BANK WORLD COVERAGE INSIDE WINTER 2019
NEW ENGLAND
THE RESOURCE FOR NEW ENGLAND’S FINANCIAL LEADERS
ING INCLUD TURE THE FU
NKING OF BA
E M GUID A R G O PR E 26 G SEE PA
ALEXA, SIRI & YOU VOICE COMMANDS AND THE FUTURE OF BANKING
GUARD YOUR DATA FROM CYBERCRIME
A P UBLICAT I O N O F A M E R I C AN B U S IN ES S M ED IA
MAXIMIZE
YOUR WEB PRESENCE
INSIDE EASTERN’S
INNOVATION LAB
CSI KNOWS FUTURE FINTECH.
A P U B L I C AT I O N O F AM ER I C AN B U SI N ESS M E D I A
CONTENTS
WINTER 2019
NEW ENGLAND
THE RESOURCE FOR NEW ENGLAND’S FINANCIAL LEADERS
THE FUTURE OF BANKING
SPECIAL CONFERENCE COVERAGE
BankWorld kicks off January 17 and 18th in Uncasville, Connecticut. This issue includes what topics bankers are talking about in the industry and some solutions to help bring your bank to the next level.
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12 THE ACTIVE VOICE
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Statistics
Community Banks Flex Tech Muscles
8
FinTech
Eastern Bank Brings FinTech Inside The Bank
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Technology
Preppring For Inversion
Innovation
Time For Your Bank To Get Into The Tech Race
21
Innovation
To Become An Innovator, Start by Reframing
46
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BANKING NEW ENGLAND 3
By Bruce Paul, Special to Banking New England
STATISTICS
Closing The Tech Gap
Community Banks Holding Their Own
A
ccording to the most recent Banking Benchmarks, the perceived technology gap is closing between big banks, community banks and credit unions. Over 3.3 million ratings were collected from bank customers and credit union members across New England. When consumers were asked to rank banks they have not used, they were only slightly more likely to assume that the larger banks have better technology than smaller banks and credit unions.
DOES BIGGER EQUAL BETTER IN TECHNOLOGY?
This gap has been narrowing over the past five to six years as more and more consumers tell us that they assume all institutions have basically the same level of online and mobile services. In fact, when we analyzed the latest Benchmarks results for each individual town across Massachusetts, Connecticut, Rhode Island and New Hampshire, we found that in over 80% of the towns, there was at least one community bank or credit union Bruce Paul ranked in the top three in technology by potential customers. When consumers and businesses are asked to rate their own bank, it is a different story. As you can see from the regional rankings listed on page 5, community banks are rated as high or higher than the largest banks over 55% of the time. It also shows that some institutions are inconsistent in different areas of their footprint. Some banks are rated highly by customers in one area but lower by customers in other areas. This is usually due to inconsistent training (see case study for two examples). This serves to remind all community banks that while big banks might have an advantage in spending and image, community banks can certainly hold their own.
DO BETTER TECHNOLOGY AND TOOLS REALLY HELP RETAIN CUSTOMERS?
Absolutely. The analysis of hundreds of thousands of interviews show that consumers and businesses that use and like their bank’s technology are 26% more likely to remain loyal and to increase their share of wallet with the bank. On the flip side, bad, out-of-date technology increases the likelihood of a customer leaving by 202%. Fortunately, only 12% of customers think the technology at their bank is subpar. (See the case study).
CONSUMERS RATE THEIR BANKS’ TECHNOLOGIES AS ...
54% AVERAGE
BETTER THAN
36% AVERAGE
BAD, OUT-OF-DATE TECHNOLOGY INCREASES THE LIKELIHOOD OF A
202% CUSTOMER LEAVING A BANK BY
WORSE THAN
1O% AVERAGE
4 BANKING NEW ENGLAND
BEST TECHNOLOGY & TOOLS
ACCORDING TO CUSTOMERS OF EACH BANK 2018 Area
Rank
RETAIL
Rank
COMMERCIAL
Rhode Island
1 2 3 4 5
BofA Citizens TD Washington Trust BankNewport
1 2 3 4 5
BofA TD Citizens BankNewport Santander
1 2 3 4 5
Salisbury Chase Thomaston Ion TD
1 2 3 4 5
Chase United Guilford TD Liberty
Central Connecticut
1 2 3 4 5
Liberty TD BofA United Northwest Community
1 2 3 4 5
TD BofA United Liberty Windsor Federal
Eastern Connecticut
1 2 3 4 5
Hometown TD Chelsea Groton Savings Institute Liberty
1 2 3 4 5
Chelsea Groton KeyBank TD Citizens Jewett City
1 2 3 4 5
Florence PeoplesBank MountainOne Monson TD
1 2 3 4 5
Florence PeoplesBank TD Westfield Country
1 2 3 4 5
North Brookfield Cornerstone TD Hometown Fidelity
1 2 3 4 5
Fidelity Cornerstone Savers Berkshire BofA
1 2 3 4 5
Equitable BofA Enterprise TD Watertown
1 2 3 4 5
Chase Enterprise BofA TD East Boston
North Shore
1 2 3 4 5
Enterprise BofA TD Eastern East Boston
1 2 3 4 5
Eastern BofA Instit. for Savings People’s United TD
South Shore
1 2 3 4 5
Martha’s Vineyard Cape Cod Five Coop Bank of Cape Cod BayCoast BofA
1 2 3 4 5
BofA Cape Cod Five Rockland Trust HarborOne Webster
Bristol, Kent, Newport, Providence, Washington counties
Western Connecticut Fairfield, Litchfield, New Haven counties
Hartford and Middlesex counties
New London, Windham, Tolland counties
Western Massachusetts Hampden, Hampshire, Berkshire, Franklin counties
Central Massachusetts Worcester county
Greater Boston Norfolk, Suffolk, Middlesex counties
Essex county
Plymouth, Bristol, Barnstable, Dukes, Nantuctket counties
GRAPHIC: BANKING NEW ENGLAND
*Data provided by New York Bank Benchmark
BANKING NEW ENGLAND 5
CASE STUDY:
Two community banks recently updated their online banking services within a few months of one another in the middle of last year. Both used the same core provider and upgraded to the same online platform. Before the transition, both of their respective customer bases rated their technology very poorly and at both institutions the online and mobile usage was about 20% to 25% behind local competitors. The percentage of customers at each institution that did not know how to use the tools was between 45% and 50%. A year later, the outcomes have been very different. For Bank A, there has been a 17% increase in the number of their customers using the online tools. Those customers now rate the institution’s tech 7% above average, and overall loyalty and cross-sell have started to increase. All of this while cost-to-serve has just started to drop. They got everything they hoped from such a big investment. For Bank B, the transition has been tough—online usage has actually dropped 3% among customers and loyalty has dropped slightly. And complaints have soared. So far, the net result of the transition has been negative. So why such different outcomes despite moving to the same tools? Their customers are very clear (we interview thousands of them as part of our Banking Benchmarks): the training they received was vastly different. At Bank A, one year after transition, 9% of the customers say the tools are hard to use and 12% said they still needed training to use the new tools. At Bank B, customer responses are 59% and 62%, respectively. Bank B leadership had assumed that the tools would be intuitive enough that their customers would figure them out and did not have a structured training program for their customers — or their staff. During our interviews, we heard comments like: “How am I supposed to be able to use the online banking if the staff at the branch don’t know how?” The clear lesson is that the training is as important as the tools.
DOES TECHNOLOGY REALLY ATTRACT NEW CUSTOMERS?
This answer is more complicated. Most consumers do say that technology is important in choosing a new bank. But what is less clear, in the minds of those same consumers, is which banks have the best technology. The latest Benchmarks results show that 72% think most banks and credit unions have about the same caliber technology and tools. Out of the hundreds of institutions we cover in the region, the vast majority were rated average or above in technology by potential customers. Only 32 banks and credit unions in New England were rated as subpar by non-customers. While this is bad news for the largest banks that have spent tens of millions of dollars developing their tools and even more money marketing those tools, it is good news for many smaller institutions that are getting the benefit of the doubt from prospects.
THE TIMES ARE CHANGING
New England banks have to ensure that they are ready for the continuing shift away from the branch toward technology. More than two-thirds of New England consumers say they will increase their usage of online and mobile banking tools this year. For high income earners (over $250,000 per year), that increases to 71%, and for Millennials, that goes up to 74%.
MILLENNIALS ARE CHANGING THE LANDSCAPE, NOT DEMOLISHING IT
Many bankers believe that the younger generation, the Millennials, are causing the branch to go the way of the dinosaur. Some bankers think the only reason to keep branches open is to accommodate wealthy, elderly customers who just want to come in for a chat. In New England at least, both of these notions appear to be overblown. Across the region, less than half of Baby Boomers say they prefer using a branch or the phone over online and mobile. Among Millennials, about a quarter say they actually prefer the branch or phone versus online and mobile. This does vary quite a bit from town to town so it is very important to understand the dynamics in your particular trade area. 6 BANKING NEW ENGLAND
GENDER GAP
In a reversal of roles in years past, women in New England are now almost 20% more likely than men to prefer online/mobile to branch/ phone. Women are also going to increase their use of online and mobile faster, further widening this technological gender gap. This gender disparity is playing out in some interesting ways, with a few New England banks ranking much higher among women than men. With the financial and tech savvy of women compared to men, this could be a very lucrative approach for some institutions.
THE THREAT OF FINTECH
Many articles have proclaimed the banking industry as doomed in the face of a fintech revolution, with companies like Apple, Google, Amazon and others supposedly poised to relegate the hapless old bank to the history books alongside the whip and buggy purveyors. In New England, non-banking technology has made some inroads, with 31% of customers currently using some non-banks to handle their money. While that is not a surprise to many, what might be a surprise is that Millennials are the least likely to use non-banks and Baby Boomers are more likely to do so. The reason lies not in age, but in wealth. New England residents with incomes over $100,000 are much more likely to have diversified their financial partners than their less well-off counterparts. Technology and tools really can make a difference in a customer’s experience, and usually for the better. It is important to know how you compare to your local competition, both from your customers’ perspective and your potential customers’ perspective. First and foremost, you have to determine if your technology is a net positive or net negative. Then you can plan how to fix it and prevent attrition, or to leverage it to gain loyalty and new business. ■ ___________________________________________________ Bruce Paul is president and CEO of Customer Experience Solutions, which produces the semiannual Massachusetts, Connecticut, Rhode Island and New Hampshire Banking Benchmarks. For information about subscriptions to the Benchmarks, or specific results for any banking institution or trade area, email info@cescx.com.
Customer loyalty is your bank’s number one asset. To improve it, you need to measure it.
Over 1 million independent, unbiased reviews by your own customers and your competitors’ customers that can help you discover where you have a competitive advantage, and where you are vulnerable. To learn more about our subscriptions or to get your Customer Experience Benchmark Report, visit cescx.com/benchmarks or email info@cescx.com.
