The Distraction of Innovation for Community Banks

The word innovation has become popular in banking circles today.  Larger banks claim to have a lock on it, smaller banks seem to think they need it, but what is the real issue here?  Larger institutions have development staff that focus on new products and services, trying to be the first to bring out the next big thing.  Any such advantage from being first in market is going to be short lived.  Often, much of the so-called innovation is merely a variation on an existing capability.  Like using your finger to slide a bar in one direction or the other to transfer funds, instead of typing in an amount.  A good example of true innovation is the extension of so-called “warm carding” capability out to the customer.  Lost your card?  Need some time to look in all the usual places?  Just temporarily freeze it, using your mobile banking app, and have a look around.  If you find it, great!  Turn the card back on and keep spending.  But if it’s really lost, go ahead and report it and get a new one.  This has been a popular feature, rightfully so, and after some initial promotion by those who were early to market, it is largely available to everyone.

As I lead strategic planning sessions for community bankers, I hear a lot of discussion and
frustration about the need for innovation, how vendors are holding them back, and that large banks have an advantage.  I also see a lot of industry publications promoting an innovation mentality.  As a community financial institution, it will be very difficult for you to pioneer new banking products and services.  There, I’ve said it - you should be breathing a sigh of relief!  It should be very easy, however, for you to rapidly deploy new technologies as they become available.  This is where your focus should be.
In my experience, it is not a lack of availability that causes community banks a problem, it is delays in deploying products that customers want and need.  Today, many smaller banks are woefully behind with technologies like on-line account opening, mobile deposit, and on-line loan applications.  Internally, failing to make email and the bank’s core application available on remote devices hinders lenders and other calling officers when they attempt to be responsive and work in the field with customers and prospects. At a recent EFT conference, a panelist asked for a show of hands of those who had deployed biometric technology for digital account access.  Not only were there no banks among the 100 or so in attendance who had it, NONE of them reported they were even considering it.  In a day where security is an important concern, this is troubling, since such technology is readily available.

My recommendation is that you focus on your deployment cycles, so that your bank is as
competitive as it can be in the markets that you serve.  When combined with the personalized service that community banks are famous for, this creates a scenario for success.

Here are four steps to success:

> Ensure that your strategic plan is designed to identify your desired direction, and the products and services needed to support your goals.

> Evaluate your current situation and enumerate the gaps in products and services, relative to the first point, above.

> Engage with all key constituencies simultaneously to plan the acquisition, implementation, training, and deployment of these resources.  Include marketing, operations, finance, compliance, retail banking, and commercial business lines.  Often, I see compliance concerns overriding operations needs, or operational practices that ignore compliance issues.  Building a team that works together can help you overcome such typical obstacles.

> Ensure that your effort to roll out these new technologies starts with knowledgeable,
enthusiastic employees, and carries through to customer education and marketing efforts.  This is always a formula for success with new products and services.

As always, I am available to assist you in addressing these or other matters. 

trent@trentfleming.com

Trent Fleming Quoted in Recent American Banker Article

This bank learned the hard way to ramp up M&A-related retention efforts By Jackie Stewart Published July 25 2017, 3∶37pm EDT More in Community banking, Recruiting, M&A, Employee retention, Client retention, Virginia Union Bankshares doesn’t want to repeat the mistakes of the past. The $8.6 billion-asset parent of Union Bank & Trust, which endured employee attrition after its 2014 purchase of StellarOne Financial, has taken steps to improve the odds of keeping more people after its pending acquisition of Xenith Bankshares.  Executives, since announcing the deal in May, have spent time on the road visiting employees. A video featuring the CEOs of both companies has also made the rounds in an effort to allay fears while promoting the merger’s long-term value.

The realization is that other banks will aggressively court nervous lenders and support staff, while the hope is that better communication will persuade anxious performers to stay at Union.
“Competitors immediately assume that there will be disruption and angst so they decide to approach your customers and your employees,” said John Asbury, Union’s president and CEO. “We knew that was going to happen. It’s important that we control the message immediately.”
StellarOne, an acquisition completed by Asbury’s predecessor, taught the current management team a harsh lesson about retention. More than 10 StellarOne commercial lenders left after the deal closed, which factored heavily into flat loan growth in the first year.
The experience isn’t unique to Union, but it does underscore how critical it is to be proactive with employees. Staying out in front of people with the right message can be challenging, industry experts said.
“It’s one of those things you can go crazy trying to deal with,” said Tim Chrisman, founder and principal of the executive search firm Chrisman & Co. “It’s become a bigger issue because of

the availability of talent. Lenders are the franchise.”

