WINTER 2017 | 1

Transformation

WINTER 2017

Banking On 2018

Why Consumers Should Choose Your Bank

Staying Afloat In Your Data Lake

2 |

4 CHARTING THE JOURNEY FOR SUCCESSThis is the first in a series of thought pieces related to Novantas’ views on sustainable transformation efforts, particularly with a focus on evolving the revenue generation side of the equation.

6 | TIME FOR CUSTOMER-LEVEL PRICING: NEW TOOLS OFFER MORE WAYS TO SEGMENT

8 | HANDS OFF: CUSTOMERS WANT ROBO SERVICES FROM THEIR BANK

11 | SIGFIG SEES BANKS AS ROBO PARTNERS

12 | A LITTLE BANK EMBRACES ROBO INVESTING

14 | HOW TO AVOID DROWNING IN YOUR DATA LAKE

16 | BANKS STRUGGLE WITH NEW RESERVE RULES

18 | CRYSTAL BALL: BANKING ON 2018

22 | WHY SHOULD CONSUMERS CHOOSE YOUR BANK? DISTINCTIVENESS IN THE NEW WORLD OF RETAIL BANKING

25 | LENDERS NEED TO SEEK NEW SKILLS FROM COMMERCIAL BANKERS

27 | SENDING THE RIGHT SIGNALS: INDUSTRY ADVANCEMENTS IN BEHAVIORAL LIFE MEASUREMENT

29 | AT THE PODIUM WITH NOVANTAS

30 | NEWS YOU MAY HAVE MISSED

WINTER 2017 | 3

elcome to the winter issue of the Novantas Review.

It seemed appropriate to focus this issue on the theme of transformation as we head into a new year that will likely be filled with change. The recovering interest rates and calming of regulatory waters are allowing bankers to focus on the future digitally- enabled business model — and the challenges of transformation. Transformation is nothing new, of course, but 2018 is likely to bring fresh challenges — from rising interest rates to technology innovation to heightened competition from nascent players like direct banks and robo advisors. Through it all, the banks will need to be nimble.

In this issue, you will get a first look at our proprietary research about what consum-ers think about robo advisors and the characteristics that make a bank distinct. We also dig into how financial institutions can stay afloat in their data lakes and how to tackle thorny issues that can arise when banks use technology to make segmented offers to their customers.

The Novantas Review is going through its own transformation, too. It is now being overseen by Robin Sidel, a former Wall Street Journal reporter who has joined Novantas as the director of a new initiative called the Novantas Center for the Future of Banking. (You will be hearing more about that next year.) We are making changes to the content of the Review and adding new, exciting sections. In this issue, we are introducing a feature called “At the Podium With Novantas,” which highlights speeches and appearances made by our executives at industry events. We also are adding a “News You May Have Missed” section. Stay tuned for additional improvements in 2018.

We wish you the warmest of holiday seasons and a prosperous 2018.

EDITORIALDirector, Novantas Center for the Future of BankingRobin Sidel+1 212.901.2742rsidel@novantas.com

CONTRIBUTORSManolis DavrisKaushik DekaDarryl DemosGordon GoetzmannKaren GrahamHank IsraelPaul KadinSherief MeleisGreg MuenzenMichael RiceDave RobertsonMatthew SharpRobin SidelEthan TeasSteve Wiggins

DESIGNArt Direction and ProductionAdrienne Cohen

NOVANTAS, INC.Co-CEOs and Managing DirectorsDave KaytesRick Spitler

Corporate Headquarters485 Lexington AvenueNew York, NY 10017Phone: +1 212.953.4444Fax: +1 212.972.4602marketing@novantas.comwww.novantas.com

OfficesCharlotteChicagoFinTech Center, New YorkSan FranciscoSydneyToronto

A Note from the CEOs

Dave KaytesCo-CEO

Rick SpitlerCo-CEO

4 |

COVER STORY

Congratulations! The banking indus-try is now stronger than ever. Don’t take your bows yet, though, because the work doesn’t stop here.

Despite rising interest rates, low credit losses (though they are going up) and other strong macro-economic fac-tors, many banks need a major transfor-mation. That’s because a disproportion of time and investments has been focused on regulatory changes and cleaning up the mess of the financial crisis. As a result, banks haven’t paid enough atten-tion to the technological changes that have altered banking forever.

And now many banks risk being left behind.

It will take thoughtful planning and intensive work to seize the future. Banks still need to wring out costs from legacy systems to free up investment dollars. Organizations must focus on delivering satisfaction to increasingly demanding customers who want to open accounts online, receive personalized offers, and

BY GORDON GOETZMANN, ETHAN TEAS, AND SHERIEF MELEIS

relevant advice. After all, customers have plenty of places to turn for finan-cial services, and a growing number of those choices aren’t coming from banks.

Bank leaders are also under pressure from boards and investors who are seeing the same revolution. They want to know where their institution fits in the new world of banking. If they don’t like what they see, they won’t hesitate to pursue change.

The decision to embrace a transfor-mation typically is triggered by a potential crisis. It’s unclear if we’re at the crisis point yet. However, we believe that the signals for more radical change are becoming stronger. Becoming more proactive on act-ing on them will be the difference between moving more boldly into the future or potentially stuck in a more panic-stricken burning platform situation.

LEADING A TRANSFORMATION IS HARD WORKMost transformations over-promise and

under-deliver. There are myriad reasons for that, but one of the largest is that organizations don’t keep close enough tabs on their customers. That is inexcus-able today because it is very clear what customers want: more convenience so they can bank when they want, where they want, and how they want.

Another prime reason for failure is because organizations that need to transform themselves tend to underes-timate the competition. Again, there’s little reason for that to happen in today’s environment. Bank competitors already are beating on the doors of traditional bank customers, resulting in market share gains.

Novantas believes that banks must take specific steps to improve the chanc-es of a successful transformation.

First, transformations typically require material changes to cut costs, grow revenue and fund new investments. As an example, despite closing thousands of branches, banks must continue to

CHARTING THE JOURNEY

FOR SUCCESS

WINTER 2017 | 5

CHARTING THE JOURNEY FOR SUCCESS

Sherief MeleisEVP, San Franciscosmeleis@novantas.com

Ethan TeasManaging Director, Sydneyeteas@novantas.com

Gordon GoetzmannManaging Director, New Yorkggoetzmann@novantas.com

overhaul their distribution networks. More branches need to be consolidated; Novantas estimates that one-third of all U.S. branches are still unprofitable. Reinvest these savings into new digital services for customers that highlight the bank’s brand.