FIN TECH
8 BANKING NEW ENGLAND
By Keith Griffin, Special to Banking New England
EMBRACING CHANGE Eastern Bank Brings Fintech Inside The Bank
A
t 200 years old, some people could have called Eastern Bank a “stodgy old bank” – but not after CEO Bob Rivers had his way. Rivers refused to let the bank be left behind and now Eastern finds itself at the forefront of institutional disruption. The key to revolutionizing Eastern Bank, Rivers learned, is that bankers no longer need to see fintech entrepreneurs as adversaries. “The attitude of fintech has changed,” he said, stressing the importance of collaboration. Fintech leaders want to collaborate with banks because banks have the ready capital and know the regulations. It’s that focus on collaboration that rocketed Eastern Bank into the spotlight with its Innovation Lab and made other banks take note. Technology employees flood to Eastern with the knowledge that the bank is blazing the way. It all began with a pondering. Rivers looked at Kendall Square, located about three miles from his State Street offices, and thought, who are these people? How can we get to know them? How can we go into business with them? POUNDING THE PAVEMENT Cambridge’s Kendall Square is an area known for innovation and transformation. What once was a salt marsh has evolved. An old center of manufacturing and distilleries, Kendall Square was primarily
2013
deserted after World War II, except for the presence of the Massachusetts Institute of Technology. The 1980s saw the birth of Biogen, transforming the area into a breeding ground for life sciences, biotech, pharmaceutical, and information technology firms. Kendall Square’s vitality was cemented with the creation of the Cambridge Innovation Center in the 1990s. Donald Westermann, now Eastern Bank’s Chief Information Officer, was studying for his Executive MBA at MIT. Rivers posited to Westermann the lowtech, old-fashion idea of pounding the pavement and introducing themselves to the fintech disruptors populating Kendall Square. Fintech disruptors are those that want to move financial technology beyond the status quo. The duo spent the next two years introducing themselves and developing a network of contacts. From these discussions came Eastern’s Innovation Lab, which opened in the spring of 2013. Its primary goal was to fund fintech disruptors. SAVING PERKSTREET FINANCIAL Eastern Bank’s network of contacts paid off when they discovered PerkStreet Financial. PerkStreet had shuttered its operation in the face of lost funding and increasing regulatory concerns. The fintech disruptor was an online bank that gave customers cash-back rewards for using its debit and checking accounts. PerkStreet was viewed as a fintech disruptor because
THE YEAR EASTERN'S INNOVATION LAB OPENED ITS DOORS. ITS PRIMARY GOAL WAS TO FUND FINTECH DISRUPTORS.
BANKING NEW ENGLAND 9
it offered cash back on debit card transactions. Other disruptors focused on the customer service experience, while others were evolving backroom operations. Dan O’Malley was the founder of PerkStreet and had met Rivers through a mutual friend. This “friend-of-afriend” situation led to PerkStreet’s 25 employees joining Eastern Bank. O’Malley said the personal touch was a consideration, but what ultimately drove him to working with Rivers was his commitment to change. “I spoke with several banks during this time and what was appealing about Bob and Eastern was their commitment to evolving the bank. I wanted partners who would be willing to make the financial, time, and emotional commitments to change. Bob had conviction on doing so,” O’Malley recalled. “Bob’s approach would not have been successful without the effort to sit 10 BANKING NEW ENGLAND
down face to face with entrepreneurs. One of the things that makes Bob exceptional is his ability to connect and build credibility with people of many kinds of backgrounds. His well-known success in bringing diversity to Eastern Bank is a result of this ability, as are the relationships he has built in the innovation community,” O’Malley said. O’Malley backs up Rivers’ observation about the importance of collaboration. “I think many people overestimated how much power alternative lenders had versus banks,” he said. “Lending has always been dominated by banks, who have a structural advantage versus nonbanks in how they’re able to use their balance sheets to lend. I think the market is waking up to the fact that banks never went away.” That’s an especially valuable tool for small banks, Rivers added. “Bandwidth is a mindset thing. Small banks can get engaged. They just need to want to
collaborate.” PerkStreet evolved their operation to become Numerated Growth Technologies and spun off from Eastern in May 2017 after a reported $9 million was raised by a Silicon Valley venturecapital investment firm. Eastern kept 25 percent of the proceeds. THE RIGHT MINDSET Rivers concedes it was unusual for a community bank like Eastern - granted it’s a big community bank - to get heavily involved in starting up an incubator and creating a technology company. However, it’s not just the bank’s size that made the difference. “It requires the right mindset and the right talent,” he said. Being small helps, though. As Rivers explained, smaller banks can get the leadership more directly involved. It’s not so much Eastern Bank’s size that allowed Rivers to make his visits in
THE STORY OF HOW WE BUILT A TECHNOLOGY PLATFORM AND NOW A RAPIDLY SCALING VENTURE-BACKED COMPANY THAT IS CHANGING THE INDUSTRY INSIDE OF THE BANK IS CLEARLY WELL KNOWN IN THE TECHNOLOGY COMMUNITY. – Bob Rivers, Eastern Bank approach is working. “I was recently at a technology event in the city and had someone come up to me and say, ‘Hey, you’re the Eastern Labs guy!’ The story of how we built a technology platform and now a rapidly scaling venture-backed company that is changing the industry inside of the bank is clearly well known in the technology community. It’s undoubtedly raised the profile and perceptions of Eastern Bank,” he said. Another lesson smaller banks can learn from Eastern’s experience, Rivers said, is all bankers need to become followers. Maintaining the status quo can mean losing market position. Banks of all sizes need to have a desire not to be left behind, he counseled. Also, he added, it’s good career advice for those who want to assume the top spot. Bank boards of directors may cut an incumbent CEO some slack as he or she approaches retirement. The same won’t be true for their replacements. The board will expect changes because they see beyond the day-to-day needs. ■
Kendall Square, in any case. It helped that Eastern Bank is a mutual savings bank. Rivers doesn’t have the quarterly performance anxiety other top bank execs have. “We’ve been willing to take risks others haven’t,” he said. “If we had been public, we wouldn’t have been able to make that investment. Our long-term is thinking in 10-year increments, not quarterly.” A side benefit of Innovations Lab 1.0, Rivers explained, was it’s now easier to recruit technology employees. Prospective hires no longer perceive Eastern Bank as a fossilized institution unwilling to evolve. O’Malley recounted this anecdote to prove how that
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BANKING NEW ENGLAND 11
TECHNOLOGY
The Active
VOICE
Banks are literally listening to their customers more than ever
T
by PATRICK SANDERS
oday’s convenience-driven, technologyobsessed society is changing the banking world – again. Banks, credit unions and investment services are exploring ways to give consumers powerful tools to access their accounts, pay bills, transfer money and buy and sell stock with the sound of their voice. The new era of voice commerce - brought on by the proliferation of smartphones, mobile banking services and the rise of smart speaker technology is driving massive changes in the banking industry, experts said. “I think that the biggest thing is understanding that your clients are going to want to experience the bank or credit union in their preference. Sometimes you’re going to have clients that want to have a digital experience at an ATM, in branch, or mobile, or voice,” said Mark Ranta, head of digital banking solutions at
12 BANKING NEW ENGLAND
ACI Worldwide. “Voice is just a single stop on this evolutionary trend. First it was desktop, then it was laptop, then it was mobile, then it was tablet, then it was bringing the multichannel from branch to ATM to online to digital to voice.” “The next stop is probably virtual reality,” he said. “And who knows where it goes from there.” The growth of voice assistant programs – Amazon’s Alexa, Apple’s Siri and Google Assistant – are a major driver in expanding voice programs at banks and credit unions. U.S. Bank, American Express and Capital One are among those that are Alexa-enabled. J.P. Morgan Chase is now allowing institutional customers to access analysts’ reports via Alexa. In October, TD Ameritrade broke new ground by becoming the first bank to allow customers to make stock trades using voice commands. “While the confluence of AI and machine learning and voice interfaces is a very powerful mix, it’s just
in its infancy,” said Sunayna Tuteja, lead for digital strategy, experience and innovation for TD Ameritrade, a brokerage based in Nebraska. “Where we are today compared to where we’re going to be in five years – it’s going to be like the iPhone (growth) experience. Five years ago the whole idea of trading on a device that you use to play Angry Birds and Candy Crush, it was like, ‘What are you doing?’ It was a novelty. Today the idea that you would have a bank account or a trading account or any relationship with a financial services company that isn’t mobile first is unfathomable.” “So we believe that these technologies, while maybe novel, become necessities,” she said. “The shift from novelty to necessity happens very quickly.” It’s not a matter of if, but when. Flush with mammoth research and development budgets, the nation’s big banks are well on their way to perfecting voice technology. But what about regional banks, smaller institutions and credit unions? When do these players – assisted by fintech partners – jump into the voice command pool? A few have. New England Federal Credit Union has an Alexa skill that tells members branch hours and rates for auto loans, but the skill doesn’t allow you to make transactions. “I think that question is different for every bank or credit union. You need to take a step back and go, ‘OK, what is my DNA?’” said Chad Watkins, director of market intelligence at Informa Research Services. “Who am I? How big am I? I think there needs to be a lot of selfreflection before you can make that decision.” “If you are Chase or Bank of America, it probably is extremely important that you are cutting edge and that you’re in the front,” Watkins said. “But if you’re a community bank that isn’t necessarily concerned with being the most technically savvy bank then it probably doesn’t hurt to wait and let that play out and let the vendors that you deal with figure it all out before you move forward.” Outside of Alexa, TD Bank uses voiceprint technology to allow customers to access their accounts. TD VoicePrint uses a customer’s voice to confirm their identity. The bank rolled out the service a year ago and it now has 2 million users. “TD Bank’s authentication system makes account verification easier and more secure for customers by using
voice biometric technology to analyze the sound, pattern and rhythm of a caller’s voice to create a voiceprint and confirm their identity,” said Lindsay Sacknoff, head of U.S. contact centers for TD Bank. “A person’s voiceprint is as unique as their fingerprint – no two are exactly alike. Once a customer enrolls in TD VoicePrint, there’s no need for them to remember PINs or security questions – their voice is their password.”
years. People forget that five or six years ago there was no such thing as an Alexa in your life. Today, there are over 15 million Alexa-powered devices in the United States and that number is projected to hit 100 million by 2020.” “Just the pervasiveness of the technology, even though it’s nascent, how it’s becoming part and parcel of our daily lives is a trendline that we are watching,” Tuteja said.
