Financial Services Law

June 17, 2015

Five on Five: How the Evolution of Fintech Is Changing the Face of Community and Regional Banks and What You Can Do About It

Watch your back

Market share for community and regional banks is slowly being taken away by “nontraditional” providers of financial services, whether they be peer-to-peer lending platforms or other distributors of consumer financial services through the Internet. In addition, global technology leaders are adopting innovative ways to transmit money while leveraging their customer information base. Further disrupting the field are “traditional” financial institutions with a nearly exclusive online presence that understand how best to use customer data and preferences to sell more profitable services, all at reduced costs. Rather than run away from those alternative financial engines, community and regional banks should embrace the challenge they present and augment their service offerings and, more importantly, the method of delivery of those service offerings to ensure they stay relevant. Companies that historically were slow to embrace new technologies wrote their own obituary—think Kodak. And companies that did not adequately strategize around the best manner to deliver their services ultimately lost their way—Betamax anyone? Recent partnerships between traditional financial institutions (and even industry trade associations) and alternative financial platforms illustrate the opportunities that healthy competition creates.

You look old

Strong corporate governance is critical to a financial institution’s success. The board sets the risk appetite, evaluates key management and ultimately is responsible for a bank’s safety and soundness. But a board should look closely at itself and ask whether it can improve the skillsets of its directors without compromising quality. One of our clients just elected a board member who is in his twenties and has a deep understanding of an important local market—a daring, but wise, move. Who better to understand the changing demographic than someone who is part of the changing demographic? Who better to understand what the millennial generation is looking for in financial services than someone who is a millennial and whose age-based colleagues have built the engine models for Square, Lending Club and the panoply of digital currency businesses that may be significant disruptors in the years ahead. These customers may not represent a large portion of your current business targets, but they certainly will be in 10 or 20 years. Many management teams may hope to be acquired prior to that time so they don’t have to address those problems. For some that may work, but for most that is not a growth plan to be successful nor is it a mark of successful leadership.

Use your light saber effectively to ward off threats

The threat of compromising a customer’s information was not so acute when a customer walked into his or her bank with a passbook and the teller wrote down the latest account balance, and that was the only record a customer maintained of his or her account information. With the dominance of technology in the delivery of financial services and the scope of information financial institutions maintain about their customers, cybersecurity threats are real and, if a threat turns into a successful breach, the costs can be enormous. Developing a framework to identify the systems and assets that are at risk, protecting that framework, and ultimately responding to potential and real threats should be at the forefront of a bank’s management of cybersecurity risk. Coupling that framework and adopted procedures with an effective cyber insurance policy can minimize the costs associated with a successful breach, though not necessarily the reputational harm that may come if your customers’ data has been compromised. Consider also designating a special committee of the Board to address and monitor cybersecurity issues and populate that committee with qualified board members.

Show me the money

It’s easy to talk about making more money. Every company wants to enhance their revenue streams, but for community and regional banks the historically low interest rate environment has been an ongoing drag on earnings, which has a disproportionate effect compared to other industries. Banks have adjusted, but need to continue to be creative in exploring diversified product lines, strategic partnerships, improved marketing and customer service outreach, technological improvements, and balance sheet adjustments, all at reduced costs. First step to consider: Look closely at the top three items that are contributors to noninterest income and ask, “What can we do to drive those numbers up. Retool existing personnel to deliver those products more effectively? Reinvest in your technology or infrastructure? Outsource? Every option should be on the table. Whiteboard it. Think creatively.” Then choose five (5) of your competitors and look closely at the top three items that are contributors to their noninterest income and study the trends. What are your competitors doing that you should be doing? Then look at the websites for five alternative financial product providers and see what they are doing and how they are trying to capture market share. And talk with your colleagues. Bank executives may ultimately be competing for market share, but there is a generally great camaraderie that extends across the industry. You can learn a lot from those running institutions that may be performing better than your own.

Don’t forget what got you here

Will community and regional banks become irrelevant over the next decade or two? Definitely not. Convenience and ease of use will ultimately never overwhelm the need for personal customer service and a deep understanding of a client’s business, two key differentiators from a strict technology service provider. But those will not be enough to allow banks to continue to grow and thrive when the new customer base they are serving has grown up without ever walking into a branch. Continue to distinguish yourselves through innovative, personal service offerings. Reach out to clients on an ongoing basis (not just when they need your help) to check in, and ask what you can do better, and whether you are meeting your clients’ needs. Market yourselves with your best asset—your people—but allow your people to serve your client base with the best and most innovative technology resources that are available.