How Banks Kept Customers During the Pandemic, Even Commercial Ones

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Digital transformation and strategy are examined as part of Bank Director’s Inspired By Acquire or Be Acquired. Click here to access the content on BankDirector.com.

Despite closed branches and masked interactions, the coronavirus pandemic may have actually improved customers’ relationships with their banks. They have digital channels to thank.

That’s a shift from the mentality pervading the industry before the pandemic. Business lines like commercial lending seemed firmly set in the physical world: a relationship-driven process with high-touch customer service. The Paycheck Protection Program from the U.S. Small Business Administration completely uprooted that approach. Banks needed to deliver loans “as fast as possible” to their small commercial customers, says Dan O’Malley, CEO of data and loan origination platform Numerated during Bank Director’s Inspired By Acquire or Be Acquired. More than 100 banks are currently using the platform either for PPP applications or forgiveness.

The need for rapid adoption forced a number of community banks to aggressively dedicate enough resources to stand up online commercial loan applications. Sixty-five percent of respondents to Bank Director’s 2020 Technology Survey said their bank implemented or upgraded technology due to the coronavirus. Of those, 70% say their bank adopted technology to issue PPP loans. This experiment produced an important result: Business customers were all too happy to self-service their loan applications online, especially if it came from their bank of choice.

“Self-service changes in business banking will be driven by customer demand and efficiency,” O’Malley says, later adding: “Customers are willing to do the work themselves if banks provide them the tools.”

Digital capabilities like self-service platforms are one way for banks to meaningfully deepen existing relationships with commercial borrowers. Numerated found that borrowers, rather than bankers, completed 84% of PPP loan applications that were done using the company’s platform, and 94% of forgiveness applications. That is no small feat, given the complexity of the application and required calculations.

Those capabilities can carve out efficiencies by saving on data entry and input, requesting and receiving documentation, the occasional phone call and the elimination of other time-consuming processes. One regional bank that is “well known for being very relationship driven” was able to process 3,000 “self-service” PPP loan applications in a morning, O’Malley says. Standing up these systems helped community banks avoid customer attrition, or better yet, attract new customers, a topic that Bank Director magazine explored last year. Already, banks like St. Louis-based Midwest BankCentre are reaping the gains from digital investments. The $2.3 billion bank launched Rising Bank, an online-only bank, in February 2019, using fintech MANTL to open accounts online.

The impetus and inception for the online brand dates back more than three years, says President and CFO Dale Oberkfell during an Inspired By session. Midwest didn’t have a way to open accounts online, and it wanted to expand its customer base and grow deposits. It also didn’t want to replicate the branch experience of opening an account — Midwest wanted to compress the total time to three minutes or less, he says.

Creating the brand was quite an investment and undertaking. Still, Rising Bank has raised $160 million in deposits — as many deposits as 10 branches could — with only two additional employees.

“We didn’t spend the dollars we anticipated spending because of that efficiency,” Oberkfell says.

Midwest BankCentre is exploring other fintech partnerships to build out Rising Bank’s functionality and product lines. The bank is slated to add online loan portals for mortgages and home equity lines of credit — creating the potential for further growth and efficiencies while strengthening customer relationships. He adds that the bank is looking to improve efficiencies and add more tools and functionality for both customers and employees. And how are they going to fund all those technology investments?

Why, with the fees generated from PPP loans.

Exploring Banking’s What Ifs

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What if the ball didn’t sneak through Bill Buckner’s legs in 1986?

What if you answered the call to deliver two pizzas for 10,000 bitcoins in 2010?

What if Hillary Clinton lost the popular vote but won the electoral college in 2016?

Thought exercises like these can take you down the rabbit holes that many opt to avoid. But how about asking “what if” type questions as a way to embrace change or welcome a challenge?

Mentally strong leaders do this every day.

In past years, such forward-facing deliberations took place throughout Bank Director’s annual Acquire or Be Acquired conference. This year, hosting an incredibly influential audience in Phoenix simply wasn’t in the cards.

So, we posed our own “what ifs” in order to keep sharing timely and relevant ideas.

To start, we acknowledged our collective virtual conference fatigue. We debated how to communicate key concepts, to key decision makers, at a key moment in time. Ultimately, we borrowed from the best, following Steve Jobs’ design principle by working backward from our user’s experience.

This mindset resulted in the development of a new BankDirector.com platform, which we designed to best respect our community’s time and interests.

Now, as we prepare to roll out this novel, board-level business intelligence package called Inspired By Acquire or Be Acquired, here’s an early look at what to expect.