One of the newest entrants in the field is TD Ameritrade, which partnered with Amazon to create a voice platform to allow customers to check stock prices and made trades using Alexa. “Despite all the great technologies around us, finance still suffers from that perception - and a little bit of reality that it’s complex and jargony and keeps people out rather than making it more inclusive,” TD Ameritrade’s Tuteja said. “We believe that with the power of these new interfaces and technologies, we can break down those barriers. And one of the ways to break down those barriers is to go where the consumers are.” “In this case consumers are spending more and more of their time with smart speakers,” she said. “How do we meet them in an ecosystem where they feel more comfortable? We looked at the technology and the trendline around it and the confluence of AI and machine learning and voice just in the last few
SECURITY IS PARAMOUNT It’s one thing to tell Alexa to add bananas to your grocery order or asking Apple’s Siri if it’s going to rain today. But using voice commands to bank is another matter. First, there’s the regulatory hurdle unique to financial institutions. And even if a small bank or credit union hires a fintech vendor to do the heavy lifting in rolling out a voice command application, the financial institution still has the regulatory requirement and is on the hook should the vendor suffer a data breach. There’s also the matter of getting consumers comfortable with the idea of processing financial transactions without talking to someone face to face, using an ATM or seeing a confirmation on their smartphone or computer. “Security is always a concern with the introduction of new functionality. Security methods, principles, and testing BANKING NEW ENGLAND 13
techniques have to be introduced in tandem. Instances where new technologies, such as voice recognition, have come into the spotlight have been when security testing and approach was not evolved along with the new technology,” said Lori Williams, vice president of fulfillment at Gigster. “With that being said, you can have the top team of security experts in the world and it is still impossible to cover every base. Innovative new things inevitably bring even more innovative ways to break them,” she said. “Turn that innovative new thing into a medium that can be easily accessed by nearly 7.5 billion people and you’ll get very innovative ways to break it.” “With this – like any new feature – security policies and methods have to be not only responsive but creative in order to adequately protect the platforms they serve in order to ensure the safety and scalability of voice recognition in banking apps,” she said. Tuteja said TD Ameritrade made security and privacy a priority when rolling out its product. “The bottom line for us is that we’re in the trust business,” she said. “Whether you are trusting us with your money and executing a trade by coming in to one of our branches and talking to one of our financial consultants, or if you’re doing it online or through our mobile app or now through Alexa, we want to make sure the same degree of prudence is applied to all ecosystems.” Watkins, who said he doesn’t see himself using voice services for banking, said widespread use of voice technology by banks and financial institutions is “inevitable.” “Throughout history, usually the technology wins,” he said. “If there is a major event such as a data breach or something comes out very negative in relation to this technology, then maybe that will curb it and delay it, but I think that we’ve kind of moved past that too.” “Is the horizon two years? Five years or seven years?” he said. “I don’t know. I think those bumps in the road are going to dictate that, but I think it’s coming.” ■
14 BANKING NEW ENGLAND
“Today the idea that you would have a bank account or a trading account or any relationship with a financial services company that isn’t mobile first is unfathomable.” – Sunayna Tuteja, TD Ameritrade
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BANKING NEW ENGLAND 15
TECHNOLOGY
Prepping For Inversion
D
by MIKE DAVIS
eath, taxes and inversion. Inversion isn’t that certain, but it seems more inevitable every day. The spread between the 10- and 2-year Treasury yield stands at 14bps, potentially just a single Fed move away from turning negative. We are often asked when we think the curve will invert, when recesMike Davis sion will occur and when rates will fall. We do not have the proverbial crystal ball, but we can look at history to give guidance on the future.
below in Chart I. Point “0” on the x-axis is the first quarter of inversion. The negative and positive numbers indicate the months prior to and after the initial curve inversion, respectively. See Chart I Below: Average Historical 10- and 2-Year Treasury Yields during Inversion Periods
A SIMPLE VIEW OF HISTORY To keep this exercise simple, we take the average of the 10- and 2-year Treasury yields from the last three curve inversion periods of 1989, 2000 and 2006 and plot them
HOW TO POSITION THE BALANCE SHEET Lessons from the past say that interest rates are likely to move higher from here. The Fed is certainly pointing to higher rates with a median Fed Funds rate of 3.375%
A few observations: • With current curve spread at 14bps, we are historically 6 months away from inversion • From 6 months prior to inversion, short rates increased 96bps while long’ rates increased 41bps • Interest rates, both short and long, immediately fell once the curve inverted • Inversion lasted 9 months on average • Recession began 16 months after inversion and lasted 11 months
Chart I: Average Historical 10- and 2-Year Treasury Yields during Inversion Periods Recession
7.50 7.00 We are here
6.50 6.00 5.50 5.00 4.50 4.00 -24
-21 -18
-15
-12
-9
Average 10-Year
16 BANKING NEW ENGLAND
-6
-3
0
3
6
9
12
15
Average 2-Year
18
21
24
27
by 2020 as indicated by the dot plot. Rate direction is less certain on the long-end. The 10-year Treasury yield stands at 3.15%, down from its recent peak of 3.23%. This portion of the curve will be driven more by inflation and growth expectations. Incorporating history and adjusting for what we know today, we offer the following balance sheet suggestions. LIQUIDITY Historically, liquidity becomes an issue for depositories at this point in the rate cycle. To offset margin compression, financial institutions typically grow the loan portfolio to add higher yielding assets. Additionally, deposits either migrate to CDs or move out of the banking system in search of higher returns, causing more reliance on wholesale funding. We hear anecdotally that these same patterns are reemerging in this cycle. We suggest that financial institutions focus on adequate asset side liquidity sources. We recommend keeping a minimum percentage of assets in securities that can be readily converted to cash and having a secondary loan trading program. Through secondary loan trades, financial institutions can sell non-core loans to fund loan growth instead of using bond portfolio cash flow to fund
growth. Additionally, in the event of a liquidity crunch, financial institutions will look to the bond portfolio for quick access to cash. INTEREST RATE RISK Managing interest rate risk can be tricky at this point in the rate cycle. Near-term, deposit betas are likely to increase with competition heating up, leading to margin compression. Longterm, the industry faces the inevitable decline in rates once the economy takes a downturn. We think the latter could have a more material impact to earnings. For our asset-liability clients, the down 100 scenario poses the most impact to earnings with a 4.89% decline in net interest income; under a bear flattener scenario, our client group gains 3.62% in net interest income. To manage, we suggest a modified barbell structure. We like keeping a portion of assets short through floating-rate loans/securities or short cash flow investments. We like weighting some cash flow longer-term with call protection. Adding fixed-rate loans with prepayment penalties or investments with limited optionality should be the playbook. Any mix of float/ fixed should be determined on an institution specific basis.
BOND PORTFOLIO In the context of our barbell strategy, we recommend SBA pools on the short end. SBA pools are full faith and credit, tied to the Prime rate and reset monthly or quarterly with no interest rate caps. Additionally, these securities offer historically attractive relative value. Discount SBA floaters can be found at an effective spread of Prime -247 bps, which compares to a long term average of Prime -265. To add some duration to the portfolio, we suggest well-structured CMOs with loan balance collateral. This collateral offers call protection as smaller loan balance borrowers are less likely to prepay when rates fall. We also recommend agency CMBS product. FNMA DUS and Freddie K’s are good investments to pick up spread to Treasuries and offer good call protection through yield maintenance or defeasance. Conclusion The markets are moving fast. We recommend having a plan to position once the rate cycle changes to protect income and margin. ■Mike Davis is the managing director of strategies at SunTrust Robinson Humphrey. BANKING NEW ENGLAND 17
INNOVATION
In A Flash by PATRICK SANDERS
T
here’s no doubt today’s world is moving quickly. Far quicker than it did during the days where brick-and-mortar community banking was the only game in town. And by all indications society will continue to pick up speed. A recent Goldman Sachs report shows that 90 percent of data in the world was produced just in the last two years, and the speed of that data generation is increasing faster than we can monitor. Even now, only two percent of worldwide data is being analyzed. Bank customers are walking around carrying smartphones with more data processing power than the computers that powered early spacecraft. Financial institutions are scrambling – sometimes unsuccessfully – to reimagine their businesses to meet the demands of customers whose needs are changing faster
18 BANKING NEW ENGLAND
than ever. “The challenge is that the velocity of new technology and changes in technology is more than it was 10 years ago,” said Chad Watkins, director of market intelligence at Informa Research Services. “The integration across different technologies has always been a challenge for companies, but the velocity of changes is making it much more challenging. The velocity of change is at a pace that we’ve never seen before, so that’s what’s causing the burden to the banks.” In a 2017 Digital Banking Report, respondents overwhelmingly pointed to systems integration and challenges with legacy technology as the two biggest obstacles to innovation. In short, how can banks with yesterday’s technology meet customers’ needs today, all the while preparing for the unknown challenges of tomorrow?
KNOW THYSELF
Innovation for the sake of innovation is a losing strategy. Financial institutions can’t make changes unless they first know why they need to make a change, and what their needs really are. Graham Tasman, principal of business advisory services at Grant Thornton in Philadelphia, said self-awareness is one of the most important factors for innovation. “That includes understanding what the future of banking is and what your position will be in the banking ecosystem in the future so you can plan accordingly,” Tasman said. “Systems don’t create the innovation, they are enablers. Innovation comes from having clarity around what the bank wants to be known for in the eyes of their customers, what they think their customer
IT’S TIME FOR YOUR BANK TO GET INTO THE TECH RACE
value propositions are, which to me means there’s a customer strategy element to this that would come first.” That’s the strategy that Patriot Bank used when it decided to update its branches. After having a lot of conversations with bank employees and customers, Patriot realized that most of its walk-in traffic wanted to perform a cash transaction and get in and out of the bank quickly. It made more sense for the bank to operate smaller, more efficient branches that focused on moving customers in and out, rather than the large offices it had, said Patriot Bank President Rick Muskus. Patriot remodeled or relocated its nine branches to smaller offices and installed interactive teller machines (ITMs) that provides personal service 12 hours a day from employees who work offsite. Patriot also installed ITMs at two additional locations, giving the bank a footprint of 11 locations, and it
offers a mobile site that serves customers from Maine to Florida. “It’s the world we live in,” Muskus said. “In hectic environments, given how busy people are, and the resulting demands on consumers and business customers, the ability to transact from your office or home is a massive convenience, as well as the ability to show up at the bank at 6 o’clock after it’s closed and be able to do all you could do at 2 in the afternoon.” “Those types of conveniences are important in our business model these days,” Muskus said. “That is really the thrust of why we continue to always look for improvement avenues when it comes to utilization of our branch offices and online technology.”
INNOVATE WITH CARE
When you say innovation, it’s easy to think right away about creating a great online or mobile experience that allows bank customers to do anything they want from their office or smartphone. That’s the consumer model that made Amazon, Uber, Lyft and other companies so popular, and customers naturally expect the same thing from their bank. The nation’s biggest banks, such as Bank of America, J.P. Morgan Chase & Co., Citigroup and Wells Fargo & Co., are in a better position to invest research and development dollars into creating technology that seamlessly integrates systems and keeps all the development under one roof. Smaller banks and credit unions, however, usually are looking at outside providers to help – and that can create some additional challenges. “The whole fintech movement and the companies that are not banking entities themselves, but technology startups focused on the financial services sector, are really diving deep into what the customer needs and developing capabilities to support that,” said Will Callendar, partner at A.T. Kerney. “Many banks would want to be able to offer some of those technologies on a partner basis to their customers. There is a whole triage process that you would go through from that dimension to understand what is out there from a thirdparty fintech provider that would logically and consistently expand the product set. “Once you identify those different players the question quickly becomes, how would we integrate those into our core IT platforms? A lot of banks are still operating on systems that were developed a generation ago and through no fault of their own, they weren’t built with the idea of third-party integration in mind,” he said. “So the workaround and the ways you address that have become pretty critical questions.” One example, Watkins said, is a bank who looks to a fintech provider to develop a mobile app to schedule appointments. There are plenty of obstacles. “Does it actually integrate into your frontline staff so when I come to do my appointment, they know that I have an appointment? When I get there, can I just check in with an iPad of some sort, or do I get there and they have no idea I have this appointment and I still have to wait 20 minutes?” he said.
