What Banks Need to Do to Address Technological Change


technology-4-27-16.pngIn the past few years the fintech industry has grown exponentially. According to a recent Forbes article, the existing number of fintech start-ups globally are between 5,000 and 6,000, all seeking to take a slice of the financial services marketplace. The fintech industry broadly includes any new technology that touches the financial world, and in many ways, this industry redefines forever the notion of traditional banking. More specifically, fintech includes new payment systems and currencies such as bitcoin, service aggregators such as robo advisors, as well as mobile applications, data analytics and online lending platforms. The fintech industry can also be divided into collaborators and disruptors, those businesses that provide services to banks and those that are competitors for services and looking to displace banks. As new technologies and approaches to delivering financial services are adopted, community banks will be challenged to meet the future expectations of their customers as well as to assess the additional risks, costs, resources and supervisory concerns associated with providing new financial services and products in a highly regulated environment.

The largest commercial banks have recognized the future competitive impact on their business as fintech companies create new and efficient ways to deliver services to their customers. Bank of America, for example, recently announced a fintech initiative and plans to target the start-up market for potential acquisitions. The large banks have the advantage of scale, deep pockets and the luxury of making bets on new technologies. If not by acquisition, other banks are partnering with new players that have unique capabilities to offer products outside of traditional banking. While community banks are not new to the benefits of fintech, the advancement and number of new technologies and potential competitors have been difficult to keep up with and integrate into a traditional bank’s business model. On top of that, the fintech industry remains largely unregulated at the federal level, at least for now.

Competition, compliance and cost are the three critical factors that bank management and board members must assess in adopting new technologies or fending them off by trying to stick with traditional banking values. Good, old-fashioned service based on long-term banking relationships may become a thing of the past as the millennial generation grows older. Contactless banking by the end of this decade or sooner could rule the financial services industry. While in some small community banking markets, the traditional relationship model may survive, it is far from certain as the number of brick-and-mortar bank branches in the United States continues to decline.

Also falling under the fintech umbrella is the rapidly escalating online marketplace lending industry. While most banks may rationalize that these new alternative lending sources do not meet prudent credit standards in a regulated environment, the industry provides sources of consumer, business and real estate credit serving a diverse market in the billions. While the grass roots banking lobby has been around forever, longtime banks should take note that the fintech industry is also gaining support on Capitol Hill, as a group of Republicans are now preparing legislation coined the “Innovation Initiative” to facilitate the advancement and growth of fintech within the financial services industry.

Fortunately, the banking regulators are also supportive of innovation and the adoption of new technologies. The Comptroller of the Currency in March released a statement on its perspective on responsible innovation. As Comptroller Thomas Curry noted, “At the OCC, we are making certain that institutions with federal charters have a regulatory framework that is receptive to responsible innovation along with the supervision that supports it.” In an April speech, he confirmed the OCC’s commitment to innovation and acceptance of new technologies adopted by banks, provided safety and soundness standards are adhered to. The operative words here are responsible and supervision.

Innovation will come with a price, particularly for small and midsize community banks. Compliance costs as banks adopt new technologies will increase, with greater risk management responsibilities, effective corporate governance and advanced internal controls being required. Banks may find it necessary to hire dedicated in-house staff with Silicon Valley-type expertise, hire chief technology officers and perhaps even change the board’s composition to include members that have strong technology backgrounds. In the end, banks need to step up their technology learning curve, find ways to be competitive and choose new technologies that serve the banking needs and expectations of their customers as banking and fintech continues to converge.

Making Smart Technology Decisions In M&A


Technology integration can prove painful for today’s acquirers, due in part to outdated legacy technology, complicated contracts and training challenges for bank staff. Eric Isham of Nymbus outlines key considerations that boards and executive teams should keep in mind when making technology decisions in an acquisition.

  • Key Technology Issues for Acquirers
  • Legacy Core Concerns
  • Integration Challenges

Move Your Model Risk Management From Policy to Practice


risk-management-4-1-16.png“Supervisory Guidance on Model Risk Management,” issued by the Office of the Comptroller of the Currency (OCC) and Federal Reserve in April 2011, raised the bar for banks’ model risk management (MRM) programs. Banks that are implementing an MRM framework must overcome many challenges, including:

  • Gaining organizational buy-in.
  • Adopting tools and templates.
  • Developing metrics for determining whether a model is working as intended.
  • Facilitating risk-based model validations.
  • Recruiting staff and resources.