Second, management needs to change too. Transforming a company is hard work that is made even tougher in an industry that is notorious for its silos. Changes in work flow, performance met-rics and governance are all on the table.

Third, a successful transformation needs to start with a vision of the next horizon. That doesn’t mean leaders have to be fixed to a particular path, but they must commit to this “point of arrival” even if the future is murky.

HOW TO TACKLE A TRANSFORMATIONTransformations can take many forms. They can include the material reshaping of a business portfolio, the elimination of layers and other cost reductions, or major innovations.

The expense-oriented approach can seem like a quick fix to yield benefits in the short-term, especially for investors. But they can also inhibit future revenue growth, especially if investments aren’t made appropriately for the future.

Bolder approaches aimed at radical innovation may appear to succeed in a closed environment, but can fail to gain the financial and management support from traditionalists who have been the revenue generators. Initial excitement can be difficult to sustain, leaving an organization fatigued without accom-plishing the goal.

Novantas believes that the most successful transformations are those that focus clearly on the customer’s needs, providing a clear path to achieve distinction and, ultimately, satisfaction. They can take the form of well-designed small innovations that carry fewer risks, but can have big pay-offs when executed successfully.

BETTER TRANSFORMATION PRINCIPLESUltimately, the goal of any transfor-mation is to evolve into a healthier, more agile company that can generate

revenue, grow its customer base and gain market share. To do so, banks must consider four key questions:

1. What are our key products and associated services? For most banks, the operating accounts and the associated services (online, mobile, bill pay, merchant, and other services) and the savings and credit tied to these relation-ships, represent the best measure of customers’ attractive revenues and profitability. This holds true for consumers, businesses and commercial customers, both for existing and new customers. This historical focus is funda-mental, but perhaps not enough. Banks need to follow customer behaviors that will likely redefine value-added products. That may require the bank to think outside the box, create new value-added services and/or require forming new, non-traditional alliances. If banks continue to define products as they already exist, they may miss an important opportunity to differentiate themselves.

2. What is our distinctive differen-tiation with target customers? Once agreed on the key products, it is easier to focus attention on the most important customers and their needs. In the case of most banking customers, convenience (defined as easily accessible, reduces efforts, saves time, avoids hassles, and better informs) is table stakes, though the expecta-tions of convenience are chang-ing. National banks have invested heavily as they see customers turn away from branches and the traditional sales and service func-tions to more digital services that customers increasingly prefer. Banks can also tap the emotional needs of customers, providing services that may be valuable to them, such as helpful face-to-face assistance and making them feel that the bank is doing what is best for them. Such tactics can help build a brand.

3. How will we continue to “inno-vate” to further improve our differentiation? This is a step that helps the best companies succeed — stay tightly focused on the core products and gauge customer needs. This will trans-late into above-average customer growth and revenue, creating a virtuous cycle in which a bank can continue to reinvent offerings. We believe this is a key step in a well-designed transformation effort where an organization begins to discover a new way of working that needs to be guided and managed internally. It is one where customers and what is important to them is front and center. It is also where the organi-zation learns and comes to accept that not all efforts succeed, and that agility is critical.

4. Managing the transformation for longer-term success. Once the organization can answer questions 1, 2, and 3, it is notably easier to consider the other issues that will need to be addressed in establishing a successful lon-ger-term transformation. These include employee engagement and ownership of the change, sticking with the plan to hit the “point of arrival,” and development of the necessary new competen-cies required for success.

Transformation is an ongoing process. What works today may not work tomorrow. The best companies are the ones that can identify the need for change, and then take the bull by the horns to achieve it.

6 |

DEPOSITS

Imagine you are sitting on an airplane in a middle seat you booked at the last minute, and somehow the topic of price comes up with your row

mates. You discover that your window and aisle neighbors each paid $200 for the flight, but you paid $1,000 for your seat. While frustrating, travelers tend to accept that they will have to pay more money for the same product when seats are scarce.

Banks are starting to use the same kind of tools to make more detailed dis-tinctions among their retail customers. Instead of seats, however, more banks

should tap the growing sophistication of analytics to make individual decisions about rates, fees and other services.

The strategy works for airlines because they have determined the aver-age price paid is really the combination of many ticket preferences, class of service, flexibility of fare change, choice of seat, and time to travel. Their pricing methodology has evolved to deliver the value the customer seeks at the time and price they are willing to pay. By breaking down that average price into components that customers value, there are huge revenue opportunities.

CUSTOMER-LEVELBY HANK ISRAEL

TIME FOR

PRICING

WINTER 2017 | 7

TIME FOR CUSTOMER-LEVEL PRICING: NEW TOOLS OFFER MORE WAYS TO SEGMENT

1. One to All or One to Each (Fair-ness): Is it fair that everyone gets the same thing or that they get what they need/desire most?

2. Everyone knows and understands their offer, but does everyone know and understand all offers? (Transparency): Should the bank make the customer aware of all offers and the criteria under which they were determined, or should it provide choices and allow the customer to choose the appropriate offer, or should only one offer exist?

3. The Neighborhood Barbeque

Banks can do the same: offer higher rates to customers who tend to hold balances longer, or even run a private sale for deposits for customers you know are price-sensitive — just as clothing retailers do.

Offers may be segmented based on balance size or whether it even makes sense to a customer who previously hasn’t responded to a promotion. Banks can also assess whether the customer is likely to keep the balance at the institu-tion based on historical behavior, such as whether they previously moved money out of the firm when a promotion ended.

Today’s customer treatments are typically transparent because they are made in a public forum, such as through the mass media or a bank’s website. Cus-tomers can easily determine that they are receiving an offer because they live in a specific geographic market. Terms of the offer, particularly when it comes to rate, also are clear.

That transparency may be at risk, however, in today’s digital world where banks make more direct-to-consumer offers. Banks, therefore, must take extra steps to make sure customers know what they are getting.