This new offering consists of short-form videos, original content and peer-inspired research — all to provide insight from exceptionally experienced investment bankers, attorneys, consultants, accountants, fintech executives and bank CEOs. Within this new intelligence package, we spotlight leadership issues that are strategic in nature, involve real risk and bring a potential expense that attracts the board’s attention. For instance, we asked:

WHAT IF… WE MODERNIZE OUR ENTERPRISE

The largest U.S. banks continue to pour billions of dollars into technology. In addition, newer, digital-only banks boast low fees, sleek and easy-to-use digital interfaces and attractive loan and deposit rates. So I talked with Greg Carmichael, the chairman and CEO of Cincinnati-based Fifth Third Bancorp, about staying relevant and competitive in a rapidly evolving business environment. With our industry undergoing significant technological transformation, I found his views on legacy system modernization particularly compelling.

 

WHAT IF… WE TRANSFORM OUR DELIVERY EXPECTATIONS

Bank M&A was understandably slow in 2020. Many, however, anticipate merger activity to return in a meaningful way this year. For those considering acquisitions to advance their digital strategies, listen to Rodger Levenson, the chairman and CEO of Wilmington, Delaware-based WSFS Financial Corp. We talked about prioritizing digital and technology investments, the role of fintech partnerships and how branches buoy their delivery strategy. What WSFS does is in the name of delivering products and services to customers in creative ways.

 

WHAT IF… WE DELIGHT IN OTHER’S SUCCESSES

The former chairman and CEO of U.S. Bancorp now leads the Make-A-Wish Foundation of America. From our home offices, I spent time with Richard Davis to explore leading with purpose. As we talked about culture and values, Richard provided valuable insight into sharing your intelligence to build others up. He also explained how to position your successor for immediate and sustained success.

These are just three examples — and digital excerpts — from a number of the conversations filmed over the past few weeks. The full length, fifteen to twenty minute, video conversations anchor the Inspired By Acquire or Be Acquired.

Starting February 4, insight like this lives exclusively on BankDirector.com through February 19.  Accordingly, I invite you to learn more about Inspired By Acquire or Be Acquired by clicking here or downloading the online content package.

Turning to Technology as Margins Shrink

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It’s a perfect storm for bank directors and their institutions: Increasing credit risk, low interest rates and the corrosive effects of the coronavirus culminating into a squeeze on their margins.

The pressure on margins comes at the same time as directors contend with a fundamental new reality: Traditional banking, as we know it, is changing. These changes, and the speed at which they occur, mean directors are wrestling with the urgent task of helping their organizations adapt to a changing environment, or risk being left behind.

As books close on 2020 with a still-uncertain outlook, the most recent release of the Federal Deposit Insurance Corp.’s Quarterly Banking Profile underlines the substantial impact of low rates. For the second straight quarter, the average net interest margin at the nation’s banks dropped to its lowest reported level.

The data shows that larger financial institutions have felt the pain brought about by this low-rate environment first. But as those in the industry know, it is often only a matter of time until smaller institutions feel the more-profound effects of the margin contraction. The Federal Reserve, after all, has said it will likely hold rates at their current levels through 2023.

In normal times, banks would respond to such challenges by cutting expenses. But these are not normal times: Such strategies will simply not provide the same long-term economic benefits. The answer lies in technology. Making strategic investments throughout an organization can streamline operations, improve margins and give customers what they want.

Survey data bears this out. Throughout the pandemic, J.D. Power has asked consumers how they plan to act when the crisis subsides. When asked in April about how in-person interactions would look with a bank or financial services provider once the crisis was over, 46% of respondents said they would go back to pre-coronavirus behaviors. But only 36% of respondents indicated that they would go back to pre-Covid behaviors when asked the same question in September. Consumers are becoming much more likely to use digital channels, like online or mobile banking.

These responses should not come as a surprise. The longer consumers and businesses live and operate in this environment, the more likely their behaviors will change, and how banks will need to interact with them.

Bank directors need to assess how their organizations will balance profitability with long-term investments to ensure that the persistent low-rate environment doesn’t become a drag on revenue that creates a more-difficult operating situation in the future.

The path forward may be long and difficult, but one thing is certain: Banks that aren’t evaluating digital and innovative options will fall behind. Here are three key areas that we’ve identified as areas of focus.

  • Technology that streamlines the back office. Simply reducing headcount solves one issue in cost management, which is why strategic investments in streamlining, innovating and enhancing back-office processes and operations will become critical to any bank’s long-term success.
  • Technology that improves top-line revenues. Top-line revenue does not grow simply by making investments in back-office technologies, which is why executives must consider solutions that maximize efforts to grow revenues. These include leveraging data to make decisions and improving the customer experience in a way that allows banks to rely less on branches for growth.
  • Technology that promotes a new working environment. As banks pivoted to a remote environment, the adoption of these technologies will lead to a radically different working environment that makes remote or alternative working arrangements an option.