In the five years since the guidance was issued, we have found that most banks struggle with implementation in three areas:

1. What’s a model? The guidance defines a “model” as a “quantitative method, system or approach that applies statistical, economic, financial or mathematical theories, techniques and assumptions to process input data into quantitative estimates.” (To read the guidance see OCC Bulletin 2011-12 or Federal Reserve Supervision and Regulation Letter 11-7.) This seems straightforward, but determining what should be considered a model is tricky. A model should be clearly identified and defined in an organization’s policy to make sure the model inventory is complete and accurate. Models have specific features: They use theories and assumptions, and the results are estimates. Also, models are used repetitively in support of important business decisions.

2. Validation or review? All models should undergo a full validation process at some fixed interval. The intensity and frequency of validation work should be based on the model’s risk, but validations should assess the soundness of all model components—inputs, processing and outputs. Validation staff should possess the requisite technical competencies and sufficient stature within the organization to effectively challenge the model developer and operate independently from model development and use to preserve objectivity.

The guidance also directs banks to “conduct a periodic review—at least annually but more frequently if warranted—of each model to determine whether it is working as intended and if the existing validation activities are sufficient.” The annual review for each model should affirm previous validation work, suggest updates to previous validation activities or call for additional validation activities. The annual review also should include an assessment of model performance results, of the logs where changes made to the model are recorded, and of business environment changes. Material changes may trigger limited testing or partial revalidation.

3. Model documentation. According to the guidance, “[d]ocumentation and tracking of activities surrounding model development, implementation, use and validation are needed to provide a record that makes compliance with policy transparent.” As such, banks should use a standardized approach for documentation across all models, although documentation for vendor models could be slightly different than in-house model documentation. Documentation templates are real time-savers. Also, a centralized repository provides an enterprisewide view of MRM policy, program and guidelines documentation. Banks need to collect, retain and update model documentation regularly. Version control and the ability to search documentation electronically are two critical document management must-haves.

Also, consider the purpose of the document and the target audience when developing documentation because some users are more technically proficient than others. Overly technical or complex topics might be more appropriate for appendices or supporting documents than for overview procedures. Documentation frequently is “low-hanging fruit” when it comes to audits, validations and regulatory examinations. Make sure your institution has a process to test its documentation for policy compliance.

The Role of Technology
Examiners expect banks to have a complete understanding of model risk throughout the enterprise, to confirm that validations are completed and issues remediated, and to employ a consistent approach throughout the enterprise. It’s undeniable that technological tools can help manage the depth and breadth of MRM activities.

Technology can efficiently provide essential support for key MRM processes, especially for banks facing human resource constraints. A bank can achieve a centralized and consistent approach by using technology to maintain and manage model information, model risk policies and model framework information. Technology also reinforces compliance with bank policies and procedures and simplifies reporting.

Don’t rush into the first technology solution that comes along, though. Take the time to develop a set of detailed requirements for both current and future needs. Determine the information and intelligence required from the system, including reporting, analytics and dashboard requirements. Identify the processes and procedures that can be automated or improved with technology, and try to automate those manual processes that are time consuming and most critical.

Go Beyond Validation
MRM practices should extend beyond just performing validation. Don’t forget governance, effective challenge and performance monitoring. Plot your course and establish more efficient MRM processes that align with today’s regulatory expectations.

Three Questions to Ask About Your Bank’s DNA


Today, numerous financial technology (fintech) companies are developing new strategies, practices and products that will dramatically influence the future of banking. Within this period of transformation, where considerable market share is up for grabs, ambitious banks can leapfrog both traditional and new rivals. Personally, I find the narrative that relates to banks and fintech companies has changed from the confrontational talk that existed just a year or two ago. As we found at this year’s FinTech Day in New York City on Tuesday, far more fintech players are expressing their enthusiasm to partner and collaborate with banking institutions who count their strengths and advantages as strong adherence to regulations, brand visibility, size, scale, trust and security.