Banks also need to decide when and if customer-service staff should proac-tively explain the rationale for an offer (if, for example, it is designed to attract customers who wouldn’t consider the institution otherwise.)

Ultimately, customer-level pricing means customers will be treated based on their profitability and potential to their banking partners. As a result, some customers may receive more lucrative offers than others based on their situa-tion. That doesn’t mean, however, that others will be treated poorly. The trick for banks is what to do if a customer becomes aware of another targeted offer (to a friend or relative) and wants the same terms? It is difficult not to honor the offer, but the value for the bank may be eroded if the offer provided to the first customer is not transferable to the second.

To avoid such a conundrum, banks should be as specific as possible with their offers to meet a new target audi-ence, such as new money of $50,000 or a customer who already has more than $250,000 in assets with the bank.

Moving to customer-level treat-ments can present technical and brand-positioning challenges to banks. By clarifying the bank’s promises and developing a pricing policy consistent with those promises, customer level treatments can help cement a brand rather than complicate it.

Hank Israel Director, New Yorkhisrael@novantas.com

The simple fact is that tiered pricing, paying more interest on accounts

with higher interest, or providing other offers can create a deeper relationship.

This same digital disruption has arrived in banking. By evaluating cus-tomer transactions, deposit and loan trends, and reactions to digital and direct offers, banks can decipher the underly-ing preferences customers have for rate, fees, and service. That knowledge, in turn, can help a bank tailor experience based on those customer preferences.

On the surface, these capabilities seem like nirvana because banks can now provide customers exactly what they want. But they have also exposed three major concerns that Novantas has identified among its clients:

Discovery (Trust): If I receive a great deposit rate and my neigh-bor finds out, how does the bank decide to treat the neighbor?

Novantas believes that banks can use new analytical tools without running afoul of those concerns. Indeed, some of the new capabilities are just an exten-sion of what banks have been doing for years, such as offering different deposit rates in different geographies.

The simple fact is that tiered pricing, paying more interest on accounts with higher balances, or providing other offers can create a deeper relationship. The real question banks need to consid-er is whether they are comfortable pro-viding the same service for a different price to an assortment of customers, just as airlines do with their seats.

Airlines are already diving deeper into customer pricing than just basing prices on the timing of ticket purchases. They are now charging for baggage, wifi, pre-boarding, “premium” seats, etc. PRICING

New Tools Offer More Ways to Segment

8 |

FINTECH

After years of hesitation, U.S. con-sumers are now ready to open investment accounts at their bank.

The twist: instead of relying on finan-cial advisors and brokers in the branch, they want computers to help guide their investment strategies. Banks also need to be careful that the new offerings don’t cannibalize funds that sit in existing savings and checking accounts.

New research from Novantas and robo-advisory firm SigFig shows that 68% of bank customers are very interest-ed or extremely interested in opening a robo-investment product. Of those, a

whopping 88% say that they will open an account in the next 12 months.

And significantly, most of them prefer to get the service from their bank instead of another institution.

That is good news for the growing number of banks that are exploring the use of robo-advisory products, which use computer algorithms to set asset allocations with automated rebalanc-ing. The model, which sits between do-it-yourself-investing and human wealth advisor-based relationships, is often aimed at consumers who have $5,000-$250,000 in investable assets.

BY PAUL KADIN AND KAREN GRAHAM

CUSTOMERS WANT ROBO SERVICES FROM THEIR BANK

HANDS OFF:

WINTER 2017 | 9

HANDS OFF: CUSTOMERS WANT ROBO SERVICES FROM THEIR BANK

PREFERRED ROBO-ADVISOR PROVIDERThere is significant consumer demand for a Robo-Advisor offering with nearly half of consumers interested in the Robo-Advisor concept preferring to open an account with their primary bank.

Q29 With which type of financial services company would you be most interested in opening this type of investment account? Base: T3B interested respondents (N=1036)Source: Novantas Research: 2017 Robo-Advisor Consumer Demand

Many of these consumers just aren’t comfortable managing their own port-folios and don’t have enough money to attract wealth-management firms.

Novantas believes that banks are well-placed to serve such customers. Consumer investment assets have been most elusive for retail banks because customers haven’t considered their offerings to be as credible as major bro-kerage and wealth management firms in consumers’ minds. The advent of robo investment now offers banks a new arrow in their quiver.

And banks that pursue such strategies can also use them as a potential path for providing more personalized wealth-man-agement offerings in the future.

The robo-advisory category has been growing rapidly over the last 5 years, fueled by direct-to-consumer fintech players like Betterment, SigFig, Wealthfront, Personal Capital and oth-ers. The addition of robo products from mainstream companies like Vanguard and Schwab has resulted in the largest influx of assets to this new category.

While robo-advisory products now represent less than 1% of consumer assets under management, Novantas projects growth will accelerate to $1.5T of assets in 2020. The new offerings are especially appealing to millennials who

Investment FirmNon-Bank Financial Institution

Primary Bank

42%

7%

45%

REASONS FOR INTEREST FROM PRIMARY BANKConvenience and familiarity are major factors driving consumers’ preference for their primary bank; fewer than 1 in 4 would expect better pricing.

Q30 Please indicate the reasons you would be most interested in opening this type of investment account with your primary bank? Base: Respondents most interested in the concept from Primary Bank (N=469)Source: Novantas Research: 2017 Robo-Advisor Consumer Demand

I want it to be easy to transfermoney between multiple accounts

My bank already knows me

I want to keep all of my money in the same place

It's easier than opening a new account with another company

I prefer being able togo into the branch

My bank understandsmy financial goals

I believe my money ismost secure with a bank

I would expect better rates orpricing from my primary bank

40%

38%

30%

28%

26%

25%

25%

23%

have increasing wealth potential, a high distrust of advisors, an aversion to fees, and an affinity for technology.

The trick for the banks is to design

these offerings in a way that expands relationships. They also must ensure that customers aren’t just siphoning funds from their other accounts into the new offerings.

The prospect of cannibalization will be a big issue for banks that pursue robo-advisory businesses in the coming year. If the new offerings aren’t struc-tured correctly, any gains that are fun-neled to wealth-management divisions won’t be significant enough to offset pain at the retail level.