Before they announced the Xenith deal, Union’s executives reviewed missteps tied to StellarOne, Asbury said. Management, which largely focused on the communication strategy, determined that it would quickly get as much information out to employees as possible.
Accurate and timely disclosure is critical, particularly when addressing the company’s strategy and an employee’s future, industry experts said. Failure to do so can spur employees to look for opportunities elsewhere.
“Role clarity and honest and clear communication of the ... vision are the two things that must occur,” said Robert Voth, who leads Russell Reynolds’ consumer and commercial financial services practice. “If you don’t have a clear and transparent message ... you can’t have the merging of two cultures into one working toward one unified goal.”
Discussing layoffs can be an uncomfortable process, which is why some executives avoid the subject. Avoiding such a conversation can often lead to uncertainty and attrition that may have otherwise been avoided.
“There is great fear in a merger,” said Tim Scholten, president of Visible Progress, a consulting firm. “There’s a culture change, a system change, technology change, leadership change. ... There’s never a more fearful time than that.”
Union and Xenith, both based in Richmond, Va., filmed a 15-minute video of Union’s director of corporate communications interviewing Asbury and T. Gaylon Layfield III, Xenith’s CEO. The executives discussed the merger’s timing, post-closing priorities and how the deal would benefit clients. The video, which also had a transcript, was distributed to employees after the deal was announced.
Videos can provide additional insight that employees may not get from written correspondence, while allowing well-prepared CEOs to let their personalities sell the deal, said Trent Fleming of Trent Fleming Consulting. People may be more apt to watch a video than wade through a lengthy memo, he said.

“Video is where communication is going,” Fleming said. “People turn to YouTube and other media for everything. If you use video, then people can see" a CEO’s likability or honesty. "No other medium other than an in-person meeting gives you that.” Sellers also run a risk of losing key staff, which can be particularly damaging in rare instances where a deal is called off, industry experts said.

“As the seller, you’re concerned about being able to hold together the kind of team you need to operate until the deal occurs,” Layfield said. “You never know with 100% certainty that any deal will occur, so you have to plan for that very remote possibility.” 

Union and Xenith made an attempt at “harmonized” communication, where each CEO sent a message to employees the deal the deal was announced, along with a customized list of frequently asked questions for staff at Xenith and Union. 

After completing conference calls with media and analysts, Asbury and other Union and Xenith executives visited Xenith’s headquarters, along with offices in Virginia Beach and northern Virginia, to meet with employees.  Outreach continues. Both banks have mechanisms in place for employees to let the integration teams know if something is working well or if any improvements are needed. Asbury has also continued to meet with Xenith’s employees.

“Communication is critically important,” Layfield said. “We both ascribe to that point of view. It’s a lot better for the organization as we go through the changes that inevitably happen from a merger with the two of us working in tandem. That’s the appropriate tone that two CEOs should take.”
Jackie Stewart
Jackie Stewart covers community banks and mergers and acquisitions for American Banker.

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Urgent Alert - Intellectual Property Issues in Banking Software

Rarely do I deviate from 6 newsletters a year, but I am issuing this “Urgent Alert” because it contains information that will help you to best protect your bank should so-called intellectual property issues arise.

One of the non-financial terms that I always try to negotiate in software vendor contracts involves intellectual property. Because of the rise of so-called “patent trolls” and the ease with which patents are being given, banks need protection from such claims. The best way to handle this is to ensure that your vendor offers language indicating that they will defend any such claims that are brought against your institution. Now is a good time to review your current contracts to ensure that they contain such a clause. If they do not, contact your vendor and request that such language be added. I can supply sample language if you need it, but in almost all cases the vendor will have suitable language that can be added to your contract. The most likely reason you don’t already have this language in a master agreement is if you have just renewed such an agreement over and over, never updating the language.

Several banks have already received a letter regarding a certain issue surrounding mobile check capture. It is likely that your bank will too. I want to encourage you to refer any such claims directly to your software vendor(s) so that they can help you to manage this. Please don’t respond directly to these letters, as your vendor(s) are well aware of the situation and are best positioned to respond. I would also advise you to alert your state and national banking trade associations about the receipt of such a letter, as these organizations are also working to help the industry manage such claims.

