Small banks must spend more time and resources to make banking frictionless for customers — or risk becoming irrelevant.
And that effort has to include a digital strategy, panelists said at last week's American Bankers Association's annual convention. The panelists — ConnectOne Bancorp CEO Frank Sorrentino III and nCino CEO Pierre Naudé — noted that some banks have been slow to change, choosing instead to cling to branch-centric models.
Banks that want to consider themselves full-service institutions need to capture all of a client's wallet share, which is impossible without a strong digital presence, Naudé said.
"The problem" with the old model "was that the bank allowed the customer to go out and have a Capital One credit card, an American Express card and a car loan from somewhere else," Naudé added. "Your mind set has to change, and the only way you can do that is by putting technology in place."
A Conference of State Bank Supervisors' survey of 571 community banks conducted between April and July found that about 40% have no plans to accept online loan applications, while nearly three-fourths feel the same way about online closings.
The $6.1 billion-asset ConnectOne, one of nCino's clients, expanded its digital reach in June when it
Naudé and Sorrentino shared their views of digital banking after their panel discussion. The following is an edited transcript of the conversation.
Are we at the point where every community bank needs a digital strategy?
FRANK SORRENTINO: Do you think the internet is here to stay? Do we think our clients are gravitating in digital ways outside of the bank? How are people shopping? How are they buying their groceries? It's important for bankers across the country — no matter what size they are — to think about what their clients need. The entire economy is being built around companies using digital tools. I don't know why there's some segment of bankers who think it doesn't apply to them — that there's some kind of vacuum that gets created when they step into the branch like it's 1974.
PIERRE NAUDE: When you go to a farm, the farmer gets into a tractor with an air-conditioned cab and a satellite feed telling him where to plant. When that farmer gets stops at the bank he doesn't want to see a file folder with some outdated pie charts. He wants to see somebody with an iPad. The misconception that people are less sophisticated in smaller towns is totally outdated. The internet is driving the banking experience they're looking for. If they can't find it from the smaller bank, they can get it from the big banks.
Why are some banks resistant?
SORRENTINO: I think in any economy the things that get disintermediated last are the things that are heavily regulated. Because of our government guarantee, because of some of the regulation and laws, banks have been a protected class for quite a while. So even for the bankers that are thinking about the future there's some comfort for some who say, "I have that protection and we can stay in that protected class." Then there are guys like us, who say, "I'm terrified that the future looks very different than it looks today."
NAUDE: As you grow, you have to do it without adding people or it defeats the purpose of growing. So the only answer left is automation. The other thing is that all of us are in a war for talent. Who's going to work at a bank where everything is done on paper and we enter the same data 15 times? That's why the cloud is so important. The cloud has allowed the smallest community banks to use exactly the same technology as Bank of America or JPMorgan Chase. We deploy the same technology at a $1 billion-asset community bank as the big four. So you get that level of sophistication and tools but at a much lower price because it's user-based.
So digital is an equalizer even though the big banks are spending so much in that space?
NAUDE: Just remember, billions of that is for maintaining old, archaic, home-built systems. People forget that. The sliver of funding that goes to new innovation is very small. These big companies are a conglomeration of multiple integrations, acquisitions ... and you've got all of these disparate systems. To make sense of the enterprise they have to spend that kind of money. A smaller bank today can be just as efficient and fast. [Sorrentino] competes with the big four every day in New York City.
Customer attrition is high for digital channels. What's the solution?
SORRENTINO: People generally are looking for specific things. If it's rate, and the rate isn't the highest, then they might be fickle about maintaining their relationship with you. But I think there are some pretty good examples out there of banks that have utilized digital channels to expand their market presence and to be able to do things in unique ways. I think we're headed more toward an economy where you're going to see banks that specialize in different things. For the past 150 years, regardless of their size, banks were all doing pretty much the same things. You're starting to see segments of the banking industry that are becoming more focused and niche plays around certain expertises. And we're going to see some differentiation around that.
What features of banking apps are most important to consumers?
SORRENTINO: Today it's in the payment space. We were one of the original providers of Zelle, which competes with Venmo. So the ability to send payments back and forth is critical. Ask a young person when the last time they wrote a check.
NAUDE: If you look at why people use an app it's to check a balance, to send money, transfer money, pay a bill or take a picture of a check. Those are essentially the five uses. They do that daily, and that replaced the branch for most transactions. There are tools where banks can open a new account in three minutes and 47 seconds.
What's the next big thing in digital banking?
SORRENTINO: Data and AI. Our ability to process transactions and do tasks within the bank without the use of human beings. To be faster, with less friction and error free. And then also to use all of those tools and all the data that we've gathered from customers to generate predictive analytics around what they need. Artificial intelligence around things like why are you spending so much money this month on something in particular.
NAUDE: That's for the consumer, but in the back office of the bank it will involve taking massive amounts of data-entry workout. Also, automated underwriting for small businesses. So a lot of manual work will become automated and then we'll use data analytics and AI to serve up solutions. As you do your job it will start telling you, "Here's what we've seen in the last 50 loans that looked just like this one." So you will know what to watch for and what extra data or collateral you might need.
