Banks of all sizes are implementing innovative technologies to grow their organizations but which ones are doing it right? Filmed during Bank Director and NASDAQ OMX’s inaugural FinTech Day in New York City, four financial technology providers offer their perspectives on which financial institutions are leading the way with the latest technologies.
Preparing for a successful merger or acquisition is complicated enough without the additional burden that comes from poorly managed core services and information technology (IT) contracts. Unfortunately for many banks and credit unions, an existing oligopoly enjoyed by only five major core IT vendors nationwide has led to these contracts having an unnecessarily negative impact on mergers and acquisitions (M&A) in the financial services industry. In many cases, mergers can simply fail or cost shareholders dearly as a result.
According to a recently issued annual report by the Business Performance Innovation Network (BPI Network), “continued vendor consolidation into an oligopoly within the core processing and IT services industry has made it increasingly difficult for community banks and credit unions to negotiate fair market pricing from vendors.”
Paladin fs, LLC takes it a step further, suggesting that few existing agreements are M&A ready, and when institutions attempt to negotiate their own core IT contacts alone, they’re playing a game they are very unlikely to win. There is no efficiency in contract pricing and fair market value cannot be determined hard market intelligence and pricing data. In fact, a Paladin fs survey reveals that most institutions are paying too much for these contracts, sometimes by as much as 40.2 percent. Further, the overpayment amount varies by region.
The only way to overcome this risk in advance of M&A is to be better informed before opening a negotiation with these critical vendors—positioning contracts now to help with a merger strategy later. To that end, Paladin has created the industry’s only knowledge base of core IT services contract costs and favorable business and legal terms designed to protect shareholders before and during a merger. Called the Paladin Blue Book, the company leverages this intelligence to renegotiate and restructure core IT contracts for clients, saving them, on average, between $960,000 and $1.2 million over the course of a standard five-year term—without the reputational risk that comes from having to reduce staff. Additional profit improves shareholder equity and the future merger position.
“Getting the numbers right can be exceedingly difficult for an institution,” said Aaron Silva, president of Paladin fs, LLC. “Vendor sales teams are meticulouslytrained at advancing complicated contracts and are expert at delaying the contract phase until the institution has lost most of its bargaining power. Paladin has been very successful at short-circuiting this process and putting the institution back in control.”
Silva points out that timing is critical. Most institutions should begin investigating core IT options 24 to 30 months before their contracts expire. The sweet spot for signing the best deal generally falls 18 to 24 months before the existing contract ends. With less than 18 months until the contract renews, bank and credit union leaders find that their switching leverage erodes rapidly should their negotiation fail with the incumbent provider as little time remains to find another vendor, negotiate a new contract or convert services in time.
One common scenario that Paladin’s clients face is a contract that auto-renews unknowingly, saddling the buyer with an early termination fee. These fees can range in the millions of dollars. Another problem occurs when an acquiring bank learns of hidden fees and onerous terms buried in the 150+ page contract that ambush deals at great expense. For example, one recent institution acquired another to learn later that costs to recover archived item processing images exceeded $640,000.
Vendors know that each time one financial institution is acquired by another, one of the core IT vendor contracts will be abandoned. Existing contract language in 90 percent of agreements reviewed by Paladin ensures any exit from services will be as expensive as possible for the institution and even more expensive to acquire. It’s important that banks reposition or renegotiate these contracts in advance of an acquisition with these concerns in mind.
Silva says his company offers an M&A readiness assessment for any institution contemplating a merger in the future. This process has uncovered a number of these scenarios, any one of which could have doomed an M&A transaction.
There are a number of trends currently serving to drive the financial services industry toward more M&A activity. These include market contraction, a flat economy, integration demand and historically high compliance costs. But as firms are driven together, they must first ensure that the contracts governing their most important technology platforms are not positioned to negatively impact the merger. Doing this in advance of a merger has been shown to benefit both the seller and the acquirer.
I am a big believer that many banks have immediate opportunities to expand what banking means to individual and business customers. This special supplement to Bank Director magazine highlights a number of interesting technologies that have re-shaped the fortunes of banks across the U.S.