My purpose in writing this alert is to make you aware of both the general issue of your needing protection in the case of intellectual property disputes, and the specific issue concerning mobile check deposit that I expect you will see shortly in the form of a letter.

Remember, I am not an attorney, and you should always consult an attorney about legal matters. Please let me know if you have questions or if I can assist you in any way.

Trent Fleming

trent@trentfleming.com
901-896-4007

D+H Acquired by VC Firm

For more than 10 years, the Holy Grail of core banking software has been the application that features full United States functionality (especially regulatory compliance) along with multi-lingual and multi-currency aspects.  Such a product would be well received by both foreign and US-based banks, who have offices domestic and foreign.  So far, a modern, integrated enterprise solution has not been found.  The acquisition of D+H by a venture capital firm that already owns Misys, a well known international firm, appears to be the latest effort. 

Misys will join two D+H cores, SPARAK and Phoenix (which already has some international flavor, courtesy of a Caribbean presence).  SPARAK is a stable, more mature community bank product, mainly found in smaller asset based, rural banks across the US, and some speculate that it may eventually be phased out or sold to another US based technology provider.  Meanwhile, combining Phoenix with Misys may give the new owners a leg up on introducing a solution that covers the needs of both domestic and foreign banks for a truly global product.  While the merger will move the combined company into the top three US-based firms in terms of revenue, they will remain a smaller player in terms of the number of US banks processed.

In addition to the core offerings, the new company will continue to be well positioned to serve the platform lending software needs of small and large banks.  Under the D+H umbrella is a suite of lending applications ranging from consumer to commercial to mortgage banking, that are arguably best of breed solutions.  Ongoing efforts to enhance interoperability and service/support among these products promise even better things for the future.

Current D+H customers, especially SPARAK users, should watch events carefully, for clues to how the new owners will move to align resources for maximum benefit, and of course for maximum profits.  

If you would like to review your core vendor relationships, D+H or otherwise, please feel free to contact me. trent@trentfleming.com or 901/896-4007

In Defense of Legacy Core Systems

Tagging along with the FinTech wave of technology innovation, there are a handful of companies promoting “next generation” core systems.  Generally, their sales pitch involves explaining why your current legacy core system is not right for the future, and encouraging you to change.  There are at least two problems with this approach.  First, your basic accounting needs have not changed.  The requirements for bank data processing remain the same: accurate, timely posting and reporting of customer and bank information. The surviving core vendors have proven themselves over time to be reliable partners, have invested heavily in infrastructure and staffing to support their bank customers, and yes, continue to invest in research and development to bring out new products and services.  Second, converting to a different system – any system – is far more complex than it used to be, and will have a tremendous impact on your employees and your customers.  The customer impact in particular is troubling, because they are likely using systems ranging from mobile to Internet to bill pay that they’ve become comfortable with.  Change will bring about apprehension, and may in fact adversely impact utilization.  Utilization that you’ve worked hard to promote.

Here are four reasons you should consider “re-investing” in your current core system rather than converting to a “next generation” product.  To be fair, I’m making the assumption that your current software is still supported and enhanced by your vendor.  If that’s not the case, we need to have a separate conversation.

First, your existing core software covers the basics very well.  Your customer accounts are posted in a timely and accurate fashion, and you have access to the products and services that your customers need.  To be successful, you have to cover the basics and execute on them well.  This level of processing is not the desired result, it is merely the start.  It builds a solid base upon which you can begin to add internal services, including financial analysis and reporting, and customer facing solutions, including mobile, distributed capture, and P2P.  Don’t take for granted that your core system performs as expected, day in and day out.  This is a key component of your IT infrastructure, and should be viewed as a positive.

Second, address the underutilization of your existing systems.   The result is reduced productivity and higher costs.  In my experience, most companies are using less than 25% of the available feature/function of software they invest in.   Doubling that utilization will pay significant benefits.  Underutilization is caused by several factors.  Key influences include minimal training at conversion time, no follow up training, and failure to keep pace with new releases.  All of these factors will contribute to a growing gap between your usage and the product’s capabilities.  Training is the key, and it requires a commitment to establishing and managing a training regimen.  Options include vendor supplied utilization assessments, web-based training, and attendance at regional and national vendor conferences for education on new capabilities and training opportunities. 