The potential hit is significant: Novantas estimates that for every $100 million in savings deposits moved over to robo-advisory assets under manage-ment, a bank can lose a net of $1MM in revenue. That figure assumes the poten-tial for lost NIM (150 bps illustratively) despite an increase in advisory fees (50 bps illustratively).

That’s why banks need to integrate deposit and robo-investment offer-ings with thoughtful product design, pricing and marketing strategies that

$

10 |

FINTECH

lead to overall growth in funds from existing customers. Banks that keep robo advisory as a stand-alone product within the wealth-management division will be missing the impact on retail consumer relationships.

Indeed, customers want that inte-grated relationship: the top two reasons cited by consumers who are interested in robo services are “I want it to be easy to transfer money between multiple accounts” and “my bank already knows me,” according to Novantas research.

That means banks will need to pull incremental investment dollars from oth-er sources, notably retirement accounts from other institutions. Such consolida-tion of assets will increase the likelihood that customers stay with the bank.

Novantas sees four important keys to success for banks entering the robo-

advisory business:1. Design robo-advisory pricing in

conjunction with deposit pricing and consider bundling relation-ship benefits. This will encourage expansion of existing relationships and has the potential to be a dis-tinctive proposition for acquisition of new main bank accounts. Cam-bridge Savings Bank’s CSB One account is an example where offers and functionality are integrated between their robo-advisory prod-uct and checking package. Cash incentives and fee waivers are offered to checking account cus-tomers for opening Cambridge’s Connect Invest product.

2. Align sales and service models to initially bring robo-advisory cus-tomers in through the retail seg-

ment, but systematically upgrade them to advisory relationships. Clear lines of staff accountability between retail (branch, phone, online), branch-based advisors, and wealth-management business development are required for seamless acquisition, onboarding and cultivation of investment assets, regardless of whether they are transferred from existing accounts or pulled in from outside holdings.

3. Build comprehensive advice and guidance capability that crosses cash management, investments and lending. Consumers need easy access and integrated advice on using all the bank’s products appropriately across life events and life stages.

4. In marketing messaging, stress the point that all the products consumers need are available from their main bank. Novantas research on the drivers of bank distinctiveness highlights “serves all banking needs” as cited by 46% of shoppers as important in selecting a bank. The availability of a robo-advisory product that is inte-grated with a checking relationship can be compelling for customers.

Robo-advisory products present an attractive addition to banks’ product set and potential fee income. White-label partners also make it more practical than ever, especially amid competition from fintech providers, national banks and direct banks. But the path to success will challenge longstanding problems of seg-regated management of product, pricing, sales/service and marketing across retail and wealth-management domains.

Done well, this nascent product can result in larger, longer and more profit-able customer relationships.

59%

57%

23%

19%

4%

4%

2%

50%

33%

14%

25%

7%

4%

4%

Savings account(s)

Checking account(s)

Certificate(s) of Deposit (CD)

Money Market account(s)

Non-retirement investment accounts

I'm not sure

Other, please specify

SOURCE OF INITIAL DEPOSITNearly 60% of consumers plan to invest less than $25k initially and are more likely to pull from existing deposit account balances, not non-retirement investment accounts.

Base: Respondents with T2B interest from Primary bank (N=308) | T2B Interest from Financial Institution other than primary bank (N=344)Q32 Please estimate how much you would be likely to invest, as a starting point, into this type of investment account?Q33 From which of your existing deposit and/or investment accounts would you be most likely to transfer money for an initial deposit?Source: Novantas Research: 2017 Robo-Advisor Consumer Demand

Paul Kadin Managing Director, New Yorkpkadin@novantas.com

Karen Graham Director, Chicagokgraham@novantas.com

WINTER 2017 | 11

Mike Sha doesn’t want to put banks out of business.

While many fintech start-ups are trying to compete with traditional finan-cial-services providers, Mr. Sha sees his firm as a partner to banks that are explor-ing the nascent world of robo-advice.

The chief executive officer of SigFig, a firm that offers automated investment advice, says banks need to recognize the enormous opportunity to serve customers who previously have had nowhere to turn because they don’t have enough money to attract traditional wealth managers.

“We are more likely to achieve our mission of having that impact on that wide audience by working with the industry rather than trying to put them out of business,” says Mr. Sha, who estimates there are “hundreds of millions” of people who need access to investment advice.

A number of banks have announced partnerships with SigFig, including Cit-izens Financial Group Inc., UBS Group AG, and Wells Fargo & Co. SigFig has also teamed up with Cambridge Sav-ings Bank, a community bank in Mas-sachusetts. (See A Little Bank Embraces Robo Investing)

“Others are clearly beating the

David vs Goliath drum, but we’re not part of that narrative. We want to sit side-by-side with traditional incumbent players who are interested and willing to evolve their product and business model,” says Mr. Sha.

Mr. Sha’s connection to investing dates to his childhood in Malvern, PA. where one of his chores was to dial a phone number each day and write down a series of numbers that he heard on a recording. He didn’t know it at the time, but he was tracking the end-of-day net asset value of mutual funds owned by his mother who was an enthusiastic investor.

He played stock-market games in high school and earned degrees in computer science and math at Harvard University.

“Even as a kid, I geeked out on stuff related to finance and money,” he recalls.

After earning degrees in computer science and math at Harvard, Mr. Sha landed at Amazon.com where he launched the company’s Visa credit card and built fraud-detection models. He founded Sig-Fig in 2011 in a bid to solve what he consid-ers to be “a real gap in financial services.”

The timing, he says, was right.“Banks are quite intrigued and serious

about partnering with fintech companies. If we had started this company 10 or 20 years ago and tried to do this, we would

have had a real uphill battle,” he says.It has also been an uphill battle for

banks, which have stumbled in their efforts to develop investment opportuni-ties for the mass-market customer.

“It is ironic that it is a new opportunity for them, but most American consumers just don’t fit the traditional investment-ad-visory model,” Mr. Sha said, referring to wealth-management divisions that target high net-worth clients. “Retail banks have tons of upside in this trend because all of these people who have $50,000 or $100,000 are already customers of these banks.”

Mr. Sha also sees robo-investment services as an opportunity for wealth advisors, not as a replacement for them. By automating some of their duties, they can spend more time with clients.

Still, banks need to figure out how much effort they want to devote to the new offerings.

