September 2015 Banking Exchange

Competitive intelligence for bankers

September 2015 bankingexchange.com

community bank survival How community banks can survive in an overregulated, tech-crazed world

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/Contents September 2015

16

Community bank survival “Have we peaked?� asks one community bank CEO. Bankers discuss four keys to future success: people, M&A, branches, technology

By Steve Cocheo, Executive Editor Cover: welcomia/Shutterstock

22

Showtime for social The numbers are staggering and bank involvement growing. Six ways to help sharpen the focus

By Lisa Valentine, contributing editor

September 2015

BANKING EXCHANGE

1

/ contents / 4 On the Web

8

“Big Text” next big thing?; Reg B after same-sex marriage; Lending to high-tech

6 Like it or Not Regulatory relief is coming too late for many banks. Here’s a suggestion

September 2015, Vol. 1, No. 4 Editorial and Executive Offices: 55 Broad St., New York, N.Y. 10004 Phone: (212) 620-7210 Fax: (212) 633-1165 Web: www.bankingexchange.com Twitter: @BankingExchange Subscriptions: (800) 895-4389, (402) 346-4740 Fax: (402) 346-3670 Email: bankingexchange@halldata.com

8 Threads Wellness programs do reduce costs; Will EMV boost mobile pay?; Case for video tellers; Why not a “banker on call” app?

Chairman & President Arthur J. McGinnis, Jr.

13 Seven Questions Bank hedge fund manager Tom Brown on big-bank blame, Dan Tarullo, leadership traits, and the need (or not) for scale

28 Risk Adjusted Five takeaways from the first live stress tests of mid-size banks

30 Bank Tech How Wells Fargo’s R&D unit puts innovation to work for business customers

13 34 Idea Exchange

Editor & Publisher William Streeter bstreeter@sbpub.com Executive Editor & Digital Content Manager Steve Cocheo scocheo@sbpub.com Creative Director Wendy Williams Design Consultants Sarah Vogwill, Gal Dor Editorial & Sales Associate Andrea Rovira arovira@sbpub.com Contributing Editors Ashley Bray, John Byrne, Nancy Castiglione, Dan Fisher, Jeff Gerrish, John Ginovsky, Steve Greene, Lucy Griffin, Ed O’Leary, Dan Rothstein, Melanie Scarborough, Lisa Valentine

Bank marketers share their sources for ideas, and tech’s growing influence

Director, National Sales Robert Vitriol bvitriol@sbpub.com

36 Counterintuitive

Production Director Mary Conyers mconyers@sbpub.com

As Generation Z makes its way onto the stage, is it time to ask, “Have we overdone the Gen thing?”

Circulation Director Maureen Cooney mcooney@sbpub.com

36 Subscription Information: Banking Exchange Magazine (Print ISSN 2377-2913, Digital ISSN 2377-2921) is published March, May, July, September, October/November, December/January by Simmons-Boardman Publishing Corp., 55 Broad Street, 26th Floor, New York, NY 10004 Pricing: Qualified individuals in the banking industry may request a free subscription. Non-qualified subscription, printed or digital version: 1 year, financial institutions $67; other business $93; foreign $508. 2 year, financial institutions $114; other business $155; foreign $950. Single Copies are $35 each. Subscriptions must be paid for in U.S. funds.

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Marketing Manager Erica Hayes ehayes@sbpub.com Editorial Advisory Board Jo Ann Barefoot, Jo Ann Barefoot Group, LLC Ken Burgess, FirstCapital Bank of Texas, N.A. Steve Ellis, Wells Fargo & Co. Mark Erhardt, Fifth Third Bank Joshua Guttau, TS Bank Jane Haskin, First Bethany Bank Trey Maust, Lewis & Clark Bank Earl McVicker, Central Bank and Trust Co. Chris Nichols, CenterState Bank of Florida, N.A. Dan O’Malley, Eastern Bank Dan Soto, Ally Bank McCall Wilson, Bank of Fayette County

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/ ON THE WEB / Popular Stories on

bankingexchange.com

Is “Big Text” the next big thing?

Reg B review after ruling on same-sex marriage

Lending to high-tech borrowers

It could be a snarky comment on Facebook or the notes of a call center rep. Such unstructured data can yield useful insights, if you can tap it. Text analytics still lags business intelligence efforts, but is gaining.

Read more at http://tinyurl.com/ BigTextBlog

Now that same-sex marriage is a constitutional right, it’s a good time to look at how Regulation B addresses the issue and marital status change in general. Watch out for lingering gender-specific language in state laws.

Read more at http://tinyurl.com/ same-sex-lending

Preparation is critical because hightech credits differ in five key ways from the usual: due diligence, valuing intellectual property, importance of reputation, unique market terms, and cost sensitivity. Attorney David Lawson explains each. Read more at http://tinyurl.com/high-tech-lending

Mobile banking meets mobile shopping: This is big The so-called feedback loop—in which people get real-time feedback about their actions—can work in banks’ favor as people check balances on their smartphones before making a purchase. Banks are in a key position to help turn impulse buying into impulse saving—something Google, Apple, and Amazon won’t do.

Read more at http://tinyurl.com/ bankingmeetsshopping

Subscribe to our free weekly newsletters, Tech Exchange and Editors Exchange at bankingexchange.com/newsletters

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To suggest topics, new blog subjects, and other web ideas, contact Steve Cocheo, digital content manager, scocheo@sbpub.com, 212-620-7219

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/ like it or not /

The elephant in the room

S

ome readers may wonder why, in a story on community bank survival strategies, we did not devote more words to the obvious threat posed by excessive regulation.

Isn’t it, after all, the elephant in the room—raising costs, draining resources, and contributing to a sharp reduction in the number of smaller banks?

It is, but for this article, we chose to focus on competitive challenges where the outcome is less dependent on government. Clearly, the two cannot be completely separated.

The problem isn’t reg ulation, per se. The problem is regulation without bounds. Banking is an economic essential and so needs some oversight. Done right, oversight is a plus. It sets banks apart from unregulated financial players.

In human affairs, however, no good concept remains untainted for long. Any banker with more than a few years in the business knows that regulation over time becomes entrenched, unbelievably complex, and unevenly applied. It stifles innovation—except for the innovation required to comply with it.

No banker I know would say that protecting consumers from financial abuse is not impor tant. Yet I would wager that nine out of ten bankers would say that the Consumer Financial Protection Bureau is unnecessary, and, on balance, is hurting as much as it’s helping.

CFPB is just one example. It’s time for policymakers to stop using the financial crisis as an excuse to lambaste and handcuff banks. It should be abundantly clear by now that whatever gets thrown at the biggest inevitably f lows downstream to the smallest, one way or another.

The solution to this challenge requires different strategies from those in the cover story. It is why banks form trade groups and why they hire lawyers, lobbyists, and political strategists. It requires grassroots action, emails, congressional visits, testimony, and ad campaigns.

There are some requirements in common with competitive success, however. These include perseverance, patience, money, time, and personal commitment.

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September 2015

One requirement that is unique to political success, however, is a united front. We have all seen what happens when factions within one or the other of our major political parties focus only on their narrow interests. They lose. But when the factions set aside their differences, and focus on common elements, powerful things happen. Can the same be brought about in banking?

The argument has been made that banks are doing well, so why so much whining about regulatory burden?

Many, but not all, banks are doing well, it’s true, despite heav y compliance costs. But that overlooks the fact that over 1,000 small banks have gone away since the passage of Dodd-Frank.

Hundreds more likely will follow. The cover story makes the point that growth enables a great deal of extra cost to be absorbed. But many markets don’t support that kind of organic growth, and banks in those markets face the prospect of acquiring other banks to gain the necessary scale or being acquired themselves. Options not always viable.

Would consolidation have occurred anyway as the industry copes with the “Age of the App”? To a degree, yes. That’s why the cover story focuses on the competitive strategies for survival rather than regulatory strategies.

But, as noted above, you can’t separate the two. The reality is, absent the abusive—yes, abusive—regulatory regime that has increased way beyond need, more banks could successfully navigate the waters of technological change.

The likely outcome absent a clear, rallying cry? Government will gradually and partially close the barn door after thousands of banks have disappeared.

Here’s a suggestion, building on a point made by bank investor Tom Brown in Seven Questions: The leaders of the two biggest trade groups claiming to represent community banks—the American Bankers Association and the Independent Community Bankers of America—should put aside their differences and publicly join forces to ensure community banks’ survival.

BILL STREETER, Editor & Publisher bstreeter@sbpub.com

It’s time for policymakers to stop using the financial crisis as an excuse to lambaste and handcuff banks

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/ THREADS FITNESS PAYBACK Wellness programs do reduce costs

By Ashley Bray, contributing editor

L

ong before the Affordable Care Act, rising healthcare costs led many banks to invest in wellness programs with the thought that healthier employees would lead to lower healthcare costs.

This logic has proved correct.

“We do see that employees that participate in our wellness program, on average, have lower claims and costs overall than compared to nonparticipants,” says Megan Thom, senior analyst in benefits at $17.1 billion-assets First National Bank, Omaha, Neb., which has had a wellness program for 15 years.

Sound Communit y Bank, Seattle, Wash., which self insures employees and has offered a wellness program for seven years, also has noticed a decline in costs. “I’ve tracked the last six years of per capita healthcare costs,” says Laurie Stewart, president and CEO of the $492 million-assets bank, “and every year but one our costs have gone down. The one year they went up, we just happened to have a whole bunch of babies.” In Sound Community’s best year, the bank boasted a 12% reduction in costs.

These decreases in costs are directly correlated to an increase in participation, so banks make sure to incentivize participants, most commonly through a discount in the healthcare premium.

Many banks go beyond just a simple premium reduction, however, recognizing that the program must be fun and appealing to keep employees engaged.

“The goal with any of this wellness activity is to make sure you keep your finger on the pulse of the employees,” says James Miller, human resources director at $1.1 billion-assets Bank of Ann Arbor, Mich., which also self insures employees and whose wellness program helped the bank see a 6% reduction in costs from 2013 to 2014. “If you start adding things that they don’t want to do, they won’t participate and then you’re just wasting your money. I try to keep it fun.”

Smartphones, wearable devices, and online portals are some of the biggest inf luences shaping wellness programs today, and many banks have instituted a points system that rewards participants for reaching certain goals or points totals for things like steps, food, sleep

Banking on the go: the future of digital banking Top places Americans are using their mobile banking app

54% Work

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BANKING EXCHANGE

September 2015

39%

Restaurant

38%

Checkout line

17%

On a date

10%

Client meeting

habits, and more. Some banks have even made their discounted healthcare premiums dependent on a goal or points total. Employees are able to track their progress and points online or through a device like a Fitbit or smartphone. “People really seem to like that, because they can keep score throughout the course of the year,” says Miller.

While employees are engaged in competition with themselves to reach certain goals, banks recognize the need for a social component to these programs. “We also cover a spouse or significant other or partner, because we know that people do a better job of staying with an exercise or fitness program if they do it with somebody else,” says Stewart.

First National Bank recently partnered with a third party to create an in-house social networking tool that helps employees connect. “One of the m a i n c omp onent s a r ou nd p e ople’s well-being is being able to be socially connected to those who have the same interests that they do. But in large organizations, it can be hard to find people that have similar interests,” says Thom.

“The social tool really allows our employees to form communities.”

Education is as important as the activities, so that workshops and “lunch and learns” on various health and wellness topics also prove popular. “We believe that people are at different stages in

terms of their readiness to change, and so our program offers a big component around education to give people different ways of engaging based on where they are,” says Thom.

All these offerings aim at increased participation, but top-to-bottom involvement also is important. “It absolutely makes a difference to hear your executive management team talking about its importance and encouraging people to participate in the program,” says Mariano “JR” Pimentel, human resources development officer at $1.6 billion-assets Bristol County Savings Bank, Taunton, Mass. “That sends a very loud and clear message that this isn’t just something they want frontline employees to do; this is something that everyone needs to do.

