Posted on October 15, 2019

BANKING: CONSUMERS AREN’T CHANGING. THEY’VE ALREADY CHANGED.

“We are what we repeatedly do. Excellence, then, is not an act, but a habit.” While this may sound like an adage from the great Vince Lombardi of the Green Bay Packers, it’s actually credited to someone some 2,300 years earlier by the name Aristotle.  Heard of him? Yeah, apparently so has the banking industry.

EARLY BANKING

Unfortunately for most banks, consumer behaviors no longer align with incessant habits. As we all know, the domestic banking industry has spent approximately the last 225 years perfecting habits. For example, banks are very good at assessing and mitigating credit risk and interest rate risk, despite some of those habits revolving around obsolete constructs. Banks have repeatedly invested in tangible real estate both to convey a sense of power and security for their clients but also to provide a place for them to conduct their financial business. For too many banks, their fixed assets still comprise a significant portion of their balance sheet. In defense of the old bankers in the room, can you really blame them? I mean, they’ve grown up in an industry where every conversational metric revolved around asset size, and profitability was a direct derivative of that quarter’s customer traffic through the lobby, offices, drive-through, and ATM. It wasn’t until the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 that truly cut the reigns on interstate branch banking. Because we all need a fancy office on a high traffic thoroughfare to serve our customers, right?

NEW AGE IDEA

I’m not here to suggest banks should close their branches; there’s another discussion for how to build congruence and fluidity between a bank’s physical space and digital space. I’m merely suggesting that the next $.75 of $1.00 allocated for fixed assets be spent on the real estate of the 21st century…virtual real estate. This consists of all the virtual channels and mediums by which customers can interact and engage in banking: native apps, web apps, online banking, mortgage, and wealth platforms, websites, blogs, social media…virtual reality? You get the idea. These types of real estate aren’t quantified and taxed (yet) in the same way that physical real estate is, however they provide banking with no geographic limits and the ability to reach a variety of age and gender demographics. Real estate, in either the virtual or physical sense, is just a medium, or tool, which will continue to be used to serve clients.

FUTURE WEALTH CLIENTS

While the industry of FinTech has embodied the “fail-fast” ethos of experimenting with technology and emerging client behavior, banks are deathly afraid of failing. As preservers of capital and safe-guarders of their depositor’s funds, it’s understandable. However, those banks without full breadth of omnichannel capabilities are starting to show cracks in the dike. Most of them are still sporting healthy profitability, so they can be ignorant of that fact. However, it’s often evidenced in tracking the average age of the client base. Running a successful bank, long-term, is a never-ending succession plan by looking at your client-base through a time series regression. Those that capture and cross-sell clients at the early stages of adulthood are most likely to retain them. Most young adults don’t know or care what the inside of a bank looks like. A vault? Unless it’s for my now worthless baseball card collection from 1990, the only vault I need is on the cloud. Mortgage applications and underwriting? Entirely online. Small business and consumer loans? Automated decision-making platforms with fast funding. Future wealth clients? They have student loan debt and need access to cheap, mobile-centric platforms with integrated financial literacy, advice, and automated money-movement and spending tools to aid their behaviors.

Consumer behaviors aren’t changing. They’ve already changed. They can buy goods on Amazon after reading reviews, comparing recommended similar-goods, all with one click. This sort of ease and convenience is now expected in the digital banking experience.

ENTER FINTECH COMPANIES

The largest banks in the world have been pouring money into digital banking solutions, trying to build out and continuously deepen the omnichannel experience. What makes now the inflection point requiring action? Well, as of July 31st, 2018, the OCC announced that they will start accepting national bank charter applications from FinTech companies. Per their own words, “The federal banking system must continue to evolve and embrace innovation to meet the changing customer needs and serve as a source of strength for the nation’s economy…”

Banks still have an advantage, albeit a diminishing one. Most have a trusted client base and a strong and stable capital base. This must be leveraged with digital investments into client acquisition, underwriting, servicing, trading, education, and a multitude of other verticals with the same fervor that was done 25 years ago with physical infrastructure. In other words, it’s time to be excellent again, but first we need to develop a few new habits.

Mark Donovan is Senior Vice President of Commercial Lending for Illinois National Bank. He helps businesses, small and large, find solutions to fund projects, purchases, acquisition, and other asset related transactions. He was a board member for Springfield Parks Foundation, LPGA State Farm Classic, and IL State Comptroller’s Local Government Advisory Board. Mark holds an MBA from the University of Illinois Springfield.