Competitive intelligence for bankers
OCTOBER/NOVEMBER 2017 bankingexchange.com
must do to “get”
technology Process maturity, organization structure, and skill sets rank at least as important as tech itself
FINTECH WILL CHANGE BANK M&A KEEP DIGITAL MARKETING SAFE
/Contents October/November 2017
14 3 things banks must do to â€œgetâ€? technology Bad tech can sink a bank like bad loans. It just takes longer. How to stay afloat. By Quintin Sykes, Cornerstone Advisors
20 Keep digital marketing safe Update your bank without betting the bank. By Steve Cocheo, executive editor
/ contents / 4 On the Web
October/November 2017, Vol. 3, No. 5 Editorial and Executive Offices: 55 Broad St., New York, N.Y. 10004 Phone: (212) 620-7210 Fax: (212) 633-1165 Email: email@example.com Web: www.bankingexchange.com Twitter: @BankingExchange LinkedIn: www.linkedin.com/company/ banking-exchange
Perspectives from the millennial generation • Real-time payments in a year • Challenger banks build on niches • “Weekend Think.”
6 Like it or Not
Tech is two-edged—don’t let it cut you
8 Threads Why not start a mutual fund? • Digital Achilles heel • What credit signs say • Credit cards edge overdraft fees
28 12 Seven Questions 20 Compliance Watch
Executive Editor & Digital Content Manager Steve Cocheo firstname.lastname@example.org
Banks must be more like a “Day 1” company, notes analyst Alenka Grealish
28 Idea Exchange One bank’s answer to Kabbage
30 Industry Resources Free white papers, eBooks, webinars
32 Counterintuitive Why everyone is “front line” now
Banking Exchange (Print ISSN 2377-2913, Digital ISSN 2377-2921) is published February/March, April/May, June/July, August/September, October/November, December/January by Simmons-Boardman Publishing Corp., 55 Broad Street, 26th Floor, New York, NY 10004 Pricing Qualified individuals in the banking industry may request a free subscription. Non-qualified subscription printed or digital version: 1 year, financial institutions $67; other business $93; foreign $508. 2 year, financial institutions $114; other business $155; foreign $950. Single copies are $35 each. Subscriptions must be paid for in U.S. funds. Copyright © Simmons-Boardman Publishing Corporation 2017. All rights reserved. Content may not be reproduced without permission. Reprints For reprint information Contact: Mary Conyers, (212) 620-7250, email@example.com For Subscriptions & Address Changes Please call: (800) 895-4389, (402) 346-4740, or Fax: (402) 346-3670, e-mail: firstname.lastname@example.org Write to: Banking Exchange, PO Box 3135, Northbrook IL 60062-2620 Postmaster Send address changes to Banking Exchange, PO Box 3135, Northbrook IL 60062-2620 2
Group Publisher Jonathan Chalon email@example.com Editor & Publisher William Streeter firstname.lastname@example.org
22 Bank Tech
9 ways to address rising credit risk, before banks do it all again
Chairman & President Arthur J. McGinnis, Jr.
Fintech will change bank M&A says top KBW analyst Fred Cannon
Digital marketing carries fresh risks, plus all the exposures of traditional ads
24 Risk Adjusted
Subscriptions: (800) 895-4389, (402) 346-4740 Fax: (402) 346-3670 Email: email@example.com
Art Director Nicole Cassano Graphic Designer Aleza Leinwand Editorial & Sales Associate Andrea Rovira firstname.lastname@example.org Contributing Editors John Byrne, Nancy Castiglione, Dan Fisher, Jeff Gerrish, John Ginovsky, Lucy Griffin, Mike Moebs, Ed O’Leary, Melanie Scarborough, Lisa Joyce Director, National Sales Robert Vitriol email@example.com Production Director Mary Conyers firstname.lastname@example.org Circulation Director Maureen Cooney email@example.com Marketing Manager Erica Hayes firstname.lastname@example.org Editorial Advisory Board Jo Ann Barefoot, Jo Ann Barefoot Group, LLC Ken Burgess, FirstCapital Bank of Texas, N.A. Steve Ellis, Wells Fargo & Co, Mark Erhardt, Fifth Third Bank, Joshua Guttau, TS Bank Brian Higgins, First Financial Bank Trey Maust, Lewis & Clark Bank Earl McVicker, Central Bank and Trust Co. Chris Nichols, CenterState Bank of Florida, N.A. Dan Soto, Ally Bank Dominic Venturo, U.S. Bank McCall Wilson, Bank of Fayette County
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/ ON THE WEB / Now Showing at
Perspectives from the millennial generation
Real-time payments likely to fly in a year
Challenger banks build on niches
Have you caught “Next Voices” yet? Millennial authors blog on banking issues from their perspective. Topics range from the role of tech in financial services to millennials’ view on bank community service to the “gig economy.” Read more at http://tinyurl.com/nextvoices2017
Early indications show that real-time payments will soon become a musthave capability for banks, in terms of satisfying customer demand and providing revenue. The big payoff will be on the business side. Read more at http://tinyurl.com/realtimepay
BankMobile targets students with mobile-only accounts—and a wrinkle. Amalgamated’s digital unit seeks customers who share its social outlook. And Monese helps immigrants establish financial credibility. Read more at http://tinyurl.com/challengerbanks
Ponder long-term issues with “Weekend Think” Fridays we publish an article with longerterm, big picture implications. We label it “Weekend Think,” to flag it as something bankers should be considering. Recent “thinks”: “Are you missing consumer credit opportunities?” and “Innovation’s great. But it’s got to be right.” Look for the Weekend Think at the top of our homepage Friday—Sunday, or see Twitter and LinkedIn updates.
Subscribe to our free weekly newsletters, Tech Exchange and Editors Exchange at bankingexchange.com/newsletters To suggest topics, new blog subjects, and other web ideas, contact Steve Cocheo, digital content manager, email@example.com, 212-620-7219
/ like it or not /
Don’t get cut by two-edged tech sword
e’re living in a time that can only be described as a cross between a science f iction saga and a horror movie. We’re not talking about global politics, but about the relentless advance of digital technology. The sci-f i compa r ison is obv ious enough—talking bots, machine learning, and so forth. The horror part is because the digital advances also create huge vulnerabilities, exploited daily. The issue you are now reading contains multiple articles that relate to the use of technology by banks, notably the cover story. Considering the two-edged nature of technology, you may wonder, “Why so much focus on technology? Is that all banking is about?” Fair questions. The answer to the second certainly is, “No.” The fundamentals of the business haven’t changed, and won’t so long as there is money and commerce. How the business is conducted, however, arguably is undergoing the most dramatic change ever. The industry has always incorporated technolog y, and sometimes led the way. But things do seem different now. The advances of digital technology in the past ten years have upended the status quo in countless ways. Barriers have fallen and things have been made possible that seemed inconceivable a short time ago. In times past, a bank could lag a bit in technology, perhaps waiting for a change of management to catch up. Not now. Hence the importance of technology, despite its risks. It’s true that the “Uberization” of banking has not yet occurred. The dreaded fintech onslaught that threatened to roll the industry has hit a few speed bumps, and now the talk is all about partnering. Nevertheless, the technology and approaches that are driving the fintech movement are having very real impact, not least on changed customer expectations—both consumer and commercial. No bank can afford to ignore the trend, but the challenge is three-fold: legacy systems, regulatory scrutiny, and a riskaverse culture—all interrelated.
Of the three, we would argue that only one is a negative—legacy systems. Even there, legitimate reasons exist why bank tech departments haven’t simply ported ever y thing over to the cloud (as one example). But banks are upgrading, and the shift is picking up speed. The cover story (p. 14) marks out a clear path for this progression in three areas: strategic data culture, integrating and managing technology partners, and improving processes, not just digitizing them. Regulatory scrutiny can be a colossal pain at times, but also is a plus in terms of keeping the industry squarely focused on safety and soundness. Regarding a risk-averse culture, that, too, has advantages. Frankly some institutions are not risk-averse enough in regard to the credit cycle. With technology, as several other articles in this issue discuss (Bank Tech, p. 22, and Counterintuitive, p. 32), there is a growing understanding of the need to allow a faster, more free-wheeling approach to development, while at the same time keeping the mission-critical functions locked down. In most circles there is recognition that banks can’t and shouldn’t simply mimic a fintech startup. Back to the horror mov ie. Does it sometimes seem that all we have accomplished in the digital age is to hand the keys to the kingdom to the crooks? By the time you read this, the Equifax and SEC debacles may have been replaced by other even worse breaches. We suspect that even the experts would privately ag ree we don’t k now what we have unleashed or where it will end. With digitalization have come countless benefits (many of which are very substantive, some just passing fads), but also detrimental ramifications, the most obvious being cyberfraud. It’s not that the banking industry has been asleep on this issue. Cyberfraud has been a priority for years. But as the industry properly focuses on the need to be more agile and innovative, now is not the time to become less risk-averse on cybersecurity. Stating the obvious, perhaps. But worth stating, nonetheless.
BILL STREETER, Editor & Publisher firstname.lastname@example.org
Does it sometimes seem that all we have accomplished in the digital age is to hand the keys to the kingdom to the crooks?
C T D t B H m a P D G t c E s
BANKINGEXCHANGE.COM: SMART NEWS FOR SMARTER BANKS
Can America grow new banks again? Cybersecurity is everybody’s iss The next thing: Agile banking? 5 AML technologies you must understa Due diligence—checking out a bank 4 internal frauds and how to spot them Quick lessons in loan swaps Making “Three Lines of Defense” w Blockchain: What you need to know NOLs in acquisitions … simplified! Hang on—Big Tech is remaking banking 4 techniques for better financ management. Have the right conversation with customers. Get real about strategic planning in 11 steps Fintech and banks shaking hands Panama Papers: Hot—but issues aren’t new Getting ready for more HM NEWS AND BEYOND Digital strategy: Does your bank have one? - Bank tries out Pokémon ANALYSIS. Go “Flying money” may land inINSIGHT. U.S. What’s new with SOLUTIONS. neobanks? Day in the life of Compliance 10 reasons fintech startups fail. When blockchain cryptocurrencies, and AML meet Brexit Blues: “We Don’t Need No Education” CFPB means it as you read it. How community banks can survive Banking on artificial intelligence How are marketplace lenders’
/ THREADS WHY NOT START A FUND?