While we do not expect branch banking to disappear, we do expect it to change. And while all three technology investment alternatives are reasonable options for banks to adapt and survive in tomorrow’s next normal, it is important to know that failing to appropriately invest will lead to challenges that may be far greater than what are being experienced today.

Digital Transformation Defined

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Many banks know they need to undergo a digital transformation to set their institution up for future success. But what do most bankers mean when they talk about digital transformation?

“If you look at the technical definition of digital, it means using a computer. Congratulations, we can all go home because we all use computers to do everything in banking today,” jokes Nathan Snell, chief innovation officer at nCino during a presentation at Bank Director’s BankBEYOND 2020 experience.

Of course, a digital transformation requires technology, Snell says, but he argues that the integration or adoption of this technology should change how a bank operates and delivers value. Going beyond that, it should be accompanied by a cultural shift to continually challenge the status quo — otherwise this attempt at change may fall short of innovation and transformation.

You can access Snell’s complete presentation and all of the BankBEYOND 2020 sessions by registering here.

How Digital Transformation is Driving Bank M&A

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Three large bank acquisitions announced in the closing quarter of 2020 may signal a fundamental shift in how a growing number of regional banks envision the future.

While each deal is its own distinct story, there is a common thread that ties them together: the growing demand for scale in an industry undergoing a technological transformation that accelerated during the pandemic. Even large regional banks are hard pressed to afford the kind of technology investments that will help them keep pace with mega-banks like JPMorgan Chase & Co. and Bank of America Corp., which spend billions of dollars a year between them on their own digital transformation.

In October, First Citizens BancShares acquired New York-based CIT Group. Valued at $2.2 billion, the deal will create a top 20 U.S. bank with over $100 billion in assets, and combines the Raleigh, North Carolina-based bank’s low-cost retail funding base with CIT’s national commercial lending platform.

The two companies are a good strategic fit, according to H. Rodgin Cohen, the senior chair at Sullivan & Cromwell, who represented CIT. “If you look at it from CIT’s perspective, you can finance your loans at a much-cheaper cost,” says Cohen in an interview. “From a First Citizen perspective, you have the ability to use that incredible funding base for new categories of relatively higher-yielding loans.”

But digital transformation of banking was an underlying factor in this deal, as increasing numbers of customers shift their transactions to online and mobile channels. The fact that the pandemic forced most banks to close their branches for significant periods of 2020 only accelerated that trend.

“There is enormous pressure to migrate to a more digital technology-driven approach — in society as a whole — but particularly in banking,” Cohen says. “The key is to be able to spread that technology cost, that transformational cost, across the broadest possible customer base.  It doesn’t take a lot of direct savings on technology, simply by leveraging a broader customer base, to make a transaction of size really meaningful.”

A second scale-driven deal is PNC Financial Services Group’s $11.6 billion acquisition of BBVA USA, the U.S. arm of the Spanish bank Banco Bilbao Vizcaya Argentaria. Announced in mid-November, the deal will extend Pittsburgh-based PNC’s retail and middle-market commercial franchise — now based in the Mid-Atlantic, South and Midwest — to Colorado, New Mexico, Arizona and California, with overlapping locations in Texas, Alabama and Florida. In a statement, PNC Chairman and CEO William Demchak said the acquisition provided the bank with the opportunity to “bring our industry-leading technology and innovative products and services to new markets and clients.”

The deal will create the fifth-largest U.S. bank, with assets of approximately $566 billion. But Demchak has made it clear in past statements that PNC needs to grow larger to compete in a consolidating industry dominated by the likes of JPMorgan and Bank of America.

Lastly, in a $6 billion deal announced in mid-December, Columbus, Ohio-based Huntington Bancshares is acquiring Detroit-based TCF Financial Corp. to form the tenth largest U.S. bank, with assets of approximately $170 billion. Chairman and CEO Stephen Steinour says the two companies are an excellent fit with similar cultures and strategies.

“It’s a terrific bank,” Steinour says in an interview. “I’ve known their chairman for a couple of decades. Many of our colleagues have friends there, or family members. We compete against them. We see how they operate. There’s a lot to like about what they’ve built.”

The acquisition will extend Huntington’s retail footprint to Minnesota, Colorado, Wisconsin and South Dakota, while deepening its presence in the large Chicago market. And with extensive overlapping operations in Michigan, Huntington expects the deal to yield approximately $490 million in cost saves, which is equivalent to 37% of TCF’s noninterest expense.