“The traction in the industry won’t be limited by concerns over the offerings, but by competing priorities like systems overhaul for KYC requirements, the NIM crisis and the closure of branches,” predicts Mr. Sha.

Robin Sidel Director, New Yorkrsidel@novantas.com

BY ROBIN SIDEL

SIGFIG SEES BANKS AS ROBO PARTNERS

12 |

FINTECH

With $3.5 billion in assets and 17 branches, Cambridge Sav-ings Bank isn’t an obvious example of a cutting-edge

financial institution.But this Massachusetts-based bank

has taken a leap into the future by inte-grating an automated investment plat-form into its regular offering of checking and savings accounts. It is one of the first small institutions to adopt a robo-invest-ment service for its customers.

The move to partner with SigFig came at a time when Cambridge was searching for ways to engage young adult customers who want easy access to financial products through mobile devices.

“They want stuff fast and personal-ized and intuitive and at the right val-ue,” says Wayne Patenaude, president and CEO.

The bank, which previously didn’t have any investment offerings for its customers, had considered several strategies before settling on a deal with SigFig. Because it wasn’t in the busi-ness of providing investment advice, Cambridge didn’t have to figure out

how the new service would mesh with a traditional investment platform.

Cambridge has fully integrated the robo product into its banking plat-form, allowing customers to seamlessly transfer money between the investment accounts and their other accounts. The entire service can be accessed from one screen, whether it is on a PC or a mobile device.

Cambridge is pitching the service in its branches and is training staff members to introduce customers to the product.

“You have to be careful with the regulations about what employees can and can’t say to a customer,” says Mr. Patenaude, who has been the bank’s CEO for five years. Licensed SigFig representatives also are available to talk with customers in electronic face-to-face meetings.

He expects other banks to pursue sim-ilar strategies, regardless of their size.

Robin Sidel Director, New Yorkrsidel@novantas.com

BY ROBIN SIDEL

A LITTLE BANK EMBRACES ROBO INVESTING

Wayne Patenaude, CEO

WINTER 2017 | 13

To learn more abouT mbCa and how you Can geT

involved, ConTaCT:

Brent T. TjarksExecutive Director, Mid-Size Bank Coalition of AmericaBrent.Tjarks@midsizebanks.com+1 213.335.4344

The beST oF boTh worldS

They offer the same breadth of products, services, and channels as larger banks, with the flexibility of smaller community banks.

Mid-size banks meet the changing needs of expanding businesses, thus helping to create jobs and economic vitality that stabilize the nation’s backbone.

The Coalition exists to support the continued success of this vital group. Our priorities are simple —

mid-Sized banKS

Empower Banks to participate more effectively in the national legislative and regulatory dialogue on issues materially impacting mid-size banks’ ability to serve their customers and contribute fairly and fully to the U.S. economy.

Encourage Greater clarity and appreciation for the distinctive nature, scope, and contributions of mid-size banks to the U.S. economy and importance of sustaining them.

Educate The public on the vital role of mid-size banks in helping main street businesses, entrepreneurs, and their families grow the U.S. economy.

Promote Awareness of the considerable contributions and support mid-size banks provide to communities across the U.S., and the benefits of those communities derive from the ability of these banks to fully compete in the marketplace.

Reform Regulatory thresholds for financial policy issues and regulatory measures that fail to consider the unique challenges and resources of mid-sze banks and create a distortion in planning for natural growth and the associated growth in lending.

ADVERTISEMENT

14 |

TECHNOLOGY

Data and analytics are sparking innovation at all levels within banks, but they are also breath-ing new life into an age-old corporate war over ownership.

HOW TO AVOID DROWNING

IN YOUR DATA LAKEBY DARRYL DEMOS AND KAUSHIK DEKA

The data lake is often at the center of the debate. As a result, business leaders need a better understanding of its value and technology leaders need to better manage expectations to avoid

over-promising and under-delivering.If unchecked, data lakes can turn

into a money pit, dividing the business and technology teams that battle for control of data and analytics.

WINTER 2017 | 15

HOW TO AVOID DROWNING IN YOUR DATA LAKE

Kaushik Deka Director, New Yorkkdeka@novantas.com

Darryl DemosEVP, New Yorkddemos@novantas.com

A data lake is enabled by low-cost storage for raw data in a “natural state”, creating the potential for high-speed data processing and a vision for democratized analytics. The full promise of the data lake is to enable predictive modeling and real-time analytics at scale, driven by a richer and granular data model. The models and insights can be deployed with an agile environment to produce results that weren’t previously possible with a traditional warehouse architecture and development methodology.

Structured properly, not only does the data lake provide a cheap and scalable data repository often hosted on Hadoop Distributed File System (HDFS), but it can also be embed-ded with a significant computational layer to support intense workloads like machine-learning models and streaming analytics. Companies like Netflix, for example, have been able to leverage Hadoop on the cloud to serve tens of millions of customers with streaming services.

Banks are rushing to dump files into their lake, telling users that they are opening the data for individual self-service.

What’s not to like? All data are in one place, easily accessible with promise of massive processing power, especially to handle customer analytics at scale.

Not so fast. Like many new tech-nology investments, the vision of the future and the timing of reality are often out of whack. In the 1990s, customer relationship management (CRM) platforms were all the rage, with predictions that they would revolutionize the industry in year or two. But back-end problems and other stumbling blocks delayed the projects, some of which took a decade to reach their stated goals.

As a result, Novantas believes that business leaders need a better under-standing of the value of a lake and its role in a data and analytical ecosystem. CDOs and CTOs, meanwhile, need to have a firmer grasp on the nuances of their technology selections and temper expectations to avoid over-promising

and under-delivering. And both groups need to be focused on use cases and agile development to make the right kind of short-versus-longterm trade-off.

Based on formal and informal sur-veys with business managers, CTOs and CDOs, Novantas has identified the most common data-lake pitfalls that can cause significant disenchantment if not addressed:

1. Data put into the lake are not as complete or well-documented as central data teams claim. These are holes that, discovered later, can be difficult to go back and plug. Serious business problems can develop, eroding faith in the promise of a new vision.