BANKING NEW ENGLAND 19
It’s up to the bank to make sure the fintech’s technology works as seamlessly with the bank’s systems as an Amazon or Uber app does. “Be really disciplined in the market research,” Watkins said. “Is this something that would make me stand out in the market space, and then have I done my market research to make sure that this is something that the customer not only thinks is cool, but is something that they are going to want and use? It’s not just my customers, but it’s also the general population that I’m trying to capture as I’m growing my business.”
INNOVATE AND INTEGRATE
Just creating the app or partnering with a fintech provider doesn’t mean you’re through. Vendor management with your fintech partner is a long-term commitment, and the more partners you have, the more risk a bank assumes. “You’ve now extended your transaction network to some third party that has to have all the compliance and regulatory fitness that your own bank has in the eyes of the regulator,” Tasman said. “If you extend a transaction out to a smartphone and you don’t control the front end as the bank, sitting in the back seat and there’s a breach, it’s the bank’s fault even if the fintech was sloppy. You have to manage that integration.” And remember – computers are going to continue to get faster, data generation is going to continue to increase and the needs and demands of customers will continue to grow and be more dynamic. “It seems like the market has to rationalize and reconcile the future of banking,” Tasman said. “If I’m a CEO of a bank, large or small, and if you fastforward 10 years, how do you describe the services that a bank provides? Is it a bunch of products that you’re selling like you do today, whether it be digital or not, or is it a customer experience that knits all that together in a way that makes that bank more sticky with a client? “If banks can’t figure out how to get plugged in with the life and lifestyle of their customers, they are probably going to miss the boat.” ■
20 BANKING NEW ENGLAND
Patriot Bank, based in Stamford, CT, recently undertook an innovation challenge to make their bank branches more accessible to customers, while also increasing its mobile reach. “Our technology has evolved as a lot of banks our size need to adapt,” CEO Rick Muskus said. “So we have instituted online account opening capabilities that a lot of banks have moved toward now. I don’t need to tell you that a lot of people really don’t go to the banks as much anymore which is why we need smaller branches to some degree. Our online capabilities for consumers and businesses allow customers to CEO RICK MUSKUS do all they need to without leaving their office or home, so we have that experience that is extremely important to us to continue to improve upon.” The challenge, he said, is being able to serve customers regardless of how they want to interact with their bank. “There will be a group of customers who want the one-on-one experience and they will always go to the bank. We appreciate that, we thrive on that and we are a community bank and it’s our role to engage with our customers,” Muskus said. “That’s balanced out by younger customers or older customers who are out of market or who have other demands that require their banks to be able to rely more on technology rather than dealing with a person." While the bank has physical locations in Westchester County, New Haven and Fairfield counties in Connecticut, Muskus said some of the bank’s most valued customers are located as far away as Florida, Boston and Maine, thanks to the bank’s mobile site and online presence. “We view our customer base almost like a credit union model, in which these are our members, these are our customers, these are our long-term assets,” he said. “We’ve watched youngsters grow up to adults banking here, and we’ve watched small customers become big companies on our watch, and it’s important to have that national platform because companies grow, they get bigger, they move. Folks grow up, retire, they move. And we want to be able to maintain those relationships no matter where they are. It’s very valuable to us.”
INNOVATION
Smart Innovation Begins with Reframing by Amy Radin
I Amy Radin
f you feel tremendous pressure these days to innovate, you are not alone. According to the Gartner 2018 CEO and Senior Business Executive Survey, 62 percent of 460 CEO respondents reported their organizations have digital initiatives or transformation programs underway. The recognition that new sources of client and shareholder value must be pursued to remain vibrant is pervasive across all sectors of the economy, including financial services. The trends – including demographic and societal shifts, technology disruption, regulatory change, and many others – are creating opportunity, as well as threats, for banking sector incumbents. The forces of change have made status quo untenable for businesses, their employees, and external constituents. Few business leaders come out openly as being against innovation. But innovation is hard to do and invites pushback, even resistance. Being an innovator on a daily basis means knowing that efforts may not succeed the first, second, or even third
62%
time. Confronting this possibility can make innovation controversial, even polarizing. It conjures up the idea of cool stuff, but it also means change in a world where shareholders have come to expect – and reward – predictability. Complexity, ambiguity and uncertainty are part and parcel of living in innovation territory. The reality is, innovation is a non-negotiable priority, but it is daunting to execute and deliver results. The good news is that any organization can influence the success of its innovation outcomes. Where is the starting point? Leaders must be willing to set aside legacy ways of doing things, and adopt the tools, methods, metrics, processes, policies, talent and structures that enable and accelerate innovation. Be open to the many possible forms innovation can take. There may be opportunities to innovate the client experience, communications or the brand, the business model in its entirety, or internal processes and technology platforms. You may be
OF 460 CEO RESPONDENTS REPORTED THEIR ORGANIZATIONS HAVE DIGITAL INITIATIVES OR TRANSFORMATION PROGRAMS UNDERWAY. BANKING NEW ENGLAND 21
"COULD ANY OF US HAVE IMAGINED, EVEN 10 OR 15 YEARS AGO, THAT WE WOULD FIND IT IMPOSSIBLE TO LEAVE HOME WITHOUT OUR HAND-HELD MULTIFUNCTIONAL COMPUTER AND COMMUNICATIONS DEVICE?" seeking incremental innovations to sustain your business, or a few small bets on potentially disruptive moves. What should your innovation portfolio look like?
and backward-looking metrics, from traditional business models, are applied to gauge potential impact and measure worthiness to continue to move forward.
Have a clear business objective. Are you seeking to attract and build relationships with a particular client segment, grow revenues, decrease expenses, or both? What are the drivers of your objective in today’s business model, and where do you see your leverage to have an impact? Factor in the feasibility requirements to make your ideas operational realities.
Deploy prototyping and experimentation capabilities, including active collaboration with users. Could any of us have imagined, even 10 or 15 years ago, that we would find it impossible to leave home without our hand-held multi-functional computer and communications device? Very few people can articulate their dreams of what is possible, so answers to questions like, ‘What do you need?’ tend not to be terribly productive. That’s why prototyping can be so valuable: by giving users a model, even a very rough one, to play with and to which they can react, product development, marketing and technology colleagues can figure out through observation what client needs and preferences are. User collaboration in product, service and experience developments also helps get everyone within the organization on the same page with regard to where their efforts and investment dollars can have the greatest impact.
Actively engage to get insights about your clients especially their emotional needs, and not just those that are rational. A few years back I worked with a team that pioneered a digital experience where borrowers who were late on loans could arrange new payment terms. What was the appeal to clients? Collections phone calls, the industry standard, are embarrassing. Most people are good people to whom bad things happen: a job loss, medical emergency, even a car repair can set a borrower back financially. By providing a private, additional alternative to the collections call, the bank found repayment levels increased meaningfully. Understanding client emotions around their financial needs has implications for business performance, and can be a source of innovation that delivers results. Use metrics that are relevant to assess innovation performance and potential. Legacy performance measures may have little relevance to innovation breakthroughs, and can turn out to undermine potential opportunities when they are applied to nascent concepts. Consider focusing on metrics that can nurture these investments and empower the team. Choices should have rigor, be reasonable for the evaluation of potentially unprecedented products and services, and be able to hold their own even in zero-sum resource allocation processes. New growth opportunities are put at risk when overly precise 22 BANKING NEW ENGLAND
Innovation can be messy compared to the banking sector’s traditional operating standards. Innovation is not neat or linear. Think about it as a series of interconnected, irregular and moving loops. Compared to the structure of pre-digital organizations, it can feel messy, even chaotic. But now more leaders are realizing that innovation has a rhythm and discipline all its own. Those who are embracing new approaches to tools, metrics, processes and policies, as well as talent and structure are making progress. These leaders know that innovation is no longer tomorrow’s problem, and that the means to create innovation impact on key goals is within reach. ■ Amy Radin is an innovation catalyst, advisor, and keynote speaker on making innovation happen.
Our 100 years means that wherever you are going, we can guide you there.
GERALD GAGNE, CPA, CISA PRINCIPAL, IT ASSURANCE SERVICES
GERALD GAGNE, PRINCIPAL At Wolf & Company, we pride ourselves IT ASSURANCE SERVICES
on insightful guidance and responsive
service. As a leading regional firm, our dedicated professionals and tenured leaders provide Assurance, Tax, Risk Management and Business Consulting services that help you achieve your goals. Visit wolfandco.com to find out more.
BANKING NEW ENGLAND 23
GREAT EVENTS START AT AMBIZ MEDIA 2019 SHOWS
THE FUTURE OF BANKING
BANK WORLD January 18, 2019 Mohegan Sun Uncasville, CT
24 BANKING NEW ENGLAND
All New MGM Spr ingfield
3.29.19
The Great New England Credit Union Show March 29, 2019 MGM Springfield Springfield, MA
BankHorizons Technology & Strategy April 15-16, 2019 Resorts Hotel & Casino Atlantic City, NJ
www.bankconferences.com
Banking New York Conference April 23, 2019 Crowne Plaza White Plains, NY
There’s nothing quite like standing face-to-face with potential new clients. At American Business Media, we are proud to be the nation’s largest producer of bank and credit union conferences, putting financial executives in direct connection with vendors and advisors who help them succeed. We go beyond the ordinary to create exciting, unique events that educate, inspire and entertain while creating connections between financial professionals and the industry leaders who serve them. Visit www.bankconferences.com for a full listing of our 2019 shows and links to sign up as a sponsor, exhibitor or attendee.
BANKING CONFERENCE
BEST BANK Expo June 28, 2019 MGM Grand Springfield, MA
Big East Banking Conference October 11, 2019 The VERVE Crowne Plaza Natick, MA
BankHorizons Senior Management October 16, 2019 Atlantic City, NJ
www.bankconferences.com
New England Women in Banking October 25, 2019 Hotel Viking Newport, RI
BANKING NEW ENGLAND 25
THE NORTHEAST’S PREMIER BANKING SHOW
THE FUTURE OF BANKING
SHOW PRODUCERS
January 17, 2019
4 p.m. – 5 p.m. REGISTRATION OPEN 5:30 pm – 8:00 pm NEW LEADERS AWARDS RECEPTION & GALA Join us as we once more recognize the banking industry’s up-and-coming stars. Sponsored by Wolf & Co., this year’s soiree gets a new home at the exciting Mohegan Sun Cabaret Theater.