It becomes a part of departmental activities and the bank’s culture.”

JPMorgan Chase survey finds rising bank technology use 2015 vs. 2014

30%

Using physical banking locations less

33%

Using their mobile app more

35%

Using a bank’s website or online portal more

September 2015

BANKING EXCHANGE

9

/ THREADS /

WILL EMV BOOST MOBILE PAY?

Longer transaction times could be a factor By Melanie Scarborough, contributing editor

E

mergency responders are taught that “seconds matter,” and that may soon apply to banking as well. The new EMV debit and credit cards rolling out are more secure, but slower. Instead of being swiped, they remain in the point-of-sale terminal until the transaction is complete, launching concerns that the cards could lose favor to faster mobile payment methods.

Lee Wetherington, director of strategic insight for Jack Henry & Associates, noticed the lag while using his EMV card in Europe. “I can tell you it’s a discernible difference,” he says. “You’re looking at two to three seconds, sometimes longer, until the transaction is complete and the card comes out.”

Two t o t hree second s may sound insignificant until that time is placed in context. A spokesman for Visa says their current processing time for swipe cards is 200 to 300 milliseconds. “People compare and contrast,” points out Wetherington. “Right now, they think, ‘Why would I use Apple Pay when swiping my

card is just as fast?’ That comparison will materially change once they’re using their EMV card. It will be discernible to the average cardholder that that is a slower way to pay.”

So far, mobile payment applications, such as Apple Pay and Google Wallet, which are available in the newest smartphones, haven’t gained w ide appeal among consumers—in par t because there are so few compatible POS devices.

That may change this month with the

introduction of Samsung Pay, which will work with all existing terminals. “Does this mean there will be a mass migration to mobile payments? I’m not making that forecast,” says Wetherington. “But convenience can be a top driver in deciding what payment [method] to use.”

So can information, according to Cary Whaley, vice-president, payments and technology policy, at the Independent Community Bankers of America, who says EMV cards will be an adjustment, and customer education is essential.

Before going to work for ICBA, Whaley was a banker, and says that “with this type of change, we trained everyone short of the janitor—even folks not in customer contact—because you never knew when they were going to be asked a question at church or in the supermarket.”

To keep c ust omer s loya l t o t heir EMV cards, banks w ill have to keep pace with progress. “The key to all this is being forward-thinking and f lexible enough to anticipate market and technology changes,” says Whaley. Does the

Video tellers: Handful of “ITMs” scores By John Ginovsky, contributing editor

M

ove over ATMs, here come interactive teller machines.

These machines—essentially souped-up ATMs with cameras and microphones that link walk-up or driveup customers with a live person located in a central office—have proven to be well worth the effort, albeit for the very few banks that have embraced them.

Advocates point to their ability to extend full-service banking hours, make staffing more efficient, and make things more convenient for customers. Doubters ask why a customer would choose a virtual teller after coming to the branch.

Research by Celent published late last year indicates that barely 2% of banks have them in operation or have definite plans for them, while about 37% are considering adopting them.

“The whole idea of video in the branch remains a polarizing topic for banks,”

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says Bob Meara, analyst for Celent. He notes, however, that for financial institutions using video tellers, “it’s pretty mu ch a no - b r ainer to d e li ver sub stantially the same functionality as an in-person teller via video, at a substantially reduced staffing cost, if you have a decent number of branches and can realize the efficiency of centrally managing and deploying those resources.”

This resonates with two institutions that have had experience with ITMs: PCSB (formerly known as Paige County State Bank), Clarinda, Iowa, and Salin Bank, Indianapolis, Ind. PCSB installed its first ITMs in 2013, and now has 14 in service at six branches. “We were looking to improve our facilities and help the customers in our market footprint have a better banking experience,” says James Johnson, CEO and president.

chip have to reside on a card? Could it be moved to a phone? Can customers be assured their EMV cards are as secure as Apple Pay, which uses tokenization so the transaction number doesn’t track to the debit or credit card number?

Wethering ton says banks have an advantage they may not realize as mobile shopping and mobile banking merge.

Some phone apps, for instance, allow users to capture the image of an item they’re considering buying, and the app tells them what the damage would be to their primary checking account. Another phone application, Dig it , monitor’s the user’s bank balance and automatically moves excess funds into a savings account. “They’re a third-party, nonf inancial institution, so the sav ings account is not at your bank, and Digit is keeping the interest on that account,” he says. “Banks could do the same thing, and it would serve your best interests.”

Certainly, banks are better suited than phones to guiding customers’ purchasing decisions, and Wetherington urges them not to cede that ground. “All the financial institutions are being told they’re obsolete,” he says, “but if you look at what’s actually evolving in the mobile space, banks have context better than any disrupters can bring to bear.”

The bank realized customers would benefit from the ability to do full-service banking on their terms, rather than the bank’s restricted hours. With ITMs, PCSB operates from 7:00 a.m. to 7:00 p.m., weekdays, and 8:00 a.m. to 1:00 p.m. on Saturdays. Johnson says that most days from 5:00 p.m. to 7:00 p.m. only two tellers are needed to handle the transactions from all six locations.

As for the argument that customers who come to the bank expect to deal with live tellers, Johnson says the bank remains fully capable of doing that. Even with walk-up customers, for those who want to do simple transactions and the live teller is busy, “they will jump over and use the ITM as an overflow—most without hesitation.”

Read more, including Salin Bank’s experience, online at http://tinyurl. com/videobankingcase

Fintech investment Venture capital and large banks are the two biggest players

I

nvestment in financial technology nearly tripled in the United States in 2014 over 2013, building on a compound five-year annual growth rate of 56.6% from 2010 to 2014.

U.S. fintech deals and investments hit $9.89 billion sprea d over 493 transactions in 2014, according to an analysis by Accenture of data compiled

by CB Insights. This compares to $3.39 billion spread over 494 deals in 2013.

In 2014, New York deal value grew to $768 million, a 32% increase over 2013, which enabled it to overtake fintech deal growth—by percentage growth rate—in the Silicon Valley, other U.S. markets, and globally. Global investment tripled during 2014, rising to $12.2 billion from $4.05 billion in 2013.

The increase in fintech investment comes from two major sources now, according to the report.

One is venture capital. The report states that the venture capital commu n it y se e s f i nt e ch a s “ t he ne x t frontier.” Many opportunities in media and retailing have already been well worked over by venture capitalists, the report indicates, and they now see that “financial services, for the most part, is a growth play.”

T he o t he r s ou r c e of g r ow t h i s

graphFACT

existing, major financial services companies, according to the report. “ They are embracing things like cloud technology, mobile wallets, and blockchain to fundamentally reexamine their business and operational models,” the report states. As a result, large banks and insurance companies are investing in fintech venture capital funding, incubators, and startups.

The repor t indicates that banks have had a change of heart on innovation investment. “In order to keep up with the significant advances in digital technology, banks are forging closer ties with the fintech community,” the report states. “The narrow view that all innovation and development needed to come from within—also known as the ‘not built here syndrome’—has started to fade.”

The report indicates that the types of fintech innovation being backed are evolving. Until recently, fintech was almost synonymous with payments technology, but that space has grown very full. The study found that, looking solely at New York, payments-related investment hit 33% of the deals (by number of deals) done in 2012, but had fallen to a share of 21% in 2014—a tie with lending investments.

Fintech deals and investments in the U.S.

Investments ($M)

Deal Volume (#) 494

12,000

493

397

10,000 362

$9,887

500

400

8,000 6,000

300

267

200

4,000

0

100

$3,394

2,000 $1,644 2010 Deal Volumes (#)

$1,852

$2,020

2011

2012

Investments ($M)

0 2013

2014

Source: Accenture analysis of CB Insights data

September 2015

BANKING EXCHANGE

11

/ THREADS /

Why not a “banker on call” app?

“Uberize” business banking to maximize service By Pierre Naudé

“H

ere we go again,” says anyone who follows the long-running debate about the future of the bank branch. It seems as if the future should be here by now.

Maybe it is.

The answer comes in two parts: retail and business banking.

In retail banking, online and mobile channels can and will suffice for 99% of interaction required by the bank. Portal development, more sophisticated websites, and electronic handling of documents and signatures will contribute to this. Therefore, the branch footprint can shrink significantly.

In business bank ing, the “ banker on demand” concept comes into play.

H ig h-ne t-wor t h sm a l l bu si ne s s or business-lending customers represent significant value to the bank. Rather than pushing these customers toward interaction in the branch, why not visit them in their business or at a coffee shop?

Instead of having a network of physica l branches that (most) customers loathe visiting, why not provide them with an app they can open on a tablet and see where bank cars—coded for different specialties—are in their area, and then simply request one?

Why can’t we integrate this ease-of-use

concept into banking? If customers need a banker to sign a document; need a wealth manager; need to take out a business loan; or to deposit large amounts of cash, why not order a banker or cash collection ser vice, much like we call upon Uber? That company is evolving the way the world moves by seamlessly connecting riders to drivers—and now services—through its platform.

Here is my challenge to the marketplace: Start planning today for a new wholesale and retail strategy.

Your retail strateg y needs to start maximizing electronic interaction and transparency across the omnichannel and ensure millennials want to bank with you—they are tomorrow’s customers.

For your wholesale strateg y, think about the best way to prov ide your customers with personal services—commercial lending, wealth management, and cash collections—that are available at the tip of their fingers.

Banks need to return to the days of the “doctor on call,” ensuring that they are able to meet with customers on an as-needed basis. And they need to do this in a 21st century way that leverages technology to make the service more efficient, cost effective, and convenient for banks and their customers.

Pierre Naudé is CEO of bank technology company nCino. A longer version of this article appears online at http:// tinyurl.com/bankeroncall

Passwords becoming passé Usernames, too, as folks open up to alternatives

S

ignaling a potential change in a long-standing, widespread practice, consumers are interested in alternatives to usernames and passwords to protect online security.

New research from Accenture, based on a survey of 24,000 consumers across six continents, reveals that 60% f ind usernames and passwords cumbersome.

Most (77%) would try something new.

“The widespread practice of typing usernames and passwords to log on to the internet might soon become obsolete,” says Robin Murdoch, managing 12

BANKING EXCHANGE

September 2015

director of Accenture’s internet and social business segment. “Consumers are increasingly frustrated with these traditional methods, because they are becoming less reliable.”

Research reveals that openness to alternatives is pervasive in countries in many parts of the world, with consumers in China and India most likely to be open to alternatives, at 92% and 84%, respectively. In the United States, 74% also are willing to consider other methods.

“As hackers use more sophisticated and less obvious methods, passwords are

no longer seen as the definitive answers to the security question,” Murdoch says.

“Traditional one-step passwords are now being matched with alternative methods using biometric technologies, such as fingerprint recognition and two-step device verification. Within the next few years, we are likely to see many more consumers embracing these and other alternatives.”

/ Seven Questions /

Still punching

Straight talk from long-time bank hedge fund manager Tom Brown, guaranteed to get your juices flowing By Bill Streeter, editor & publisher I would say, f irst, I’ve never been a banker, but I think the big banks have taken a bad rap for many years that they caused the Great Recession. I have written blog after blog trying to explain why I don’t think that was anywhere close to being accurate, and it generates an incredible [counter] reaction every time I do. I don’t think it’s ever going to change.

O f t he ba n kers under $5 bi llion, maybe half of them agree with me that the Independent Community Bankers Association should not be fighting the big banks as much as they are. But the other half says they should.

My view is that banking industry leaders ought to be fighting together to ease some of the regulatory burden on them.

Not fighting against each other, which then doesn’t enable any thing to get through Congress.

Second Curve Capital’s Tom Brown calls them as he sees them.