Community bank rolls out advisory service and mutual fund for small investors By Kathie Beans, freelance writer
t’s not just for millionaires anymore. The Wealth Management Div ision of Bryn Mawr Trust, a $3.44 billiona ssets bank outside Philadelphia , formed a new subsidiary, BMT Investment Advisers, and launched a multi-cap mutual fund designed to serve massmarket customers. Now, individuals can buy shares of the new BMT Multi-Cap Fund with a minimum investment of $25,000. By contrast, customers of the bank’s Wealth Management Division need to invest a minimum of $2 million in separately managed accounts. Stephen M. Wellman, chief operating officer of t h e ba nk’s Wea lt h Management Division, defines massmarket c ustomers broadly—simply anyone not currently served by its Wealth
Management Division. “We have had clients looking for a lower entry point for assets under management,” Wellman explains. Bryn Mawr Trust wanted to be able to serve those customers, and it views the initiatives as “good for customer retention overall.” The formation of BMT Investment Advisers and the BMT Multi-Cap Fund fits within a long-standing focus on trust and investments at the 128-year-old institution located in Philadelphia’s tony Main Line. According to Wellman: “We wanted to streamline our investment division where account minimums are high.” He adds that the bank wanted to serve the needs of its smaller account customers who may want to, for instance, rollover a 401(k) or open an IRA with balances that do not meet the minimum. “When we are able to aggregate our client assets in a fund, it simplifies investment management, trade execution, trade settlement, and portfolio accounting,” Wellman points out. “That’s what makes it more scalable in managing small client accounts.” According to Wellman, other small banks could consider launching a mutual fund if their assets under management were of a sufficient scale to support the expense ratios associated with such a mutual fund. “Banks seeking a single investment vehicle, which would be available to a wide variety of client types,
MILLENNIALS FEAR STOCKS . . . OPPORTUNITY? Banks’ interest in offering investment products ebbs and flows. Research from LendEDU, an online marketplace for student loan refinancing, shows a majority of millennials are afraid of investing in the stock market. Yet LendEDU’s research indicates this is a mistake for these young people. Read the full report here: tinyurl.com/stockfear
58.6% of 502 millennials surveyed said they are afraid of the stock market
would benefit from launching a single mutual fund,” Wellman says. The Wealth Management Division was able to introduce these initiatives without adding additional staff. Instead, Wellman says that Br y n Maw r Trust employed a strategic sourcing model, using Philadelphia law firm Stradley Ronon, to help the bank fulfill specific SEC requirements, which can be burdensome for small institutions. The BMT Multi-Cap Fund is long-only and seeks to provide capital appreciation and a moderate level of current income by investing in equity securities of large-, mid-, and small-cap publicly traded companies. The fund invests in common stocks, preferred stocks, convertible securities, and securities of other investment companies. Under normal market conditions, the fund will invest at least 80% of its net assets in equity securities of publicly traded companies.
Expand client base Wellman says the initiatives, launched in August 2017, broaden the bank’s client base. The BMT Multi-Cap Fund is available outside the bank’s wealth division and can be sold by financial intermediaries, or brokers, who select from many funds for 401(k) platforms. Nonbank customers also can buy the fund directly from Bryn Mawr Trust. Fund sales are available to all U.S. residents.
52.3% pointed to the 2008 financial crisis
60.4%* said they are worried about losing their money
*of those who said they are afraid of the stock market
After one month of operation, the BMT Multi-Cap Fund has $115 million in assets. As of June 30, 2017, Bryn Mawr Trust’s Wealth Management Division had $12.05 billion in wealth assets under management, administration, supervision, and brokerage. BMT Investment Advisers does not currently have plans to offer other investments besides the BMT Multi-Cap Fund. Wellman points out, however, that “the fund was formed as a series trust and that means it can add funds in time.” An expanded distribution will take place over the next year or two. Quasar Distributors, LLC, a wholly owned subsidiary of U.S. Bancorp, is serving as the distributor for the BMT Multi-Cap Fund. Wellman also notes that the bank reserves the right to raise that minimum investment on all its accounts, including the BMT Multi-Cap Fund. He also says customers could ask for a waiver of those requirements. For instance, Wellman says a bank customer may want to open an account for a grandchild with an investment that is smaller than the minimum requirement. That grandparent could apply for a waiver. Wellman also points out that the net expense ratio for the BMT Multi-Cap Fund is capped at 100 basis points, and no existing wealth division client is disadvantaged from a fee perspective by the initiatives.
WHAT’S AT STAKE
$3.46 million Amount LendEDU found a 27-year-old would forfeit over 38 years* if she used savings accounts for retirement versus investing in equities *based on nominal three-month T bill returns and geometric mean of S&P 500 returns
/ THREADS /
DIGITAL ACHILLES HEEL
If you can’t offer current tech, you’re missing out By Steve Cocheo, executive editor
mall business owner Craig Shealy likes doing business loc a lly, including his banking. But for community banks to attract or hold onto the patronage of firms like his, he says, they have no choice but to provide up-to-date tools, including digital. Speaking on a panel at Finovate Fall, and in a subsequent interview, Shealy explained that when his estate sale business, Legacy Navigator, launched, larger banks showed no interest in serving the young firm’s needs. Shealy decided to go with a community bank near the firm’s Virginia headquarters. “Their people made a lot of effort to provide service,” said Shealy, cofounder and CEO, “but their problem was that their systems were so bad.” An out-of-state project exposed the bank’s shortcoming, Shealy recounted. He knew he would be making many supply purchases while on the assignment and advised the bank of the trip so he wouldn’t have any hassles using his debit card. The bank acknowledged his notification, and he thought he was set. In spite of the advanced word, antif raud me a su re s wou ld pre vent t he transactions from going through. His bank wound up having to process much
of his out-of-state activity manually. Be yond t h i s emba r r a s sment a nd inconvenience, Shealy said the local bank’s payment services don’t provide the kind of f lexibility and tracking that he would like to have from his bank. As a result, Shealy said the company frequently uses American Express business charge cards for purchasing. It’s not a matter of doing business on credit—the firm pays off Amex from its bank accounts— it’s just that the data services Shealy wants
aren’t available from the bank. “That sounds like a lost opportunity there,” said Jim Bruene, panel moderator, and head of BUX Advisors, which works with banks to improve digital offerings. Service is important, and Shealy said he would still choose his bank on that basis. But technology has become critical to getting his job done. Adapted from a longer article on BankingExchange.com. To read more, go to tinyurl.com/digitalheel
WHAT THE CREDIT SIGNS SAY
ere are some signs to ponder: • The Dow Jones Industrial Average is hitting new highs amid growing concerns about a significant price correction. • Bond yields across the spectrum of maturities and product are showing contradictory signs, seemingly alternating between an approaching season of rising rates (and falling prices) and a continuation of the historically low level of yields. • The Federal Reserve Open Market Committee is frankly perplexed. The group has telegraphed its uncertain outlook in the minutes of its meetings for nearly the past year.
Does this sound like a business-asusual outlook for the foreseeable future? Here are some concerns expressed by OCC and other observers about trends and practices in the extension of credit: • Waiving guaranties. • A failure to price for risk. • Disconnect on loan structures. Principa l matur ities that have no close relationship to the underlying fundamentals of the deal. • Frozen outlook on deposits. A heavy empha sis on deposit compensation while everyone understands that when rates eventually rise, deposits will flee to higher yielding opportunities or reprice.