With more than 125 attendees at Nasdaq’s MarketSite on Times Square, we explored the fundamental role financial technology firms will play in changing the dynamics of banking. While we heard about interesting upstarts, here are three questions that underpinned the event that I feel a bank’s CEO needs to sit down with his/her team and discuss right now:

1. Are We Exceeding Our Customer’s Digital Experience Expectations?
Chances are, you’re not. But you can re-set the bar to make clear to your team that while customer expectations have shifted in pronounced ways, this is an area that a bank of any size can compete, especially with the help and support of a fintech company. If you are looking for inspiration, take a look at these examples of successful partnerships that we highlighted at FinTech Day:

  • City National Bank in Los Angeles and MineralTree in Cambridge, Massachusetts, developed an online business-to-business, invoice-to-pay solution that enabled the bank to differentiate itself from its competitors and attract new corporate customers. (In June 2015, City National was acquired by Royal Bank of Canada.)
  • USAA in San Antonio, Texas, and Daon in Reston, Virginia, collaborated to roll out a facial, voice and fingerprint recognition platform for mobile biometric authentication that enhances security while enhancing customer satisfaction.
  • Metro Bank teamed up with Zopa, both in the United Kingdom, on a deal which allows Metro Bank to lend money through the peer-to-peer platform the fintech company developed.

Any good experience starts with great data. Many presenters remarked that fintech companies’ appetite to leverage analytics (which in turn, allows a business to tailor its customer experience) will continue to expand. However, humans, not machines, still play critical roles in relationship management. Having someone on your team that is well versed in using data analytics to uncover what consumer needs are will become a prized part of any team.

2. How Do We Know If We’re Staying Relevant?
How can new players show us whether the end is near? That is, what part of our business could be considered a profit center today but is seriously threatened in the future? As you contemplate where growth isn’t, here are three companies that came up in discussions at FinTech Day that could potentially help grow one’s business:

  • Nymbus, a Miami, Florida-based company which provides a cloud-based core processing system, web site design, marketing and other services to help community banks compete with bigger players.
  • Ripple, a venture-backed startup, whose distributed financial technology allows for banks around the world to directly transact with each other without the need for a central counterparty or correspondent.
  • nCino, based in Wilmington, North Carolina, which developed a cloud-based, end-to-end small business loan origination system that enables banks to compete with alternative lenders with quick processing and approval of loans.

3. Do We Have a “Department of No” Mindset?
Kudos to Michael Tang, a partner at Deloitte Consulting LLP, for surfacing this idea. As he shared at FinTech Day, banks need structure, and when one introduces change or innovation, it creates departments of “no.”

For instance, what would have happened if Amazon’s print book business was able to jettison the idea of selling electronic books? If you refuse to change with your customers, they will find someone else who does. Operationally, banks struggle to make change, but several speakers opined that forward-thinking banks need to hire to a new level to think differently and change.

Throughout FinTech Day, it struck me as important to distinguish between improvements to the status quo and where financial institutions actually try to reimagine their core business. Starting at the customer layer, there appears massive opportunities for collaboration and partnerships between established and emerging companies. The banks that joined us are investing more heavily in innovation; meanwhile, fintechs need to navigate complex regulations, which isn’t easy for anyone. The end result is an equation for fruitful conversations and mutually beneficial relationships.

Innovation Takes Center Stage


Technology has always been integral to banking, bringing both speed and efficiency to a transaction-intensive business. But in recent years, technology has stepped onto center stage as a prime component in every bank’s growth and distribution strategy. Technology has, in effect, gone from being a way to save money (a crucial function that it still fulfills) to a way to make money. Much of this activity is being driven by the continued growth of mobile and online banking.

In an effort to highlight the importance of technology and the evolving partnership between banks and their financial technology providers, Bank Director held its second annual FinTech Day today at the Nasdaq MarketSite in New York. The event brought together senior executives from banks, technology companies and investment firms to create a dialogue between these important groups, encourage cross-fertilization and build a foundation for collaboration.

This year’s event also featured Bank Director’s inaugural Best of FinXTech Awards, which recognizes examples of innovation and collaboration between banks and their financial technology providers. The awards have been given to five banks and their technology partners, chosen by Bank Director from among 10 finalists.