A

couple of years ago—well, getting on 25—Ed Crutchfield, then CEO of First Union Ba n k , la shed out i n f r ustration at “that little red-haired kid” Tom Brown after reading yet another of his analyst reports on the bank that, in typical fashion, was bluntly critical.

Undeterred, Brown has never changed his stripes in calling it as he sees it. Initially, his work appeared as investment

Photo by William Alatriste

Big banks didn’t cause the Great Recession, Brown maintains, and fighting them won’t ease regulatory burden notes as a sell-side analyst for Donaldson, Lufkin & Jenrette, and other firms, then as a manager at the Tiger Management hedge fund. In 2000, he established his own successful f inancial services hedge fund called Second Curve Capital, named after a book called The Second Curve, by Ian Morrison. He continues to

write regularly on bankstocks.com, the news and commentary site he and his staff have run for many years.

Brown may run a hedge fund, but he never hedges his opinions. You know where he stands. If you take him to task over some view—in person or on his blog—he’s always up for the challenge. But unlike some pundits, he will admit it when he’s wrong.

Agree with him or not, Brown is a keen observer of the banking scene. His commentar y is skewed more toward large institutions, but his fund invests in banks down to a “couple of billion” in assets, and, as you will read here, he is not a believer that size alone is better.

The dialogue that follows won’t disappoint Tom Brown aficionados, and will probably annoy the heck out of others. If you find yourself in the latter camp, just keep reading, because you’re bound to find someone else’s ox being gored that will have you nodding in agreement.

Q1. There is still a great deal of anger in the industry toward the largest banks.

What would you say to those bankers who view the largest banks as detrimental to the industry’s reputation?

Q2. A couple of months ago, you took BB&T to task for the bonus that the board voted to give top management for the acquisition of Susquehanna Bancorp, if it works out. Why is it that managements and boards of banks— large or small—sometimes appear tone deaf to the impression such decisions create?

BB& T ha s a re c ord of bei ng a n ex t remely wel l-ma naged orga n i zation. But as I wrote, it absolutely makes no sense to me [to pay management a bonus for doing what is, essentially, its job]. With some institutions, you might say the management was just greedy.

But that would not be what I would suspect is the motivation here.

I think if I had to look at one factor, it would be, frankly, an incestuous board.

I’m a fan of—let’s call them—soft term limits. So after somebody is CEO for ten years or after somebody is a board member for ten years, I think the burden should be on them as to why they should stay in that position. We need more turnover. We need more dissent.

Q3. Two-part question. First: In your time in the business, can you think September 2015

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/ Seven Questions / of any improvement in the regulatory regime? Or has it only progressively grown more complex and burdensome? Second: If you were in charge for a day, what would you change?

You know, we’ve seen a couple of major real estate cycles, and, certainly, the rapid growth in outstandings, and the concentration in outstandings wasn’t something the regulators caught in the second cycle [leading up to 2008], but maybe the necessary changes are in place now so that it won’t be as painful in the next cycle.

But what I worry about the most is that we have now pushed so much business outside the banking industry that the credit problems in the next economic down-cycle will take place in the shadow banking system. The best example of that would be leveraged lending. The regulators have been all over the banks to cut back on their leveraged lending, and they have. If you look at where the nonperforming assets are in the leveraged lending portfolios today—in a healthy economy—they’re eight times higher in the shadow banking system than they are in the banking system. Nobody is looking at those lending activities.

Some of the individuals in the regulatory bodies are so scared to death that they’ll be called in front of Congress again that they are coming out with rules and regulations and supervisory actions that are overly restrictive, making it easier for the nonbanks to pick up business.

If I were in charge for a day, the overall goal would be to simplify regulation.

There are too many people inside a bank today that do nothing but try to focus on compliance.

Take a $5 billion bank. They’re getting pressure now to not only have a chief credit officer, but to also have a chief risk officer. That’s not even a requirement for a bank that size, but the examiners come in and they say, “Well, that’s a best practice for a bank over $10 billion and that seems to be where you’re headed, so . . . .”

Also, we’ve got too many conf licting regulations today. For example, large banks have new liquidity requirements, and they have higher capital requirements. But the liquidity requirements and the capital requirements are in conf lict, because to increase your liquidity means you increase the level of [liquid] assets, which then means you have to increase your capital position.

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A s for rolling back Dodd-Frank, I think with any major legislation like healthcare or Dodd-Frank, there are certain elements that even a guy like me would say, “Okay, that’s a constructive change.” For instance, it eliminated the OTS, so that’s a positive that I wouldn’t change. But I think there’s probably about 90% of that law I would change.

Q4. Given his focus on supervision, is Federal Reserve Board Governor Daniel Tarullo the most powerful person in the banking industry?

If there’s a populist sentiment against big banks that is very strong and very deep, that’s exactly how I feel about Dan Tarullo. He is the most powerful person.

He’s never worked in the private sector. He’s big government—knows all the answers—but, unfortunately, all major [supervision] decisions go through him.

He is out to get big banks and big bankers. And I don’t think that’s his job. I wish more of the Federal Reserve Governors would get involved in bank supervision, but they all love monetary policy so much they don’t.

One of the results of this is the conflict between having higher capital standards and having a stress test. We don’t need both. If you can pass a stress test and have the minimal level of capital based on the assumptions that our regulators are requiring, then I don’t think holding institutions to a separate capital standard is necessary. We’re wasting a lot of effort by having both of them.

I’m not a big fan of models. Look at the modeled losses on single family residential mortgage loans and what actually happened. So I think we’re better off with just capital standards. What I don’t like about the stress tests is the arbitrary nature that has been put into the process. Essentially, any bank can be failed, because the Fed won’t give the banks enough guidance as to how they’re actually conducting the stress test this particular year. It’s like they purposely try to embarrass the bank managements by failing them.

Q5. Shifting gears, changes in the fintech world are coming fast and furiously. How big an impact do you see for banks?

I give a lot of speeches to bank boards, bank industry groups, and bank management teams, and in my presentations,

I’ll often include a picture of an empty [bank] branch. My biggest concern— because I’m an investor—is that I’ve got a bunch of Kodaks in my portfolio.

They’re Kodaks because of the fintech competitors that are developing. So we spend a lot of time trying to understand fintech competitors.

But the impact depends on the product. In the remittance business, we’re seeing companies come along and dramatically lower the cost of transferring money, and it’s wreaking havoc on the business models of MoneyGram and Western Union.

With marketplace lenders, however, the bet is that they are going to be a better underwriter, a lower cost originator than companies like Capital One or Bank of America. I don’t think that’s going to happen. One reason is because I don’t think the business model works. And secondly, I think the valuations of the companies are excessively high.

One of the things I’ve learned is that specialists—monolines—can be very successful for a period of time. And then either the lack of diversification or their push for excessive growth in a restricted area causes the specialist to lose.

Also, with some marketplace lenders, such as Lending Club, the question is when they sell these loans, are they securitizations? If the regulators rule that they are, then the lender is going to have to comply with the skin-in-thegame requirements. And that completely changes the business model, because of the capital they’ll need to grow the business. So the cost to originate seems, to me, to be too high. Some argue that that cost will come down as they get bigger. I don’t think it will come down far enough.

One other thing: With a lot of the fintech developments, if the business relates to funds, then they must have a bank partner. That works well as long as you’re not big. But when the nonbank starts driving the results of the bank, then you get the watchful eye of the regulators. We see this in the debit card business, where two banks dominate the nonbank debit card business.

One is called Bancorp, and the other is Meta Financial. We are large shareholders of both. Both of them have gotten hammered by the regulators because of concerns that the prepaid card business can be a money laundering tool. And so the systems required of players in that

“A lot of top 100 banks, when they get on a roll, believe they can’t do anything wrong— not recognizing that they’re at a favorable point in the economic cycle. That’s called confusing brains with a bull market” Tom Brown, Second Curve Capital business are incredible. They basically have to have the same BSA software that Citibank uses.

Q6. What leadership traits have you observed over the years that set apart successful banks you have followed?

I have seen many different leadership styles. Take Dick Kovacevich [retired chairman of Wells Fargo]—one of the all-time great CEOs. His leadership style was to inspire, and as the bank grew bigger, he grew less and less hands-on. But he came up with some key principles of how the company was going to operate, and he was able to communicate that throughout the organization, and they executed it well.

Then again, I think Jamie Dimon will go down as one of the greatest CEOs of all time. But, unlike Kovacevich, he needs to understand how every one of his businesses works and how they make money and what the risks are. And so he has a deep understanding of each of the businesses. For Jamie, that style works.

In both cases—and this is true with all great CEOs—you can’t force growth. If you’re a highly leveraged institution like banks are, you have to take what your franchise is giving you at that particular point in time. So you can’t come out and promise 15% earnings per share growth every year, because you don’t know you can deliver that. I’d say a lot of top 100 banks, when they get on a roll, begin to believe that they can’t do anything

wrong, as opposed to recognizing that they’re at a very favorable point in the economic cycle. In my business, we’d call that confusing brains with a bull market.

Whereas great CEOs, like both of those two individuals that I mentioned, will pull back on the growth in certain lines of business when they think that they should.

Q7. What’s your take on the community bank sector? Do you buy into the need for a certain scale?

In every one of my presentations, people will ask, “What’s the optimum size?” And I have an answer, but what I point to is that if you look at banks that are $100 million, $500 million, $1 billion, I can show you a very successful bank at any size category.

So it’s not that there’s a size that’s too small. But somewhere between $1 billion and $50 billion is a sweet spot, in my view.

That said, the number of acquisitions in 2015 as a percentage of the banks that existed at the beginning of 2015 is almost back to the peak activity that we saw in the late ’90s. And almost none of that is among banks above $5 billion in assets.

The reasons for that are, number one, the fact that smaller banks now have to add a chief risk officer, among other things, which is expensive. But regulatory burden is not just a cost. These guys are just frustrated they can’t operate their companies like they used to, so it’s the cost of regulations plus increased scrutiny.

The second reason is they’re not earning an adequate rate of return on the capital for their investors. And the investors are tired. I listen to a lot of earnings conference calls, and it is a knee-jerk reaction of management and shareholders to say that, “We’ll all make a ton more money when interest rates rise.” As an investor, that worries me. It’s just not going to be that simple.

In banks of any size, there are two ingredients that we always f ind lead to success. One is focus. They don’t do everything. They don’t serve every customer in every market. They’re focused on a few things that they do really well.

A nd the second one is the quality of the management.

So community banks can, in some ways, be like a monoline, but not a pure monoline. They have the ability to focus on lending to certain industries or they can be in certain geographies. That can also bring increased risk, but in any metropolitan market, typically what you’ll see is a large national bank losing market share, a large national bank holding market share, and a community banking organization that has been consistently gaining market share. So it bugs me when banks of a certain size say, “We’re not big enough to compete.” Because I can show you banks of any size that are doing very well. And if you don’t know how to run your core business well and grow organically, then you shouldn’t be making acquisitions.

September 2015

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community Bank

survival

What will it take to bring your bank to the next level? Bankers and others weigh in on four key elements: people, M&A, branches, technology

By Steve Cocheo, executive editor & digital content manager

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P

ennsylvania’s Lehigh Valley was once synonymous with Bethlehem Steel, the country’s second-largest producer.

Bethlehem, bankrupt since 2001, lives on only in memory—that plus five towering blast furnaces that remain on the home plant property, reminders of the past.

David Lobach, Jr., notes this essential piece of history of the market his bank serves, and very successfully. The bank opened the year the steel company went under. Lobach, chairman, president, and CEO of $741 million-assets Embassy Bank of the Lehigh Valley, remains high on his bank’s potential. But he admits that he wonders about the future.

“Where are community banks in their business life cycle?” he asks. “Have we peaked? Or are we still in growth mode?

I think about this all the time.”

Lobach shares the same frustrations many community bankers do, including regulatory burden, notably, as well as rapidly shifting technology.

