As banks look to fuel their loan growth in this highly challenging market, many are trying to diversify away from a heavy commercial real estate portfolio by looking to other profitable business lines. However, growing the loan portfolio has proven difficult and this session, filmed during Bank Director’s 2014 Growth Conference, shows approaches banks are taking.
Video Length: 45 minutes
About the Speakers
Douglas H. Bowers, President & CEO, Square 1 Bank Doug Bowers is president and CEO of Square 1 Financial and Square 1 Bank. He has over 30 years of banking experience from Bank of America and its predecessors, where he held a wide range of leadership positions, including head of commercial banking, head of foreign exchange, head of large corporate banking, president of EMEA (Europe, Middle East and Africa) and president of Bank of America’s leasing business.
Wayne Gore, Senior Vice President, BancAlliance Wayne Gore is a senior vice president of Alliance Partners and has been with the group since its formation. Prior to joining Alliance Partners, Mr. Gore held leadership roles in the financial institutions group with McKinsey & Co. and served as managing director at the corporate executive board. Previously, Mr. Gore was an investment banker with Merrill Lynch and Goldman Sachs as a member of the mergers & acquisitions teams.
Jim Mitchell, President & CEO, Puget Sound Bank Jim Mitchell is president & CEO for Puget Sound Bank. After spending over 30 years in executive banking roles in the Seattle area, he assembled the team that started Puget Sound Bank. Past local positions include senior vice president and manager of the Seattle corporate banking office of Sterling Savings Bank and senior vice president of U.S. Bank in Seattle.
George Teplica, Senior Vice President and Director of Commercial Banking, The Bryn Mawr Trust Company George Teplica is the senior vice president and director of commercial banking at The Bryn Mawr Trust Company. He leads Bryn Mawr Trust’s Commercial Banking Group, which delivers credit and other financial services to closely-held businesses, professional firms and not-for-profit organizations in metropolitan Philadelphia.
Banks increasingly face competition from outside the banking industry.
Facebook is already a licensed money transmitter, enabling the social media giant to process payments to application developers for virtual products. The retail juggernaut Wal-Mart Stores Inc. launched Bluebird in partnership with American Express Co. late in 2012 so users can direct deposit their paychecks, make bill payments, withdraw cash from ATMs and write checks. Customers also have access to mobile banking, which includes features like remote deposit capture and person-to-person (P2P) payments. As of August 2013, 1 million customers used Bluebird, according to Walmart Director of Communications Sarah McKinney. Wal-Mart’s Sam’s Clubs also offer small business loans through a non-bank Small Business Administration (SBA) lender. PayPal, which is owned by eBay, Inc., also has gotten into the business of P2P payments.
An audience survey of 120 bank directors and senior executives at Bank Director’s Growth Conference on May 1 found that many felt that their institutions are at least on par with their peers in the industry when it comes to innovation through technology, and just 17 percent said that their bank lags behind. However, the vast majority, at 91 percent, revealed concerns about non-banks entering financial services.
Community bankers aren’t alone in their concerns about competition from unregulated entities. Just days after the audience survey May 1, Jamie Dimon, CEO of JPMorgan Chase & Co., told the audience at the Euromoney Saudi Arabia conference in Riyadh that he sees Google and Facebook specifically as potential competition for the banking giant. Both offer services, such as P2P, that could chip away at income sources for banks. But the regulators could play a role in dampening these innovators’ ability to compete. “There’s no way that Google wants to be a regulated bank,” he said.
Perhaps Google and Facebook won’t pursue a future as regulated banks, but will partner with banks instead. CaixaBank, based in Spain, announced a partnership with Facebook on May 5 that will allow the bank’s customers to view account balances and transfers through their own Facebook profile or the bank’s Facebook page. Users can also make small donations to charities of up to 15 euros (about $20) to charities affiliated with the bank. CaixaBank plans to offer P2P payments through Facebook in the near future.
Half of the attendees surveyed at the Growth Conference said they would be open to a partnership with a financial technology firm. Wilmington, Delaware-based The Bancorp Inc., a financial services company with $4.7 billion in assets, offers private label banking to partners who sell services under the partner’s brand, including PayPal and Simple, which was recently acquired by Banco Bilbao Vizcaya Argentaria (BBVA).
Would your bank consider partnering with or acquiring a fintech firm?
Bill Roop, CEO and president of $1.1-billion asset Alpine Bank & Trust, headquartered in Rockford, Illinois, thinks the banking industry could see an increase in these types of partnerships. “You’re going to see a growing awareness of the different ways that you can touch a customer, and I think the industry has to be very open to partnering and working together to share the wallet…while also maximizing the benefit to the customer,” he says.
Regulations are often cited as constraints on a bank’s ability to innovate, but more attendees at the Growth Conference cited technology investment, at 42 percent, or the vendor relationship, at 31 percent, as greater barriers to innovation.
A little more than one-quarter of the audience blamed regulations for the lack of innovation in the industry. Regulation is just part of a banker’s life, says Roop. “Hire the appropriate individuals as you can, be sure you’re compliant with what the laws are, but our job is to serve the customers.”
The survey also found that one-third of attendees sit on bank boards with at least one member who has technology expertise, and almost half said that their board doesn’t have a technology expert but needs one.
As many community banks rely on core processors for customer-facing technology solutions such as mobile and online banking, the vendor can make or break an institution’s ability to innovate, and determining and investing in the right technology while still running an efficient institution can be a challenging balancing act for community banks.
“I’ve tried to weigh all these products and services out there. Yeah, I’d love to have all [of] these things but there’s a cost to that, and our cost is spread among $140 million in assets and two branches,” says Jim Marshall, CEO and president of blueharbor bank, which is based in Mooresville, North Carolina, and uses all lowercase letters in its name to convey a more contemporary approach to banking. “That’s one of the challenges of a small bank.”
