Meeting grave threats. Partnering for profitable growth, not just for innovation. The need for speed. Fertile ground for partnerships. Changing your culture. Leveraging the community.
These concepts, and their theoretical and practical offshoots, were the key themes discussed at the 4th Annual Banking Symposium, hosted by Goodwin Procter LLP on November 19, 2015. During last year’s symposium, which focused on “Technology, Innovation and the Future of Banking,” participants heard that the winners emerging from the “disruptive innovation” facing the banking industry would be the banks who viewed disruptions not simply as burdens to be overcome or avoided but rather as opportunities to be seized.
Building on that discussion, this year’s symposium, “Community Banking on the Horizon: Seizing Opportunities,” focused on how community banks can seize the opportunities presented by technological and generational change. Specifically, moderators, panelists and attending bankers representing over 20 institutions discussed:
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How to use branch transformation and innovative product delivery to expand customer relationships;
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How to partner with technology providers and non-bank lenders to enhance competitiveness and profitability in the lending area; and
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How “FinTech” can set you apart from the crowd.
Key takeaways from the Symposium included:
1. Meeting Grave Threats – The Status Quo Is Not An Option. More and more community banks are interested in financial technology, or “FinTech,” and are attending FinTech trade shows, proactively examining how FinTech affects their business and how they can leverage FinTech to facilitate growth and improve profitability. FinTech companies pose “the greatest threat to traditional banking in my lifetime,” said Steven Antonakes, Senior Vice President and Chief Compliance Officer of Eastern Bank and former Deputy Director of the Consumer Financial Protection Bureau, who has witnessed two banking crises, the passage of numerous landmark banking laws and significant industry consolidation during his 25-year career as a banking regulator and now a banker. According to Antonakes, FinTech companies have significant advantages that allow them to disrupt traditional banking in a manner similar to the way innovative disruption has transformed other industries. FinTech companies have: (1) raised billions of dollars in capital from venture capitalists and the public markets; (2) are not burdened with extensive branch networks or legacy IT systems, resulting in substantially lower operating costs; (3) are subject to little or no regulation, further driving down costs and freeing them to test new products; (4) are leveraging distrust of the banking industry resulting from the financial crisis; (5) are actively utilizing technology and big data to customize products; and (6) are offering traditional lending products in an innovative manner more conveniently than traditional banks. Success in utilizing technology to deliver goods and services in a faster and more convenient fashion will determine whether community banks “thrive or go the way of the local bookstore or video rental shop,” noted Antonakes. "The status quo is not an option.”
2. Partnering for Growth (Not Just Innovation). “Community banks are not looking for alternative lending per se, but rather for growth,” said Dan O’Malley, Head of Eastern Labs and Chief Digital Officer of Eastern Bank. Marketplace lenders are doing a better job of meeting customer needs. To the extent that community banks can address these needs (i.e. customizing products by using big data, speed/quick access to capital, simple and easy-to-complete application processes, the utilization of digital signatures etc.), they will better position themselves for growth. Community banks who can’t build their own technology platforms can still realize the speed and other benefits of technological innovation by partnering with marketplace lenders or other technology providers. "A well-selected marketplace partnership can benefit community banks with: (1) viable and transparent loan products to bank customer base to maintain their depository relationship; (2) near-zero loan origination costs; (3) valuable asset origination; (4) diversification from real estate; and (5) potential CRA credits,” said Rana Mookherjee, Structured Products – Capital Markets for Funding Circle, a leading marketplace lender exclusively focused on small businesses.
3. The Need for Speed. “Marketplace lending has altered customer expectations about speed and the way customers shop for capital,” said Gina Harman, Chief Executive Officer of the Accion U.S. Network, a nonprofit business lender. Although non-traditional lenders used to focus on consumer lending, they are increasingly targeting small business lending. Community banks often tout quick response times and local decision making as competitive advantages when competing for loans against larger banks, but these advantages often disappear when competing for loans against non-traditional lenders that can make credit decision in a matter of days, if not hours. The success of non-traditional lenders demonstrates that borrowers are frequently willing to pay higher rates for faster access to capital. Community banks that are willing and able to deliver products more quickly, by leveraging technology or big data, could foster loan growth and increase yields. According to O’Malley, the hardest part for banks is not updating underwriting policies or procedures, but getting comfortable with real time lending.
4. Fertile Ground. “FinTech is very good at delivering products quickly and efficiently, but banks have advantages that FinTech companies do not possess,” said Pablo Fernandez, FinTech entrepreneur and former Executive Vice President and Head of Strategy of Santander Bank. According to both Mr. Fernandez and Mr. Antonakes, these advantages include an existing customer base; a rich source of data about their customers; existing barriers to entry for non-banks to enter the banking system (non-banks may not want to enter due to the difficulty of the chartering process, the higher degree of scrutiny a charter brings, and the restrictions on activities and investments associated with a banking charter); and a lower cost of funds, access to the Federal Reserve discount window and payment system, as well as federal deposit insurance. Because each party needs what the other party has, there is fertile ground for partnerships among banks and FinTech companies. “If someone can deliver a platform more cheaply, why not partner?” asked Fernandez. But before banks can make this leap, banks need to “change the mindset” of serving all the needs of their customers.
5. Changing Your Culture. Despite the fertile ground for partnerships, “there is an understandable defensiveness among banks that FinTech is taking advantage of what banks have built in terms of infrastructure and trust (fraud protection, etc.). The challenge for community banks is to change the defensive posture to an opportunistic/growth posture – to make the traditional bank the disruptor,” said Aaron McPherson, Senior Vice President of Global Payment Strategy for Fidelity Information Services. “What Aaron is proposing is not typically part of a bank’s culture,” said Mike Butler, President and Chief Executive Officer of Radius Bank. “The banking industry has not caught up on the importance of the customer experience.” Community banks that wish to innovate, through a partnership with a FinTech company, by going it alone, or by acquiring innovative companies, would be wise to focus on changing their culture to the same extent they focus on changing processes and procedures.
6. Leveraging the Community. “The biggest advantage that banks have is their community,” according to Fernandez. Millennials in particular are focused on “impact investing” – they want to know that their money is being spent for the good of the community in which they live. Because community banks have such close ties to their communities – arguably the greatest strength of community banks – they should have a competitive advantage in showing customers the positive impact that their funds are having on the local community in a personal and tangible way. Despite their good works in areas such as small business lending, civic engagement, community development, low income housing, financial literacy, and support for nonprofits and charitable activities, community banks often do a poor job turning these good works into customers. To reverse this trend, community banks should focus on advertisement and engagement: advertise on the bank’s website the impact on the community that funds invested with the bank are having; ask customers on Facebook what community organizations the bank should support; and invite customers to community events via the bank’s Twitter account. High-touch/low-tech methods of advertisement and engagement also still prove effective. “The one-to-one connection with customers is more worthwhile than trying to be everything to everyone,” said Christine Conrad, Vice President of Product Management and Development of Martha’s Vineyard Savings Bank. Community banks, in contrast to larger institutions, can and should take advantage of their local brands and ability to cater to an individual customer’s needs, qualities that are particularly attractive to Millennials.
We would like to thank our presenters and attendees who joined us for this year’s Banking Symposium. We are already hard at work preparing for 2016, and we look forward to seeing you next year.