January 18, 2019
SCHEDULE AT-A-GLANCE January 17, 2019 5:30 p.m. – 8:00 p.m. New Leaders Awards
January 18, 2019 8:00 a.m Concurrent Seminars 8:45 a.m. Concurrent Seminars 9:30 a.m. General Session 11:15 a.m. General Session 12:00 p.m. Complimentary Buffet Lunch 12:00 p.m. CEO Luncheon (by invitation) 1:00 p.m. General Session 1:45 p.m. Concurrent Seminars 2:30 p.m. Raffle 3:00 p.m. Exhibit Hall Closes
26 BANKING NEW ENGLAND
7:30 a.m. REGISTRATION
8:00 a.m. EXHIBIT HALL OPENS 8:00 a.m. – 10:00 a.m. SBA LENDERS FORUM We welcome the U.S. Small Business Administration as it presents an update and forum for banks and credit unions working to improve access to capital to our region’s growing small business economy. NARRAGANSETT ROOM (Upper Level) 8:00 a.m. – 8:45 a.m. ARE YOU FLATTERING THE COMPETITION? QUIT IMITATING, START DIFFERENTIATING With branch costs rising and foot traffic falling, the banking industry is facing some tough realities: The traditional bank branch just wasn’t designed for the modern, digitally enabled consumer—yet bankers are hard-pressed to pry the allure of physical branches out of those same consumers’ hearts and minds. Today’s branch transformation efforts should be focused on clearly identifying what consumers want, what they’re ready for, and how their needs can best be satisfied on a branchby-branch basis. In this session, we’ll discuss why it’s so critical for banks to: • First, analyze their current situation (customers, branch operations, market dynamics), • Then define the ideal customer journeys they want to provide, • And lastly, develop a roadmap that prioritizes the steps required to drive customer adoption of new technology solutions. Presented by Simon Powley, Senior Consultant, Global Advisory Services, Diebold Nixdorf. MEETING ROOM 1
IMPLEMENTING AN SD-WAN SYSTEM Learn how to provide a BusinessFirst, Self-Driving Network for today’s forward thinking enterprises. Banks require always-on access to applications with secure and reliable connectivity over the Wide-Area Network and the Internet. Business driven SD-WAN technology offers the promise of both while offering the possibility of significant savings in telecommunications costs. Presented by Scott Stanney of Silver Peak. MEETING ROOM 2 8:45 a.m. – 9:30 a.m. PEOPLE FIRST! CREATING CYBERSECURITY CULTURE Defense-in-Depth is a bedrock cybersecurity concept that refers to the layers of security controls required to mitigate cybersecurity risk to an acceptable level. Though this concept is intended to integrate the many seemingly disparate control layers, it is almost always compartmentalized in practice, due in part to outdated thinking. Here’s a radical concept: IT Departments do not own security, and neither do IT systems. Cybersecurity is an organization-wide function that must have top-down business integration to ensure bottom-up participation. How do we meet the challenge? Cybersecurity Culture is our concept at Sage Data Security that unifies the many layers of defense and updates the way we need to think about controls to relate them directly to the culture of an organization. Attendees at this session will learn how to unify the many components of a well-conceived and managed cybersecurity program that will reduce risk and create a safer environment in which to fulfill the objectives of a sound business strategy. Presented by John H. Rogers, CISSP; Director of Advisory Services, Sage Data Security. MEETING ROOM 2 FIRST LOOK: WHAT ARE YOUR BANKING BENCHMARKS? Bruce Paul, CEO of Customer Experience Solutions, will present an exclusive first look at the latest Banking Benchmarks. Senior leaders will see the very latest household and business results before any individual subscriber or the press. This is an excellent opportunity to network with your peers while getting access to actionable, informative data that could impact your
THE FUTURE OF BANKING
strategy for 2019 and beyond. During this exclusive sneak peek presentation, you will learn: • How many customers will switch banks in 2019 • Why they are leaving their current bank • What they are looking for in a new bank • Who is poised to win market share and who is poised to lose MEETING ROOM 1 9:30 a.m. – 10:15 a.m. FINTECH DISRUPTION OF THE CORE IT OBSTRUCTION Fintech will disrupt every aspect of banking IT in the next 5 years but nobody is giving banks a plan on how to find, assess, procure and implement friendly fintech alternatives. Even worse, few are talking about the market obstruction being executed by the major Core IT suppliers and how this could blow up an institutions’ efforts in executing an innovation and digital transformation plan. Join Aaron Silva, president and CEO of Paladin fs, and Alex Lopatine, managing director of Fintech Advantage, for this timely and provocative session. MEETING ROOM 1 10:15 a.m. – 11:15 a.m. BREAK WITH EXHIBITORS 11:15 a.m. – Noon THE ANATOMY OF A SOCIAL ENGINEERING ATTACK According to some studies, over ninety percent (90%) of data breaches involve some element of social engineering. Fortunately, there are many ways to improve your organization’s ability to detect and respond to social engineering attempts. This session will examine the anatomy of a social engineering attack and demonstrate how your organization can improve its ability to protect, detect, and respond to these threats. Presented by Nathaniel C. Gravel, Vice President of Information Security and Technology, and Michael Kannan, Senior Security Consultant, GraVoc Associates, Inc. MEETING ROOM 2 12:00 p.m. – 1:00 p.m. BUFFET LUNCH INSIDE EXHIBIT HALL INVITATION ONLY: CEO/CFO LUNCHEON James Chessen, the Executive Vice President and Chief Economist of the American Bankers Association will be our keynote speaker for this event. In this capacity, Mr. Chessen oversees four departments: Economic Policy and Research which monitors the financial performance and condition of the banking industry as well as studying legislative and regulatory issues; the Benchmarking and Survey Research Group which conducts primary research
and comprehensive survey reports to meet members’ information needs; the Center for Payments and Cybersecurity which works to influence policy on payments, cybersecurity and emerging technologies that support the delivery of high-quality, secure payments services; and the International Monetary Conference Secretariat which annually brings together CEOs from 62 global banks and 26 countries. MEETING ROOM 1 1:00 p.m. – 1:45 p.m. WHY YOU SHOULD AUDIT YOUR CULTURE — AND HOW TO GET STARTED As we have seen from many high profile gaffes, an institution’s culture can have a surprising effect on the profitability and reputation of the organization overall. Culture combines many things and, you must approach it so that a focus on one thing doesn’t blind you to others. In this compelling presentation, we’ll dig into what it means to “audit your culture” and areas of focus. Attendees will learn: • The critical components you must include in any culture audit program • What controls you need so you don’t incentivize the wrong behaviors • To incorporate concepts into an Enterprise Risk Management program • How to quantify what you’re doing and connect it to the bottom line Presented by Meredith Piotti, CPA and principal of Wolf & Co. MEETING ROOM 1 1:45 p.m. – 2:30 p.m. THREATS AND OPPORTUNITIES: NAVIGATING THE FINTECH EVOLUTION An update of key trends in FinTech with a focus on how community banks can benefit from valuable innovation while adapting to threats from emerging competition. Presented by Kyle Charette, AVP, Business Development at COCC. MEETING ROOM 2 DON’T GAMBLE WITH CYBERSECURITY
Come and join the discussion with Cybersecurity Industry Leaders: Michael Brown- Rear Admiral United States Navy (Ret.), Brad Kirlin- SVP & CTO at Fidelity Bank; and Ramesh Natarajan- VP of Engineering, CyGlass Inc., as they share insight regarding some of security’s most pressing challenges, examine current trends, and provide valuable resources to help you get off on the right foot in 2019! MEETING ROOM 1 2:30 p.m. – 3:00 p.m. LAST CHANCE WITH EXHIBITORS RAFFLE PRIZES ANNOUNCED CONFERENCE CLOSES BANKING NEW ENGLAND 27
FLOOR PLAN
THE FUTURE OF BANKING
EXHIBITOR FLOOR PLAN
American Business Media
680
Pulse
Marquis
540
30
530
70 CSC
60 100 CSC
Security Management Partners
PWCampbell
140
150
160
170
180
Connecticut Bankers Association
Red Hawk
Red Hawk
NYMBUS
200
BCAC CT COMP Jack Henry Infoshred, LLC
190 750 760 790
Sage Data Security
800
The Long Group
Coastal Outsourced Solutions
760
New England Money Handling Systems
130
East Commerce Solutions
770
Crowe
120
Sycorr
780
Silvercloud
110
CFT
220
710
700
The Warren Group
NEACH
CRIF
Magee
290
310
320
330
350
360
AI Foundry
Fiserv
Cummins Allison
Bonadio
450
460
470
480
490
500
510
520
First Data
GraVoc Associates, Inc
Harland Clarke
Ventus Global Networks Solutions
BITS
Scantron
Lighthouse Payment Services, Inc.
Winbrook
United Wholesale Mortgage
570
580
590
600
610
620
630
640
Silver Peak Systems
NES Group
COCC
COCC
Integrated Security Group
240 BranchServ
Diebold Nixdorf
650
28 BANKING NEW ENGLAND
ZRent
Accubranch 400 AI Foundry 330 American Business Media 680 Bank Compliance Assoc. of Conn. 190 BITS 510 Bonadio 470 BranchServ 240, 260 Center for Financial Training 220 Coastal Outsourced Solutions 780 COCC 630, 640 Conn. Bankers Association 160 CRIF 310 Crowe 130 CSC 70,100 CT Computer 750 Cummins Allison 460 Cyglass 210 Diebold Nixdorf 650, 660 East Commerce Solutions 290 Federal Reserve Bank of Chicago 440 FirstData 450 Fiserv 360 GraVoc 480 Harland Clarke 490 Infoshred, LLC 770 Integrated Security Group 520 Jack Henry & Associates 760 Zrent 350 Lighthouse Payment Services 580 Long Group 800 Magee Company 320 MagTek Inc. 430 Marquis 30 National Sign Corporation 380 NEACH 60 NES Group 620 New England Money Handling Systems 140 NYMBUS 200 Paladin fs NA Pulse 540 PWCambell 110 Red Hawk 170, 180 Sage Data Security 790 Security Management Partners 710 Scantron 570 Silver Peak Systems 610 Silvercloud 120 Solidus 390 Specialized Data Systems 370 Sycorr 150 The Warren Group 530 United Wholesale Mortgage 600 US Small Business Administration 270 Ventus 500 Winbrook 590 Wolf & Company 410, 420 220 190 210 220
Specialized Data Systems
260
210
215
BranchServ
Cyglass
US SBA
Solidus
Accubranch
National Sign
370
380
390
400
410
420
430
440
Wolf & Co.
Wolf & Co.
MagTek, Inc.
Federal Reserve Bank
Diebold Nixdorf
660
THEY SAY...