2. If poorly architected, processing capacity may initially appear to be slower than traditional warehouses. For banks that are spending millions of dollars to move from an enterprise data warehouse to an enterprise data lake, an under-utilized data lake can quickly sour expectations.

3. New skills are needed to work in a distributed computing environ-ment like Hadoop and to develop analytics that can leverage its com-puting horsepower. The engineers who build data and machine-learn-ing pipelines and the scientists who harness the data lake to devel-op predictive models have skills that are hard to find and may not have much banking domain exper-tise. Existing analysts may not be trained for the new technologies.

4. The people who want funding for the analytic arms race may make too many promises and heighten expectations, setting up everyone for failure. Skeptical business

people may be less willing to assert authority in the early stages because all the analytical promises sound great and the technology is so new.

One of the first ways to avoid such stumbling blocks is to make sure the two groups (business unit and technology leaders) are fully-informed at the outset about the potential of the data lake and the possible problems that may arise when onboarding the technology and filling the lake.

Technology leaders need to take the initiative. While money is needed to fund new initiatives, it does no one any good to over-promise. Successful initiatives can start with smaller, tar-geted programs that can grow in size and sophistication.

The data lake is a big investment, both in time and dollars. Be prepared for the reality that certain other busi-nesses and functions may come first, delaying the benefits that a data lake can provide. On the flip side, a bank may need to scale back other investments to make way for the data lake.

Business leaders and technology experts must understand that a data lake is not an immediate panacea. Introduced correctly, it can be a mechanism that treats data as a strategic asset and adds significant operational leverage. But that will take time, talent and a well-defined technology roadmap aligned with clear business objectives.

16 |

RULES & REGULATIONS

Banks are grappling with a new rule that changes the way they account for losses, a move that is causing significant practical

problems and may also have wide-reach-ing implications for loan pricing and overall product strategy.

The issue, which will be one of the biggest challenges facing banks in the coming year, is complicated by a lack of complete and historic loan data at many institutions.

Given this shortfall, banks will need to start sharing data about the historic performance of their loan portfolios with each other if they are to be pre-pared for the new rule.

The change in GAAP standards, known as CECL (Current Expected Cred-it Loss), requires U.S. banks and credit unions to set aside reserves for each loan commensurate with the total future credit losses expected throughout the life of the loan. The move is aimed at reducing earnings volatility by better anticipating future problems. It may also result in bigger reserves and lower profits.

The new standard, which takes effect

beginning Dec. 31, 2019, is creating intense work for banks (finance, credit, risk, and data departments) that will have to plow through loan origination data, ongoing servicing data, and ultimate loss and charge-off data. While most banks have done a better job collecting loss data in the years since the financial crisis, many challenges remain.

After years of a benign credit envi-ronment, many banks just don’t have a good sense of potential losses. That is particularly the case in some specific loan portfolios, such as risk measures at origination for CRE loans.

Additionally, a flurry of merger activity among smaller institutions means that some loan portfolios have incomplete data. Banks that have at least five or six different systems that contain the required information are bound to run into data-mapping issues.

By sharing loan-performance data, banks can get a better sense of perfor-mance when they model for the lifetime of their loans.

CECL is a significant change from the previous standard, called the Incurred

BY STEVE WIGGINS

Credit Loss method, in which banks set aside reserves for losses they expect to occur within the next 12 months. Such reserves usually only are set aside once an asset already experiences significant credit deterioration to the point where collection becomes doubtful.

The accounting change is partly aimed at addressing some of the fallout from the financial crisis when investors in bank stocks lamented the lack of foresight in bank balance sheets. Losses realized from defaults in loan portfolios far exceeded the reserves banks set aside for such scenarios.

The rules require banks to make “life of loan” reserve forecasts. This means all future expected losses must be reserved for at the time of origination, no matter how remote the probability of loss may be. The loss estimates must be based on “reasonable and supportable forecasts” and forecasts are expected to include for-ward-looking views of the economic envi-ronment in the bank’s primary markets.

It is expected that those macroeco-nomic forecasts need to extend at least one year, but as many as three years may

WITH NEW RESERVE RULESBANKS STRUGGLE

WINTER 2017 | 17

BANKS STRUGGLE WITH NEW RESERVE RULES

be ideal. FASB’s guidelines indicate the macro forecasts should be “reasonable and supportable”, meaning that they are based on analysis, relevant to the bank’s market and can be predicted with a sense of accuracy.

FASB’s guidelines also state that banks can then revert to their historical loss rates to estimate longer-term losses since CECL requires loss estimates that go out to the entire life of the loan — which could be as much as 30 years for a mortgage.

The banking industry has expressed concern about the new rule. The Wall Street Journal reported earlier this year that executives at 18 U.S. regional banks asked Treasury Secretary Steven Mnuchin to conduct an analysis of the long-term economic effects of the rule. Some federal lawmakers are also worried about the rule, which could potentially cut into bank profits by forcing companies to set aside more for future losses.

The American Bankers Association has said that it is concerned about how

banks will implement CECL, especially the burden it could place on community banks. The demands are particularly chal-lenging for smaller institutions: a study by Pacific Coast Bankers’ Bank in Califor-nia found that only 11% of chief financial officers at financial institutions with less than $10 billion in assets believed they are prepared for the CECL transition.

CECL’s reach goes far beyond the reserve estimates and their effect on the Allowance for Loan and Lease Losses (ALLL). Depending on the bank’s loan mix, it could experience a material change in its reserves, and most likely that change would be an increase. If the economic forecasts are reasonable and accurate, many banks should experience a reduction in ALLL volatility (and thus earnings volatility); however, less robust forecasts may lead to higher ALLL and earnings fluctuations.

Moreover, CECL has the potential to fundamentally change the economics of offering certain loan products. For

example, longer-dated assets such as fixed-rate residential mortgages may realize large increases in reserves, there-by reducing their profitability. This, in turn, could lead to fundamental changes in loan pricing, and even in bank and product strategy.

The clock is ticking.In order to be ready to produce updat-

ed financial statements by the end of 2019, most banks want to do a full year of parallel runs alongside current reporting, which means that models need to be in place, tested, and validated by the end of 2018. To meet that deadline, models need to be developed ideally by 3Q-4Q 2018, meaning the data needs to be in order by the end of 2Q 2018.