“The more we spend on things that don’t matter,” says Lobach, “the less we can spend on things that do matter.”

Since the Sarbanes-Oxley Act (Embassy is a public company) and the Dodd-Frank Act, he says, bankers have watched entire new regimens of regulation, and new regulators, arise. He can’t help thinking of those cold blast furnaces, even though the bank has been doing well. Not all community banks have fared as well, but even for those that have, the question remains: Is that success sustainable?

Pa r t of how Emba ssy succeeds is st rong empha sis on t e a mwork a nd culture. Lobach notes how fintech entrepreneurs and other nonbank competitors exploit “friction”—factors in regulated banking that make it more difficult for customers to obtain what they want.

“We have to think about what we are not doing,” says Lobach, “so we don’t make opportunities for these entrepreneurs.” Ever y bit of friction breeds a bunch of apps.

Lobach says he loves being a banker, “but I don’t like the way the pendulum has swung.”

In Florida, John Corbett, president and CEO at $3.9 billion-assets CenterState Banks, Inc., Davenport, says, “It’s a fact of our business that the U.S. government plays an outsize role.” Corbett says Washington has been engaged in

“regulatory arbitrage” since the financial crisis, closing many small banks, deciding who would and wouldn’t be helped, and also making it “hard to be a big, bad Wall Street bank.” He says the sweet spot of banking today seems to be $5 billion to $10 billion.

“You don’t get up in the morning to build a business around regulatory arbitrage,” says Corbett, who helped start CenterState Bank of Florida, N.A., in 1992. “But you have to know that it is out there.”

It’s not just regulatory costs that concern community bankers. Running a successful bank is never a slam dunk, but currently the challenges have ramped up ominously: They include thin margins that may or may not improve with an uptick in rates; greater requirements

Yet even these players, and many more inter viewed, face challenges to their traditional banking models, and are weighing adjustments. They recognize that growth always offsets a lot of costs, and that the current stellar state of credit quality also helps. But not all banks are in growth markets, and credit quality is always cyclical. Hence for many community banks, there is a greater sense of uncertainty about their future.

Disruption or distraction, or both?

Even leaving aside the impact of new regulations and compliance, community bankers can find it hard not to be affected by all the talk about “disrupters” in finance. There is much talk among

“The more we spend on things that don’t matter, the less we can spend on things that do matter,” says Embassy Bank’s David Lobach for capita l w ith fewer sources; new rules and new scrutiny covering mortgages and ever y consumer f inancial product; heavy new risk management requirements; and the aforementioned technology revolution affecting every aspect of business. All of these weigh more heavily on community banks than on their larger counterparts.

Despite that, many banks are doing well. McCall Wilson, president and CEO at Bank of Fayette County, Tenn., says the $352 million-assets lender is having its best year ever. “Our branch network has finally paid off,” says Wilson. The bank’s deposit share has grown significantly.

In Munster, Ind., part of the greater Chicago market, Peoples Bank SB is coming off its second acquisition in 18 months, which will put it in the range of $850 million. Ben Bochnowski, president and COO of the former mutual, says Peoples, publicly owned, continues to balance its four prime “boxes”: community, shareholders, customers, and employees.

the consulting fraternity about changing business models that can’t be discounted.

Yet the viewpoints are hardly unanimous.

“I think the community banking model has a very bright future, but there will be fewer people participating in that experience,” says Matt Pieniazek, president of asset-liability management advisors Darling Consulting Group. “There is a finite amount of opportunity.”

Community bank investor Joshua Siegel counsels moderation. Community banks can be revolutionary, evolutionary, or stagnant, he says. Most should be striving for evolutionary, he suggests, concentrating on what they do well, while not ignoring new technologies that they can adopt as they go. For all the talk about fintech and such, says Siegel, when you get past the hype, exciting new apps serve a small part of America, for now.

Referring to a new app called Digit, which sweeps excess checking balances into insured savings to force thrift (and keeps the interest as a fee), Siegel says, September 2015

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/ survival / “Most of America doesn’t need funky things. I don’t think people in Olathe, Kans., are itching to sign up with Digit.”

By contra st , Paul Schaus wor r ies that community bankers will always be behind, these days.

“The velocity of change is faster and faster,” says Schaus, president and CEO at CCG Catalyst Consulting Group. He says that those in denial could wake up some morning to the shock that the world and their business model don’t match. Schaus gets “relationship,” he says, “but without the right product experience, it won’t fly.”

“We’re at the point in banking where it’s not the banks presenting change to the market, it’s banks that are catching

up to the market,” says Schaus. “Nowadays, people are demanding services that banks don’t even offer yet.”

Wouldn’t it be great if a banker could obtain a “Community Bank Survival Kit” containing everything needed to thrive?

Truth is, after speaking with executives at community banks of multiple sizes, bank investors, consultants, and more, the overwhelming conclusion is that no one “kit” would suit.

But there are key issues to consider.

One of which is that a banker’s best survival kit may be between his ears. As evidence of that, read how bankers and others feel about four key elements of survival—people, M&A, branches, and tech innovation.

PEOPLE: Still the core

“‘Relationship’ is the antithesis of app.

Even millennial customers want to talk to someone,” says EagleBank’s Paul.

“You don’t build a business around regulatory arbitrage,” says Corbett of CenterState, “but know it’s out there.

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“It’s all about the people,” one way or another, is something heard from many of those interviewed.

Consultant Don Musso, head of FinPro, Inc., is in his late 50s and believes strongly in what some might scoff at as the “cult of the millennial.” He’s outfitted his own headquarters with a pool table and other features younger people like to see in a workplace.

Musso says that some of the more enlightened bank CEOs he works with tend to see themselves competing with the Googles of the world for present and future talent, not for experienced bankers.

“What good is hiring someone with 30 years of experience in an antiquated model?” he asks. Similarly, when making an acquisition, a buyer needs to consider the workforce that will be inherited— does it fit the future?

Not all bankers interviewed shared Musso’s hard-nosed view, but they all are thinking hard about the human element.

At $506.9 million-assets United Bank, Atmore, Ala., Robert Jones, president and CEO, hasn’t put all his chips on millennials. But he has found them a very interesting group of employees to get to know and work with.

One factor that sets United Bank apart is that it is a Treasury-accredited Communit y Development Financial Institution. Jones points out that millennials are known to be interested in work that has a positive social impact.

The bank’s CDFI efforts fit that well.

They see the bank having a mission. “You can’t compete with Wall Street offers, but you can show them what you do and give

Looking ahead has never been so critical. Consultant Paul Schaus: “People are demanding services that banks don’t even offer yet”

them some autonomy,” says Jones.

Millennials also tend to be very technology oriented, and Jones has taken a dva nt a ge of t hat . Five m i l len n ia l employees serve on the bank’s Emerging Tech Group.

“They are our hunters,” says Jones, seeking out new ideas. One that’s saved United “a ton of money,” according to Jones, is using Google Hangouts. This free app enables the bank to have meetings around its 19 offices in Alabama and Florida that used to require staff travel and time. Hangouts, multi-media capable, “are much better than a conference call,” says Jones.

But there’s more than youth in the people decision these days. Market intelligence is ranking higher than ever in the HR decision process.

In Okeechobee, Fla., drive-through lanes are a good deal larger than anywhere else in CenterState Bank’s system.

Corbett says that Florida is a polyglot collection of markets. The bank has four regional presidents and eight community presidents. They adapt the bank to the market. And that’s why Okeechobee drive-throughs are bigger—so they can allow cattle ranchers towing cow trailers to easily use them.

“You either have the right people making local decisions,” says Corbett, “or you are not going to be a player.”

Today’s best community banking leaders, maintains Darling Consulting’s Pieniazek, “just seem to put the right people on their bus.”

of activity and staff over that asset base.

When you are smaller, Maust continues, you have to specialize. It doesn’t have to be a product specialty. You could specialize in a region or a geographic footprint of some def inition. But you have to narrow the focus somehow.

Achieving scale is one reason for making an acquisition, and every bank at one time or another wrestles with that option. Knowing why you want to do an acquisition should be a basic, experts say.

Sam Kilmer, senior director with Cornerstone Advisors, points out that some mergers might be done for geographic reach, some to pick up new business lines, some to bulk up, some to achieve

“Find merger]partners that make sense,” says Peoples’ Bochnowski. “It’s not just for the sake of getting bigger.”

M&A AND GROWTH: What size?

Any rule of thumb about the size a bank “must” be should be treated critically.

Joshua Siegel suggests that $1 billion could be a good target in cities, and $500 million in suburbia—but nothing is coast-to-coast gospel. Siegel says in many rural communities, an $80 million bank could do quite well. “Even if the whole market is only 3,000 people,” says Siegel, “if you have 2,800 of them, you have a bank.”

You used to hear that you had to be a $1 billion or $2 billion bank to survive, observes Trey Maust, copresident and CEO at Lewis & Clark Bank, a young $137 million-assets institution in the Portland, Ore., area. Now, he says, the larger you are, the more of a generalist you can be—you can spread more types

“Where are community banks in their business life cycle?” asks Embassy’s Lobach. “Have we peaked?”

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/ survival / scale economies, some for expertise. The bank has to be clear what it is looking for.

For example, Rheo Brouillard, president and CEO at $1.4 billion-a sset Savings Institute Bank and Trust Co., Willimantic, Conn., acquired Newport Federal Savings Bank, in Rhode Island, about two years ago. The bank needed to expand its markets to grow loans, and to bolster its mortgage lending reach.

“It’s gone very well,” says Brouillard, adding that the company is scouting for another deal in the near future.

Peoples’ Bochnowski’s take on the mergers: “We have to find partners that really make sense. We’re not an aggressive acquirer, and if there’s not a cultural fit, we won’t do it. You can’t just do things just for the sake of getting bigger.”

Maust agrees, saying, “I’d rather be smaller with a strong margin than larger with a mediocre margin.”

Not every banker feels a pressing need for acquisitions. Says Embassy’s Lobach: “We like organic growth. We like that because we do it well, and we can always get better at it. Maintaining our culture is very important to us, and to our board.”

In the end, it’s the growth that matters.

It makes so many things possible. How community banks achieve it will always vary. As a community banker pointed out in an article in the July issue, if you operate in growth markets, organic growth is not only possible, but preferred by many.

But in slow- or no-growth markets, M&A may be your only option.

BRANCHING: Still more yea’s than nays

We didn’t inter v iew any community banker who didn’t indicate that the future holds branches that are fewer in number, smaller in size, and devoted more to sales than to transactions. They get it.

You don’t have to search long on the web to find views that branches are, or should be, disappearing. CCB Catalyst’s Schaus, for one, is concerned that community banks are too caught up in the “symbolism” of the local branch, not unlike the way people feel about the local Post Office.

But the majority of those contacted still see the value of a physical place of business. “What I always go back to is that most people like to look at a physical building when they are banking,” says Barry Lockard, president of $442

million-assets Cornhusker Bank, Lincoln, Neb. “It’s hard for them to just push their money into cyberspace. They like to drive by and see where that money is.”

“Even if people don’t come in, they like the idea of still having a place to come to,” adds Brouillard.

Cornerstone’s Kilmer notes that every month that goes by, customers are less inclined to visit branches. However, he says the branch must be considered in context. People value community banks because they are in, and of, the community. “That matters,” says Kilmer, as much as banker service on community organizations and boards. “The power of the branch, if it is done right, makes a powerful billboard.”

L oba ch a g re e s: “ There a re some things about ‘old school’ that is still ‘good school.’ The branch works for us. But our approach, from the beginning, was not to have one on every corner.” The bank has seven, each of them featuring sit-down teller stations, and “no cattle lines.”

At $970 million-assets FirstCapital Bank of Texas, N.A., Midland, every branch has been redesigned over the last two years.

Tools and tips to consider for your bank’s survival kit

S

uggestions and ideas distilled from the research and interviews conducted for the main article.