TIME is
MONEY. We give you more of both.
Cummins Allison branch automation technologies have helped thousands of FIs become more efficient. Our reliable cash, coin, check and ATM solutions move low-value deposit and cash handling transactions away from your tellers, reducing operating costs and improving staff performance. Your branches are more productive and profitable, and your customers get a better experience. Simple, yet effective branch automation technologies from Cummins Allison add to your bottom line and allow your staff to focus on what matters most – more meaningful engagement with customers.
GET MORE AT
cumminsallison.com/automation BANKING NEW ENGLAND 29
THE FUTURE OF BANKING
DIAMOND SPONSOR
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30 BANKING NEW ENGLAND
We might not hold your hand but information management we understand. We got you babe!
The Beat Goes On At Booth # 770 R
Document Destruction | Records Storage | e-Recycling
www.infoshred.com
BANKING NEW ENGLAND 31
TECHNOLOGY
L
Fighting Back Against Cybercriminals
ike everything in technology today, the activities of cybercriminals are constantly evolving. Your company must keep pace to protect your data and your company’s reputation. And in my experience, the place most clients in financial services and community banking start is with this query: “What are our peers doing?” It’s a good question and the answer is simple: you and your peers are moving services and infrastructure to third-party “cloud” providers. This often includes escalating services from your core system vendors. It’s already a critical relationship, there’s been thorough due diligence research and assessments performed, SOC reports have been consumed. Still, do you know enough? A good place to start is understanding the business strategy of cybercriminal organizations. Let’s review briefly the Magecart case. Magecart is a cybercrime organization focused on injecting its cardskimmer code into e-commerce websites. Formerly content to attack individual sites, this group made a change to its strategy that other threat-actors have also pursued with great success. Why attack a single site, when you can poison the code
32 BANKING NEW ENGLAND
By JOHN ROGERS of application developers, and have them distribute it to their customers? Magecart, for example, breached 8 Ticketmaster sites, and British Airways, with such an attack. When customers purchased ecomm scripts developed by a third-party vendor, they came pre-injected with the Magecart skimmer code. There is also Wannacry, which resulted from poisoned update code for a popular accounting software. Both these examples I’d refer to as “reverse concentration risk”, and they relate directly to the risk community banks face as more and more services are moved to the cloud. Imagine FIS, Fiserv, or Jack Henry & Associates experiencing a similar compromise of core banking software? Imagine a wide-spread disaster event of the type referred to in the FFIEC’s Appendix J, the supplement to the Business Continuity Examiners Handbook? “An increasing concentration risk corresponds to financial institutions’ increased use of third-party service providers. That, in conjunction with industry consolidation, has resulted in fewer, more specialized TSPs providing services to larger numbers of financial institutions. This trend increases the potential impact of a scenario in which a TSP is required
to support recovery services to large numbers of financial institutions due to a widespread disaster...” Appendix J may not have directly addressed successful compromise of thirdparty vendor’s source code, but indirectly, it’s right there. If I was in the cybercrime business, I’d focus all my efforts on attacking cloud service and software providers, and I wouldn’t be alone in that strategy. For this reason, it is crucial that due-diligence research on these critical vendors -as well as verifiably strong control environments, required by contract whenever possible- should be a primary focus for community banks. Let’s look at some questions that need to be answered by vendors in four key control areas.
SOFTWARE DEVELOPMENT LIFECYCLE (SDLC)
How much do you know about your vendor’s SDLC controls? Here are some key questions to ask: • Are the developers training in security coding practices? • How are test and development networks segregated? • What segregation of duties controls are in place between development and test environments?
• Where is source code stored and what extra protections are applied? • What security testing is performed at each development stage, and against the final versions? • What is the remediation practice to mitigate findings from testing engagements? • What detective controls are in place, such as activity and access reviews? Malware-Proof Replication Considering the success advanced ransomware variants capable of finding and infecting backup storage locations, we need to know that backup and replication functions are specifically engineered to prevent and detect malware compromise of data at rest. Some questions to consider: • What are the “air-gap” controls applied to replicated data stores? • How often are backups and replicated virtual environments tested for integrity? • How often are these environments security tested? • What are the detective controls applied to these stores and environments? Multifactor Authentication (MFA) Unfortunately, there are still many examples of single-factor remote access
in the community banking sector. From 0ffice 365 to critical banking systems, we are still writing frequent findings in this control area. It’s worth noting that there is some confusion over what constitutes MFA. True MFA consists of multiple active challenges to the user attempting access. Installed certificates, and IP Restriction are great controls, but they are not examples of MFA. I’ll address them in the next section. MFA includes: 1. Something you know. 2. Something you have. 3. Something you are. In each of these three components of MFA, the “you” refers to a challenge to the active user, not a computer or user account. Does your service provide allow single-factor remote access to its information systems and resources by its employees? Do employees at your TSPs with Administrator privilege use MFA for all access, and do they use separate accounts for daily activities that don’t require elevated privilege? Multi-Layer Authentication User-based digital certificates installed on laptops and tablets are excellent multilayer authentication controls. The reason these are not considered MFA is that the certificates are associated with the user ac-
count and don’t actively require an action from a user, once installed, apart from the first factor of MFA, something you know. If I have the device, and the user’s logon credentials, I am gaining access, whether I’m the authorized user or not. Similarly, IP Restriction is a great multi-layer control. Again, there is no active challenge to the user, but rather, a coded challenge to the device’s IP Address of origin, at work. In all cases, the business strategy should be driving the selection of controls and vendors. However, that strategy should incorporate cybersecurity risk considerations from the very beginning. I like to say we need to move from “bolted-on” to “baked-in.” This has never been a more important concept. With the shift in cybercriminal attack strategies, it is incumbent upon financial institutions to respond appropriately. Any environment can be reasonably secured to reduce cybersecurity risk to acceptable levels. Knowing the right questions to ask, and requiring the right answers, is a big part of risk awareness that provides organizations with the information they need to make sound risk-based decisions. Happy outsourcing! ■
John Rogers is Director of Advisory Services at Sage Data Security.
BANKING NEW ENGLAND 33
TECHNOLOGY
STAND OUT ONLINE DEVELOPING A HIGHLY FUNCTIONING WEBSITE
34 BANKING NEW ENGLAND
F
by BRIAN GRAVEL, VP of Creative Technology at GraVoc
ew people will argue that having a well-designed, high functioning website is not critical to any institution. Even the simplest sites have a big impact when it comes to your customers’ experience and engagement with your brand. While there are a lot of things to consider when you are evaluating your site, we’ve outlined some of the common pitfall banks fall into with their websites and offer some insight on how to fix them. • Have a flexible and easy to use CMS - Keeping your site’s content fresh and up to date is important on a number of levels. Benefits include everything from improved search engine results to a better user experience. The key to keeping your content fresh is to have a content management system (CMS) that your own marketing team can interact with and update easily. • Bridge the gap with navigation and design - Navigation and design play a key role in any site’s user experience. Be weary of stuffing all your pages into your menu options and let your design flow visitors through the site. While it is important to keep a somewhat conventional navigation menu, don’t feel you need to play it too safe with design and sacrifice your appeal to a modern audience. • Make sure your site is responsive - Most sites have converted to a responsive (aka “mobile friendly”) design by now. If you haven’t, make sure you do as soon as possible! On average, website traffic that is coming from mobile devices is only increasing year over year and now search engines such as Google are prioritizing sites with responsive frameworks over those without them. • Consider ADA compliance first not last - Having a site that is ADA compliant is now a requirement for most financial institutions. Be sure to have your site evaluated by a professional to understand where you need to make changes to be compliant with ADA standards. If you are in the process of a redesign, make sure this effort is at the forefront of your design and development so you avoid unnecessary back tracking. • Keep the content coming - Financial institutions often stick to the “less is more” principal when it comes to content. While you don’t want to have paragraphs upon paragraphs
of content on every page, you do want to have relevant and dynamic content throughout your site. Consider leveraging a blog or news section, unique landing pages and other areas where you can beef up your site’s content. For example, if your institution has multiple locations, create individual pages for each location, rather than having one single page for all locations. • Time to get social - There are still a number of banks and financial institutions that are not on social media. Not having a social media presence can cost you business and you’ll miss out on making connections with key growth demographics. To quote from an article from American Banker, “It’s time to get with the program, especially if you’re interested in customer experience. If that’s where the clients are, you have to be there.” If you are already on social media, be sure to humanize your posts. Banks tend to rely on automated messages and posts which can be a turn off for a lot of customers. • Focus on goals not clicks - It is easy to confuse meaningful statistics with the number of clicks and page visits your site has. While both of these are important metrics to your website, your team should set up goals and monitor them frequently. These goals should have a tangible end point and connection with your customers. For example, drive customers to fill out a form or engage in a chat. This will allow your staff to take the reins and start a conversation that will lead to more conversions. • Understand the value of your website - Many banks and credit unions don’t realize the value their website holds for marketing and conversion. It is good to step back once in a while and reevaluate what you are putting on your site, who the site speaks to and how effective your calls to action are. You may be missing opportunities simply through complacency. If you are going through a redesign or rebuild of your site, then keep all of these tips in mind and have a conversation with your development team about each item. If your site is not going through any major update process, address each of these items one at a time and you’ll soon master your design, message and user experience. Your website is a critical part of your institution’s brand and it deserves your attention. ■ BANKING NEW ENGLAND 35
TECHNOLOGY
Shift Branch Transformation
From A Siloed Initiative To A Holistic Strategy
T
by CHRIS GILL, Senior Director, Diebold Nixdorf Global Advisory Services
here are a couple of interesting, opposing forces at work in the financial industry these days, and I see them causing trouble for many financial institutions around the globe. The pace of change has increased dramatically—everyone is looking over their shoulders at non-traditional competitors and fintech startups—but there’s often still a sense of inertia around making transformational changes. So when these two sentiments crash against one another, what happens? One of two things: • FIs rush to adopt whatever new feature their competitor has just
36 BANKING NEW ENGLAND
implemented, or whatever new technology seems most buzzworthy at the moment, without doing the due diligence to understand whether it’s right for their customers or their long-term growth strategy. • Individual departments in the FI pursue new strategies or change processes without thinking through how those changes will impact the rest of the organization—or their customers—so initiatives that seemed to have so much potential end up failing. Both of these approaches travel the path of least resistance: they may move the needle momentarily, or excite the
board of directors, but how are they helping lay the foundation for the future? As physical and digital channels converge and become one seamless ecosystem (at least from a consumer’s point of view), it’s critically important that banks view branch transformation through the lens of a holistic strategy. Rather than focus strictly on modernizing the lobby, or migrating transactions to the ATM, strategic branch transformation can give FIs a deeper understanding of their customers’ needs and pain points, and enable them to implement changes that may incorporate more than one channel—and thus involve more than one department inside the bank.