Data analysis efforts are underway at many banks, but the timeline is tight. Will your bank be ready?

CREDIT DATA CHALLENGES FACED BY MIDSIZE BANKS

Insufficient volume and/ or quality of historical

data

“Reasonable and supportable forecasts” require macroeconomic

factors and forward-looking information, but

most banks don’t use such information in their

loss models

Many midsize banks are challenged by the analytical requirements

to develop these types of models in-house

Banks unsure which model style is best for particular asset types

Steve Wiggins Director, New Yorkswiggins@novantas.com

Novantas is exploring a cooperative effort that would address CECL challenges by developing a loan-data consortium to help banks round out their

data completeness.The consortium would also help banks to develop their

mandated loss-forecast models.The Novantas loan-data service will gather large volumes

of loan-level historical data from member banks across the country in an effort to provide them with a solid foundation

on which they can build their CECL loss models.Data will be transformed, cleaned, and standardized into a

single format in line with Novantas’ data model. Anonymiza-tion ensures confidentiality of each member bank’s portfolio.

Novantas will also provide advanced benchmarking of a bank’s portfolio against the rest of the membership to enable member banks to understand how they compare to their peers.

For more information, contact Steve Wiggins at swiggins@novantas.com

18 |

CRYSTAL BALL

As we head into 2018, there are a few certainties for the banking industry. Institutions will have more opportunities to explore technology through partnerships, as well as cre-ating their own new platforms. Regional banks will need to pursue strategies that make them distinct from the national players that are scooping up deposits at a fast clip. Cus-tomers — whether corporate or consumer — will give their banks a run for their money to get the best rates and the best service.

And then there are a slew of unknowns surrounding inter-est rates, regulation and merger activity.

While we don’t have a crystal ball, we know a lot of smart folks who spend time thinking about these issues. Here are some of their thoughts:

BANKING ON 2018

Crystal Ball

WINTER 2017 | 19

BANKING ON 2018

Legislative reform will con-tinue to be extremely diffi-

cult, so look to the regulators for any real easing of the regulatory burden. Chang-es at the top of the regulatory house are all significant harbingers of relief. High-er interest rates, the Fed’s unwinding of its portfolio and continued revenue and cost pressures will remain drivers of bank consolidation, at least on the small end, and look for some of the traditional acquirers in the mid-size to re-enter the game. And the onslaught of fintech in-novation will both threaten and provide interesting opportunities for banks as the struggle for primacy in customers’ minds, hearts and wallets continues. The business of banking will remain as tough and difficult as ever.

The next decade is likely to see a dramatic shift in the

way we as a society view intermediate capital. The decline of the public markets will likely accelerate as the cost of these exchanges continues to increase while the benefit — namely liquidity — becomes increasingly less apparent in the face of a rapidly expanding — and by extension — increasingly liquid, private market. The implications of this fundamental shift are likely to have a profound impact on both the financial services industry as well as the broader economy. There will be nega-tives for liquid equity market players such as asset managers and exchanges, but it will be very good for private-market par-ticipants like private equity, distributors and service providers.

Consumer preferences and habits will continue to drive

big changes in the banking industry in 2018. Investment in mobile banking will continue to advance as younger genera-tions quickly adopt digital ways to bank at a faster pace than ever before. ATMs will play a more prominent role in con-necting our physical spaces to digital by assisting customers with their everyday banking. Branches will remain a crit-ical part of deposit growth and will be-come more closely aligned with digital offerings to make the customer experi-ence even simpler. New branch formats will continue to emerge, like all-digital branches and more e-ATM kiosks, offer-ing customers more choice depending on their banking needs.

Olivier Sarkozy, founder and managing partner of

Further Global, a private-equity

firm that is focused on

financial services

Thasunda Duckett, CEO of

consumer banking at

JPMorgan Chase

Virtually every major bank, in-surance company, payments

company, and asset manager now has a strategy around their technology invest-ments, with the goal of significantly im-proving customer experiences. Fintech start-ups are a central part of this strategy, and in fact many financial institutions are also investing in companies, either direct-ly or through their own or external funds. In 2018, we should expect many more of these initiatives to get into production. Ditto for enterprise distributed ledger ap-plications. Real-time P2P to banked con-sumers and low-risk business will be free, or close to it. So in 2018, we will see the rubber meeting the road in several core enterprise fintech themes, and we’ll see who are the winners and who is not cut-ting it. Similarly, many consumer-facing fintech companies will need to face up to the reality that customer acquisition costs are still way too high for the LTV of their existing business model.

John Douglas, partner in

the financial institutions group at Davis Polk & Wardwell LLP

and head of its bank regulatory

practice

Hans Morris, founder and managing partner at

NYCA Partners, a venture

capital firm that is focused on

fintech

20 |

CRYSTAL BALL

Corporations worldwide are holding record levels of cash

and that will continue in 2018. Histori-cally low rates, even at slightly higher forecast levels, still encourage compa-nies to borrow. More of this cash will be deployed directly in money market in-struments as rates on bank deposits and earnings credits for transaction services lag the markets. The wild card is how quickly central banks right-size their own balance sheets and allow markets to find a true equilibrium.

The U.S. banking industry en-ters 2018 anticipating rising

rates, more and larger acquisitions, and less interference from regulatory bodies. But those are the same three big expecta-tions we had heading into 2017. Will 2018 be the year where these three promises play out in a major way, or will it be an-other year of slow, incremental advance-ments without the kind of transformation-al progress the industry needs?

The Fed’s 2016-2017 actions are finally translating into

additional churn in deposit portfolios, which will accelerate regardless of how FOMC “dot plots” evolve. Expect more separation between deposit ‘haves’ vs. ‘have-nots’, and large moves in direct banking, from established and new players alike.

Corporate bankers will in-creasingly compete on ad-

vice and experience in 2018, even more so than functionality and price. As part of that effort, more than half of the re-gional and global banks will formally designate a chief customer experience officer who will own the vision and ar-chitect the design of the target customer experience. To drive high-value growth, at least six to eight banks will pursue out-of-footprint strategies to leverage distinctive expertise and capture nation-al share in target segments.