• Higher leverage. Banks are willing to accept significantly higher loan-todeposit ratios—often approaching 100% and beyond. • Excessive analytical emphasis on the recent past. The last few years have been generally benign in terms of credit risk in the marketplace. So it’s natural to want to emphasize favorable economic conditions. But we’re lending into the future, not into the past. Our industry has become conditioned to look for risk. But I fear that too many of us are looking under the wrong rocks. Adapted from the Talking Credit blog at tinyurl.com/creditsigns
Are bankers looking for risk in the right places? By Ed O’Leary, contributing editor
CREDIT CARDS EDGE OVERDRAFT FEES
Rewards make plastic more profitable than overdrafts By Melanie Scarborough, contributing editor
ast year, for the first time, credit card interchange fees surpassed overdraft revenue as the top service-charge moneymaker, bringing in $33.8 billion compared to the $33.3 billion collected in overdraft charges. “This is a major shift in how depositories have collected fees for decades,” says Michael Moebs, economist and CEO of Moebs Services, Lake Forest, Ill. “In 2006, a year of consumer economic prosperity, overdraft revenue was 53.2% of all service-charge revenue. Credit card revenue comprised only about half of the total overdraft revenue.” The shift is a predictable result of the Dodd-Frank Act’s Durbin Amendment, which lowered for many banks the amount they could charge in debit card interchange fees. Under the Durbin rule, the interchange price of a debit card transaction remains about 43 cents for depositories with assets of less than $10 billion, but bigger banks may charge only approximately 25 cents. To entice customers to use their credit cards more often and for more big-ticket purchases, big banks offer reward programs that provide prizes or cash back. Given lower account and transaction volumes, such incentive plans are expensive for banks with less than $10 billion in assets, according to Moebs. “If the smaller institutions are going to have a credit card reward program, it should be an internal financial services reward: If you accumulate enough points, you can have a reduced overdraft fee or a reduced fee on a loan,” he says. “That makes sense because it’s something they can control. The customer can’t get cash from them.” Tr y ing t o duplic at e t he big ba n k reward programs by giving away prizes is inadvisable for smaller banks because “they don’t have the volume, and without volume, they can’t make money,” elaborates Moebs. Where smaller banks can make money
is by taking advantage of their edge from the Durbin Amendment and increasing their volume of debit card transactions. “The debit card is where the reward program should go for the small guys because there’s a price ceiling on the big guys,” points out Moebs. “That’s an area where reward programs could really work for smaller institutions because they can get a higher [interchange] price, which can cover their higher costs.” (Nonetheless, Moebs recommends that smaller banks again stick with an internal reward program.) Another principal reason credit card revenue is outpacing overdraft profits is because the median charge for an overdraft has increased since 2010—driving consumers to payday lenders. “In 2000, payday lenders were a little over 5% of the overdraft market. By 2017, more than half of people who overdraw go to payday lenders,” says Moebs. Banks are beginning to realize they can keep that business in-house by lowering their overdraft charges, according to Moebs. For instance, in the first quarter of this year, banks in the Washington, D.C., metro area dropped their overdraft fees by as much as $3. Adapted from an longer article on BankingExchange.com. For more, visit tinyurl.com/CardsvsOD
Cutting through millennial hype
o why should you care about millennials? Their sheer size for one thing, writes Brian Higgins in a review of Jeremy Balkin’s Millennialization Of Everything: How To Win When Millennials Rule The World. In 2015, millennials became the largest generational cohort in the United States at 75.4 million, according to the U.S. Census Bureau. By 2025, they will comprise 75% of the global workforce and represent 40% of eligible U.S. voters. While the uniqueness of every generation has been oversold, says Higgins, first vice-president at Cincinnati-based First Financial Bank, differences do exist and derive from shared generation-defining experiences. For millennials, there are three such experiences. These are: • Digital proficiency: “Millennials are the first generation in history to be raised in a digital, technology, and media-saturated world,” writes Balkin. • Great Recession: Witnessing its impact on their parents has seemingly created an aversion to credit risk and established a trust deficit. • 9/11: The terrorist attack (and others that followed) contributed to the sense of mistrust in institutions. Even Balkin, a millennial who is head of innovation for HSBC USA, concedes that not every millennial is the same; they fall into three groups: • Younger millennials (18-22): Full digital natives who are too young to even remember 9/11 or the financial crisis. They are heavily dependent upon parents for advice and support. • Middle millennials (23-29): This subsegment felt the full brunt of the Great Recession. They are most likely to suffer from high student debt. • Older millennials (30+): This group is not as fully digital native as younger and middle millennials and is more likely to be married and employed. Higgins encourages bankers to read Balkin’s book and approach it with a questioning mind. Read the full review at tinyurl. com/HigginsReview
/ Seven Questions /
FINTECH WILL CHANGE BANK M&A Top KBW analyst Fred Cannon sees fintech and banking coming together into single industry By Steve Cocheo, executive editor
few years ago, Sanjay Sakhrani, managing director and consumer finance analyst at Keefe, Bruyette & Woods, walked into his boss’ office to propose a significant change in KBW’s coverage. Sakhrani told Fred Cannon, executive vice-president, that he felt that the continuing evolution in financial services dictated some changes in the firm’s coverage universe. Sakhrani already covered Mastercard and Visa. He believed it was time to begin adding other techoriented companies that were entering financial services. C a n non, t he f i r m’s g loba l d i re c tor of research and chief equit y strategist, agreed. Today, KBW, traditionally focused on bank equities, also covers firms like PayPal, Square, and Green Dot. And a bit over a year ago, K BW, in cooperation w ith Na sda q, launched the KBW Nasdaq Financial Technology Index, an eclectic mixture of 50 publicly traded fintech firms across multiple industry categories. Fast-forward to the present and Cannon himself, in a mid-August report titled, Is America Running Out of Banks?,
observed that the largest megabanks have been hitting federal deposit concentration limits, and that the drought of new banks would favor mid-sized banks, which would continue to acquire small banks. Then Cannon proposed a major change in outlook: “We expect that bank M&A will shift over time to bank/fintech M&A with the largest banks looking to acquire successful fintech firms. This will be pushed by the limitations on bank acquisitions by the largest banks, and by the need of fintech firms to partner with banks to expand their operations. While regulators are looking at a new fintech bank charter, we expect that to be limited in scope.” In addition, Cannon believes that the historical dynamic to start new banks is shifting to the fintech start-ups. In other words, f intech start-ups are the new de novos. We explored this further in an interview with Cannon. The following recap has been edited for length and clarity. Q1. What started you thinking about a bank/fintech M&A trend? I’ve been puzzled by the lack of new startups since the financial crisis. Most of the discussion around this has concerned regulatory constraints. But as I dug into this, I began to think that maybe the historical entrepreneurship in finance— traditionally folks starting new banks to get their economy going—has shifted from the banking sector to Silicon Valley. At KBW, we haven’t viewed fintech in the way Uber has impacted the taxi business [disrupt and replace]. We view fintech more like a hardware industry— a utility. Fintech start-ups either create technology that’s eventually adopted by banks, or the companies sell to banks. We’re already seeing some of that. Q2. Do people just not want to invest in new bank charters anymore? In the wake of the financial crisis, a lot of capital—such as from private equity
firms—that might have gone into new charters went into recapitalizing existing banks. Postcrisis, there certainly was a regulatory element, insofar as increased regulation and FDIC’s reluctance to insure new banks. But while people talk about that, I haven’t heard about people applying for charters and getting turned down by FDIC. Something else at play here is that we are still in a banking world that is deposit rich and asset poor. Mid-sized banks are looking for creative ways to build loan books. They already have an advantage in lending to small- and mid-sized companies and in doing commercial real estate loans. But they’re starting to see those sources of assets ebb. And they, too, will be looking toward asset generation from electronic delivery through fintech-type operations. Not everyone agrees, but my view is that loan growth is more demand-driven than supply-driven. A lender decides on the credit quality they will accept. Demand is driven by economic issues. And the bank will lend to people who fit its bucket. The only real way to expand the pie from the supply side is to adjust your lending criteria. Student lending is a good example. That business has good economies of scale, and smaller banks have not been involved. But I can see partnerships between SoFi and regional banks adding those types of loans to the banks’ loan mix. Fintech partnering reduces the need for economy of scale in most lending businesses, and over time, that should help small- and mid-sized banks to the extent they can create partnerships. How much will be driven by acquisitions versus partnerships? I don’t know yet. But for small and mid-sized banks, I would guess it will be partnerships. Q3. Traditional reforestation was driven by local investors looking for a new bank and investors looking to build a bank for eventual sale. Is the patience of capital changing? Most of f intech is funded by venture
capital. The VCs will ultimately decide the exit strategy for fintech companies, rather than the entrepreneurs who may be in love with their technology. So I view the VCs as similar to the John Eggemeyers, Gerry Fords, and Patriot Capitals of the world [all longtime bank investors]. They have a certain return and time frame in mind. I think that’s dominant in fintech. Three or four years ago, we saw IPOs for Lending Club, OnDeck, and others, and fintech was all the rage. Valuations went through the roof. I used to say that a fintech is a financial company that wants a technology multiple. But some high-profile fintech names haven’t been able to retain those kinds of valuations in the marketplace. So partnerships or sales will be more in the minds of the entrepreneurs who started or funded fintech firms. It’s hard to say for sure, but I think we will see an evolution. I don’t know what we will call them, but banks and fintechs will merge into one industry. They won’t be seen as two separate industries in the future. Q4. There is also the opposite trend— some of the fintechs, such as Varo, SoFi, and Square are seeking bank or industrial bank charters. Do you see that gaining momentum? Let’s consider this from the viewpoint of the “man or woman on the street.” In spite of all the hype, we haven’t seen the fintech firms shake up the banking industry as much as they’ve shaken up the way that banks deliver their products. Take SoFi. I don’t think we’ll see SoFi become the biggest bank in the country. I think it will continue to grow, but its growth will be absorbed into the banking system. A year or so ago, my son-in-law was ref inancing his student loans. Now, remember that part of the key to SoFi’s initial, extremely rapid growth was this: They cherry pick the government program borrowers. They will give strong borrowers a 4% loan to replace the
government’s 7% all day long. My son-in-law has a good credit score and a job, so he thought SoFi would be the place to refinance. But when he shopped around, he found SoFi’s rate wasn’t even competitive against Citizens Bank. So one of things we have yet to see is f intech create pricing dynamics that banks are unwilling to compete with. That’s very interesting, right? We haven’t seen the fintech industry price so that they grab all the market share. In other words, we haven’t seen an Amazon emerge.
I don’t know what we will call them, but banks and fintechs will merge into one industry. They won’t be seen as two separate industries in the future Q5. Where do you classify a company like Amazon? I don’t put Amazon in the fintech category. I view them as logistics. But that’s just me. There’s a big gray area out there. We have a hard time figuring out where providers who produce software, do logistics, or sales like Amazon end, and where banking and financial technology begin. Q6. Meanwhile, in the United Kingdom, dozens of new banks are somewhere in the start-up lanes—the “challenger banks,” as they are called. Why have things evolved so differently there? Consider two factors. First, the U.K. ha d n’t ha d a new cha r t er i n m a ny years. The U.K. hadn’t seen the banking
entrepreneurship that the U.S. long had. We’ve always had our start-up banks, our challenger banks, here. Until recently, the U.K. never allowed that entrepreneurship in banking. Consider also that when the U.K . opened things up, all kinds of entrepreneurship came in with the challenger banks. Take Metro Bank. The force behind that is Vernon Hill, who was the successful entrepreneur starting banks in New Jersey. [Hill’s Commerce Bank was acquired and then became part of TD Bank in 2008.] Q7. Where do these trends leave the traditional community bank? At the end of the day, banking is about providing credit to qualified borrowers. I don’t think technolog y has yet supplanted the value of relationships in certain types of lending. In the area of commercial real estate lending, for example, market knowledge continues to be critical. That says to me that there’s a role for a community bank whose people are trained in banking, who have deep roots in the community, and who can factor in that extra piece of information that doesn’t fall out of the numbers for making the lending decision. At the same time, small community banks will have to become very savvy technologists. When I talk to bankers from small and mid-sized banks, certainly among the $1 billion-$2.5 billion size group, even guys my age recognize that they need to be, or acquire, some savvy technologists to continue to be successful. A key piece of it is understanding the evolving payment system, and protecting the bank’s part in it. Another part is understanding the dynamics of lending today—how technolog y is transforming all the areas of credit. It’s an evolution. Remember, there are many small and mid-sized banks out there producing good returns on capital.