The five winners are:

  • Univest Bank and Trust Co. in Souderton, Pennsylvania, and nCino in Wilmington, North Carolina. The project: Developed a cloud-based, end-to-end small business loan origination system that enabled Univest to meet the challenge of aggressive alternative lenders that are pushing into that important lending market.
  • CNLBank in Orlando, Florida, and CheckAlt in Los Angeles, California. The project: Jointly developed a new solution for remittance processing that greatly reduced the volume of payment exceptions, resulting in reduced costs and improved commercial client retention. In December 2015, CNLBank was acquired by Wayne, New Jersey-based Valley National Bancorp.
  • Somerset Trust Co. in Somerset, Pennsylvania, and Malauzai Software, Inc. in Austin, Texas. The project: Developed a mobile banking solution that allows Somerset retail banking customers to securely check balances, use picture bill pay and remotely deposit checks from any location of device.
  • Metro Bank in Harrisburg, Pennsylvania, and BizEquity in Wayne, Pennsylvania. The project: Developed a private label version of BizEquity’s online business valuation service, available through Metro’s website, that is used as a tool to bring prospective business customers into the bank’s branches. In August 2015, Metro was acquired by Pittsburgh-based F.N.B. Corp.
  • City National Bank in Los Angeles, California, and MineralTree in Cambridge, Massachusetts. The project: Developed an online business-to-business, invoice-to-pay solution that enabled the bank to differentiate itself from its competitors and attract new corporate customers. In June 2015, City National was acquired by Royal Bank of Canada.

The five winners were honored today at FinTech Day in New York. The other five finalists were USAA and Daon Inc., Seattle Metropolitan Credit Union and D+H, First Financial Bank and StrategyCorps, Central Bancompany and Ignite Sales, and Metro Bank and Zopa, both located in the United Kingdom.

The Seven Facets of a Digital Bank


If one were to start a new digital bank today, what would the defining characteristics be? Although there are some similarities to traditional bank counterparts, digital-only banks are in many respects very different. Here are the seven facets of a digital bank that will help drive its success.

Adjacent to each facet are organizations, including digital-only and traditional banks, as well financial technology companies, that Bank Director believes embody each characteristic.

Innovation Takes Center Stage


fintech-day-closing-bell.png

Technology has always been integral to banking, bringing both speed and efficiency to a transaction-intensive business. But in recent years, technology has stepped onto center stage as a prime component in every bank’s growth and distribution strategy. Technology has, in effect, gone from being a way to save money (a crucial function that it still fulfills) to a way to make money. Much of this activity is being driven by the continued growth of mobile and online banking.

In an effort to highlight the importance of technology and the evolving partnership between banks and their financial technology providers, Bank Director held its second annual FinTech Day today at the Nasdaq MarketSite in New York. The event brought together senior executives from banks, technology companies and investment firms to create a dialogue between these important groups, encourage cross-fertilization and build a foundation for collaboration.

This year’s event also featured Bank Director’s inaugural Best of FinXTech Awards, which recognizes examples of innovation and collaboration between banks and their financial technology providers. The awards have been given to five banks and their technology partners, chosen by Bank Director from among 10 finalists.

The five winners are:

  • Univest Bank and Trust Co. in Souderton, Pennsylvania, and nCino in Wilmington, North Carolina. The project: Developed a cloud-based, end-to-end small business loan origination system that enabled Univest to meet the challenge of aggressive alternative lenders that are pushing into that important lending market.
  • CNLBank in Orlando, Florida, and CheckAlt in Los Angeles, California. The project: Jointly developed a new solution for remittance processing that greatly reduced the volume of payment exceptions, resulting in reduced costs and improved commercial client retention. In December 2015, CNLBank was acquired by Wayne, New Jersey-based Valley National Bancorp.
  • Somerset Trust Co. in Somerset, Pennsylvania, and Malauzai Software, Inc. in Austin, Texas. The project: Developed a mobile banking solution that allows Somerset retail banking customers to securely check balances, use picture bill pay and remotely deposit checks from any location of device.
  • Metro Bank in Harrisburg, Pennsylvania, and BizEquity in Wayne, Pennsylvania. The project: Developed a private label version of BizEquity’s online business valuation service, available through Metro’s website, that is used as a tool to bring prospective business customers into the bank’s branches. In August 2015, Metro was acquired by Pittsburgh-based F.N.B. Corp.
  • City National Bank in Los Angeles, California, and MineralTree in Cambridge, Massachusetts. The project: Developed an online business-to-business, invoice-to-pay solution that enabled the bank to differentiate itself from its competitors and attract new corporate customers. In June 2015, City National was acquired by Royal Bank of Canada.