But this deal is predicated on much more than just anticipated cost saves, according to Steinour.

“What Apple and Google and Amazon are doing is teaching people how to become digitally literate and creating expectations,” he says. “And our industry is going to have to follow that in terms of matching those capabilities. This combination is an opportunity to accelerate and substantially increase our digital investment. We have to do more, and we have to go faster, because our customers are going to expect it.”

Steinour hedges on if these recent deals also signal that banking is entering a new phase of consolidation, in which regionals pair off to get bigger in a new environment where scale matters. But last year’s $66 billion merger of BB&T Corp. and SunTrust Banks Inc. to form Truist Financial Corp. — currently the fifth-largest U.S. bank, although the post-merger PNC will drop it down a peg — was also driven by a perceived need for more scale. Senior executives at both companies said the primary impetus behind the deal was the ability to spread technology costs over a wider base.

But clearly, the need for scale was a factor for Huntington as well. “We’re investing heavily in this opportunity to combine two good companies, get a lot stronger, accelerate our investments and spread that over a much bigger customer base,” he says. “That makes eminent sense to us.”

As Steinour comments later, “We’ll be stronger together.”

New Research Finds 4 Ways to Improve the Appraisal Experience

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Accelerating appraisals has become increasingly important as lenders strive to improve efficiency in today’s high-volume environment.

Appraisals are essential for safe mortgage originations. Covid-19 underlined the potential impact of modernizing appraisal practices, and increased the adoption of digitally enabled appraisal techniques, appraisal and inspection waivers, and collateral analytics.

Banks have numerous opportunities to improve and modernize their appraisal process and provide a better consumer experience, according to recent research sponsored by ServiceLink and its EXOS Technologies division and independently produced by Javelin Strategy & Research. The research highlights several actions that lenders can take to improve their valuation processes, based on the feedback of 1,500 single-family homeowners in March who obtained either a purchase mortgage, refinance mortgage, home equity loan/line of credit for their single-family home, or who sold a single-family home, on or after January 2018.

1. Implement digital mortgage strategies that streamline appraisal workflows. One of the most-compelling opportunities to make appraisals more efficient is at the very onset of the process: scheduling the appointment. Scheduling can be complicated by the number of parties involved in an on-site inspection, including a lender, appraiser, AMC, borrower and real estate agent. Today, two-thirds of consumers schedule their appointments over the phone. This process is inefficient, especially for large lenders and their service providers, and lacks the consistency of digital alternatives.

Lenders that offer digital appraisal scheduling capabilities provide a more-predictable and consistent service experience, and reduce the back-and-forth required to coordinate schedules among appraisers, borrowers, real estate agents and home sellers. Given younger consumers’ tendency to eschew phone calls in favor of digital interactions, it’s essential that the industry embraces multiple channels to communicate, so borrowers can interact with lenders and AMCs on their own terms.

2. Increase transparency in the appraisal process. Even after an appointment is scheduled, consumers typically receive limited details about the appraiser, what to expect during the appointment and how the appraisal factors into the overall mortgage process. For example, 61% of consumers received the appraiser’s contact information before the appointment; while only 20% were provided with the appraiser’s photo and 9% were told what type of car they will drive. Providing borrowers with more information about the appraisal appointment bolsters their confidence; information gaps can contribute to a less-satisfying experience. Nearly 20% of consumers said they were not confident or only somewhat confident about their appointment, while over 30% said the same about the names of the appraiser and AMC.

3. Focus on efficiency. Overall, 38% of consumers said the duration of the overall appraisal process contributed to a longer mortgage origination process; delays among purchase mortgage and home equity borrowers were even higher.

For example, about two-thirds of appraisal appointments required the consumer to wait for the appraiser to arrive within an hours­long window or even an entire day, as opposed to giving the consumer an exact time when the appointment will take place. Given this challenge, lenders and appraisal professionals that offer more-precise appointment scheduling can improve the consumer experiences and streamline the origination process.

4. Implement processes and technology that support innovative approaches to property inspections and valuations. Covid-19 highlighted the opportunity banks have to adopt valuation products that sit between fully automated valuations and traditional appraisals, such as valuation methods that combine third-party market data and consumer-provided photos and video of subject properties. This approach still relies on a human appraiser to analyze market data and subject-property

This concept is gaining traction in the mortgage industry. In the future, it’s conceivable the approach could be expanded with the use of artificial intelligence and virtual reality technologies.