Third, you must actively manage the relationship.  While it seems trite to call the relationship a partnership, it really must be.  Your commitment to the core vendor is huge, both financially and in terms of relying on them to help you exceed customer expectations.  Two key elements of this partnership are support and contractual issues.  Support is highly dependent on a number of factors, but let me encourage you to employ these two techniques – document and escalate.  Don’t accept poor service.  If your initial support experience is not good, work to escalate to someone who can help you.  Consider sales and management channels if the traditional support channels don’t work.  For serious matters, especially if systems are not working at all, make sure you properly document the incident.  This is not only a regulatory and management matter, it will also be of great value if the relationship turns sour, or when you begin to negotiate a renewal.  I frequently hear clients relate stories of poor service, but when asked for documentation they don’t have it.  

The contract with your vendor is the governing document for pricing, service levels, and all other matters involving the relationship.  It is important that you are familiar with it, and that you use any excuse – new contract, renewal, or extension – as a time to negotiate better terms and conditions than you have now.  I find many cases where banks have signed the “boilerplate” language from a vendor, and later discover that those terms and conditions are not necessarily in their favor.  Please also use the pricing section of the contract to evaluate your current billing, to be sure it is accurate.  These are often lengthy and complex bills, and only the contract can guide you in understanding if you are being properly charged. 

Finally, community banks don’t need to be Beta testers.  Resist the urge to be the bank where a new vendor works out the kinks in a new system.  Your goal is to deploy reliable technology that meets the needs of your employees and customers.  Testing and development environments are generally not conducive to those goals.

Here are two things you can do today to improve the value you get from your core banking solution.

1)    Seek to improve utilization through better training.  Engage your vendor in this effort, and put together a game plan that provides immediate help, along with a game plan for maintaining a higher level of utilization.

2)    Actively manage the vendor partnership, engaging with the vendor to understand current contract terms and conditions, ensure your pricing is accurate, and demand a satisfactory level of support. 

I  bring 35  years of experience to my role as a trusted advisor to executives on matters of strategy, management, and technology.  I am a frequent speaker at industry meetings, and serves on the faculty of the graduate banking schools at the University of Wisconsin and Penn State University.

This fall, I will be speaking to the following conferences:

1)    Kansas Bankers Lending Conference

2)    Iowa Bankers Technology Conference

3)    Kentucky Bankers Annual Convention

4)    Southeast Oklahoma Bankers Association Quarterly Meeting

I’m currently assisting clients in strategic planning, vendor evaluation, and operational efficiency.

More information on these and other matters at my website www.trentfleming.com or contact me directly, trent@trentfleming.com

Purported EMV Flaw

You've no doubt seen the news stories about hackers discovering an alleged flaw that allows EMV chips to be compromised.  I don't believe this is cause for much alarm.  The stories I've read indicate that the mag stripe on a card can be re-written to effectively turn off the chip.  I'm sure this is possible, but it would require physical possession of the card.  Ideally, your fraud detection, combined with the customer hopefully reporting a lost or stolen card, would serve to protect you.  In addition, the bulk of the story seems to be about merchants not encrypting transactions, chip or otherwise.  That is a very different matter - and you would think that merchants would have learned from the Target breach that encryption is important.

So let's keep our heads straight, and continue to deploy good fraud technology, including the feature that allows customers to temporarily disable a misplaced card - while we plan for partial or full EMV implementation down the road.  Meanwhile, a good dose of employee and customer education about card fraud and safety is probably in order.  You may get calls about this perceived EMV flaw.  Make sure you are ready to respond.

Remember - you control the message or the message will control you.

Managing Strategic Risk in Core Vendor Relationships

There’s been a lot of attention around core system selection, contract negotiation, and related matters recently.  I want to remind you that I have extensive experience in these areas, and generally have open projects involving new system selection, contract negotiation, and re-negotiation of existing contracts.  I have two things that will be of great value to you: extensive experience over the last 30 years, and a proven methodology designed to get you the very best outcome.

This time, I want to discuss contract negotiation (and renewal negotiations).  Next time, we will discuss system selection.

Just like contingency planning, vendor management is more than a regulatory requirement.  It is a prudent business practice. The failure of banks to properly manage their relationships with vendors caused banking regulators to impose vendor management guidelines. Poor vendor management costs money, plain and simple, and creates issues of exposure and liability that may be hidden until some sequence of events occurs that brings such liability to the forefront. 