3 THINGS BANKS MUST DO to
hen people mull over “cutting the cable” and switching to streaming or slinging their home entertainment, they tend to fall into two camps: those who understand the new technologies (or trust their tech-savvy offspring) and those who haven’t a clue and just stick with what they have. In business, there is a similar technology “comfort” divide, and banks are no exception. There is one key difference between the consumer and business worlds, however. At home, it doesn’t matter too much, relatively speaking, if you just stick with cable. In business, increasingly, the ability to effectively assimilate new technology is mission critical, and perhaps even existential. This article takes a top-down look at what differentiates tech embracers from tech avoiders in banking with the hope that some in the latter camp, of which there are many, can find a way before they fall too far behind. While many banks settle for “me, too” delivery experiences, some have chosen a different path. Leaders in these institutions “get” technology, understand the possibilities of deploying it (as well as the limitations), and apply it for the benefit of customers. There is an added benefit to this: Building processes and a foundation to leverage technology to improve customer experience enables bank employees to perform their jobs more efficiently. Bank leaders who understand how to leverage technology apply it in a variety of ways. This article focuses on three applications in particular: • Establishing a strategic data culture and leveraging data for revenue growth. • Identifying and integrating technology partners into the bank environment, leveraging a vendor performance management mind-set. • Using technology as an enabler of well-designed processes for the benefit of external and internal customers.
Bad loans will sink a bank quickly. Bad technology will, too— just not quite as fast. Here’s how to avoid that trap By Quintin Sykes, Cornerstone Advisors
Shutterstock/ Sergey Nivens
STRATEGIC DATA CULTURE Cornerstone Advisors describes a future-ready analytics environment as one where a bank can use analytics as a competitive differentiator. In a recent Cornerstone survey of more than 300 financial institution executives, only 23% of respondents felt that their institutions were “very” or “somewhat” future ready. (See chart on page 17 for rankings covering eight functions.) Most financial institutions have not developed an approach to effectively manage data as an asset. The data remains “locked up” in core systems and application silos. These banks do have a basic set of information used for financial, management, and regulatory reporting, but they are unable to leverage that data for customer acquisition and retention. When banks adopt a strategic data culture and acquire and implement specialized modeling and quantitative analysis skills as well as tools to enable predictive analytics, their overall data culture will mature. Examples of successful deployment of analytics for revenue generation in banks that we have seen include building on investments in analytics for fraud and risk performance into targeted campaigns to improve credit card October/November 2017
cross sell and utilization; and building on investments to achieve a single, unified customer view by incorporating external demographic and credit report data to enrich profiles for use in cross sell. Limitations of early analytics As indicated, a minority of banks can lay claim to having a data culture. Most have data managed and leveraged in silos and on an ad hoc basis. Banks without a data culture are typically in early states of analytics maturity. Cornerstone identifies four maturity states that a financial institution may find itself in. From least to most mature, they are Reacting, Managing, Leading, and Innovating (see chart, page 18). Financial institutions in the Reacting state spend signif icant time massaging data by hand. Options are limited to a few specialized users and the IT department, and tools used to “munge” (transfor m, combine, cleanup) data commonly include Excel, Access, and Monarch. This manual effort not only creates inefficiency but increases the likelihood of error and multiple versions of the truth. Skill sets around governing and managing data are limited to report writers and database administrators. 16
The primar y uses of data in most financial institutions remain in the areas of compliance and risk management— the use of marketing solutions, such as a Marketing Customer Information File, notwithstanding. Extensive time is spent on data cleanup after-the-fact versus at the point of creation, as no governance processes are formalized that ensure ownership of data and data quality. So the reporting produced is often questioned as there is no trust in the results provided. Path to strategic data culture The best data warehouse, analy tics, and visualization solutions alone do not enable banks to successfully integrate data analytics. Banks must start with a vision for use of data analytics within the company—including organization, and processes—before moving on to tools. This is where culture comes into play versus just approving another project on the IT steering committee agenda. Leaders that get the value of analytics start with engaging business units across the bank in development and execution of the vision, ensuring sound governance and data management processes are in place, and acquiring and developing the necessary skill sets.
Once the vision is agreed upon and communicated, bankers must formalize governance processes that establish ownership of data (e.g., “data stewards”), encourage collaboration across business units (e.g., set up “data domain stewards”), and provide oversight at a strategic level (e.g., establish a “data governance committee”). In many cases, these governance processes and tools already exist and simply may need to be formalized and enhanced. A similar, lightweight approach is described in Robert A. Seiner’s book Non-Invasive Data Governance. With governance and organizational responsibilities established, a Managing maturity state is achieved, and data can begin to be managed as an asset. Data is cleaner, more detailed, and more accessible to the business users that need it, preparing the institution to move beyond basic regulatory and financial reporting. This describes a process. There’s no way to implement across-the-board data governance and improved data quality all at once. Initial areas of focus—once governance is in place—include data def initions and quality standards for critical data elements in a select number of domains (banks subject to DFAST and
/ cover story /
CCAR stress-testing regulations know this well). This effort is then expanded to additional data elements and domains over time. Definitions for common metrics in use throughout the bank also will be established early in the analytics maturity life cycle. These initial efforts have the added benefit of documenting data sources and destinations. W it h t r u s t wor t hy, c r o s s - dom a i n data available, business intelligencerelated skills needed to leverage it can be acquired and developed. These additional resources can be used to develop da shboa rds a nd v isua lizations that enable managers to grasp quickly the performance of their business units. Availability of this data becomes next day or even real time instead of waiting ten days after the month’s end. Success stories are great for securing the management buy-in needed to encourage use of data for decision-making, at which point the Leading maturity state is achieved. Finally, the highest analytics maturity state in our model, Innovating, can occur once data and reporting move beyond tools for risk management. Organizations that have a data culture and are able to execute on it deploy scorecards, dashboards, and analytics that move beyond risk and are used to improve customer experience, improve efficiency, and generate revenue for the bank. By proactively managing data as an asset, banks can unlock the power of data and tools for risk management purposes by augmenting them with additional data and modeling to generate insights that can be used to acquire, cross sell to, and retain customers. Data in these kinds of organizations is used to understand how customers “feel,” as Ray Davis, chairman of $25 billion-assets Umpqua Bank, has observed, and ultimately to understand how they actually behave and buy. Under Dav is, Umpqua recently established a subsidiary, Pivotus Ventures, which among other things has been acquiring talent to further expand its capabilities in data science and advanced analytics.
Leveraging VENDOR PORTFOLIO MANAGEMENT
Part of “getting” technology is understanding the possibilities it creates in executing on and enhancing the bank’s vision and strategies. Digital sales and service technology in particular continues to be one of the great strategic
oppor t unit ies to improve customer experience. Banks that dif ferentiate themselves via digital channels with solutions beyond those offered by their core solution providers provide an example of leveraging vendor portfolio management and related processes for the benefit of customer experience. The vendor management office alone isn’t going to bring these solutions to market sooner, especially from relatively new providers. Business line stakeholders must be engaged, and the quantitative vendor management approach of the past, focused on reactive data collection and price negotiation, must evolve to a qualitative approach that emphasizes capability and service level, enabling proactive management of the bank’s vendor and solution portfolio. Cornerstone Advisors refers to this approach as vendor performance management. Beyond legacy vendor management Thinking about vendor management solely from cost, risk, and regulatory standpoints can stif le a bank’s ability to differentiate. This reactive, legacy approach may be effective in ensuring contracts don’t auto-renew, SOC 2 control reports are collected and reviewed, and vendor risk ratings are maintained, but it misses the boat on understanding how well bank vendor capabilities align with bank needs now and into the future. The legacy approach to vendor management works for commoditized products and services, but presents a barrier to
providing superior customer experience and internal eff iciency. It misses the capabilities of the many nontraditional— a.k.a. fintech—options now available. Without collaboration among vendor management and business units, passively accepting what a vendor provides becomes the norm, resulting in underutilized capabilities and delivery experiences that pale versus customer experiences at other banks and especially at nonbanks, which have dramatically altered consumer expectations in recent years. Applying vendor performance management Banks with success in digital sales and service, as an example, typically incorporate an environment scan and establish vendor performance management stakeholder roles to measure effectiveness of existing solutions from their current portfolio of digital providers, identify additional solutions available from their current providers, and identify alternative providers including new market entrants. Formally establishing stakeholder roles for vendor, application, and channel ownership within the bank ensures the right resources are engaged to participate in the qualitative analysis of existing and proposed solutions. Ideally, all employees can contribute to the environment scan by sharing what they experience as consumers. However, a formal process of scanning the external environment helps stakeholders understand where additional capabilities may
How ready for the future is your bank? Digital banking 47%
Fraud/risk management 41%
Branch delivery 28%
Contact center 23%
Somewhat future ready
Very future ready
Source: Cornerstone Advisors’ What’s Going On in Banking 2017 (research on banking industry execs).