This is where a roadmap specifically devoted to transformation becomes so important—and I’m surprised at how often I peel back the curtain a bit at FIs and discover they haven’t really thought out their long-term transformation journey or developed a more comprehensive implementation plan to support new solutions being introduced to customers. A good place to start if your organization is trying to shift to a consumerjourney-focused strategy is to look at individual customer interactions, and map every possible journey with the processes behind each step in that journey: • First, define the ideal experience for a particular journey, say, making a cash deposit. - Define target experience expectations. - Create ideal (future-state) consumer journeys. • Second, define the changes to people, process and branch design required to deliver the ideal journey. For example:
- Determine the required lobby management approach to introduce customers to depositing at the ATM. - Identify the employee skills and training required to deliver the journey and meet customer expectations. • Third (yes, this should happen at the end!), optimize your technology. - Determine the functionality required on self-service and digital channels and the relative importance of adding new features. - Ensure self-service devices are optimally located in the branch to facilitate customer adoption. Many FIs have yet to do the work of conducting a comprehensive analysis of their branches and customer channel usage, instead relying on anecdotal evidence, or, worse, making decisions based on their own gut instincts. That’s where an industry partner can pro-
vide the necessary depth of expertise to quickly analyze and guide the development of a transformation roadmap. No matter what kind of financial institution you run, no matter where it’s located or how big or small it is, you’re never going to need ALL the technology available out there today—just like your organization certainly won’t implement every new marketing strategy you see or buy into every single advertising channel. As consumers set the bar higher and higher, it becomes more important than ever to think critically about how your organization can grow most effectively, and in ways that matter most to your customers. Before you make any large technology purchases or invest in new solutions, make sure you’ve done the due diligence to know that it’s a sound investment. ■
Chris Gill
Chris Gill is Diebold Nixdorf’s Senior Director, Global Advisory Services.
“If your organization is trying to shift to a consumer-journey-focused strategy, look at individual customer interactions, and map every possible journey with the processes behind each step in that journey.”
BANKING NEW ENGLAND 37
TECHNOLOGY
The Retention Advantage
A
By TOM LONG
dam Smith introduced the world to the Industrial Revolution. Centuries later, this revolution has now entered its fourth phase. Termed the Exponential Age, it is defined by the velocity or speed of change found in this new era. Disruption is everywhere. Firms of all types are being put out of business every day.
In this era, no financial institution competes against a class of competitors, a peer group or even the fin tech sector. Rather, in the Exponential Age, each financial institution competes against a single, identical competitor. And, this common competitor is time. Therefore, survival in the Exponential Age is all about slowing down the clock and each financial institution is confronted with this shared challenge and opportunity.
The New Competitor In order to survive the Exponential Age, every financial institution must recognize that the definition of its competitive set has changed in an unexpected manner.
The Expectations Challenge The Exponential Age is the intersection of digital technology and changing consumer behavior. Changing consumer expectations are rapidly influencing bank-
12% Attrition Rate
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8 YEARS
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ing. For more than 25 years, The Long Group has been surveying consumers and businesses regarding their financial behavior. Today, these discussions reveal that consumers expect interacting with their financial institution to be faster, easier, more convenient and less expensive than ever before. In other words, today’s consumer wants it all. They expect more for less. These changing expectations are challenging the viability of every financial institution. Furthermore, unmet needs introduce new competitors into the client relationship and promote churn. The Attrition Tax How does a financial institution slow down the clock? By focusing on improving retention. Attrition is the tax that every financial institution levies on itself, compromising growth. The average financial institution closes twelve percent of its account base each year. As a result, the average financial institution is expected to replace its entire client base every eight years necessitating an aggressive sales focus to replace volume lost to attrition. Moreover, by halving attrition, the longevity of a client relationship is doubled, slowing down the clock in the Exponential Age and accelerating growth.
of a client is halted by simply building a relationship with each customer. The Gateway to Survival For decades, expanding a client relationship has advanced at glacial speed with the average financial institution requiring more than ten years to acquire the third account relationship. Today, three in five clients maintain a causal connection to the average financial institution increasing the risk of churn in the Exponential Age. Developing these at risk client relationships by compressing the sales cycle is the gateway to survival in the Exponential Age.
80%
of client churn is produced among transactional clients
Work Smart Not Hard With unprecedented risks and opportunities confronting every institution, now is the time to act. Closed accounts and lost relationships are compromising growth. Competing requires financial institutions of all sizes to transform data into information, translate information into knowledge, convert knowledge into strategy and pivot strategy into action. Work smart not hard to change the growth trajectory. Success in the Exponential Age depends on relationship management to create a retention advantage and build customer stability. â–
The Retention Mystery Solved Improving retention is not a mystery. It is simply a function of the size of a client relationship. A dichotomy in every client file exists representing those that purchase on a transactional basis and those that maintain a relationship with the financial institution. Each group behaves differently. Eighty percent of client churn is produced among transactional clients, those that maintain one or two accounts with the financial institution. In contrast, those that maintain a relationship define the balance sheet and earnings of a typical financial instituTom Long tion. In other words, the transient nature
Today, incremental gains in market share are less a function of the acquisition of new clients and more focused on building stability into the relationships that have been acquired. Knowing the precise conversation to have; one that is personalized, relevant, meaningful and consultative improves the customer experience, drives revenue and extends the tenure of a client relationship.
Tom Long is the principal at The Long Group LLC, based in the Greater Boston area.
BANKING NEW ENGLAND 39
R
BUSINESS
Manage Your Third-party Risk Before Auditors Come Knocking By MARC RICCIO
40 BANKING NEW ENGLAND
esearch has shown that the financial industry outsources over 85% of it’s information technology. Outsourced technology can include basic applications such as your phone system, alarm system, network, servers, or PC support for desktops and mobile devices. More critical outsourced technology might include core banking platform, loan origination, online banking system, payment solutions, or ATM processing. From basic to critical technologies, all types of third parties play a key role in business operations proving that outsourcing technology directly effects your institution every day. Outsourcing technology has major benefits if managed correctly. If an effective third-party risk management system is not in place, auditors will be waiting to knock down your door. Institutions rely heavily on outsourced technology to perform business functions resulting in an increased overall operational risk. If an outsourced vendor unsuccessfully delivers services, then the institution relying on that vendor runs the possibility of failure. The risk associated with your outsourced technology providers directly effects the overall internal operational risk of your institution. If you are effectively managing your entire operational risk management program, you are ensuring you will always be able to perform everyday business functions, which are critical to survival. One of the biggest struggles of managing third-parties is the amount of time, effort and documentation collection it takes to complete the tasks required by the FFIEC and FDIC. The regulations stress the importance of maintaining a strong selection and monitoring process. This process includes qualifying and assessing the risk of each vendor, communicating with the vendor to obtain the proper due diligence documentation, receiving the authorized “signoff� of the due diligence documentation, and continual monitoring of each vendor to update their documentation. Since each vendor provides something different to your institution, the process is extremely complicated and time consuming. Each vendor must be assessed based on the risk they could bring to your institution, and all due diligence must be properly performed based on the level of risk. As a result of this, there are large amounts of resources, people, and time invested in properly managing your third parties. Typically, institutions require their vendor manager, vendor owner, legal department, financial advisor, and CFO to be involved in the entire process. There are many hands involved in vendor management, and this is not accounting for external vendor cooperation. The vendor manager has the role of overseeing the entire vendor management program and ensures that all tasks and procedures are completed correctly and on time. The vendor owner has the role of obtaining all due diligence documentation and screening the vendor. The vendor manager begins this process by requesting for the vendor to be reviewed by the vendor
owner. The vendor owner is then required to communicate with their vendor to obtain the proper due diligence information. Often, this point in the process gets delayed by the vendor because the due diligence documentation is viewed as a low priority and burden. This consequently makes an already lengthy process even longer. The difficulty of involving internal company-wide efforts and external vendor participation likely leads to miscommunication and lack of collaboration. Your institution needs to have a uniform and streamlined process, ensuring interdependencies across your institution are effectively controlled. If this process is completed manually, the implementation becomes increasingly complicated. Financial institutions often rely on multiple documents and lists which are all managed by different people and could contain duplicate information. One of our current clients previously managed three different vendor lists; contact information, accounts receivable, critical vendors. The departmental contact list was utilized by department personnel and contained contact information needed to communicate with each vendor. The accounts receivable list was utilized by the accounting personnel and contained billing information related to products and services as well as contract renewals. The critical vendors list was created by the IT department to track which vendors provide the most critical services and what due diligence needed to be performed based on the assigned criticality. The three lists each contained important information needed by multiple personnel and departments. It would be impractical to eliminate any of the lists and would also cause chaos to simply combine. The vast amount of documentation and acknowledgements needed on an individual vendor basis essentially takes up more time and effort to maintain separately than it would with a centralized repository. This particular institution and many others have experienced the agony of maintaining a manual vendor manage
ment process and have therefore inof risk manually. Instead, the approach vested in an automated solution. Simshould be proactive to eliminate the ply automating might not be the answer “band aid” cycle because eventually to all prayers. The key is to invest in those band aids will fall off and your an automated solution that can easinstitution will suffer. ily maintain all vendor information as The latest FFIEC IT Examination well as the management process from update guides the way to a proactive acquiring a new vendor and vetting an strategy. Appendix J in the FFIEC IT existing vendor to monitoring their reExamination handbook explains the lationship. Current systems are often importance of strengthening the redifficult to use and lack the ability to silience of outsourced technology by delegate tasks to specific personnel. stressing the need to identify, measure, Since management process is so monitor, and mitigate all areas of risk lengthy, it requires many hands to get associated with outsourcing. It is no involved to perform due diligence aclonger practical to invest in several sotivities. This leaves room for miscomlutions to separately maintain all areas munication, error, and missed deadof risk management because of this lines. The ideal automated solution regulation. would include user access roles, built In order to stay ahead of the game, it in alerts, and a complete document reis recommended to have a solution that pository. User access roles would alties all areas of risk management under low all involved internal personnel the one umbrella. An all-encompassing ability to manage their specific funcrisk management solution will identify tions and keep track of their individual which vendors are correlated to your vendors. Built in alerts would ensure critical business functions. The vendor that all review dates and contracts are must allow you to complete your critibeing reviewed and managed on time cal functions or you will be in jeopardy and monitored correctly. A complete of financial loss or loss of business. You repository would centralize all vendor should maintain your institution’s busidue diligence documentation in one ness continuity plan and incident rearea to ensure that each vendor is being sponse policy and monitor the BCP and properly evaluated and controlled. incident response policies of your third The overall goal is to mitigate all parties. This will ensure that if a disasoutsourced technology risk by center or incident affects your vendor, they tralizing all tasks into one system. To will be able to continue to provide their achieve this goal, you must anticipate product or service to your institution. the risks before the auditors. UnforYour risk management solution tunately, institutions tend to maintain should incorporate vendor managea defensive “band aid” approach for ment, BCP, policy & procedures manauditors and regulations. They panic agement, incident response and emerafter a visit from the auditors and find gency communications under one a quick fix to the problem. Usually the solution to ensure all personnel can quick fix is to purchase a work together, elimisystem to cover the area nate further short-term that the auditor scrutisolutions, and anticinized. Sometimes that pate future regulatory system is only coverrequirements. An alling just a small part of encompassing operathe bigger problem and tional risk management the institution falls in solution will ultimately to a vicious cycle that make your institution just requires more band prosperous and more efaids. They might devote ficient. ■ the time and money into a vendor management Marc Riccio is Presisystem but then still dent of Specialized Data Marc Riccio manage the other areas Systems, Inc. BANKING NEW ENGLAND 41