No matter the method an appraiser uses to determine a property’s value, the collateral valuations process is fundamentally an exercise in collecting and analyzing data. Partnering with an innovative AMC allows lenders to take advantage of new techniques for completing this critical market function. You can view the full white paper here.

5 Reasons to Shift the Appraisal Process to an AMC Model

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Record mortgage activity in 2020 has inspired many lenders that have traditionally managed their appraisal processes to look at working with an appraisal management company, or AMC.

Working with an AMC allows lenders to focus on their core competencies, which is essential in this demanding environment. While some are shifting entirely to an AMC model, others are considering a hybrid approach that utilizes their original panel but leverages the innovative technology of an AMC. Lenders can benefit from working with an AMC in the following areas:

1. National AMCs dedicate significant resources towards risk management and regulatory compliance
Keeping up with evolving statutes, regulations and industry standards requires an extraordinary level of diligence and investment from institutions. For example, lenders with in-house panels must be able to demonstrate to regulators that the individuals managing their panel are isolated from the sales, operations and production functions of their businesses so there can be no question as to their impartiality. Lenders that use an AMC are relieved of this burden, because AMC appraisers are independent of the lending organization.

High-quality AMCs constantly invest in risk and compliance measures, including developing and implementing technology, systems and protocols to address a whole host of compliance needs. The best AMCs are poised to respond quickly to regulatory changes and incorporate new lender-driven requirements, policies and procedures.

2. AMCs reduce administrative oversight responsibilities
Partnering with an AMC relieves lenders of the responsibilities and overhead related to maintaining and managing an appraiser panel, such as screening, selecting and boarding new appraisers; auditing for certifications, licenses and insurance; and scoring appraisers to ensure  the most qualified appraiser is assigned to each order.

In addition to screening, onboarding and ongoing ranking, the best AMCs will require errors and omissions insurance. They also require or supply state and federal background checks for every appraiser. Premier AMCs go even further and invest in sophisticated score-carding across multiple disciplines to ensure that a highly qualified appraiser with the requisite skills and experience is selected for each appraisal.

3. Lenders benefit from the AMC’s technology and infrastructure
The best AMCs tend to be on the leading edge of technology. They make ongoing, sizable investments into developing and implementing technology, streamlining their own processes and providing a better experience for clients. AMCs with a national presence work closely with their lender base, which helps them anticipate and quickly react to emerging challenges.

When clients across the country share their insights into what they want and what their customers expect from a technology perspective, AMCs can identify trends that might take an individual lender a little longer to recognize, and help them keep their technology ahead of market- and quality-specific challenges.

For example, lenders can benefit from working with an AMC that offers real-time, digital scheduling. This technology provides consumers, loan officers and real estate agents with increased convenience and transparency. It improves lenders’ processes by eliminating phone tag and scheduling delays. Instead, the user can select an appointment date and time and receive instant confirmation. This adds to the lender’s credibility as a partner focused on customer satisfaction.

Now more than ever, banks are tasked with ensuring data security – not only their own, but that of their third-party suppliers. The top AMCs constantly invest in best-in-class security infrastructures and prioritize data security through advanced controls and regular audits of their facilities, systems, communications, and internet protocols.

4. AMCs help lenders scale
Many lenders needed to quickly recruit appraisers this year, as refinance volume spiked to a 17-year high. AMCs were able to accommodate these volume fluctuations because they had deep appraiser panels in place with nationwide coverage.

Because AMCs manage volume from lenders around the industry, they build scalability into their capabilities. In addition, this deeper pool of talent offers a wider range of knowledge such as specific property types and value ranges.

5. AMCs offer options
While some lenders may opt to shift fully to an AMC model, others elect a hybrid approach. This might take the form of adopting the AMC’s technology but not its panel management, allowing an AMC to manage a bank’s existing panel as an independent entity, or leveraging an AMC when handing off volume outside of the geographic footprint or area of expertise.

When a lender has a trusted panel they want to keep but not manage, it can allow the AMC to manage those appraisers in their system. The lender benefits from the AMC’s technology, experience and appraiser oversight, score-carding and recruitment capabilities, while eliminating their operational and fixed-personnel costs. The financial and operational benefits of this type of model can be exceptional.

To learn more about ServiceLink, visit svclnk.com.

*ServiceLink Valuation Solutions, LLC, (“ServiceLink”) is a registered Appraisal Management Company (“AMC”) in all states with AMC licensing requirements. ServiceLink’s AMC license numbers in states that require disclosure on these instructions are: NV # AMC.0000118, VT # 077.0067954-MAIN, WI #2-900.