/ cover story / The four stages of bank analytics maturity
• Strategy: Compete on analytics as differentiator • People: Data analysts, modelers; cross-functional integration • Technology: Analytics tools • Strategy: Decision-making using information/analysis • People: Business analysts, data warehouse administrators, business intelligence engineers • Technology: Data governance tools, data warehouse • Strategy: Trustworthy data/information management processes • People: Database/reporting administrators • Technology: Data marts, not necessarily integrated • Strategy: Ad hoc • People: No defined skills/roles • Technology: Tools requiring manual data manipulation
be needed by the bank and what providers and solutions can address those needs. The scan should cover industry, technology, delivery, and/or regulatory trends relevant to bank strategies. Expanding vendor risk appetite Nowadays, virtually every company— new or established—that prov ides a banking application calls itself a fintech company. Nevertheless, there are some considerations for banks that decide to work with relatively new fintechs. These start-ups aren’t going to have years of audited financial statements available and may not have dozens of peer institutions live on their solutions. Ba n k s have t o ma ke a djustment s to their risk appetites and vendor due diligence requirements to accommodate these companies. Being an early adopter mea ns the vendor ma nage ment team can’t spend six months on due diligence pursuing items they’re not going to get. This mind-set shift can be a difficult, but necessary step in organizations that have grown up with a risk-averse culture (i.e., most financial institutions). Vendor risk is not the only risk appetite that must be adjusted. Forward-looking institutions also want to bring new features to customers, not all of which will be successful. Early adoption of new solutions and capabilities means getting comfortable and prof icient with 18
“test-and-learn” methodologies including customer beta testing and internal proofof-concept efforts, enabling delivery of user feedback, rapid solution deployment, and iteration. The failure rate of these initiatives will be higher, and feedback must be continuously reviewed to determine if a given initiative requires further iteration, or should be killed. Identifying and contracting with fintech prov iders is just a star t. Banks that get technology have ensured they have an integration environment and skills availability (internal or external) that supports these emerging f intech companies as well as more established best-of-breed providers, ensuring they can chart their own course versus being reliant on large, incumbent core, delivery, and business application providers. We have seen that when business units are engaged as partners with vendor management, vendor portfolio management serves not only as an effective tool for cost and risk management, but also as a means of maximizing the use of existing vendors and solutions to bring additional technology capabilities to the bank.
ENGINEERING OVER ENERGY
Banks that get technology ask the question Jeff Bezos of Amazon asked in his 2016 shareholder letter: “Do we own the process, or does the process own us?” O ne r e c ent t r end i n i n s t it ut ion s
pursuing a process improvement mindset has been a focus on lending activities. For example, reengineering lending processes from an end-to-end perspective has created substantial benefits in our clients in areas including mortgage and consumer loan origination via digital channels, providing not only a superior customer experience during the application process, but an efficient underwriting process behind the scenes. Another example is streamlined small business lending processes that better align under writing requirements with the size/risk of the credit, reduce turnaround times, and improve credit administration efficiency. Brute force and culture roadblocks Bank s that have had success in the areas above haven’t applied technology exclusively. Their approach is to use a collaborative, engineering mind-set to first look at the process. Without that, it’s tempting for them to throw bodies and then technology at manual processes to improve efficiency. The brute force of additional headcount can get the daily work out the door, but eventually can result in risk management issues from errors as volume increases. By not tackling process automation from an end-to-end, customer-facing perspective before applying technology, we see banks inhibiting their ability to realize the full benefits of automation in several ways including these: • Automating a poorly designed process can leave wasteful steps in place, resulting in continued inefficiency. • Pursuing process improvement within a departmental silo reduces the ability to realize enterprise-wide versus tactical efficiency benefits. • Viewing processes from an internal customer versus an external customer lens reduces the chances of building processes that benefit the customer experience as well as the bank. Using the loan origination example above, it’s easy to envision a scenario w her e a wel l-i nt ent ione d e f for t t o improve the customer experience can have the opposite effect. A bank could go through the effort to deploy a wellde s ig ne d , e a s y-t o -u s e d ig it a l loa n application for its customers, but if it hasn’t thought through the process from application all the way to underwriting, documents, funding, and on
into ser v icing, it could easily fail to meet customer ex pectations shaped by experiences with best-in-class providers within and outside of financial ser vices. Poor communication, manual processes, unnecessary paper, and lengthy turnaround times will lead to the opposite of the expected customer experience via a digital channel without an end-to-end, customer-focused look at the process. High-growth institutions also run the risk of outgrowing managers that don’t expand their perspective beyond the bank’s four walls. If managers aren’t proactively seeking interaction with peers, participating in an external scan process, or leveraging third-party consulting and research, banks will discover that for many processes, what worked in a $2 billion-assets institution won’t work in one approaching $10 billion. Strategic data culture, described earlier, also plays a role in engineering sound process. Without the ability to accurately measure and report success, change and improvement become difficult to sustain. “We need a guy/gal” is a standard refrain in organizations where gut instinct versus facts drives decisions. But temporary gains from hiring a superstar will succumb to inefficiency if process measurement and improvement is not addressed. Evolving into a process mind-set In our strategic planning work, we see many bank leaders who have difficulty say ing “no.” If they are lef t uncha llenged, they will pursue every customer segment and tr y to execute on many more projects than their institutions can successfully complete. Three things we see in banks that are successful with process optimization and effective application of technology are: 1. Establish a clear focus in the strategic planning process—including areas where the bank wants to differentiate (see above on saying “no”). 2. Use bank governance processes to prioritize the right investments— including those that will provide clear customer as well as internal efficiency b ene f it s—a nd t o de f i ne t he “ pi vot points” in the customer experience. 3 . For m a l i z e pr o du c t , c h a n ne l , and process ownership and respons i bi l it ie s —a r e p e a t t h e m e o f t h i s article—with all three viewed from the perspective of end-to -end customer
experience versus process silos. Enhanced data analytics, discussed earlier, assist in making better process decisions. Dashboards and other reporting tools provide information on key performance indicators related to products, channels, and processes. This reporting enables targeting of process optimization efforts. Using the loan origination process e x a mple a g a i n , a n i n s t it ut ion m ay identify mortgage lending as one of its dif ferentiators, focusing investment on improv ing mor tgage or ig ination processes a nd related systems, a nd deferring initiatives focused on lowervolume lending segments. Dashboards and scorecards can be used to identify areas of focus for process improvement efforts, such as areas of friction in the application process leading to abandonment, bottlenecks in the process leading to longer-than-desired turn times, and oppor tunities to improve data quality at point of capture, reducing errors. Once the processes are defined, workf low technology, a primary tool used to enable end-to-end process automation, can be deployed for the benefit of both customer experience and internal efficiency. This digital automation tool enables paperless, straight-through processing and can be applied to account-opening and loan-origination applications as well as delivery channel and imaging/content management solutions. Workf low automation reduces cycle time for processes, increases accuracy, and reduces friction of common customer activities. Banks don’t have to be among the
largest in size and go “full Six Sigma” to rea lize the benef it s of process improvement. We have seen the Lean methodolog y, other w idely deployed process improvement methodologies, a nd e ven home - g r ow n appr oa c he s deployed in community banks as well as regional and larger banks in order to realize the process efficiency. Clear direction on the bank v ision and the areas of dif ferentiation and a pr o c e s s m i nd- se t en a ble i n s t it utions that get technolog y to apply it for maximum benefit of both external and internal customers.
MAXIMIZING versus SETTLING
Technology is fascinating, powerful, and can enable realization of substantial benefits to both customers and financial institutions, but success in deploying technology isn’t exclusively based on the technology itself. Instead, what matters just as much or more is the state of maturity of the processes that technology is applied to and the organizational structure and skill sets that are available in support of the technology. Regardless of their size, when financial institutions establish a clear vision of where they wish to differentiate and commit appropriate capital and resources to the task, they can be successful in using technology to differentiate themselves from the competition.
Quintin Sykes is managing director of the Technology Solutions practice at Cornerstone Advisors
“By not tackling process automation before applying technology, banks won’t realize the full benefits of automation” — Quintin Sykes, Cornerstone Advisors October/November 2017
/ compliance watch /
KEEP DIGITAL MARKETING SAFE New forms of communication demand plenty of old-fashioned controls By Steve Cocheo, executive editor
bank’s marketing department can open a simple social media account in minutes. An enterprising employee proceeding without guidance can, too. And both can land the bank in compliance trouble. The risk may be obvious right away, or may only reveal itself under rigorous analysis—including examiner review. The headlines out of Washington regularly illustrate that social media and other forms of public digital communication can occur faster than the speed of thought. But for banks, venturing into the digital frontier—no longer an option for most players—comes with all the compliance baggage that traditional marketing techniques have, plus more that come from the instantaneous and often f luid world of digital marketing. Fair-lending compliance risk can be an especially challenging exposure. And all the types of disclosures that traditional marketing had to include must be delivered in the new forms of communication, but analyzed differently in light of how the internet works. The tools available to marketers today range from email to social media to various types of advertising on websites and through search engines, such as Google 20
and Yahoo. All the old rules apply, as well as new laws, such as the CAN-SPAM Act, which sets rules for commercial email.