The five winners were honored today at FinTech Day in New York. The other five finalists were USAA and Daon Inc., Seattle Metropolitan Credit Union and D+H, First Financial Bank and StrategyCorps, Central Bancompany and Ignite Sales, and Metro Bank and Zopa, both located in the United Kingdom.

A Look Ahead to 2020: How Bank Directors Can Guard Against Risk


risk-12-11-15.pngAs banks look to the year 2020, we’ve identified five key risks that need to be actively assessed and monitored as the industry changes and adapts to consumer demands and competition. When it comes to data security and technology, regulatory risk, finding qualified personnel, profitability, and bank survival, bank directors need to ask:

  • How do we as an organization identify these risks on an ongoing basis?
  • How do they affect our organization?
  • How can we work with management to manage future risks?

Here’s a snapshot of the risk areas, what’s anticipated as we look to the future, and steps you can take to stay competitive and mitigate risk.

Data Security & Technology
It’s important to keep up with your peers and provide services as your clients demand them. More sophisticated payment platforms that make it easier to access and transfer funds will continue to gain popularity, particularly mobile platforms.

Being competitive requires innovation, which means software, bank integration, and sophisticated marketing and delivery. Third-party service providers may be the answer to help cut expenses and improve competition, but they also present their own unique risks.

With innovation comes opportunity: attacks on data security will increase, making the safeguarding of data a high priority for banks. While technology is an important element to this issue, the primary cause of breaches is human error. To this end, it’s essential for management to set the example from the top while promoting security awareness and training.

Regulatory Risk
Expectations from the Consumer Financial Protection Bureau regarding consumer protection will intensify. Anticipate some added expenditure to hire and retain technical experts to manage these expectations. Regulations are on the way for small business and minority lending reporting, as well as the structure of overdraft protection and deposit product add-ons, among others. Directors and management need to evaluate:

  • Compliance management infrastructure
  • Staffing needs and costs
  • Impact of proposed regulatory change to the bottom line

Qualified Personnel
For instance, baby boomers are retiring at a rate faster than Generation X can replenish, making it more difficult and costly to attract and retain skilled people. Meanwhile, the shrinking availability of skilled labor in this country is costing organizations throughout the United States billions of dollars a year in lost productivity, increased training and longer integration times.

A bank’s succession plan for its people should:

  • Identify key roles and technical abilities in your organization
  • Assess projected employee tenure
  • Develop a comprehensive employee replacement strategy
  • Prioritize training and apprentice programs

Profitability
The bottom line at traditional banks will continue to be stressed as momentum builds for institutions to reduce product and service-related fees. Overhead expenses also will continue to increase as banks boost spending for IT infrastructure to support demands by customers for mobile technology and technical innovation and finding and retaining qualified personnel to manage complex regulatory requirements. Responses to these trends are already underway. Some institutions are:

  • Divesting of consumer-related products laden with heavy regulatory requirements
  • Sharpening strategic focus on holistic customer relationships with professional and small business customers to increase relationship-driven revenue
  • Exploring new or more complex commercial lending products and partnerships designed to increase interest income to attract customers in new markets

Banks will need to closely monitor the impact of regulatory initiatives on future earnings from fees and alternative revenue sources.

Bank Survival
Here are some proactive steps to consider as your bank prepares for 2020:

  • Develop an ongoing strategy for mergers and acquisitions to expand capital
  • Consider charter conversions to lend flexibility in expanded product and service offerings or a change in regulatory expectations or intensity
  • Evaluate the impact of higher regulatory expectations

To help identify and manage risk, management should plan regular discussions in the form of annual strategic planning meetings, regular board meeting agendas, and targeted meetings for specific events. The focus should extend beyond known institutional risks, such as credit, interest rate and operational, but should also look at key strategic risks.

If your institution can innovate with the times to stay ahead of risk and competition with a systematic approach, then the path to 2020 will be less fraught with difficulties.