• Don’t be afraid to be “boring.”

Ask how any new program or product will improve shareholder returns and customer service, or strengthen your brand. If you can’t get a definite answer, is the proposal worth the expense?

• Celebrate “community”—it’s still a strength. Main Street still appreciates bankers who serve their communities.

But also consider new ways to do that (see http://tinyurl.com/citizensedmond).

• “Friction” breeds nonbank apps— find it and kill it. Look, with a customer’s eye, at how you deliver products and services for friction—things that make it difficult for customers to obtain what they want—to reduce the opportunities for tech-based competitors.

• Second-guess the urge to merge.

Too many mergers happen for unclear reasons. Know why you want to do an acquisition. If it’s for expertise versus deposits, for example, then employee

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retention, compensation, and cultural fit are much bigger concerns.

• C o n s i d e r “ b u y i n g t h e b a n ke r,” instead of buying the bank. Some community banks prefer this approach (see http://tinyurl. com/ServisFirstBank ).

• Hire with the longterm game in mind.

Hiring for experience m a ke s s e n s e, b u t b e sure the experience is re l ev an t— e.g . a che ck processing exper t won’t likely lead you through the challenge of mobile pay.

Place millennials (or comparable folks) in a position to help contribute to your tech savvy or suggest new ideas, new ways of doing things.

• Look beyond bank competition and beyond banking for ideas and challenges.

Supplement bank peer groups with participation in other business’ groups as well as conferences.

• Rethink your branches (already). It’s

been on the “do list” for years. That could include fewer of them; sit-down teller stations; instituting a “concierge” to handle most t ypical needs; supplement in-person staff with video tellers.

• Consider branch alternatives. Try LPOs in place of a branch, or rely more on officers calling on customers, using an Uber-like banker-on-call app (for more, see http://tinyurl. com/uberbank) • Be willing to work in two worlds. Banking is undergoing a longterm transition. Having a foot in the present and one in the future isn’t an inconvenience—it’s a fact of life.

• Maintain your perspective and be realistic. It’s easy to be overwhelmed by information. Much of what hit s bankers is noise, and shouldn’t be the basis of strategic decisions.

Send your tips to scocheo@sbpub.com

Investor Joshua Siegel: “Ask, what do I need on hand to maintain parity?”

“We took out teller lines and replaced them with a concierge desk,” says Ken Burgess, chairman. “The person behind that concierge desk can handle most of a customer’s daily needs.” At the same time, the bank makes extensive use of video tellers (see Threads, p.10.) and offers a mobile banking app for smartphone and tablet devotees.

CenterState Bank’s Corbett says that even as customers go more and more to electronic channels, having at least one branch in a community is considered critical. “That’s because sales still happen in the branch,” he says. Online account opening has not been stellar, in his experience. “There is a sales element in the branch that isn’t going away.”

Local geography and business mix still dictates some strategy. Patrick Frawley, CEO of $3.5 billion-assets Community & Southern Bank, Atlanta, Ga., notes that there are some markets where he doesn’t feel a physical presence is needed. The bank’s business reach is such that commercial bankers can easily drive to the customer in a relatively short time. Lewis & Clark Bank relies on a home office and two loan production offices. Maust likes the f lexibility to come and go in a given market that LPOs provide.

TECH INNOVATION: Don’t get dazzled

With the exception of regulatory overkill, nothing is a bigger source of community bank angst and frustration than technolog y innovation. In particular, the fast-changing world of mobility and its close ally—analytics/big data.

One of Lewis & Clark Bank’s slogans is, “We are bankerpreneurs,” and Maust, a former “big four” accountant, prides

himself on his staff’s expertise.

But one of Maust’s frustrations is that community banks are too much hostage to their vendors’ timetables and willingness to innovate in a specific area. The typical core-processing relationship— and all that’s bolted onto it—comes fraught with other people’s priorities, up-front costs, and termination costs, he says. All maddening to a young banker like Maust who would like to be able to quickly try things, ramp up when they work—and ditch them when they don’t.

Recently, Maust learned of a cloudbased small-business lending platform from a company called Mirador, endorsed by the Oregon Bankers Association. The technology intrigues Maust, but so too does the pricing—a bank pays only for what it uses—and the ability to drop the relationship with no significant exit costs.

Says Oklahoma banker Jane Haskin, president at $201 million-assets First Bethany Bank, “The difficult part for bankers is to know which steps to take first. So many of the new products that are available through the core processors require one product to be in place before another desired product can be implemented. It is almost like having a road map guiding you along, but technology is changing so rapidly, you aren’t sure of the destination.”

One of the big companies bankers watch is Amazon. “Amazon gets high ratings because its technology is so good,” says Chris Nichols, chief strategy officer at Florida’s CenterState Bank. The unfortunate message, he suggests, for community banks, is that the technology is far more important to many people than is the human factor.

Banker Ronald Paul, for one, doesn’t subscribe to that line of thinking. His

$5.5 billion-assets EagleBank, Bethesda, Md., serves northern Virginia; Washington, D.C.; and Maryland, a market with the third-highest population of millennials in the country.

“The word ‘relationship’ has a lot of meaning here,” says Paul, “and the word ‘relationship’ is the antithesis of an app.

Even our millennial business customers want to talk to someone.”

Indiana bank president Bochnowski, a millennial himself, maintains that technology is important, yet will never do what a banker at Peoples Bank does, but it will enhance it. He sees the need to leaven technology with humanity.

“Our mobile app does almost everything Chase’s does,” says Bochnowski, but meanwhile, he adds, a customer can connect with real people.

Bank investor Siegel says community bankers should maintain perspective and ask, “What do I need on hand to keep parity? That’s your survival kit.

Often, community banks don’t need the hot things, at least not ‘right now.’ Just make sure you are not falling behind.”

One related suggestion from community banker Joshua Guttau, CEO and CFO of TS Bank, Treynor, Iowa, is a good note to conclude this report. Over the last three years, Guttau and his team at the $505 million-assets bank have dropped out of some banking peer groups and joined peer groups in other businesses to help broaden their horizons beyond banking. He also sends his people to relevant nonbanking conferences.

“We’re not looking vertically within the industry for ideas,” says Guttau, “but looking horizontally across [various] disciplines to understand how industr y changes can be adopted or leveraged.”

A never-ending story . . .

This report has touched four of the key survival factors for community banks, but has certainly not exhausted the subject even for those four factors, much less others not covered here. Look for continuing coverage in the next issue of Banking Exchange (and beyond), and on bankingexchange.com in a new section, called “Survival Strategies” within our Community Banking channel as we delve into more detail.

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Showtime for

social

By Lisa Valentine, contributing editor

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September 2015

Social media is here to stay. Fitting it into your bank’s strategy means taking a measured approach.

Here’s how

F

or sheer magnitude, social media usage is staggering. That would be true even if there were only Facebook, which has 1.4 billion active users. But the accompanying chart from Statista (see p. 24) shows the wide range of social media services globally, including China-based Tencent QQ and Qzone with 829 million and 629 million users, respectively; LinkedIn with 347 million active users; Google+ and Instagram both with 300 million; and Twitter with 288 million.

Clearly, social media is not a passi n g f a d . T h o s e nu m b e r s a r e b o t h daunting and an indication of the potential opportunity for companies that can

successfully navigate social media’s continually churning waters.

Despite being a highly regulated and, by nature, conservative industry, banking is already broadly involved in social media: 83% of f inancial institutions have a social media presence, according to September 2014 research from the Bank Administration Institute (BAI Retail Banking Outlook: Banker Perspectives on the Financial Services Industry).

That figure, however, covers involvement ranging from active to dipping in their toes. The research also found that the most often used social media platform is Facebook (67%), followed by Twitter (24%), LinkedIn (4%), and “other” (4%), September 2015

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/ SOCIAL MEDIA / including Pinterest and Google+.

But even the 17% of banks that say they don’t have a social media presence are still participating in social media, argues Eric Cook, digital strategist with WSI and cofounder of DigitalRCP, a firm that helps businesses manage digital risk. Cook tells of a $2 billion bank that did not have an active social media presence—or so it thought—until it discovered 21 unauthorized Facebook pages with the bank’s name—some with notso-favorable reviews. (A quick search on Facebook for “I Hate Bank of America” reveals dozens of unauthorized pages.)

“You may be active or you may be

passive, but you are still involved in social media, whether you like it or not,” says Cook.

If you’re going to participate in social media—whether by choice or by force— it makes sense to create an overall social media strategy. But the pressure to just jump in and start posting on Facebook can be overwhelming, putting banks in the position of throwing spaghetti on the wall and seeing what sticks, rather than crafting a well-thought-out strategy, says Ron Shevlin, director of research for Cornerstone Advisors, Inc. Instead, Shevlin recommends not getting caught up in the competitive

SOCIAL MEDIA’S HEAVY HITTERS Leading social networks worldwide as of March 2015, ranked by number of active users (in millions) Facebook

1,415 829

QQ 700

WhatsApp

629

Qzone Facebook Messenger

500

WeChat

468 347

LinkedIn Skype

300

Google+

300

Instragram

300

Baldu Tieba

300

Twitter

288

Viber

236

Tumblr

230

Snapchat LINE

181

Sina Welbo

167

VKontakte

24

200

BANKING EXCHANGE

100

September 2015

Sources: Facebook; We Are Social; WhatsApp; Twitter; Tumblr; LinkedIn; Google.

Statista 2015 Additional Information: Worldwide; as of March 11, 2015; Social networks and messenger/chat app/ VoIP included.

wh i rlw i nd a nd t a k i ng a me a su r e d approach to social media. “You’ll read plenty of articles that warn you of getting left behind, but you won’t. This is no time to try to keep up with the Jones.”

A measured approach doesn’t mean no approach, so it’s a good time to ensure your social media strategy is in place.

The strategy should encompass more than how often the bank plans to tweet or how often it will update its Facebook page, or even which platforms to participate on. The strategy includes how the bank will measure the impact of social media, how it will structure the organization to best leverage social media, and what it hopes to accomplish.

The following is food for thought as you start to define and refine your social media strategy.

Shhhhh. Listen In social media, sometimes silence can be golden. Banks are often overwhelmed by the thought of constant tweets, YouTube videos, and Facebook postings, but there is an advantage to simply sitting back and listening, notes Chris Lorence, executive vice-president and chief marketing officer for the Independent Community Bankers Association. “There is no rule that says you have to start posting,” says Lorence. “Open a social media account and monitor what is being said about your bank and your competitors.”

Of course, the sheer volume of content on social media can be difficult to consume, so banks will need to consider how often and what they will listen to.

Listening also will help you create a social media strategy that will allow you to post relevant content, says Cook, adding that there is a misconception that banks have to post content. Instead, he says, listen and if someone asks a question or poses comment and you can offer help or information, respond. Otherwise, just listen and learn.

Pay attention to customer service

The number one reason banks maintain a social media presence is to address customer service questions (see “Top 5 Reasons Financial Institutions Maintain a Social Presence,” opposite). However, few industries have done a good job of using social media for customer service, according to Robert Harles, managing director and global lead, social media

Top 5 Reasons Financial Institutions Maintain a Social Media Presence 1. Ability to address customer service questions.

2. Support community initiatives.

3. Another way to advertise products/services.

4. Get to know customers on a more personal level.

5. Obtain additional information for internal databases.

Source: BAI Retail Banking Outlook: Banker Perspectives on the Financial Services Industry, September 2014.

and collaboration, for Accenture.

Part of the reason is response time.

The average bank response time, according to the Sprout Social Index (December 2013) is ten hours. But there are a few banks that respond more quickly. For example, TD Bank’s average response time of 75 minutes is much faster than the response time at other banks, according to Engagement Labs.