Now, technology in the financial world encompasses a broad spectrum of tools. For most officers and directors, I’ve found conversations about technology naturally incite interest in mobile banking. This isn’t a surprise when one considers that 68 percent of American adults connect to the Internet with smartphones or mobile devices, according to the Pew Research Center. Smartphone penetration is highest among people with higher incomes, and the young. What an opportunity to engage and reshape your relationships with this audience! To show how Americans use smartphones, and how banks are offering mobile services to meet that demand, Bank Director compiled an infographic on pages 4-5.
Clearly, banks are trying to reach customers with the appropriate technology to stay relevant. But some banks are pushing themselves beyond what every other bank is doing. A story on page 6 features interviews with banking leaders about the most successful innovations or technological advances impacting banks right now. Among new ideas is Malauzai Software’s and Allied Payment Network’s PicturePay, which allows banks to pay customer bills with a photo of the bill taken on a smartphone.
As many banks face pressure to grow revenue or reduce expenses, we take a look at some that are coming up with creative solutions to tackle that problem. For instance, Central Bancompany in Jefferson City, Missouri, turned to Ignite Sales to double the number of services the average new business customer uses at the bank from three to six or seven different products or services.
Likewise, City National Bank in Charleston, West Virginia, found success with the help of StrategyCorps. About one-third of the bank’s customers have opted into a value-added checking account for $5 per month, even though free checking is still available. Inland Community Bank in Ontario, California, used Paladin fs to save money on its core information technology contracts during the sale of the bank, improving the value of the deal and saving $700,000 in termination expenses.
While most banks are far more efficient than they were just five years ago, there is money to be saved in banking. Some of the more ambitious companies, who want to stay relevant and solve their customers’ problems, are saving money and growing revenues through a variety of means. Banks have to make changes to stay relevant and address customer needs, and some of the more inventive banks are finding unique ways to do this while boosting the bottom line. On behalf of our team, please enjoy this special supplement, one we designed to inspire and shine a light into what’s possible.
If banks want to realize material gains in performance, they must learn to work differently. Until they commit to drastically changing their processes by going paperless, scale will be elusive and service levels will drift in a state of costly inefficiency.
Tellingly, 58 percent of people said they believe half or less of the work in their shops is “real” work, according to a survey recently conducted by Cornerstone Advisors. Real work is valuable. The rest, the non-work activity, is waste.
Unbelievable, right? The intense cost, revenue and compliance pressures the financial services industry is facing today means that banks must seek to optimize their processes to eliminate the waste.
Here are three ways to get back to basics and banish the waste.
Identify and own the process Process design is the key to eliminating waste. However, the challenge is that processes can span across the organization and even cross organizational boundaries.
“A first step in changing the way we work is to have one person in charge of the process—the entire process, not just certain tasks within the process,” says Michael Croal, Cornerstone’s senior director.
To effect the changes necessary to eliminate this waste requires effort and a leader. And the key to success is making sure that leader has a thorough understanding of what the process must accomplish—across the entire enterprise, if applicable.
Redesign for maximized performance The paralysis-by-analysis trap often catches process improvement teams. Too much time is spent and too much momentum is lost analyzing and documenting the way the process performs. This leads to ineffective process improvement programs.
Instead, try to determine what the result of the process needs to be. Don’t just continue to do things a certain way because they have always been done that way.
Remember what Einstein said: “Insanity is doing the same thing over and over and expecting different results.”
Led by the process owner, an effective process improvement program will include:
A senior executive that believes in and publicly supports the initiative
Dedicated resources focused on process analysis, process design and change management
Metrics to identify issues and drive improvements
A training program designed for the process and executed to ensure employees are fully trained
Harness the power of technology As financial institutions begin to redesign their processes, they must realize that these processes have been passed down over years and even changes of leadership. While the technology that supports the processes may have also changed, it is unlikely that the process has ever been engineered for maximum performance from start to finish, leaving expensive technology implementations to be miserably underutilized or incorrectly used.
Technology adds little value if it is not implemented with process performance in mind. It’s also crucial to evaluate the technology used in the process.
For example, most banks own at least one enterprise content management (ECM) system. However, many implementations are not only underutilized, but they’re also incorrectly used. Historically, most financial institutions looked at ECM as a tool just for imaging and reclaiming storage costs by digitizing documents. But there is so much more that they can do than simply scanning, storing and retrieving signature cards and loan applications.