Heartland Bank has just 11 offices in central Ohio. The holding company, Heartland BancCorp near Columbus, Ohio, has $600 million in assets. The company is not traded on any public exchange and traces its roots back more than 100 years in agricultural lending.
But that doesn’t mean Heartland is behind the curve when it comes to technology. In fact, Heartland developed its own mobile banking applications, has person-to-person bill pay, mobile bill pay, surcharge-free ATMs across the nation searchable on your smartphone, and a host of other digital products designed to serve customers’ needs.
“The technology is here and it’s affordable,’’ said Heartland Chairman, President and CEO G. Scott McComb at Bank Director’s Growth Conference in New Orleans recently. More than 120 bank directors and officers attended the two day conference May 1-2, which focused on growing the bank organically, mostly through technology, data-based marketing and sales, and niche or specialized lending.
Bank of America and JPMorgan Chase & Co. may have more resources to develop technological solutions and service them, but community banks increasingly have options as well. Technology providers such as Deluxe Corp., CSI, CDW, StrategyCorps and MoneyDesktop described how banks well below the $50-billion asset range can still gain access to sophisticated technology. For instance, community banks can now analyze credit agency data to find out which of their customers are shopping for an auto loan, and then send customized marketing materials to those customers.
Banks can help customers budget and manage their entire financial lives with online banking tools, which also give banks a trove of potential marketing data on them. Banks can generate fee income by sending coupons to their customers based on the geo-location given by their smartphones. Analytical tools also allow banks to track what customers are saying about them on social media.
First Financial Bankshares, a $5.8-billion asset bank holding company in Abilene, Texas, allows customers to take pictures of their bills with their smartphones, send the pictures to First Financial Bank, and the bank will pay their bills. Similar products are being marketed to banks much smaller than First Financial.
Jeff Casey, a senior vice president at the bank, said mobile customers use three times the number of products and services of other bank customers and are 2.5 times more likely to stay with the bank than other customers. He advised banks to think five or 10 years into the future and plan for the fact that technology will be radically different by then. A full 25 percent of First Financial’s mobile banking customers currently don’t use a laptop or desktop to do their banking. “You have to get rid of this idea that you’re always going to have online [desktop or laptop] banking,’’ he said.
This fact is creating challenges for banks trying to decide where to invest. Deluxe Corp.’ Vice President Scott Wallace cautioned banks not to try to be all things to all people. The type of customers you want and the delivery mechanisms they need will determine the technology and tools to buy.
McComb, Heartland Bank’s CEO, said that community banks actually have an advantage when it comes to data and technology. Community banks are nimble because of their size and can make decisions quickly based on their customers’ needs. They know their customers better than bigger banks do. They are the American colonists fighting the English in a war against the big banks. They can be first to market, not laggards when it comes to meeting their customers’ needs. And that could mean the difference between being relevant or not at all.
What does a pop star hologram drawing thousands to her concerts have to do with banking? Well, I’ll get to that in a minute.
Hatsune Miku, a non-human creation of a Japanese media company, is even better than a real singer, if you believe some of her young fans. She’s “post-human being,” according to the media company who created her.
As banking guru Brett King described it at Bank Director’s inaugural The Growth Conference in New Orleans last week, Hatsune Miku is a sign that the banking industry’s assumptions about the value of face-to-face contact may not hold true for the next generation.
Do you really think a generation that will pay to see a hologram perform will go to a bank branch to get financial advice? That was a question King posed to the audience of nearly 200 bank directors, bank officers and industry executives who attended the conference at The Ritz Carlton in the French Quarter.
Part of the theme emerging from The Growth Conference was the need for the industry to transform itself in the coming years with technological and generational changes. However, bankers, especially commercial bankers, tend to be inherently conservative. Jumping into the latest thing and throwing money at unproven ideas is not behavior typical of most bankers. Branches were supposed to have disappeared at least 20 years ago, but they haven’t, because most bankers prefer human tellers to distribution channels that rely solely on technology. In my conversations with bank directors and bank officers at the conference, I was struck by the healthy skepticism toward technological change. One bank CEO asked me how often people are really going to want to remotely deposit checks through their smartphones. It’s a good question. As with all investments, management and boards are going to have to decide what the smartest and most appropriate technological investments are for their particular banks. Will it be remote deposit capture for commercial accounts? Maybe. Mobile check deposits for consumers? Maybe not. It depends on the bank.
“Predictions about the pace and magnitude of change are inherently very difficult, but the case for its inevitability was very well made,’’ said Michael Kubacki, the chairman and chief executive officer of Lake City Bank in Warsaw, Indiana, who attended the conference. “We need to think more about what might work for us and our clients in the future, and less about what worked in the past.”
Tied with that theme at the conference was the consistent message that community banks need to have a niche or multiple niches to help them compete with bigger banks. Bigger banks have a lower cost of funds, branches on every other corner, and an ability to invest in lots of technology.
The special niches that community banks develop will also determine the technology they need, whether it is St. Louis-based Enterprise Financial Services’ private banking business and life insurance policies for family offices, or Bethesda, Maryland-based Congressional Bank’s specialization in medical offices.
The slow growth economy and low interest rate environment have not been kind to bank income statements. Loan growth is minimal. Small businesses are still reluctant to borrow. Consumers are still deleveraging. Banks will need whatever they can do to improve their profitability in the years ahead.
“You must do an authentic self-assessment,” said Jay Sidhu, the chairman and chief executive officer of Customers Bancorp Inc., in Wyomissing, Pennsylvania, who was the keynote speaker at the conference. “You must think differently and take advantage of technology and your unique market position. You have something that big banks don’t have and you can take advantage of that. If you don’t, you’re going to be eaten up.”