Regional banks are increasingly turning to digital tools to differentiate themselves. Simple examples range from integrating tools such as Yodlee’s account aggregation and financial wellness tools into your digital platform to a stretch goal such as an omnichannel digital strategy. Investment in digital tools that fit your value proposition aimed at achieving specific goals (vs. “digital transformation”) can achieve simultaneously cost reduction and service enhancement results by streamlining onboarding, enhancing fraud prevention, or enabling hyper-personalized financial solution. All of the above – and other alternatives – are key drivers of customer retention and cross-selling.
One issue I see with digital investment is nebulous goals and process-related outcomes. For example, measuring customer engagement, digitally or otherwise, instead of measuring actual customer retention specifically related to the digital enhancement. Similarly, cost reduction through onboarding should be measured by improved pass through rates for new customers and additional product buyers in conjunction with staff productivity or cost per onboarding event.
As an industry we have gone past the acute need to digitize our processes and customer relationships to returning to the winning combination that got us there in the first place – improving our staff’s and customers’ execution effectiveness and well-being using digital tool.
Regional and community banks’ resilience has been tested and retested throughout time, and especially so since the SVB/Signature takeover in 2023. Our industry has done well in managing deposit risks since then, as well as credit risks and meeting competitive pressures (particularly from the universal banks). Net charge-offs are projected to hit 0.66% this year, the highest in a decade, though still below the 2008–2009 crisis levels. Commercial real estate (CRE) loans, which constitute a much larger percentage of our portfolios vs. the universal banks, remain a vulnerability. And yet, our performance continues to shine, and a steepening yield curve will help many of us expand margins even further.
Fortunately, shifts in regulatory tone and intent have also been helpful. The re-proposed Basel III Endgame rules, which lower capital requirements, the consideration of changing deposit insurance for smaller banks, and the consideration of raising regulatory cutoff balances could all be helpful toward leveling the playing field for smaller institutions. In addition, the positive move toward M&A can facilitate inorganic growth, offering banks opportunities to consolidate market share in emerging economies. Lift-outs remain another attractive option for market expansion after the boost they received post First Republic and other bank takeovers.
Partnerships with FinTechs continue to thrive as banks of all size experiment with new technology and innovation. While core solution alternatives haven’t panned out yet, experimentation around them with nearly a dozen potential solutions continues. New types of partnerships are also emerging, such as private credit firms, as organic loan growth disappointed in the last couple of years. These collaborations allow banks to fund mid-market companies without overextending balance sheets, countering the dominance of national banks and digital-only lenders. At the same time, like all syndications and club deals, every participant but the lead bank loses significant measures of control over the loan once funded. Such partnerships could prove most attractive, but also bear different risks from those we are accustomed to managing.
The great “North Star” of most of us remains 1:1 sales, service and marketing. It has been a battle cry of most banks for a long time, with varying degrees of success. Only our very top customers currently receive tailored advice and customized delivery, leaving room for banks to integrate various data behavioral and life-stage into their bankers’ toolkit. The opportunity facing us today involves a combination of “back to the future” techniques coupled with purposeful and culturally congruent technological modernization. We tend to focus on one first, and assume that a wide range of technological solutions is expected, demanded and necessary to retain our customer base. I’m not confident our assessments are always correct.
We’ve always claimed people are our strength. I believe this statement to be true, and not antediluvian. Our opportunity is to compete on the human dimension, and use technology to make our people better informed, more relevant and more effective than our competitors.