With ECM, banks can automate virtually any manual, time-consuming process in a paper-based world. No more lost or misfiled documents. No more shipping paper loan files between offices. No more worrying about locating documents during an audit.
Banks should view ECM as a technology to leverage across the entire financial institution to automate and streamline processes—from loan origination to new employee onboarding. If an institution has already invested in an ECM solution, the next step is to explore how to leverage the existing technology across the enterprise, including human resources and accounting departments.
ECM is just one technology example that can drastically change the way you work. Until banks commit to drastically changing their processes across the enterprise, service levels will float in a state of costly inefficiency and future growth initiatives will become unrealistic. Banishing the waste is critical for the future of the organization.
Last year, the Securities and Exchange Commission (SEC) issued a report stating companies could use social media such as Facebook and Twitter to announce key news and information in compliance with Regulation Fair Disclosure (Reg FD)—so long as investors are informed in advance which services will be used to disseminate information. The Federal Financial Institutions Examination Council (FFEIC) later released its own guidance to financial institutions on crafting their social media programs and managing risk in the social media landscape.
Social media presents an enormous—and unique—opportunity for community banks when it comes to shareholder communications as many community bank shareholders are also depositors or have a lending relationship with the bank. This opportunity will only grow as older, baby boomer depositors are replaced by technology savvy, young customers who seek to connect with their financial institutions in new ways.
Yet, sharing material news and financial information on social media is not without its pitfalls. In this article, we outline some of the Dos and Don’ts if your company is considering incorporating social media into your shareholder communications program.
Do disclose to shareholders which social media channels you will use to share news and other material information. A good place to do this is in your annual report or on the investor relations section of your website. Check out the investor relations page on OTC Markets Group’s website for an example.
Do use social media to share more than just your corporate and financial news. Include photos and links to video broadcasts from investor conferences, links to industry news and media coverage as well as analyst reports and trade information.
Do proactively engage your followers with direct questions to stimulate discussions. Consider soliciting questions from investors during shareholder conference calls or annual meetings to let them know you’re listening.
Do use active shortened hyperlinks (using an online service such as Bitly) to link to press releases and other documents that can’t be included in full social media posts (e.g. Twitter is limited to 140 characters). The SEC stated earlier this year that if a communication is limited by the number of characters or amount of text that can be included, an “active hyperlink” will satisfy Reg FD compliance rules.
Do include your “cashtag”; the dollar sign and your stock symbol (ex. $OTCM) in tweets, so investors can easily track conversations about your stock in Twitter.
Do consider a social media management tool like Hootsuite to manage your social accounts, schedule messages and measure the return on investment of your social programs.
Don’t restrict access to your company’s social media site. Disclosing material information on a password-protected or otherwise restricted website will likely not be considered Reg FD compliant.
Don’t share only positive news. Best practice in investor relations is to share your good news as well as your bad. If you share your earnings results on Twitter, don’t only share your results when they’re positive. The same with analyst reports. Don’t only share your upgrades.
Don’t ignore social media altogether. With so many new technologies to consider, it may be tempting for community bank boards and management teams to stick their heads in the sand. But they do that at their peril. The motto for social media is the same for traditional media: if you don’t own the conversation, it will own you. So, even if your bank isn’t using social media to engage with shareholders, create social media accounts so you can monitor what is being said about your company, your peers and the industry.
If you’re still stumped on how to start, check out some of your larger public banking peers who are proficient on social media such as JP Morgan Chase ($JPM) and Bank of America ($BAC). Happy tweeting!
With the rise of many innovative technology companies, financial institutions can find themselves overwhelmed when it comes to selecting the right technology partner for them. Four financial technology providers share some advice for bank boards selecting a third-party vendor. The video was filmed during Bank Director and NASDAQ OMX’s FinTech day in New York City.
What technologies should every bank have on their radar to improve organic growth? In this video, filmed during Bank Director and NASDAQ OMX’s inaugural FinTech Day in New York City, we asked four financial technology providers to share what solutions are being implemented to help banks improve customer experiences, increase market share and grow revenue.
The humble password could soon be extinct, and biometrics could take its place—a technology that, in the past, was more apt to be found in a sci-fi movie than at your local bank. New uses for biological markers may offer consumers a safer, faster and easier way to make purchases and access accounts.
