:

  • The leaders of fintech companies who are producing, researching and creating new technological solutions.
  • Financial institutions that are embracing, adopting and/or seeking to implement cutting edge advancements.
  • Service providers, consultants, advisors and lawyers who are guiding the regulatory, compliance and implementation processes.
  • The investor and venture capital communities that determine who and what might be the next best thing for financial services.
  • And the government voices, be it from the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau or even the White House.

By establishing a group of advisors, FinXTech is able to set the course and agendas for their platform, based on the thoughts and feedback from some of the best and brightest in the industry—and me. So naturally, I joined, too—to be on the inside cutting edge, in addition to adding to it.

You probably already know a lot about fintech, although you may not know who is leading it. Is it Silicon Valley? Is it Wall Street? Is it London? Or maybe Singapore? In fact, financial technology is everywhere. During my travels—and I travel so much that when people ask me where I live, I usually say the British Airways executive lounge—I see every country with a financial focus creating a fintech focus. Oslo, Berlin, Zurich, Amsterdam, Tel Aviv, Dubai, Bangkok, Sydney, Shanghai, Hong Kong, Mexico City, S??o Paulo—fintech is happening in all of these places.

Why are so many billions of dollars being poured into these new technologies for finance?

The answer is that we are revolutionizing financial services through the Internet. For the past 50 years, bank technology has mostly been deployed for internal efficiencies and usage. Today, technology is creating external efficiencies, particularly through peer-to-peer networking. Apps, APIs, analytics, artificial intelligence, big data, blockchain, cloud, distributed ledgers, machine learning and the Internet of Things are changing everything. Everything is now networked and open sourced through marketplaces and connected platforms. This technological revolution has been bubbling for years, starting with the Amazons and Alibabas of the world, moving along to the Facebooks and Baidus, Tencents and Googles. Now we have the Ubers and Airbnbs, and everyone wants to know who will be the next PayPal or AliPay.

This is why fintech is so exciting, as we have major new players like Stripe and Square appearing almost overnight and gaining multi-billion valuations. There is no doubt that we’ve got it going on, and in my next few pieces here I’ll outline the key trends, players and developments.

For now, I wish you a big hearty British welcome to FinXTech. Glad you could make it and it’s good to be here.