Indeed, customer ser v ice remains a vital component of TD Bank’s social media strategy. Vinoo Vijay, chief marketing off icer, says the bank entered social media in 2007 with a Facebook page for college students, but that the bank’s social media initiatives gained steam when it began using social media to answer customer questions. Today, the bank’s 70-member social customer service team fields questions from a variety of social media platforms.

A lthough the bank’s social media strategy is grounded in customer service, TD Bank has expanded beyond answering inquires. The bank employs a heavy localization strategy for its frequent posts and tweets, and often uses viral videos to extend the brand. A recently launched viral campaign #TDThanksYou highlights TD Bank employees surprising

customers w ith special thank you messages. The campaign, designed to pull at heartstrings, also encourages customers to share their own life memories at #TDThanksYou.

Handling the negative

Negative comments are par for the course on social media, and banks need to include a policy for responding to them as part of their social media strategy.

When confronted with a negative comment, the best approach, often, is to acknowledge the problem and state how you will address it, says Cook. Remember that your response isn’t just for the person who posted the negative comment, but for anyone who reads the post. Even if you decide to pick up the phone and call the customer, ask that person to post the resolution on the social media platform, advises Cook. Otherwise, it will look like you ignored the situation.

Another—although not failsafe—way

Sometimes silence can be golden. “Listen” and learn online.

That’s key to creating a winning social media strategy September 2015

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/ SOCIAL MEDIA / From selling to engagement

to determine whether or not to respond to negative comments is to look at the commenter’s “social power,” says Cook. If a negative review is posted by a Twitter user with ten followers, you may decide not to respond. If the commenter has thousands of followers, you may want to reconsider. However, Cook reiterates that you need a risk mitigation policy in place to drive that decision-making.

Don’t be socially “landlocked”

Debbie Bianucci, president and CEO of BAI, notes that financial institutions are experimenting with the right organizational structure to support social media.

Just over half (51%) of respondents to the Retail Banking Outlook survey have an individual or team who spends a significant amount of time on social media.

There is no right or wrong way to organize social media. Connecticut-based regional Webster Bank ($23 billion in assets) has experimented with several organizational models, reports Michael Bernard, vice-president of internet banking, but, today, has a dedicated social media team that includes marketing and customer service.

It is important to recognize that a bank’s organizational structure has an impact on the success of social media, according to Accenture’s Harles. Many banks have built what he calls “landlocked” soc ia l med ia t e a m s, wh ich make it difficult to measure the strategic impact of social media across the enterprise. Instead, Harles recommends that banks build a “social enterprise” that infuses social media across the banking organization.

Don’t let posting overwhelm you, says ICBA’s Lorence; monitor what’s written about your bank and your competitors’.

Leveraging social media with unique promotions and content engages customers, says FirstBank’s Jensen.

Successful banks tie social media activity to definable, discrete business objectives— not numbers of re-tweets or likes 26

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According to the Accenture 2014 North America Consumer Digital Banking Survey, 22% of millennials look for financial service advice via social media, yet nearly three-quarters (71%) consider their banking relationship as transactional rather than being driven by advice or a broader relationship.

“Pitching mortgage rates is not very relationship-driven,” says Cook.

Moving from product promotion to effective content marketing is a challenge for all industries, says BAI’s Bianucci.

What makes this transformation tricky for banks, however, is that they must balance the f luid nature of social media with a highly regulated environment.

Another challenge: Marketers are used to communicating with prospects and customers in a certain way, and traditional marketing does not translate well to social media, explains Cornerstone Advisors’ Shevlin, adding, “It sounds easy to communicate differently, but it isn’t.”

Shevlin, a frequent Twitter user with a substantial following, often tweets about banking, but he also tweets about nonbanking-related topics (steering clear of controversial topics, such as religion and politics). “You can’t always be serious.

Look to give a different or entertaining perspective that allows you to just interact with your customers,” he suggests.

There are examples of banks getting engagement right. FirstBank Holding Co., Lakewood, Colo., has been using social media for several years, initially starting with Facebook and expanding into other social media channels as they became more popular, notes Brian Jensen, senior vice-president. In addition to Facebook, the $15 billion-assets bank has a presence on Twitter, YouTube, Google+, Instagram, and LinkedIn, and hosts a company blog.

The bank tries to engage customers with unique promotions and content that customers will share with their family and friends. “Our goal is to provide interesting content that supports the bank’s brand in a fun and approachable way,” says Jensen.

F i r s t B a n k u s e d s o c i a l me d i a a s well as its website to spread the word about its Capture the Cube competition that challenges v isitors to f ind orange cubes hidden at Copper Mountain ski resort, which can be turned in

for a free snowboard or pair of skis. The bank encourages the winners to “Brag to your friends and revel in their jealousy.”

(Read more about that campaign in Idea Exchange, p. 34.)

FirstBank also has leveraged Twitter to provide race coverage of the USA Pro Challenge professional cycling race in Colorado as well as related interviews with cycling experts.

People engage in social media to address a fundamental human need: to matter. Be genuine and talk to people online

Not just metrics, the right metrics

So how do you measure the return on investment on social media? Rather than getting caught up in metrics, such as number of re-tweets or likes, banks need to step back and ensure that their social media activity is tied to definable and discrete business objectives, says Shevlin.

“Many banks look at what they are doing on the individual platforms instead of what they are trying to accomplish. Stay grounded with business objectives and goals,” he says.

The economics of social media differ from traditional marketing as well.

“Every outbound communication with prospects and customers has a high price tag. Social media costs next to nothing, so the danger becomes sending out too much information. Banks need to ask themselves if there is an optimal number of messages you can send out before having a negative impact, says Shevlin.

Harles agrees, saying bankers need to apply business 101 to social media.

Unfortunately, most don’t apply the same

rigorous lens to social media as they do other bank initiatives. “Right now, bankers are worried about being a good practitioner,” says Harles. “But senior executives are beginning to ask how social media is driving strategic impact.”

Webster Bank ha s key metr ic s to measure the value of social media. For example, the bank measures the beginning “cust omer sent iment ” of ea ch ser v ice opportunity it captures, and aims to improve that sentiment by the end of the interaction, says Bernard.

The bank also employs monitoring tools that provide overall community size and engagement level data that the bank uses to measure social campaign outcomes.

TD Bank’s metrics vary based on the social media activity, notes Vijay. The bank tried to implement a single metric

across all social media interaction but found that they weren’t getting a complete picture of social media’s impact.

“You can’t look at social media through a narrow lens,” warns Vijay. “Social media touches every part of your business. It is not about measuring a win/lose, but about gaining a deeper sense of who your customers really are and how to best engage with them.”

Banks also can make the mistake of getting caught up in analytic tools touted by vendors. Shevlin attended a vendor presentation about a tool that allows banks to uncover clues in tweets that a consumer is thinking of buying a house.

Shevlin’s pointed response: “What percent of Twitter users are tweeting clues that they are in the market for a mortgage? Why would you waste your time trying to find these two people? You have more important things to allocate your resources to.”

The wrap

“Social media touches every part of your business,” says TD Bank’s Vijay.

It’s about customers, not just win/lose.

Banks must experiment with the right organizational structure to support social media, says BAI’s Bianucci.

“Social media is an exciting opportunity for making connections,” says ICBA’s Lorence. Vijay adds that, by its nature, social media requires letting go. “Don’t worry about the perfect response. Let the experience be more human.”

B e hu m a n , b u t t a k e a s t r a t e g i c approach. Harles notes that taking a measured approach to social media is a good thing, since those banks tend to think about the strategic impact they want to drive. He adds that the reason people engage in socia l media is to address the fundamental human need to matter. “Be genuine and talk to people. If you keep that as the North Star, you can’t go too far wrong.”

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/ Risk Adjusted /

MID-SIZE STRESS TEST TAKEAWAYS First “live” DFAST exercise yields mixed results for banks and regulators. Here are five thoughts toward the next round By Adam Mustafa

U

nder t he D o dd-F r a n k A c t , banking institutions with consolidated assets of between $10 billion and $50 billion were required to conduct company-run stress tests and release the results publicly for the first time in June. These banks performed stress tests for regulators last year, but the results were private since they were considered a test run.

This is far different from the Comprehensive Capital Assessment and Review (CCAR) tests mandated for the largest U.S. banks and run by the Federal Reserve since 2010. Those tests are much more stringent, are subject to supervisory approval, and require the submission of an annual capital plan, which regulators can reject.

Regulators do not react publicly to results of mid-size banks’ stress tests, but they provide feedback through the conf idential super visor y process. So what lessons can be drawn from June’s release? Here are five key takeaways on the process itself and the results:

1. The regulators were not thrilled with the caliber of the stress tests Based on conversations we’ve had, and other inputs, regulators think the stress test s submit ted by these ba nk s a re lacking. Too many of the DFAST (DoddFrank Act Stress Tests) banks did not take the process seriously or treated it like a “check-the-box” exercise. Senior management took a “no news is good news” approach when delegating the stress testing process to middle management. Only a few did a good job in properly tailoring the stress tests to their business model and geographic footprint.

Many of these banks (and the vendors with whom they work) acted as if their success meeting the requirements should be measured in pounds, so they prepared and submitted voluminous paperwork.

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during the stress testing exercise, they would unanimously say “documentation” and “validation.” While these two functions are critical for best practices in stress testing, they also created analysis-paralysis, drowning the key insights at the CEO and board level. One regulator who is heavily involved in reviewing the DFAST stress tests told us that, next year, those banks that can demonstrate they actually used the DFAST stress tests to help make a strategic decision will score “a lot more points” than those banks that submit a 5,000-page report.

2. The stock market, by and large, ignored the test results When discussing the results with our bank investor clients, most said they either didn’t care or didn’t place any weight on the stress test disclosures.

Indeed, there was little change in the trading of bank stocks before and after

Your mission: Show how you would handle severe economic events specific to your bank’s enterprise risk profile the stress test releases. There are several reasons: First, the results are not comparable among banks. Second, most disclosures lacked an analytical narrative. Where were the vulnerable points?

Why were the results the way they were?

And, most importantly, what does this mean moving forward from a strategic perspective? As one institutional investor told me, all the stress test results basically said the same thing: “Hey, we will still make money, just not as much, but our assets will grow faster than our earnings because of Basel III, which is why our capital ratios go down.”

3. Banks failed to focus on idiosyncratic risks This is what bothered the regulators the most—and for good reason. Many midsize banks took the national severely adverse case forecast published by the Federal Reserve and treated it as gospel.

They should have designed a customized scenario more specific to their own footprint and idiosyncratic risk profile, while ensuring that it was comparable to the Fed’s stress scenario by using the amount of “pain” as the common denominator.

For example, a bank that concentrates in a “lower beta” market should have identif ied the macro risks in its market. On the other hand, a bank with a large asset-based lending and factoring portfolio should have concentrated more heavily on operational risk and fraud as opposed to a systemic national recession (which could actually help it gain business).

This is a huge lesson for community banks and “Dodd-Frank-lite banks.” The mission is not to show how your bank would handle a national recession, but instead to show how your bank would handle severe events specif ic to your bank’s risk profile.

4. There is a significant gap in loan loss rates between the CCAR and DFAST banks We define loan loss rates as the projected two-year loan losses under the stress test divided by the average loan balance. The median loss rate for the largest 30 banks that participated in CCAR was 5.1%.

However, the loss rates we have observed f r o m t h e D o d d -F r a n k b a n k s t h a t reported their results range from 0.6% to 2.5%. In other words, there is a massive gap between the stress test results of the CCAR and DFAST banks. On the one hand, there is plenty of controversy surrounding the stress tests of the CCAR banks since the Fed trumped the results submitted by the CCAR banks with their own models. Therefore, one could argue

that the CCAR loss rates are too high and stringent. On the other hand, the loss rates projected by the mid-size banks hardly feel like stress in comparison.

Until investors understand this gap and what is driving it, it will become very difficult to unpack value from the results of either group of banks.