Essentially, you should organize all of your vendor relationships in such a way that you know who you are doing business with, what the terms of the relationship are (time frames, service levels, bank obligations, vendor obligations) who the proper contacts are (normal involvement, escalated involvement) and have in place a methodology for tracking existing contracts, and getting new contracts into the same organized system so that they are also properly tracked. In many cases, a simple spreadsheet will do, but you will find numerous vendors who offer both desktop and web-based solutions for managing vendor relationships. Again, this is just common sense. Make sure that someone has central responsibility for vendor management. 

I want to spend some time on the specific exposure and liability involved with your large Information Technology contracts. Primarily, core processing, item processing, EFT services, and perhaps Internet banking. Especially when you outsource these services, you will find these contracts to be extremely specific, and virtually loaded with pitfalls to navigate during the course of their lifespan. Over the years, these contracts have grown in size and complexity, and I can assure you that the additional language is primarily to protect the vendor's interests, NOT yours. Below are several clauses that are most critical, as examples of how serious these matters can be. 

1) Natural Termination or "deconversion" fees. You will find that your IT contracts contain language detailing the vendor's responsibility when you choose to move to another vendor at the end of the contract. Most read something like this: "we will provide reasonable deconversion assistance at our then current rates" - or as I like to call it, a blank check. In practice, I am seeing fees that are the equivalent of an extra 6 to 12 months of processing fees. 

All that, for providing one or two sets of “tapes” or files to your new vendor for the conversion process. Note that the word reasonable, in the sentence above, is not modifying the word cost. When renewing these contracts, or signing new ones, insist on a reasonable fixed fee for the deconversion charges. Move on if a vendor won't agree to fix these costs. 

2) Early Termination fees. Let me be clear - I don't ever advise a client to arbitrarily break a contract and attempt to walk away without penalty. You wouldn't allow customers to do that with loan covenants or corporate resolutions. That being said, there is nothing wrong with attempting to negotiate a better deal when you renew or negotiate a new contract. Most of the time, early termination clauses provide for you to pay 80% of the current monthly fees, for the remaining life of the contract. First, this is too high a penalty. The vendor's margins are just not that good. Second, you will find that the vendors often include in the calculation of this 80%, pass through charges (such as telecom, or other third party fees like card production, postage, etc.) that you will still have even when you move to a different provider. I try to negotiate a true cost of the monthly fees from the processor, and then implement a sliding scale as the contract ages. I've seen a number of M&A deals fall through because the selling bank's early termination fees were simply too high. 

3) Auto-Renewal Clauses. Many contracts contain such a clause, basically saying that if you don't serve notice in advance (usually 90 days to 180 days) the contract will automatically renew, at the same terms, conditions, and pricing. First, try to take the clause out. If the vendor won't agree, simply serve notice, via a letter, at the time you sign the new contract that you will not auto-renew. This does not mean you will not renew the contract, it just means you want the opportunity to negotiate terms, conditions, and pricing prior to renewal. 

4) Refunds of Incentive Payments - especially when you move to a new vendor in the core and EFT areas, it is not uncommon for vendors to give you either hard dollars up front, or a significant credit that you can use against the purchase of goods and services. Understandably, if you break the contract early, they will want some or all of their money back. Again, I suggest a sliding scale, so that your liability decreases over time. Probably 100% the first year, then 20% reduction per year for each year after. 

I believe I've made my point that there is significant exposure in contracts for Information Technology services. It's important that you address your situation relative to existing contracts, and that you educate yourself so that future contracts are negotiated not just on price, but also on terms and conditions in order that the contracts are more favorable to your bank. 

Because of the complexity of these contracts, you will likely need help. I have extensive experience in reviewing and negotiating Information Technology agreements, and would be pleased to help you should you need assistance. My methodology includes a checklist of items for review, along with a thorough reading of every contract, addendum, and extension, and provides significant value in helping you manage this important risk area, and negotiating better contracts going forward.

Upcoming Speaking Engagements

July 27 - Advanced School of Banking at Penn State University 

August 5 - Kansas Bankers Association CEO Forum, Colorado Springs

August 11 - Graduate School of Banking, University of Wisconsin

August 13 - Alabama Bankers Association, CEO Conference, Point Clear, Alabama

Trent Fleming advises executives on strategy, management, and technology issues.  Reach him at trent@trentfleming.com or on Twitter @techadvisor