Driving Innovation Through Cultural Clarity

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New York-based Quontic Bank bills itself as an adaptive digital bank; it’s also a $1 billion community development financial institution (CDFI), lending to immigrants, low-income populations, gig-economy workers and borrowers who struggle to get a traditional mortgage. That mission means that the bank’s executives — including chief innovation officer Patrick Sells — tend to think about banking a little differently.

Its culture is a true competitive advantage of the bank — and that goes beyond having good, talented people on staff who get along with one another. It requires a mission, he says, and “strategic anchors” that can guide decision-making and empower employees.

Banks were already facing an “existential crisis” around digital and technology, Sells continues. “The pandemic that we found ourselves in has only exacerbated that tension,” he says. “[W]hen there is anxiety, we tend to act irrationally, we can tend to act scattered, we go back and forth. And what’s really critical is a steady hand as to who we are and what we need to do, and how we navigate through this, so we don’t get sucked into all of that. The culture, the clarity that we have, has definitely helped us navigate this storm.” Quontic has hired almost 90 new employees during the pandemic, he adds.

Sells discusses this further in this interview with Emily McCormick, Bank Director’s vice president of research. It has been edited for brevity, clarity and flow.

BD: It’s very easy to think about innovation, and focus on the nuts and bolts of the technology, but the culture and the mindset are so critical. How do you think through culture as it applies to innovation?
PS: There’s a tragedy in that innovation is often synonymous with technology, especially in this industry, and it really shouldn’t be. Innovation as much more than that. The thing that perhaps needed the most innovation, and would yield the greatest results, was culture that I think many banks don’t have. I think culture is an area where they’ve struggled. When you compare it to what’s gone on in the world around us — there’s so many things happening, and banks haven’t kept up with that.

These issues all interplay with each other. I think the greatest existential threat to the industry of community banking is culture. We have lost the war on talent. As the first digitally-native generation grew up and came out of college, they didn’t want to go work at a community bank. So today, we’re so behind from a technology standpoint, and we’re frantically, as an industry, trying to say, “We need this, we need that.” And that’s really a Band-Aid.

If we don’t figure out how to change this and lose the next decade of talent, we don’t stand a chance. The technology that’s new and cool today, we know the pace it’s accelerating at will be nothing compared to two, three years from now. … We also know in the data that’s coming out around millennials and the generations that follow, is that the sense of purpose matters immensely. And so for us, where we really focused on innovating, or what to do differently, is all in and around culture: How do we do that, and how do we bring that to life at Quontic? That will drive us into the future and where we want to go.

BD: You’re active on Twitter; one of your recent tweets focused on the fact that culture doesn’t end at the bank, it extends to the customer. Could you expand on that concept and how that informs how Quontic meets customer needs?
PS: There’s three components to Quontic’s culture: the mission, the de-centralized decision [making], and the shared language. Core values became that shared language, but one of our core values is try it on. For example, we want to be quick to try something new, even if we don’t know if it’s the right thing or not.

The other one is saying, “Cheese.” The next time someone asks to take a picture of you and they say, “Cheese,” what happens? Both of you smile, and usually the photographer is also smiling. How do we create that interaction? I think most customers expect, when you call your bank, you’re going to get very black-and-white answers as to what can and can’t be done. And there isn’t so much a focus on making it a pleasant experience.

An example of that, when Covid[-19] first happened at the end of March or early April, as an online bank, we picked up a lot of CD customers. For the consumer, one of the great things about CDs is you commit to putting your money in for a period of time, and you typically get the highest interest rate. If you break the CD, you lose all that interest. We knew a lot of customers would be nervous about what that meant for their financials, so we quickly reached out to say, “If you need to break your CD, you can do that penalty free.”

The majority of people said, “Thank you for offering this. As of now, I don’t want to do that.” But there was another group of people who said, “Yes, I want to do that.” Those same people called us back later and said, “I ended up being OK. I want to re-establish my account with you, and I’m going to tell everyone I know about what you’ve done for me, because it was so above and beyond.”

We want to be a spot, even though there’s a lot of anxiety going on, where we can bring smiles to people’s faces. I don’t know the data, but I doubt many banks emailed their CD customers to say, “You can break penalty-free if you need to.” We’re trying something on, and what happened from it? It deepened relationships and brought new relationships because it resonates the culture of who we are with the customer that we serve.

BD: We know that small businesses continue to be devastated by this pandemic. How is Quontic thinking through meeting the needs of small businesses, as this crisis continues and past it?
PS: This gives us the opportunity, in any crisis, to reframe, which is something I talk about in terms of innovation. What is innovation? Can you reframe what’s going on? Can we become aware of these underlying assumptions that haven’t changed in a while? If we change nothing but that, everything changes — that’s where you can find your most effective innovation.