Small screen compliance At the Regulator y Compliance Conference of the A mer ic a n Ba nkers Association held earlier this year, a panel addressed the challenges of digital marketing in all its stripes. Ma ny for ms of dig it a l ma rketing today are optimized for mobile devices, noted Renee Huffaker, senior compliance manager at Arvest. But the typical smartphone provides a very small footprint for delivering the sales message and inevitable disclosures, compared with full-page print ads. Meeting the same compliance expectations with today’s tool requires extensive communication between Compliance and Marketing. In print advertising, an asterisk leading to a footnote on the same page can lead the consumer quickly to required advisories. On a small screen, such disclosures may be delivered via hyperlinks or scrolling. Both must be used carefully. Regarding hyperlinks, Huffaker said it is critical to make them very obvious— a bold typeface is a must to signal to the user that an important notice should be
Digital media buys As an illustration of new media’s wrinkles, Huffaker walked the audience through a hypothetical media buy strategy. In the case study, the sample bank planned four digital media buys for its campaign. First was a Facebook news feed and slide show ad to be presented to targeted zip codes in the Kansas City area. Second was a “native ad”—a form of content marketing—targeted to searches arising in the Springfield, Mo., market, using the interest areas of “shopping,” “travel,” and “personal finance.” Third was a pay-per-click ad on Google SEM, using the keyword “credit card.” The buy was for all counties where the bank had a branch. (Google SEM—search engine marketing—allows advertisers to bid for their clickable ads to appear in Google search results. These are the paid items you see at the top of your search pages.) Fourth was the bank’s use of “internal assets”—in this case, advertising emails. The bank targeted customers in its database who did not already have a credit card, and included all markets and all households that the bank serves. Huffaker said the geographic element in the first three parts of the media plan
read. “You have to draw the consumer’s eyes,” she explained. Huffaker said banks also must pay heed to where links on such ads lead the consumer. Simply linking to the bank’s home page won’t help much. Ma ny banks’ websites are broad and deep. She said consumers should be pointed to a specific page relating to the product. And the continuity and quality of the disclosures made must be maintained. Huffaker suggested banks follow a “one-click” rule: Any important disclosure should be that close to the original marketing message. Including a disclosure farther down on the original message may seem safe, but she said this must be done with care. “I would caution against excessive scrolling,” said Huffaker. “Most of the time, consumers will not scroll to the bottom.”
are typical of bank buys. As a business that is still substantially defined by geography, this is a natural cost-containment method. For a nonbanking company, the decisions are all about budget versus reach, but banks face compliance risks with every element of the buying plan. One immediate exposure is the risk of being accused of redlining. How a bank markets, and where, inevitably involves geography and this defines to whom the marketing is addressed. Advertising outreach is evaluated both in fair-lending and Community Reinvestment Act compliance examinations. Inadver tently cutting out majority-minority census tracts, for example, exposes the bank to redlining risk, Huffaker said. Media buying decisions likely aren’t being made to intentionally discriminate, but the potential impact of decisions, not just the motive, must be considered. At Arvest, Huffaker said, compliance staff routinely overlays proposed target zip codes for a campaign over the census tract maps for the markets the bank serves. Close attention must be paid to majority-minority and low- and moderate-income census tracts that may or may not be included in the anticipated buy. Huffaker said every media strategy has a marketing “story” behind it. Compliance must not only understand the story, but also must be able to communicate it to examiners. The challenge goes beyond maps. Huffaker explained that the choice of interest areas and keywords targeted carries significance in the compliance mind-set. What seems like a practical or innocent choice may have implications in who will be exposed to the bank’s messages and who won’t. Either way, there may be compliance-oriented implications. Does a particular choice appear to have a gender-specific impact? Does it have an effect on the age groups that will see the message? Again, understanding the story is critical. Huffaker said Compliance must understand how the choice of media buy will match the markets the bank serves. As
an example, she referred to the difference between Google SEM and Google Fiber. The first refers to the pay-per-click ads that appear in search results, which was discussed earlier. Google Fiber is that company’s own paid internet access service. Ads purchased on Fiber, she said, are display ads that all users are exposed to in the zip codes selected. Huffaker showed an example comparing the reach of SEM versus Fiber buys. The Fiber buy only penetrated a 10% majority-minority census tract share, while the SEM buy would have penetrated these tracts at a 29% share. For the bank evaluated, 22% of its markets consist of majority-minority tracts. So the SEM buy matches the bank’s market much more closely. Even w ith such numer ic a l a na lysis, a bank must look further, Huffaker explained. Her own institution has a branch that is at the very edge of one of its county markets. Across the street begins another county, which is a lowto moderate-income location right in that spot. She suggested that while the county analysis may look right, examiners may question a buy that appeared to exclude the market beginning across the street. She said Compliance would counsel Marketing to include that area in its buy decision. There’s a further complication inherent in modern media decisions, Huffaker added. “Digital media buys can be very dynamic.” A marketing manager can tweak media buys with a few clicks, so a campaign as originally deployed may evolve into something that looks different as the manager attempts to maximize the value of what the bank is paying for. “Stay ver y close to your marketing department,” Huffaker advised. “Make sure you understand the execution of those advertising changes.”
Communication critical Clearly, communication between Compliance and Marketing must be continual in this fast-paced environment. The ease of setting up digital marketing campaigns
doesn’t negate the bank’s compliance obligations. “Getting on the same page as your marketing people is important,” Huffaker said. “ That can be a tricky group to work with.” Huffaker said a very helpful step taken by Arvest, once the bank determined that much more digital marketing would occur, was a “digital marketing summit” between Compliance and Marketing. Staff devoted two days to discussing the many issues. “We set the table on how we would do digital marketing and how it was going to work in the organization,” said Huffaker. “Marketing people are pathologically positive,” Huffaker said, and Compliance needed to illustrate the importance of having everything in order. The summit covered what was available, what was permissible, what was forbidden, and how to address changes in execution after a campaign’s initial deployment.
Compliance oversight Every form of digital marketing has its own set of challenges. Email, for example, hinges on distribution and list management as part of the compliance challenge. Social media outreach entails monitoring compliance and “listening” to what’s out there. That includes monitoring social media activity for consumer complaints, which must be addressed, as well as keeping an eye on employees who may take social outreach into their own hands. At all stages, Huffaker added, digital marketing must be monitored and tested to be certain that it remains in compliance. This may seem straightforward, but she noted that not everything in digital media is like that. Huf fa ker pointed out that dig ita l marketing monitoring tools can be very complicated to use and understand. And, in spite of the nature of digital technolog y, she warned, they are not always precise. There is a multitude of factors to measure, ranging from how long a consumer stays on a landing page to where on the bank’s site they head next. And it all begins with a click.
/ BANK TECH /
BE MORE LIKE A “DAY 1” COMPANY Old habits die hard, but banks that adopt a digital, quick-response strategy will strengthen ties with business clients By Alenka Grealish, Celent
customer and employee experiences. The mantra is easier and faster: easier and faster to do business with them (customer onboarding, self-service, digitization of manual processes) and to innovate and harness emerging technology (AI, robotics, blockchain).
Supply chain goes digital
to proxies (a common proxy is process), embrace external trends (machine learning, artificial intelligence), and enable high-velocity decision-making.
Easier and faster What does extreme customer centricity look like in banking? Banking’s new era of customer centricity is going far beyond product development and marketing to the entire customer journey. Today, a digital strategy must permeate the entire bank. Originally, many banks focused on the front end and new “form factors” (e.g. mobile banking applications). Now, leading banks are seeking to digitize the customer experience and bank operations end-to-end, adopting the approach of digital giants and fintechs that develop their products and adapt their operating models based on digital delivery. While a digital strategy must be spearheaded by the C-suite, it has to bring together stakeholders from the business, operations, and technology sides. Moreover, it needs a strong, relatively new member of the team, data science, which includes artificial intelligence (AI). The goal is to differentiate based on
Embrace bots, blockchain Which external trends should banks embrace and how? Two in particular: AI and blockchain. While it is early days for both, they will drive disruption and opportunity in banking over the next decade. Given the multiple revenue and cost pressures banks face, it is becoming imperative that they harness the potential of AI. AI shows strong potential across the corporate banking business and operating model.
hile it may seem like Amazon and commercial banks are worlds apart, Amazon’s “Day 1” business model offers key success drivers for banks to consider. The Day 1 model, spelled out in CEO Jeff Bezos’ 2016 shareholder letter, in essence means the company continually operates as a start-up. Also, Amazon—like other digital giants and fintechs—is raising customer expectations. And in small business credit, Amazon is competing directly with banks. Banks, instead, often operate like Day 2 companies and make good decisions slowly based on a maximum amount of data. While banks cannot completely emulate the Day 1 model due to their critical role in maintaining f inancial stability and security, and meeting attendant compliance constraints, they can adapt and adopt certain aspects of it. Their challenge is introducing agility and experimentation, while maintaining reliability and resiliency. Amazon’s Day 1 model rests on four pillars: pursue extreme customer centricity (“true customer obsession” and “desire to delight customers”), resist managing
An example of delighting the customer is the digitization of the financial supply chain—from procurement and financing to payment and reconciliation. Being a leader in digitizing the financial supply chain is a powerful value proposition. It enables a bank to extend its reach upstream of payments and migrate from being product-centric to being customer workflow-centric. By integrating its services into customers’ workf lows, the bank becomes a vital partner and reduces customer attrition. A bank also may generate new revenue-sharing opportunities and attract new customers. Two trends are converging and acceler a t i ng pr og r e s s i n d ig it i z i ng t he financial supply chain. First, numerous players—among them fintechs, enterprise resource planning, and accounting software providers—recognize the operational pain along the chain and strive to remove it. Second, software as a service, cloud computing, and application programming interfaces are facilitating partnerships along the chain. Third parties, however, cannot solve the pain points and scale alone. Banks and thirdparty providers need each other to realize the potential of digitization.
Starting with the front off ice, customer service and relationship manager support are prime targets. A common testing ground is using smart bots— AI-powered software that responds to queries or performs basic, repetitive tasks—to support self-service or drive call center routing, for example. Moving to the middle office, there are numerous pain points, with dominant ones being found in onboarding, compliance, and credit underwriting. Smart bots can be used here to pull financials and file with regulators, or cross-check the OFAC list. On the credit side, machine learning can improve credit scoring and pricing by processing both internal and external structured and unstructured data. Fraud detection, which bridges the middle and back office, is another prime area for machine learning that shows strong potential in resolving alerts of a suspicious transaction and determining risk level. In the back office, various types of AI can drive process automation and optimization. In payments processing, straight-through processing rates can be increased through auto-correction, root cause analysis, and smart routing. Blockchain (“enterprise-grade” as opposed to public blockchain like Bitcoin) shows potential in three key areas: cross-border payments (near term), trade finance, and KYC/AML (long term). We are clearly in the experimental, hard work phase. Banks have been busy running multiple proofs-of-concept. A s the pain points to solve become clearer, banks, their third-party tech partners, and commercial clients will make breakthroughs and set precedents over the next five years. Likely within a decade, we will see central banks using blockchain and issuing a digital version of fiat currency.