5. Analytics reveal that not all DFAST banks are the same Our graph below shows what would happen if all the DFAST banks were subject to a consistent stress test. While it is important to recognize that each bank would have different stress drivers based upon geography as well as business model—as we noted in point three—the results have validity in terms of measure of pain.

Invictus uses publicly available data and the Fed’s economic factors to stress test every U.S. bank each quarter to see how they would fare in a severe downturn. The graph shows considerable variance in bank performance under stress. A nd although no bank drops below the 4% leverage ratio minimum, some may be sur pr ised to see their

graphFACT

performance, and many lose 2% or more in their leverage ratio.

When we studied the results further, we found something surprising: The primary difference between the strong performers and the weak was the vintage profile of their loans. Those banks with heavier exposure to loans originated early on in the recovery (circa 2009-2011) performed exceptionally well, while also generating better interest income. On the other hand, banks that have experienced recent growth have more exposure to higher risk loans with lower yields.

The other interesting, but related, f inding wa s that most of the bank s have, for all practical purposes, weaned themselves off pre-crisis loans (circa 2004-2008), which have either been paid off, refinanced, or charged off by now.

In conclusion, the stress tests the DFAST banks conducted are a step in the right direction, but many banks need to probe their own bank more deeply to generate actionable results.

Adam Mustafa is a cofounder and senior partner of Invictus Consulting Group, New York, N.Y.

Dodd-Frank Banks

Application of a uniform stress test yields strikingly different results

Increase in leverage ratio Leverage ratio as reported

Decrease in LR under stress Post-stress LR (severe case) Source: Invictus Consulting Group LLC

September 2015

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/ BANK TECH /

Wells expands the value chain How the bank’s wholesale unit helped a big mall improve its customer experience through tailored innovation By Steve Cocheo, executive editor

F

or most banks, involvement with Santa Claus might go so far as to host a day with Saint Nick in a branch lobby at Christmastime. But when Well Fargo’s Bipin Sahni brings up Santa during an interview, he pulls up a screen on his iPhone and tells a story about a commercial customer, The Grove, a retail and entertainment mall in Los Angeles.

Sahni was part of a group of Wells’ executives who met with Rick Caruso, founder of The Grove’s parent, Caruso Affiliated.

“The point of the visit was to showcase how The Grove could use our innovation and technology to enhance the experience between the mall and its consumers, who have downloaded their mobile app,” says Sahni, who is senior vice-president and head of innovation and R&D for Wells’ Wholesale Services Group. (Subsequent to the interview, R&D became part of Wells’ new company-wide Innovation Group.) At one point, says Sahni, the bankers popped up a screen they had developed for the visit that said, “Sign up for Santa.” The client jumped on it.

“With this feature,” Sahni explains, “consumers wouldn’t have to stand in line for three or four hours to take a picture with Santa Claus at The Grove. Management would rather have them spend three hours shopping in the mall versus standing in the Santa queue.”

After the meeting, mall management called Sahni and said, “Can you have this ready for the Christmas season?”

“They gave us 90 days to deploy it,” says Sahni. “Actually, we deployed it in 88.”

Bank as enabler What Wells delivered went beyond a mall “fast pass” scheduling application. Caruso told the Wells team that he had been talking to some payments app developers, both startups and established companies, but was impressed because the bank had proposed something that added to the mall customers’ experience using the mall’s app.

W h a t We l l s g a v e C a r u s o w a s a 30

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software development kit that enabled his company to add the ability to schedule a visit with Santa, and to choose pictures and order them—all from the customer’s mobile device. “We gave them ease of integration of this functionality into their mobile app,” says Sahni. “It was not our mobile app; it was their mobile app. We were part of their ecosystem.”

How did Wells make this happen?

Sahni credits it to rapid prototyping, which pointedly did not begin with a 50-page document.

“We don’t do that,” he explains. What began as a few intriguing screens had become a demo app by the time of the next v isit w ith Caruso’s team. “ That became the entrance to the final deliverable,” says Sahni.

Why is a bank creating a scheduling application? Judd Holroyde, senior vicepresident and head of global product management at Wells, says, “Ultimately, there is a payment related to it. But what

The bank’s wholesale services R&D unit becomes part of the customer’s ecosystem Bipin and his team did was simplify the experience for our customer’s customer.

The whole financial services value chain is expanding, and if you’re not proactive and getting yourself integrated into your clients and helping them enable the relationship with their customers, then you’re missing something.”

Sahni and Holroyde gave an interview discussing the topic during this summer’s joint meeting of NextBank and Innotribe in New York City.

“Historically, banks have thought of themselves as having a one-to-one relationship with business customers—‘I’m the bank; you’re the customer,’” says Holroyde. “But now it’s not that you did a

payment well. That’s not a differentiator.

The differentiator is that you helped the customer do a payment well, and gave their customer a great experience. That’s what we want to hear from our customers,” he adds.

Sahni sees such experiences as essential for banks’ future. “It’s an awesome opportunity for banks to evolve,” he says.

“The technology is out there to support this. And if you don’t get into this landscape now, that won’t be good.”

Custom suits for corporates A s the R &D a r m for Wells, Sa hni’s team doesn’t churn out the equivalent of off-the-rack suits, but builds tools that enable clients like Caruso Group to “stitch your own suit.”

Sahni coins a new buzz phrase to describe this: “innovation as a service.”

Altogether, what you have is a very different way of looking at a customer call, at a commercial customer relationship.

It’s an example of the thinking coming out of Sahni’s team.

One program Sahni oversees is the Wells Fargo Startup Accelerator, begun in 2014. Small firms compete to become part of a group the bank works with during each Accelerator term to teach them how to develop a service for large banking companies like Wells. There also is opportunity for some funding, but a key element of the effort is educational.

“My team works with a lot of startups,” says Sahni. Megabanks like Wells typically work with large, established companies who can offer a team of 50 or so players to work on an offering.

“When you are dealing with a startup, it’s a very different discipline and culture altogether,” says Sahni. “You cannot expect them to have 50 people show up.

Or to even have more than two people show up, in some situations.”

Providing the right tech Holroyde is a client, internally, to Sahni’s group, and his markets are international.

Innovations come to him from Sahni’s team for an international clientele, who

face challenges not only hinged on their own countries’ state of development, but also their cross-border challenges, according to Holroyde. Much activity is customer-driven, through advisory councils that serve as focus groups and sounding boards. “We use those to get insights regarding their challenges, what they want to see improved, the sort of journey they want the bank to take them on, and how they want us to bring innovation to them,” he explains.

In many developing markets, clients enjoy a rapid arrival to where the rest of the world is already, as they don’t have to follow the same path. Holroyde notes that he grew up in a home where internet access was based on Ethernet connections, but most markets worldwide were able to jump directly to wireless channels.

There also is an internal element to innovation. Holroyde says that R&D helps a wholesale banking group like his “look at things that make us more efficient, because our customers can also feel that. It’s an important balance to strike.”

What serves both needs is a preference for agility. Holroyde says R&D moves quickly from proof-of-concept work to deliverable products and services that can rapidly move into production pilots and market-ready versions. This has been especially helpful in countries, such as the United Kingdom, where fasterpayment projects have advanced further than in the United States.

“You have to avoid having your point people get stuck in what’s happening right now,” says Holroyde. “You have to look past the challenges, because some of what the future will bring will address some of those challenges.”

Finding ways to enhance the experience of customers of banks’ corporate customers is an “awesome opportunity,” says Bipin Sahni, SVP and head of Wells’ Wholesale Services R&D.

Innovation without walls The idea is to avoid walls that can interfere with innovation. Everyone knowing what is going on is critical.

The head of mobile at Wells sits near both the head of retail services and the head of wholesale banking, in part to facilitate awareness. “They jointly own that domain,” says Sahni. “So the walls

“The whole financial services value chain is expanding,” says Judd Holroyde, SVP, global product management at Wells. “If you’re not proactive . . . you’re missing something.”

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/ Bank Tech /

are not there, really.” Joint ownership amounts to more than a matter of turf.

“One of the things that we’re always reminding our designers about in the wholesale bank is that they are still designing for a consumer,” says Holroyde.

While the electronic products and services they are designing are for corporate clients, the users “are going to compare the design to their retail experiences,” he explains. “So you still have to think about the user as a person. I know, for myself, that I wouldn’t want polar opposite experiences between what I see at work and what I see in my personal life.”

“Turbo, book me a flight” While electronic banking in some form has been around for years, for Sahni, “mobile changed the world.”

Mobiles have not only become ubiquitous, but are stuffed with apps touching on nearly every aspect of our lives. The rub, says Holroyde, is that all those programs work independently of each other.

“I c a n do 20 d i f ferent t h i ng s on my phone,” Holroyde explains, “but it becomes so noisy in my head.” He would like to see a next-generation integration 32

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One of the things that we’re always reminding our designers about in the wholesale bank is that they are still designing for a consumer service of some kind that would learn his needs, even down to when he likes to receive information. That said, Sahni adds, “I know we call these devices ‘smart’ phones, but I think they still have to grow up a bit. We have to ask: How do we leverage technology to make our lives simpler?”

Sahni would like to see mobiles become virtual personal assistants. “Right now, I may go to OpenTable, I may go to Uber, I may go to a third application, and I don’t need all that,” he says. “I want my virtual assistant to listen to my conversations and automatically book my tickets, book my car, book a table. I want it to be proactive. And if I had an appointment with Judd [Holroyde], my virtual assistant

would talk to his virtual assistant.”

Sahni would like this hoped-for personal assistant to be in always-on mode.

The v ir tual assistant would stitch together ma ny element s, includ ing banking services, says Sahni. Among its functions would be connecting various apps, and handling routine chores, such as authentication, nearly automatically, to simplify tasks for the user.

Sahni muses during the interview that he needs to come up with a name for this virtual assistant concept. He and Holroyde come up with one: “Turbo,” named for Sahni’s pet bird.

“I’ll say, ‘Turbo, get me my balance.’

Turbo will authenticate me and go talk to the bank and give me the information.

The matter’s done,” says Sahni.

Not surprisingly, this is no idle dream for the tech executive. Startups that Wells has worked with through Accelerator have been developing elements of what would be inside a “Turbo.”

One company is Kasisto, which was spun off from SRI International, a nonprofit research institute that developed Siri, the voice-activated virtual assistant purchased by Apple for its mobile dev ices. K a sisto ha s developed the Mobile Virtual Specialist for Finance and Commerce, which performs some of the functions that Sahni would like to see in his concept. At the NextBank/Innotribe meeting, Zor Gorelov, cofounder and chief executive at Kasisto, characterized Kasisto as capable of much deeper functionality than Siri.

A not her st a r t up c ompa ny c a l led EyeVer if y ha s developed biometr ic authentication based on an “eyeprint” of the eye—an “eyeball fingerprint.”

Already, elements of such technologies are making it into live service.

Subsequent to the inter v iew, Wells Fargo announced redesigns of its CEO (Commercial Electronic Office) suite of treasury management applications available online and on mobile devices, to be implemented in 2016. Voice and face biometrics for CEO Mobile customers will be piloted next year. EyeVerify technology will be made available to iPhone app CEO Mobile users next year as well.

Don’t worry about the box Often, bankers complain about regulation and compliance, seen as a ball and chain that holds the industry back. That is not a view shared by Sahni as he and

his team go about their work. It’s partly a matter of communication and partly a matter of perspective. Clearly, R&D at Wells has freedom and leeway.

Much is discussed, and some of it moves forward—with very senior levels of management kept in the loop. “We may create a prototype of some sort,” says Sahni, “and show it to management, perhaps work with customers, because that is the most important aspect for us.

We are not just doing what we think is the smartest thing, but what customers want us to deliver.”

Sometimes ideas have to be reimagined, and sometimes they just don’t f ly.