Passwords aren’t perfect. They’re easily forgotten or hacked. “[It wasn’t] envisioned that it would turn out the way it has, that people would have multiple accounts… all requiring passwords that are long and complex, yet the password is key to security for many people,” says Michael Kaiser, the executive director of the National Cyber Security Alliance, a nonprofit organization promoting cybersecurity.
Some banks and companies serving the financial services industry are working together to change the way we log into our accounts and make purchases through the use of biometrics—identifying a consumer through a certain feature or features of his body. It’s not only easier for the user—no more remembering and keying in a complicated password—it’s safer. Even if the user has a strong password, “that doesn’t do you any good if it’s stolen. The biometric becomes something that you have that no one else can have,” says Kaiser. The recent iCloud hack revealed vulnerabilities in traditional online security, where a group of hackers obtained and released the private photos of several famous actresses. Apple said it was “a very targeted attack on user names, passwords and security questions, a practice that has become all too common on the Internet.”
“Passwords are flawed,” says Kaiser. “What we’ve seen lately [are] some very stark examples of how problematic they can be.”
Michael Barrett is president of the FIDO Alliance, an organization working to create standards to authenticate users with biometrics. “Fingerprint will be one of the most commonly used biometrics,” he says. Fingerprint readers are increasingly embedded in mobile phones and personal computers. Eighty-three percent of iPhone 5s owners use a fingerprint scan to unlock their phone, according to Apple, and the company’s introduction of Apple Pay, which incorporates a fingerprint scan to approve purchases, should make the fingerprint even more pervasive. Apple Pay has partnered with banks such as Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc., and Capital One Financial Corp. But fingerprint authentication doesn’t work well for people with jobs or hobbies that wear on their hands, according to Barrett, and can be problematic for the elderly—an important consideration given the aging Baby Boomer population. In both cases, the fingerprint is less prominent and more difficult to read.
Denise Myers, director of marketing for EyeVerify, a biometric technology startup based in Kansas City, Kansas, also says that because people leave fingerprints everywhere, they’re easier to fake. The chief technologist at EyeVerify managed to make one out of a common kid’s toy: Play-Doh.
EyeVerify scans the user’s eyeball, using the camera available on most mobile phones. The user is identified by matching the pattern of the blood vessels within the whites of the eye. “You are the lock and the key,” says Myers. She says the eyeprint is more secure, since it is stored locally on the phone—not in the cloud, where it could be hacked by cyberthieves. Wells Fargo & Co. was intrigued enough by the concept to invest in EyeVerify, making it one of three inaugural participants in the banking giant’s Startup Accelerator program. The relationship is non-exclusive, leaving EyeVerify free to work with other banks and vendors. Beyond that, it is unclear how the relationship will work and whether Wells Fargo will implement the technology for its customers, says Myers.
The eyeball isn’t the only biometric the financial industry is looking at. Multinational financial services company Barclays, based in London, plans to roll out a biometrics reader, available to corporate banking clients, that confirms an online user’s identify based on the vein patterns in his finger. Barclays also uses voice biometrics to authenticate wealth management clients who use the bank’s call center, which it plans to make available to retail clients early in 2015.
Kaiser doesn’t see any downside to the use of biometrics, but says some customers may need to be persuaded that this new form of security is safer. With most biometric solutions, the financial data is stored locally, reducing the likelihood that a hacker could steal the biometric, along with the person’s identity. And unlike some Hollywood movies, a villainous rogue won’t remove a body part to access an account. Many forms of biometrics detect whether the blood is circulating, ensuring that the user’s eye or hand is attached to a living person.
More than half of bank leaders want to know how to better use data, and they agree that it’s one of the top technology concerns for their institution, according to Bank Director’s 2014 Growth Strategy Survey. Large banks are more likely to use data to support growth, but all institutions can find benefits in data analytics.
During the inaugural FinTech Day sponsored jointly by Bank Director and NASDAQ OMX, Declan Denehan, BNY Mellon’s managing director for strategy and innovation, and Al Dominick, president of Bank Director, discuss innovation and technology products and services to stay relevant in today’s banking environment. The event was held in September at the NASDAQ’s MarketSite in New York’s Times Square with over 40 participants from 30 financial technology companies.