DESIGN
Y
Designs for The Universal Banker
oung people fast become middle-aged, and this fact is providing a sense of urgency to the branch transformation trend we’re seeing today. Generation Y may receive their share of stereotyping from oldsters but they have some unexpected habits. Eighty percent of millennials say they still want the option to walk into a bank branch, 80 percent still use cash, and 64 percent of them say they still carry cash most of the time, according to studies by SurveyMonkey and Qualtrics. As in most other industries, financial institutions’ most profitable customers are the 50-plus year olds, but this threshold will likely come
42 BANKING NEW ENGLAND
By MARK CHARETTE
down somewhat as people grow more informed about wealth management over the next decade. Banking’s most profitable customers will soon be more tech-savvy than ever, and as Millennials head into their financially secure 40s and 50s, and competition grows in intensity, it will be critical for FIs to have established themselves as relevant players in this regard. After branch location, the single most important quality will be customer experience. Top-Notch Customer Experience A great customer experience will be created via two chief means: The implementation of the universal banker staffing model and its constituent
technology, and outstanding branch designs. These innovations were literally made for each other, and aligning the physical space with a modern staffing approach is more of an art than a science. Ideal universal banker candidates are valuable assets and difficult to find. They don’t need a pre-packaged understanding of financial products and services, but it’s crucial that they embody current retail culture and have an ability to appreciate where each customer is in their life journey. They must be great listeners and communicators, focused on relationship building and achieving results. They must also have a thorough grasp of banking technology and technology in general,
such as web apps, mobile software, and digital communication tools. An important piece of the transformational journey is implementing technology that replaces basic teller transactions and frees up branch staff to engage in higher value activities with customers. Shifting transactions away from the teller line onto self-service and assisted self-service technology such as ATMs and ITMs requires staff who can teach, as clients may be hesitant to use new technology and will need coaxing and educating. This type of implementation can be done in advance of any serious renovations and the resultant savings used to pay for some of the later work. Tie In Branch Design In order to bolster the relationship building activities of universal bankers, branch design should promote transparency and free movement, and reflect the demographic and socioeconomic characteristics of the market served. If the FI’s brand resonates with people of a certain ethnic background or nationality in a market, hiring staff from that culture will make the customer experience more efficient and increase trust, especially if language is an issue. Universal bankers may roam the floor, acknowledging and engaging branch visitors, but they also require a personal workspace. This workspace is an innovative, open-ended station known as a dialogue tower or pod. Pods allow customers and branch personnel to interact more intimately than the traditional teller line, whose intention was in fact the complete opposite of this. Small, with a privacy partition in the center (two customers can comfortably be served at a time), pods can be designed in a variety of styles that complement the branch architecture and brand image. A pod staffed by a personable and welcoming universal banker who can help the customer with all their financial needs (basic transactions, loans, new account openings, etc.) from beginning to end, constitutes a very positive experience for today’s busy consumer. When effectively combined with distinctive interior design and branding, this type of service inspires loyalty.
Like many other retail environtween universal staffing models and ments, the appearance of branches has technology means FIs are also poised changed dramatically over the past deto realize the power of artificial intelcade. In addition to dialogue towers, ligence to better market to and serve it’s now common to see the organizatheir clients. “Dialogue banking” truly tion’s name and logo displayed promiis about conversing with and learning nently throughout the branch, digital about the customer. Any informamedia with programmable content, tion collected from these interactions graphic walls, and increased merchanshould be captured and stored in the dising of products and services. All of bank’s customer relationship managethis pizazz serves to plant a memorable ment software. This includes data such image of the FI in customers’ minds as socioeconomic status, marital staand over time more people have come tus, age, physical address, employer, to expect this type of environment etc. Using this information to gauge when they enter a branch. The brandwhere each customer is in their lifecying palette now plays a more central cle helps the universal banker to underrole, and the organization’s banking stand their clients’ needs. It means the websites and apps are all designed to organization can respond with timely the same specifications as the branch conversations, marketing, and promodesign elements. This creates seamtions that anticipate and affirm these less transitions; from home PC, to needs via email, text, social media or smartphone browsing, to a physical phone, depending on that client’s prefbranch visit with a universal banker erences. on a computer at a pod The use of AI in marand even beyond that keting automation in to a private office on this regard is in its ina tablet, all while surfancy, but over the next rounded by the exact decade it will become same themes and mescommon. FIs need to saging regardless of the understand that hiring medium. This is the forward-thinking staff essence of what they to control these procall omnichannel bankcesses is crucial. It is ing, and most banks are the future of banking. ■ still in the early stages of implementing this Mark Charette is CEO approach. of Solidus in Rocky Mark Charette The relationship beHill, CT BANKING NEW ENGLAND 43
BUSINESS
THE ATM MARKETPLACE IS CHANGING
O
By GARY NARESKY
ver the past decade, the banking industry has been in a state of dramatic change seeing a total reduction of 3,012 branch locations. Large financial institutions have been the largest root cause of this change - they have cut more than 6,000 retail locations, according to S&P Global Market Intelligence. Community banks and credit unions with less than $1 Billion in assets have opened a net of 3,275 branches. More recently, many of the largest financial institutions have announced plans for new branch expansion. The industry, as always, continues to evolve as it faces overall market challenges and adapts to newer consumer behaviors while leveraging far more capable technology. The branch channel continues to be a core consumer selection criterion when choosing a banking partner, even though today’s technology has made it increasingly easier for consumers to transact away from branch locations. What makes a branch location so valuable to a consumer? Access to services, expertise and cash. Numerous reports have shown that cash remains extremely popular among consumers and continues to forecast a key role for the future of payments. Community banks and credit unions can leverage their advantages over larger financial institutions by optimizing the availability of ATMs to ensure consumers, who still rely on physical currency, have access whenever and wherever it is wanted. For those managing an ATM network today, the ATM industry is anything but status quo. In addition to Windows 10 compliance facing every ATM operator, the ATM OEM providers have compelling “new generation” products and solutions to evaluate. The confluence of these two factors has created a unique opportunity for the banking industry to re-evaluate what makes the most sense when addressing their customers’/members’ servicing needs. The future role of the ATM as a self-service channel is continually debated, with many experts questioning its value considering the new dynamic digital world we all live in. Smartphones, cashless transaction options, EPayments and card programs are often seen as growing importance. In 2017 however, the ATM witnessed many changes, innovations and new product launches that highlight how it is still a very vital and impactful financial technology for strategic branch transformation initiatives. 44 BANKING NEW ENGLAND
Ongoing Modernization The year 2017 represented the 50th anniversary of the very first ATM installation. Innovation continues to follow the original introductory trend with highlights including the growth of contactless accessibility and mobile transaction pre-staging offering maximized convenience for consumers. In recent years our ATM partner, NCR, has perfected a “new” customer experience with its interactive teller solution that provides the customer with fully assisted servicing that reflects a similar personalized experience that one enjoys inside the branch today. The “Next Generation” ATM devices allow for robust extended transaction sets that are available due to “core” integration of the teller platform or by the teller driving the transaction in an assisted mode. So, as you evaluate the cost of upgrading your network to Windows 10, the question becomes, “Should we invest in old technology that will do no more than it has in years past?”. This is an ideal opportunity for financial institutions to access their fleet and consider providing superior solutions to its customers/members. Some new feature-function solutions are: • Cardless transactions – no more skimming on ATM card readers • Personalization at the terminal • Bill mix option for self-service check cashing • Cross-selling at the terminal to “on us” and “non-on us” customers/members • Improved security to defend against jack potting, etc. It is certainly an exciting time for an ATM industry that provides the financial market place with many new options for consideration. For your branch transformation experience, what makes sense to you? • Traditional ATM Transactions • Assisted Self Service • Total Customer Self Service No matter what you choose, make sure your ATM network meets the needs of your customers. ■ Gary Naresky is vice president of sales, Customer Service Concepts, LLC.
3,012
THE NUMBER OF BRANCH LOCATIONS OVER THE PAST DECADE THAT HAVE CLOSED.
BANKING NEW ENGLAND 45
A BANKING NEW ENGLAND FEATURE SPONSORED BY
NICOLE ALMEIDA BAYCOAST BANK, SWANSEA, MA
N
icole Almeida, Chief Marketing Officer at BayCoast Bank in Swansea, MA, sat down with Banking New England recently to chat about the bank’s new marketing campaign, Get On The Bus, and how it has changed the way BayCoast Bank does business.
Banking New England: How did the bus start? Why a bus? Nicole Almeida: We have always put community dollars toward education. Our president and CEO truly believes education is what will move our community forward. We wanted to take it to the next level and drive it home to the community. We went through several different brainstorming ideas and ended up with a bus since it’s tied to education. We bought a bus in May 2017, wrapped it and made it into a mobile billboard. We just wanted to get more people talking about education and education funding. Now it’s this sort of symbol of education in the community.
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the bus around to events and filmed the general public saying why education is important to them. We got some great stories and delivered necessities to the schools. We turned those stories into PSAs. Students love it and it’s a mobile resource for parents. Now we are just launching our year two. We are going to collect art submissions from students with a theme of things like “What does your home mean?” and “What does education mean?” In turn, we will use those submissions in product campaigns in 2019. We are looking into arts and music programs to focus on since the arts are being cut in schools. We want to get students participating and showcasing the impact education has.
BNE: Did you think it was going to be once and done? Nicole Almeida: We started planning what year one would look like and what year two would look like. Our first layer was getting people to think about why education is important. We collected stories during year one while driving Students sit on the bus to showcase the importance of education.
BNE: What were some challenges you faced with the bus? Nicole Almeida: It is a lot of work and commitment on a lot of different fronts. You have to be nimble and flexible and there is a budget requirement. You don’t see the ROI right away, but it’s going to be there. One of our biggest challenges was staffing a bus driver. We are a department of six people. We reached out to employees to be Get On The Bus crew and hired brand ambassadors. Our biggest hurdle was just the bus and getting it places because it takes so many people. There is a lot of physical set up and being there for events and not everyone can drive the bus. BNE: What’s the future like for the bus? Nicole Almeida: We have already received calls from other banks about how we did it. We would love for the bus to go national and for more people to do what we are doing. There is a lot more work to be done in the communities we operate in. We want to spread throughout our footprint and add more things on the bus such as college application information and FAFSA information. It’s evolving to be more of a mobile resource. It’s not something that will go away.
Baycoast’s marketing campaigns are now tied to the bus.
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