Small, agile works for banks Exploring cutting-edge technology like AI and blockchain is daunting. While there are a myriad of use cases a bank could pursue, the best approach is to think small and agile, rather than bigbang transformation, and anchor on one
or two use cases with the greatest potential return. To determine which to target, consider not only current customer needs and pain points, but the potential to leapfrog the present and deliver a completely new product to meet customer needs. As Bezos states: “Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf.” He points to Amazon Prime as an example. In banking, a classic example of this thinking is the branch. In the pre-
Think small and agile when targeting tech use cases, rather than big-bang transformation internet world, a customer looking for convenience would have expected additional branches with drive-throughs—not conceiving of online banking and remote deposit capture. Some banks rolled out these products ahead of expectations, but most waited until customers requested them. That mind-set is changing. Leading banks are taking an agile approach to experimenting with new technologies. This typically involves a small product and strategy team whose goal is to assure cross business-unit initiatives. Agile equates to running proofs-of-concept that test and improve on use cases, then undertaking a small number of sprints to launch minimum v iable applications for testing (testing w it h a cross-border, intraba n k subsid ia r y, for e x a mple), a nd t hen incrementally increasing scope. These teams experiment, develop minimum viable products, fail fast, learn, succeed, and scale, or as Bezos says: “Double down when you see customer delight.”
No “walled gardens”
Agile also requires high-velocity decision-ma k ing a nd developing new processes and protocols, that is, “resisting proxies”—entrenched processes that deter change. This is a big cultural and organizational challenge for banks, which tend to move deliberately. Sometimes they follow that path for risk or regulatory reasons, but not always. In contrast, Amazon’s formula involves flexibility in decision-making processes, ability to base decisions on “somewhere around 70% of the information you wish you had,” room for “disagree and commit,” and quick recognition of misalignment issues and escalation to a higher level to resolve. Teams may have different objectives and fundamentally different views. No amount of discussion will resolve that misalignment. Without escalation, the default dispute-resolution mechanism is exhaustion—whoever has more stamina carries the decision. In addition to adapting and adopting aspects of a Day 1 model, banks must overcome organizational and cultural impediments to change and any desire to preserve the status quo, especially in lucrative businesses like cross-border payments. They should evaluate which of their services and processes could be improved or obsolesced by new technology. Furthermore, embracing the future and exceling in innovation requires that banks break from the traditional view of a bank and its products and services as a walled garden, and develop an open banking strategy in which a bank partners with third parties to manufacture and/or distribute better products and services, and embed themselves into customer workf lows. As other industries with rich revenue pools have experienc ed , t e ch nolog ic a l prog re ss w i l l proceed with or without them.
Alenka Grealish is a senior analyst at Celent. She has more than 20 years of consulting and research experience in the banking industry.
/ risk adjusted /
WILL WE DO IT AGAIN?
Here are 9 ways to address rising credit risk—and the many reasons why now is the time to do so By Kenneth Proctor, AppPax Bankware
ogi Berra is famous for having said: “It’s déjà vu all over again.” Berra could have been a bank analyst. During my risk management career, I’ve seen banking crises caused by REITs; third-world debt; oil embargoes; variable deposit versus fixed mortgage interest rates; changes in tax laws on passive real estate investments; oil price collapses; and economic dips, including the 2008-2010 recession. It’s déjà vu all over again. I’m starting to see signs that remind me of the run-up to the last crisis. Let’s examine what’s out there.
The OCC’s Spring 2017 Semiannual Risk Perspective notes that the banking industry is at the point in the cycle where lending becomes highly competitive. This results in pricing concessions; loosening of credit terms and conditions; and increasing concentrations in commercial real estate (CRE). The report points out: • Falling credit underwriting standards and practices across commercial and retail portfolios remain an area of OCC emphasis. Over the past two years, commercial and retail credit underwriting have loosened, moving from a conservative outlook to an increasing risk appetite as banks strive to achieve loan growth and maintain or grow market share. • Credit concentrations. Strong CRE loan growth has resulted in increasing credit concentrations. Regulators are concerned about the quality of CRE risk and concentration management. OCC also publishes an annual Survey of Credit Underwriting Practices. Recent conclusions support those in the 2017 risk report. For example, let’s compare recent surveys and those from a decade ago. The 2015 survey noted an easing of commercial underwriting standards, reflecting trends similar to those seen just prior to the 2008 financial crisis. It noted a trend of increasing policy exceptions, predominantly centered in commercial products. Competitive pressures, abundant liquidity, and the desire for yield in a low interest-rate environment also played 24
a part in eased underwriting standards and increasing credit-risk concerns. In 2016, the OCC survey found continued easing and increasing tolerance for looser underwriting. This trend is consistent with past credit cycles. Credit risk has increased since the 2015 survey in commercial and retail lending activities, and examiners expect the levels of credit risk in these areas to increase over the next 12 months. Primary areas of concern are aggressive growth rates, weaknesses in concentration risk management, deterioration in energy-related portfolios, and continued general easing of underwriting practices.
Back when crisis hit These recent trends echo many of the regulators’ concerns in the run-up to the 2008 financial crisis. For example:
• In 2005, the OCC survey noted a pronounced trend toward easing commercial credit standards, with significantly more banks easing underwriting standards than tightening standards, beginning in 2004. Examiners most recently reported more banks easing credit standards than tightening standards in 1998—three years before the 2001 recession. • The 2006 sur vey ref lected a pronounced trend toward easing commercial credit underwriting standards and the volume of loans approved with exceptions to lending policies. Of particular concern was the increasing volume of term loans with nominal amortization required during the initial years of the credit. The survey also found that the banks were easing under writing standards for residential mortgages and home equity lending, including reduced
documentation requirements and more relaxed underwriting criteria. • In 2007, the OCC noted easing underwriting standards and increasing loan volume. Banks’ increasing risk appetite and greater market liquidity were factors that contributed to easing standards. Examiners continued to report weakening of loan structures and less frequent, meaningful financial covenants to monitor borrower performance. A f ter several years of increasingly accommodating credit terms, the majority of banks tightened under w riting standards for commercial and retail loans in 2008. Primary reasons for this included the overall economic outlook, the downturn in residential real estate, a changing risk appetite, and a decrease in market liquidity. But the barn door could not be closed quickly enough, and the rest is history.
Housing market tightening The Case-Shiller national home price index reached an all-time high in July 2006 at 184.62. By 2009, the gains from 2004 to 2006 were almost entirely erased. A f t er seven c on sec ut ive mont h ly increases, the June 2017 index has risen again to a new, all-time high of 192.60. In the Boston, Dallas, Denver, Portland, and North Carolina markets, median home prices exceed their precrisis levels. C a s e - S h i l ler d at a i nd ic at e s t h at increasing prices are the result of a tight housing market. Both the number of homes for sale and the number of days a house is on the market have declined over the last five years. Currently, the monthssupply of existing homes for sale is low, at 4.2 months. Housing starts remain below their pref inancial crisis peak as new home sales have not recovered as fast as existing home sales. Prices are rising, but other affordability drivers are more favorable. The unemployment rate is below 5% nationally. Employment continues to grow at a rate of approximately 200,000 per month. Wages and salaries are growing at a rate just ahead of inflation. While up slightly
from 2016, mortgage rates are under 4%. Consequently, it is unlikely that current home price trends will reverse quickly.
Subprime returns In 2015, the president of a subprime lender was quoted in the financial press as saying he had reviewed a number of rejected mortgage loan applications, and he would have approved all of them—as subprimes. Again it is déjà vu. Subprime mortgage loans were instrumental in driving the increase in housing prices dur ing the 2004 -2007 time per iod,
Don’t let your lending engine run full-steam ahead. Evaluate credit risk management practices and controls peaking in 2005 at roughly 23% of total loan originations. According to The Wall Street Journal, nonbank lenders accounted for about half the mortgages originated in the United States during the first quarter of 2017. Referencing data from Inside Mortgage Finance, the WSJ wrote that “Lenders say there is an untapped market among borrowers with good credit scores like self-employed workers who don’t have proper income documentation, or for responsibly made loans to borrowers with credit problems that have had bankruptcies in the past or had to sell their home for less than it was worth. If they are successful in recruiting brokers, lenders believe the market potential for both types of loans could reach $200 billion annually.” R ising interest rates and borrowers with impaired credit are expected to increase the demand for subprime mortgages, and originations increased in 2015 and 2016. More lenders are entering the
market for subprime loans. Lending Tree and major financial institutions are even offering zero down-payment mortgages. (Admittedly, subprime loans today are not the same breed as subprime loans in 2006, but the implications are clear. As lenders seek more borrowers, they will resort to more “innovative” loans.) At the moment, as Case-Shiller points out, the supply of housing is low and housing starts are below precrisis levels. Eventually, bankers will step in with developers to fill the gap with increasing levels of residential acquisition, development, and construction lending. This generally leads to a follow-on expansion of loans for retail shopping and then commercial office space. The cycle continues.
Economic clouds gathering In a dd ition to r isk a ssociated w ith residential lending and loosening of commercial loan underwriting standards, there are other areas where credit risk, driven by unique economic trends, is increasing. For example: • Boom and bust in oil. Shale oil in western North Dakota’s Bakken f ield brought a flood of new workers to Minot and Williston. Tents and shipping containers were used as housing. In July 2015, there were 204 oil rigs operating in North Dakota. A year later, as oil prices slumped dramatically, there were only 30. Oil prices remain low and have negatively impacted not only North Dakota, but the economies of other states, including Wyoming, Alaska, Oklahoma, New Mexico, Colorado, Kansas, Montana, and Texas. • Farmland falling. After a significant run-up since 2004, farmland prices have declined since 2012 as a result of declining crop prices and cash rents on farmland. Declining crop prices negatively impact states in the region, including Iowa, Illinois, Indiana, and Wisconsin. • Retail rout. There has been an avala nche of ret a i l st ore closings over the past 18 months. Some 7,000 store locations closed in 2016 and through mid2017. Closures have been nationwide,
negatively impacting jobs, local economies, and businesses—and CRE values.