“If things don’t look good, we cut it off ourselves,” says Sahni. “I don’t need to go ask anybody to shut it off.”

This is not to say that R&D is a loose cannon. “Compliance and risk management play a big role,” says Sahni. “They are kept informed so they know what is being tried out. We’re not making any rules, nor are we making policies. But they

Wells sold retail customer The Grove on a mobile app feature that allowed shoppers to “sign up” for Santa. Instead of waiting in line, they could shop—an “innovation as a service” win-win-win, understand that this is an R&D group.”

“Something that makes the compliance angle a bit easier at Wells is that we’re not fundamentally changing the underlying financial transaction,” says Holroyde. “What we’re doing is delivering it in different ways, and building other value propositions around it.”

Ultimately, according to Sahni, the banks that will succeed at innovation will have to think beyond where banks traditionally think. “I think that any company that says, ‘We’re not going to take any risk in bringing ideas to market,’ might not be successful,” he says.

“It’s really hard to drive innovation that way. If you don’t test and learn from the testing, you’re just going to be in a conundrum of ‘What do we do next?’”

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September 2015

BANKING EXCHANGE

33

/ Idea Exchange /

TWEAKING THE MARKETING MIX Banks marketers discuss ideas, influences, and the inevitability of technology adoption By Ashley Bray, contributing editor

“Capture the Cube” campaign can help consumers snag ski boards and other prizes from FirstBank.

M

a rke t i ng h a s a lw ay s b e en about trying to stand out from the crowd, but in today’s message-saturated world, banks are forced to stand a little taller.

“As we all know, our world is quickly evolving,” says Steve Ebner, first vicepresident/marketing director at $1.3 bi l l i o n - a s s e t s C i t y W i d e B a n k s i n Aurora, Colo. “Our bank has many different points of contact with our clients.

I try to look for any fresh idea that can break through this clutter and make an impact.”

Financial institutions still study their competitors for ideas, but increasingly inspiration comes from outside the banking industry—in industries as varied as hospitality, retail, and fast food.

“Banking can be creative, but there’s a lot of areas that don’t have as much regulatory scrutiny so they can do things without having to limit their speaking,” says Brian Jensen, senior vice-president of marketing at $15 billion-assets FirstBank Holding Co., Lakewood, Colo.

Some marketers also turn to research for ideas. Whenever Union Bank & Trust, Richmond, Va., launches a marketing campaign, it has a foundation in primary research of their customer base. “We do

34

BANKING EXCHANGE

September 2015

not like to make very big movements without having a lot of background on why we want to head in that direction,” says Olen Thomas, CMO of the $7.4 billion-assets bank. “So we do primar y research, and we do focus groups. We base all of the art on the science.”

Tuning in to technology The science of technology may be the biggest inf luence on marketers as they’ve been using email, websites, and search engine optimization for a while. Social media also has had quite a moment in recent years.

CityWide Banks recently started a new weekly post across its social media platforms called #MondayMotivation.

“The goal was to create a clever, fun way to show off our employees and leverage the top trending hashtag #MondayMotivation,” says Ebner. “Each week we get a photo of a different branch team or backoff ice department holding a big sign that has a funny saying or motivational quote. It’s been a hit, with lots of shares and engagement.”

Mobile technology continues to make strides as well, and $3.9 billion-assets CenterState Bank in Winter Haven, Fla ., ha s been look ing int o mobi le

opportunities—particularly the app Periscope—which allow users to broadcast live video. “The concept of being able to stream an event, whether it’s a financial talk or what have you, may hold some promise in financial marketing,” says Chris Nichols, chief strategy officer at CenterState.

Apps can be rich ground for marketers, and $2.2 billion-assets Canandaigua National Bank & Trust in Canandaigua, N.Y., ran messaging on the music-streaming app Pandora during the summer months to capitalize on the home-buying sales cycle. The bank also has done some geo-targeted marketing centered on a new bank branch.

“We’re consistently evaluating what’s a new channel to consider: Is it going to be effective in the amount of information that we’re able to provide, and is it going to reach our appropriate target,” says Tamra O’Donnell, senior vice-president of marketing at Canandaigua National.

Marketers now find themselves having to tackle multichannel campaigns across a variety of media and platforms.

“Our media mix changes depending on the nature of any campaign that we’re running,” says Union Bank’s Thomas.

“We typically try to make sure that we touch all media, and one of the reasons we do that is because our customer base is very diverse. You can’t focus on one type of media; you have to leverage all of those.”

For some, the focus is on online channel s. “ We have ver y low i n-bra nch traffic,” says CityWide’s Ebner. “We want to be where our clients and prospective clients are.” The Colorado banker adds, “In the past couple years, we have dramatically reduced use of direct mail and print advertising, and increased web, email, social, and search channels.”

However, for others, the in-branch efforts are still important.

“The majority of customers still want to come into a branch for assistance,” maintains Rick Arthur, vice-president, marketing product director for Union Bank & Trust.

“ They may wa nt to use a ll of the mobi le st u f f a nd ot her t h i ng s, but research study after research study— even w ith millennia ls—says that they like to have the option for that personal touch,” Arthur explains.

Data streams start to be Fortunately, as marketing channels have multiplied, so too has customer data.

Banks now know more about their customers than ever before, and they’re capitalizing on this information.

“What we are beginning to embark on is the whole notion of segmenting our marketplace to determine customers that we want to target,” says Union Bank’s Thomas. One way Union Bank is segmenting its customers is according to the ways they communicate with the bank—whether that’s through email, direct mail, social media, etc.

Union also has segmented its list based on the products and services customers utilize, which can lead to more targeted and effective marketing opportunities.

More personalized marketing is an approach FirstBank is taking, as well.

“It’s apply ing customer ser v ice to marketing. We’re trying to give you something that makes more sense for you as opposed to just here’s everything we do,” says Jensen. “It’s kind of a win-win for the bank and for the customer, because they’re hopefully seeing something that’s interesting and worthwhile for them.”

Brand to the rescue But what happens when banks are offering the same products and services to the same customers? This is where a robust brand makes a difference.

“When it comes down to brand, that’s where consumers will make their decision,” says Ca na nda ig ua Nationa l’s O’Donnell. “It really is what can differentiate two similar products from each other offered by two different institutions.”

Branding is all about perception, and for some banks, this means focusing on longstanding roots in a community that other institutions can’t claim. For others,

it means crafting a persona. “What we’ve tried to do with all of our advertising,” says Jensen, “is we want to be approachable, we want to be very friendly, we want to be very human, so all of our advertising is pretty funny and quirky, and the reason we do that is we do want to be different.”

Events are a unique way to help build a brand through a blurring of advertising and community involvement.

Canandaigua National has held a free annual picnic in August for customers since 1989, which allows it to connect with customers in a unique way.

The bank also is involved in a local youth sports tournament and provides a promotiona l, branded item (most recently a bandanna) at games.

PR for it, and hopefully they think of us the next time they’re shopping for a bank account,” says Jensen.

FirstBank also leverages community events to build its brand. The bank is a sponsor of Copper Mountain ski resort in Colorado, and for the last three years, it has run a promotion called Capture the Cube. (For more information, see www. capturethecube.com.)

Copper Mountain visitors are challenged to find branded FirstBank cubes to win a snowboard or a pair of skis.

Eighty cubes are hidden throughout the season, and FirstBank provides clues via its Facebook page as well as an app it developed internally.

“We’re not trying to necessarily sell an account that day, but we want to be memorable and maybe generate some

posal. “The worst thing you could ever do in trying to come up with great ideas is to start with blinders on,” says Union Bank’s Arthur. “You really need to take the total view and come up with what you think is the idea that makes sense. And then make sure that what you’re doing makes sense from a compliance standpoint.”

Regulations may put some limits on marketing, but opportunities, new ideas, and new platforms and channels abound.

“For us it really is about a comprehens i v e a p p r o a c h ,” s a y s O ’ D o n n e l l .

“Channels continue to expand, which makes our opportunities greater. And we continue to grow along with them. So it’s a very exciting time to be in marketing.”

Compliance concerns

Of course, no matter what marketing techniques a bank is using, compliance and regulatory standards come into play.

“CFPB does present a hurdle,” says CenterState’s Nichols. “Usually their efforts are noble, and it’s the execution that sometimes prohibits banks from doing marketing they need to do.”

Most bank marketers agree that a good working relationship with compliance can make the vetting process easier. Banks also are in consensus about f leshing out an idea, then bringing in compliance to approve a fully formed pro-

September 2015

BANKING EXCHANGE

35

/ CounterIntuitive /

ARE WE ALL “GEN WHY”?

Maybe bankers have become too fond of generational stereotypes By Steve Cocheo, executive editor

“T

here may be sa id t o be t wo classes of people in the world; those who constantly divide the people of the world into two classes, and those who do not.”

This old quote came to mind while reading portions of The Gen Z Effect: The Six Forces Shaping the Future of Business, by Thomas Koulopoulos and Dan Keldsen, and comes on the heels of reporting this month’s cover story.

Among the bankers and various experts I interviewed, Gen Y—also known as millennials—often came up as the makeor-break generation for banks.

One of the six forces the book identifies is that Generation Z—those born after 1995—is hyperconnected, ready at the drop of a smartphone to doublecheck facts presented as such by elders.

Sure, ultra-reliance on the at-hand web does characterize Gen Y and Gen Z. But not exclusively. At work, everyone— including people older than I am—starts working their iPhones to check something before the person speaking finishes a sentence.

The authors call such technology “the outboard brain,” which conjures the twobrained species seen on the British sci-fi series Doctor Who. In its conclusion, the book discusses identifying ourselves as part of a given generation. The authors state: “. . . the idea of belonging to a generation no longer serves to drive us forward. Instead, it shackles us to the past, prevents us from collaborating effectively, and drives a wedge between groups of people who share more in common than age-based barriers would suggest. The def ining characteristics of a generation—distinct technologies, modes of working, and an inability to adapt to new ideas and experiences—no longer apply. The tools we use to live, work, and play are nearly identical now.”

Back in the spring, J.D. Power, in the course of its 2015 U.S. Retail Banking Satisfaction Study, found, not surprisingly, that Gen Z customers use mobile banking services more often than other 36

BANKING EXCHANGE

September 2015

Ultra-reliance on the web—what The Gen Z Effect authors call “the outboard brain”— characterizes Gen Y and Gen Z. But not exclusively generat ions. W hat wa s sur pr ising: Branch usage among Gen Z customers showed little difference (76% had visited a branch in the previous 12 months) versus Gen Y (72%) and Gen X (74%). The study found that Gen Z customers visited branches an average dozen times a year, compared to 11 and 12 times for Gen Y and Gen X, respectively. A statistical dead heat.

“There is a common misconception that younger customers aren’t using the branch,” said Jim Miller, senior director of banking at J.D. Power, in a statement.

“But they use it about the same as Gen X and Gen Y. Midsize and regional banks risk losing the Gen Z customers to big banks if they can’t meet their needs regarding digital and in-person interactions. There needs to be a seamless experience across all channels.”

Equally interesting was something Miller shared in an interview: In his experience in studying the generations, Gen Y and Gen Z are more apt to ask for advice when in a branch than any of the older generations.

One conclusion the book authors draw: “For Gen Z, connectivity creates a level of transparency in relationships that makes trust an earned status rather than one bestowed upon an individual or an organization.”

Has the time come to downplay generational thinking? The Gen Z Effect poses three questions: • D o I attach myself so closely to a specific generation that I limit my ability to challenge outdated beliefs?

• D o I quickly label others as belonging to a generation, biasing my opinions of their beliefs and behaviors?

• A m I holding onto old technologies that I’ve become accustomed to—while others slingshot past me—only because they are the technologies that I’ve come to know?

Remember, you can answer these without your smartphone.

Steve Cocheo, a boomer, swears he will soon upgrade his smartphone, if he can just keep that physical keypad.

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