For example, there’s a lot of small business owners who are behind the ball in terms of e-commerce. There [are] two ladies that own a [boutique] that I’ve gotten to know, and they wanted to open up a Shopify account to sell products online. I helped them do that. In one lens, helping [our small business customers] establish Shopify and e-commerce doesn’t result in any new revenue for the bank; but it strengthens the relationship and the [role] that banks historically played as a resource for small business owners.

There’s an opportunity to rethink branches. … While there’s great technology out there, like Shopify and Square, they don’t have people who can help you. What if the branch became a place where small business owners could get help [digitalizing themselves?] Now you’re utilizing the space that so many banks already have, and you’re beginning to play that meaningful role again in society. I think there’s a tremendous opportunity for banks to think differently, and say, “How do we help our customers also embrace technology that will ultimately help their businesses thrive?” That’s an example of a way banks can reframe what those relationships look like and deepen those relationships that’s outside of the norm as to what we think banks should be doing.

BD: So essentially, it’s about having that talent and expertise within the branch that can help the customer, and empowering employees to do that.
PS: This goes back to the mission [of] financial empowerment. It’s both that the products banks offer [are] one size fits all, and that the culture or the skills are largely the same. What if banks said, “We’re going to hire kids out of college who understand social media and e-commerce natively to help our small business customers.” Now you have talent that can help your bank figure out how to evolve. You solve two problems with one stone, and begin to change the reputation and everything. Not only does that have an impact for today, [but] my suspicion is the ROI on that over a decade is tremendous.

But you have to be willing to do something different. That’s where banks struggle, understandably; we’re taught to mitigate risk and to think about risk in everything. That can stand in the way of trying things that aren’t all that risky … it’s not that risky to add another digital bell and whistle that our core provides. It may be new for the bank, but it’s not really risky or innovative. We actually have to challenge ourselves to be bold and do something differently.

Customer Loyalty and the Competition for Stable Funding

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It’s more important than ever for banks to compete on value and increase client loyalty.

Banks are increasing loan loss reserves to counteract eroding credit quality at the same time they are also contending with competitors’ high-yield savings accounts, which pay more than 0.60% APY in some cases. August’s consumer savings rate was 14%, albeit down from a high of nearly 34% in April.

It’s easy to lose sight of the importance of competing on value in this environment, even as cost-effective ways to retain funding are more necessary than ever.

When I managed cash and investment products for banks and brokerage firms, I was regularly asked to increase the interest rate we offered our clients — often because a large client was threatening to leave the firm. My response then is still relevant today: A client relationship is more than an interest rate. In fact, multiple research studies I’ve sponsored over my career showed that when it comes to their cash deposits, the majority of clients rank safety, in the form of deposit insurance protection, first; access to their cash when they need it second; and interest rate third.

It’s a given that the majority of banks are members of the Federal Deposit Insurance Corp. and have debit cards linked to savings accounts, making clients’ funds accessible. According to the FDIC, the current average national savings rate at the end of October was 0.05% APY.

I ask potential bank partners the following key questions to understand what their strategy is to retain the excess deposits as long as possible on their balance sheet.

  • Does your bank create value with relationship pricing?
  • Does your institution have an easy-to-navigate website and app?
  • Can clients easily open an account online?
  • Does your bank offer a broad range of flexible products that meet clients’ cash needs?
  • When was the last time your institution launched an innovative savings product?

We’ve learned a lot about building more value for customers from successful consumer technology over the last few decades. Decisive points include that product attributes should be intuitive for use by front-line sales, be easily incorporated into a bank’s online experience, and allow clients to co-create a banking experience that meets their individual needs.

What would tech-inspired, easy-to-use, personalized products look like in retail banking?

Example 1:
A savings ladder strategy can meet clients’ needs for safety and access to their cash. This approach gains crucial additional value, however, when a bank deploys technology linking all the steps in the ladder into one account. Clients want to see what they’re getting in advance too: to test different inputs and compare potential strategies easily prior to  purchasing. Implementing new, individualized products should be as easy as clicking on the Amazon.com “Buy” button.

Example 2
In the face of economic uncertainty and job losses, many clients may look for flexibility. Some consumers will want to readily access cash for their already-known needs — for instance, parents with college-age children, small businesses, or homeowners with predictable renovation schedules. Advanced software lets banks meet these needs by creating customizable, fixed-term deposits with optimized rates that allow for flexible withdrawals.