Rising credit risk response So what can a bank do about all this? You can begin to mitigate increasing credit risk by taking the following steps: 1. Evaluate risk appetite. A great deal of lending expansion is the result of the reversal of conservative risk appetites adopted during the crisis. Given the economic issues that have arisen since 2015, it is a good time to review the credit risk components of the bank’s risk appetite statement, including types of loans, concentrations of loan types to capital, and estimates of potential losses. Revise financial forecasts based on this review to determine if management remains confident the bank will have sufficient earnings and capital to cover possible future losses and expenses of problem credits. 2. Review loan portfolio. Analyze the composition of the loan portfolio and identify exposures to significant local and nationwide economic drivers. Identify risk trends in the portfolio, such as concentrations with declining aggregate risk grades and other potential problem areas, such as loans with excessive extensions and renewals. Expand the coverage ratio of the independent loan review program, whether internal or external, and increase the level of loan officer reviews of credits in their portfolio. 3. Enhance loan approval process. Increa se the level of rev iew on new loan requests. Expand the use of “pref light” reviews. These are discussions 26
of potential loans between lenders and the credit administration department prior to offering terms and conditions to a borrower. Have the credit administration review and comment on the structure, terms, conditions, and collateral coverage of proposed loans as well as the financial condition of the borrower. Adjust lending limits to include increased review of new loans in areas of emerging risk by experienced lenders and the credit administration. Consider adopting a concurring loan approval scheme where lenders and the credit administration must approve the loan together and significantly reduce the loan committee approach to approving loans. 4. Strengthen credit analysis. Adopt guidelines requiring that more loans be submitted to the credit administration for preparation of f inancial analyses, global debt identification, and global cash flow analyses. Review credit administration staffing to ensure they are qualified, capable, and sufficient to support lenders and any increase in work volumes. 5. Review risk ratings. Revisit credit risk rating systems. Many rating systems are too general. (Many are so general that it is impossible to distinguish between good-, acceptable-, and pass-rated loans.) Include more objective measures like specific ratios for capital adequacy, debt service coverage ratios, earnings ratios, etc. Consider also who has the last word on ratings. In a well-managed credit risk environment, it should be the loan review or the credit administration department. 6. Increase collection activities.
Increase early stage collection efforts, such as notices, letters, and calls. Shift responsibility for these activities from lending officers to dedicated collectors. 7. Manage problem assets. Many banks leave the collection and the working out of problem loans to the lending officers for too long. Adopt guidelines for involving an experienced loan workout officer with the lender in developing a plan to improve credit. Ensure that specific objectives are included in any plan agreed to with the borrower. If those objectives are not met, transfer the loan to the workout team. Develop problem asset plans, and review these action plans regularly with the loan committee. 8. Review loan documentation. Now is the time to step up loan quality reviews and audits. Review loan documentation to ensure properly executed loan agreements are in file, liens are properly recorded, exceptions are cleared, etc. Rev iew how well you a re rea lly prot ec t ed. Ensure t he ba n k ha s a n enforceable claim for repayment or to cease and liquidate collateral. Review covenant compliance and take care to ensure the bank’s rights to enforce these covenants are maintained. If a borrower does not meet all covenant requirements, notify the borrower that the bank recognizes this and has not waived the future enforceability of its rights. 9. Evaluate loan loss reserve. Make sure that procedures for identifying and accounting for impaired credits are in place and effective. Review the qualitative factors used to adjust the reserve. In my experience, banks often adopt economic and other qualitative adjustment factors that allow them to manipulate the balance in the reserve. The “2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses” recommended nine qualitative factors. Credit risk can’t be avoided entirely, but as economic conditions change, it is prudent to evaluate the bank’s credit risk management practices, procedures, and controls. As we’ve seen, the lending engine at some banks continues to run full-steam ahead until the tracks end abruptly, and badly, rather than slowing to a stop.
Ken Proctor is chief risk officer for AppPax Bankware and executive director for Cadre Strategic Risk Management Services LLC.
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Tompkins Financial marries online biz lending with home-grown credit analysis By Steve Cocheo, executive editor
ompk ins Fina ncia l’s a nnua l report bears the slogan, “Locally focused; A world of possibilities.” That was part of the $6.2 billionassets firm’s thinking when it adopted a web-based commercial loan application system this year called “Lightning Loans.” The company, with four subsidiary banks in New York and Pennsylvania, is a traditional community banking business. Yet, just as local retailers potentially compete with Amazon and Walmart.com, Tompkins and other commercial lenders face competition from Kabbage and other national, business-oriented online lenders, promising fast service with minimal hassle. Clients increasingly want the same convenience from local providers. Kabbage, for example, promises up to $150,000 in business credit in ten minutes.
At Tompkins VIST Bank, a $1.6 billionassets subsidiary, in Wyomissing, Pa., a new generation of clients has been rising to the top positions of local small businesses, according to Neena Miller, executive vice-president and chief credit officer. Miller says the new generation wants the convenience of modern technology from their local lenders, and the bank wants to provide faster ser vice while maintaining local connections. A year and a half ago, the parent company began evaluating web-based services that could help its subsidiary banks deliver what customers desired. It found a service that could integrate with existing systems and credit standards—as a pure technology play, not a substitute for the banks’ own lending. In January, it began rolling out Lightning Loans with Tompkins VIST. Miller says the new service has been well received. Customers can access Lightning Loans directly through the bank website and fill out the application on handheld devices and computers. “We’re still a community bank, and we are still working to be high-touch with our customers,” explains Miller, a 30-year banking veteran. 28
Fit to need, not product Miller says the bank did not want an online version of the traditional paper application. That would have been cumbersome and not the faster experience customers wanted. Instead, the bank selected offerings from Mirador, a technolog y company ba sed in Por tland, Ore. Mirador streamlines the up-front aspects of applying for credit, and tailors its online process to the needs, policies, and credit practices of the client bank. Trevor Dryer, cofounder and CEO, says Mirador seeks to get away from the traditional structure of credit applications. One element of this is not giving customers the choice of what type of credit to apply for. He says customers usually don’t know what type—term loan, line of credit, etc.—would serve their needs. Mirador’s approach is to get customers to describe what and how much they need. The system adapts to fit those needs to bank products. Wherever possible, data—like IRS data— is pulled into the system electronically, and, where doable, from online sources. “Something we really appreciate is the ease of gathering information for our
clients,” says Miller. Customers can typically complete the application process in about six minutes, she says. The bank’s website promises 15, but it is generally faster. The site promises decisions “in days. In many cases, even quicker.” Miller says the bank’s small business loans often fall within the range of credit that can be granted on an individual credit officer’s authority, so it is not necessary for online applications to go to loan committee. Of the some 100 loans Tompkins VIST had processed through mid-summer, she says, all were typical. “I don’t see the needs of our clients changing,” she continues. “This is breadand-butter community bank lending.” While Lightning Loans provides much of the speed promised by online lenders, Miller says there is an important difference: rates. Online lenders may offer speed, but pricing is often higher. “It gets very expensive for the borrower,” says Miller. “We’re still doing business in our community banking world. So we’re still charging traditional market prices.” A longer version of this article can be read at tinyurl.com/IdeaExchange1011
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EVERYONE IS “FRONT LINE” Striking a balance between innovation and operations By Pamela Kilday, SunTrust Banks, Inc.
support, and operational experiences around that new solution? As banks work to distinguish themselves in a crowded marketplace, it is more important than ever to operate new tools and capabilities with the same thoughtfulness with which they are launched. A nd ma ny ba n k s must cha l lenge some traditional concepts. For instance, to truly modernize operations, banks should be working to dissolve the customary division between client-facing and non-client facing employees. This separation no longer aligns with today’s client interactions. They occur in a growing number of channels, especially given that a single transaction or experience often begins and ends in completely separate channels. If a client initiates a transaction online, like a loan application, but completes and signs the application at a branch, he isn’t necessarily relying on the service of just a front office or just a back office employee. There is mutual accountability for this transaction and for this client’s experience. Today, ever yone in some
shape or form is “front line.” The banking industr y has worked hard to shed its “slow-to-change” reputation. As a collective industry, banks have become more flexible and quick to adapt in recent years. We all want to impress our clients with the latest and greatest that technology has to offer. Who doesn’t want to hang with the “cool” kids? However, truly putting clients first means investing in tools that may not be considered sexy and may not attract millennials (and now Generation Z) immediately and in droves. Instead, dealing with the disruptors means making technology and operations decisions that will help give clients confidence in the financial decisions they are making with your bank, allowing them to worry less about their finances and instead, focus on the moments in their lives that truly matter. P a m e l a K i l d a y i s executive vice-president and head of operations for SunTrust Banks, Inc. This essay is condensed from “Innovation’s great. But it’s got to be right” at http://tinyurl. com/WeekendThink
hange isn’t the only constant in banking—though it certainly can seem that way. Mi nut e by m inut e, t he financial services industry finds itself competing, adapting, and reacting to disruptors. By now, we understand that the pace of fintechs and nonbanking entities surfacing and vying for our clients and revenue streams is not slowing down. But dealing with disruptors should be less about the race to market with a new product feature. Once the race to market is over, that’s where the real test begins for banks striving to build meaningful and lasting client relationships. Given the heightened disruption in recent years, banks’ natural response to the pressure has been to increase investments on new client-facing technology. However, the client experience cannot hinge entirely on the new technology a bank provides; the performance of that technology and its ability to strengthen relationships is just as, if not more, critical than its availability. Now is the time for banks to ensure the attention they are giving to new capabilities is not coming at the cost of creating solid operations strategies. Banks don’t necessarily need to take themselves out of the race, but rather must work to strike a balance between innovation and operations, cementing ongoing service as a fundamental part of the equation. If a new tool designed to save clients time or to offer them new conveniences is not well executed or operated, how valuable will it remain? How important will it be in one year, or in five years, if there is not a solid plan in place for continued maintenance? To truly compete with the disruptors, the banks should be putting operations at the forefront and designing operations strateg ies at the onset of a n implementation cycle. Beyond addressing how clients will use a new solution on the front end, banks need to determine how ongoing client engagement and continuous deliver y will look. What are the related service,
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