Banks can consider adding value to their product offering beyond rate with time-deposit accounts that are easy for clients to implement and designed to meet their specific cash needs and terms. A product with such attributes both meets clients’ individualized needs and creates value in a competitive field.

Example 3
If a client prefers safety with some exposure to the market upside, a market-linked time deposit account also helps banks offer more value without increasing rate. An index or a basket of exchange traded funds can be constructed to align with your client’s values, which is especially attractive in today’s market. Consider the appeal of a time deposit account linked to a basket of green industry stocks, innovative technology companies, or any number of options for a segment of your clients. Offering products that align with your client’s broader worldview allows you to build a more holistic, longer-lasting relationship with them.

The ability to create customer value beyond rate will ultimately determine the long-term loyalty of banking clients. Fortunately, we can look to technology for successful models that show how to add value through simple, intuitive, and individual products. At the same time, tech already has many solutions, with software and IT services that banks can access to meet their clients’ personal needs, even at this challenging moment. Innovation has never been more relevant than now — as banks need to secure their communities, their client relationships, and their funding in a cost-effective manner.

The Promise, and Peril, of Risk Technology

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The pandemic has underlined how essential risk technology is for proactive and responsive financial institutions.

Prior to the coronavirus outbreak, bank risk managers were already incorporating such technology to manage, sift and monitor various inputs and information. The pandemic has complicated those efforts to get a handle on emerging and persistent risks — even as it becomes increasingly critical to incorporate into day-to-day decision-making.

“Data, and getting insights from it, has always been central to how risk managers have worked. That hasn’t changed,” says Sandeep Mangaraj, an industry executive at Microsoft who focuses on digital banking transformations.

Prior to the pandemic, concerns about operational risk had increased “somewhat” or “significantly” among 51% of CEOs, chief risk officers and directors responding to Bank Director’s 2020 Risk Survey, which was completed just before the pandemic. More than half also revealed heightened concerns around cybersecurity, credit and interest rate risk, and strategic risk.

That survey also found respondents indicating there was room for technology to improve their compliance with Bank Secrecy Act and anti-money laundering rules (76%), know your customer (50%) requirements, and vendor management requirements.

One way executives and risk managers can keep up is by incorporating risk technology to help sift through reams of data to derive actionable insights. These technologies can create a unified view of risk across exposure types and aggregation levels — product, business line, region — so executives can see how risk manifests within the bank. Some of these solutions can also capture and provide real-time information, supplementing slower traditional sources or replacing end-of-day reports.

But the pandemic led more than half of respondents to Bank Director’s 2020 Technology Survey to alter or adjust their technology roadmaps — including 82% of respondents at institutions with more than $10 billion in assets. Two-thirds said they would upgrade existing technology; just 16% planned to add technology to improve regulatory compliance.

Artificial intelligence holds a lot of promise in helping banks more efficiently and effectively comply with regulations and manage risk. Many banks are still early in their risk technology journeys, and are working to identify areas or situations that can be serviced or assisted by risk technologies. Forty-six percent of respondents to Bank Director’s Technology Survey say they are not utilizing AI yet.

Those that have are applying it to situations like fraud monitoring, which generates large amounts of data that the bank can correlate and act on, Mangaraj says. Others have applied it to process intelligence and process improvement, or used it to enhance the control environment. Key to the success of any AI or risk-technology endeavor is finding the right, measurable application where a bank can capture value for heightened risk or capabilities.

“We have a client who uses AI to monitor trader conversations that can proactively flag any compliance issues that may be coming up,” he says. “There are lots and lots of ways in which you can start using it. Key is identify cases, make sure you have clear measurement of value, monitor it and celebrate it. Success breeds success.”

The addition and incorporation of innovative risk technologies coincides with many banks’ digital transformations. While these changes can often complement each other, they can also make it difficult for a bank to manage and measure its risk, or could even introduce risk.

A strong management team, effective controls and active monitoring of the results are essential keys to a bank’s success with these technology endeavors, says James Watkins, senior managing director at the Isaac-Milstein Group. Watkins served at the FDIC for nearly 40 years as the senior deputy director of supervisory examinations, overseeing the agency’s risk management examination program.

“It’s time for a fresh look of the safeguards and controls that banks have in place — the internal controls and the reliability of the bank system’s and monitoring apparatuses. All of those are extremely important,” he says.

Bank executives and boards of directors must have the processes and procedures in place to ensure they’re using this technology and contextualizing its outcomes in a prudent manner.

“I think the importance of general contingency planning, crisis management strategies, thinking strategically — these are all areas that boards of directors and senior management really need to be attuned to and be prepared for,” Watkins says.