Peter Gilchrist, executive vice

president, Novantas

Anthony J. Carfang, managing director,

Novantas

Andrew Frisbie, managing director,

Novantas

Dave Robertson, managing director,

Novantas

Private-equity firms, loan funds and other ‘non-regulat-

ed’ lenders have seen a lot of growth and have benefited from the low rate environ-ment and increased regulatory under-writing pressure on banks. I do not see this as a permanent trend. These entities have not solved the issue of how they will fund themselves when markets experi-ence volatility which is not a question of ‘if,’ but ‘when’.

2017 witnessed unprece-dented corporate optimism,

and even though commercial lending has been steady, normal run-off has netted in a lack of meaningful growth. A likely cause of this is the gridlock in Washington which creates uncertainty. Should Congress pass tax reform in 2018, I believe it will stimulate corporate and commercial activity.

E.J. Burke, co-president of Key Community

Bank, responsible for commercial

banking, residential

mortgage and private bank

at Key

Rick Remiker, senior executive vice president,

director of commercial banking at Huntington

Bancshares Inc.

For more information, contact: Alex Lee, Director | alee@novantas.com | +1 212.401.5207

The Novantas View

WINTER 2017 | 21

94,000

86,000

2,000

88,000

90,000

84,000

92,000

0

87,825

86,102

90,481

91,966

92,998

93,782

89,221

2011 2012 2013 2014 2015 2016 2017

Bran

ches

Year (total)

-0.8%

-1.1%

-1.6%

-1.4%

-1.6%

-2.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Depo

sits (

$T)

Year

12

10

8

6

4

2

0

All Other

Retail

2011 – 2017 Branch Changes

For more information, contact: Alex Lee, Director | alee@novantas.com | +1 212.401.5207

Reta

il De

posit

Gro

wth

fro

m 2

011–

2017

($B)

700

600

500

400

300

200

100

0

$659

$426

$156

$300

$153

$14 even though they only have

TOTAL DEPOSIT GROWTH

THE RATE OF OPENING BRANCHES

NATIONAL BANKS

BANKS ARE CLOSING BRANCHES

at approximately

2x a significant increase over last year

Retail

All other

Retail vs. Total Deposits, 2005 – 2017

RETAIL DEPOSITS OUTPACED

In the last two years,

for the first time in 13 years

representedOF ORGANIC DEPOSIT GROWTH

OF BRANCHES National UnitSuper Regional

Regional CommunitySuper Community

Organic Deposit Growth, 2011 – 2017

1%

Note: Retail deposits are estimates based on adjustments to repositories and non-retail institutions.

39%19%

39%

25%

9%18%

9%

22 |

NOVANTAS RESEARCH SPOTLIGHT

BY MATTHEW SHARP

For years, Novantas has challenged banks with the question: Why should someone choose your bank? For such an obvious and simple question, it has a way of

creating silence in a room of bankers as they consider what makes their institu-tion unique at a time when branches are becoming less important.

New customer research from Novantas reveals that the answer may be surprising.

While most bankers might assume that a sophisticated online or mobile- banking platform ranks high on the list

WHY SHOULDCONSUMERS

Distinctiveness in the New World of Retail Banking

WINTER 2017 | 23

WHY SHOULD CONSUMERS CHOOSE YOUR BANK? DISTINCTIVENESS IN THE NEW WORLD OF RETAIL BANKING

of what makes an institution distinct to potential customers, our research shows those features came in dead last among seven attributes that a prospective cus-tomer may assess.

Instead, the more than 3,000 consumers who were surveyed by Novantas earlier this year indicate that banks are distinct when they excel at the basics. Of seven attributes a bank may provide, “serves all your banking needs,” “is a good value,” and “looks out for its customers” ranked as the three most important factors when selecting a primary bank.

PERCENTAGE OF RESPONDENTS WHO RANKED EACH ATTRIBUTE AS “MOST IMPORTANT” WHEN SELECTING PRIMARY BANK

*percentages may not add to 100% due to rounding Source: Novantas Analysis

CHOOSE YOUR BANK?CONSUMERS

Differentiating your brand from competitors and driving acquisition are two critical, yet increasingly diffi-cult, challenges in the industry today as it undergoes a massive transforma-tion. Novantas has been exploring this issue with banks across the U.S. and recently conducted research to help banks identify and activate opportuni-ties to achieve distinctiveness.

THE STAKES HAVE CHANGEDThe Distinctiveness research serves as an extension of Novantas’ Shopper Research, which ultimately tells us which banks are winning in each market and provides a good understanding of why. What we have learned over the past several years is that convenience (actually, consumers’ perception of convenience) is the strongest predictor of bank consideration and purchase.

Banks that aren’t perceived as

being convenient simply don’t even make it in consumers’ small list of con-siderations, according to our Shopper research. Indeed, the average con-sumer only considers two banks when seeking a relationship.

Our earlier Shopper research showed that consumers consider a bank’s digital capabilities to be part of that perceived convenience, indicating that such a platform is now table stakes in the battle for customers. Since convenience is a requirement for a bank to be considered, primary bank selection doesn’t hinge on a bank’s digital capabilities.

For banks, this means building even the best digital capabilities is not enough to achieve true distinctiveness.

DEVELOPING A COMPELLING BRAND POSITIONWith convenience and digital capabilities off the table in determining what makes a bank distinct, banks must look elsewhere to identify opportunities for competitive differentiation. Novantas’ annual Shopper survey measures consumers’ associations of seven brand attributes — key criteria for selecting a primary bank. We call these our Distinctiveness Attributes:

1. Makes it easy to manage your finances2. Friendly and helpful3. Helps you plan for your future4. Is a good value5. Leading online/mobile banking6. Looks out for customers7. Serves all your banking needsWe believe a bank’s ability to stake

out a compelling brand position based on one or more of these will help solidify its place in the consideration set and ultimately contribute to purchase rates.

6%7%10%

14%17%

23%24%

Serves all banking needs

Is a good value

Easy to manage finances

Helps you plan for future

Leading online/mobile

Looks out for

customers

Friendly &helpful

24 |

NOVANTAS RESEARCH SPOTLIGHT

Matthew Sharp VP of Market Research, Chicagomsharp@novantas.com

However, while having a competitive, mar-ket-level view of performance across these attributes can be valuable, banks need to prioritize and activate the attributes that will separate them from the competition.

The latest survey reaffirmed our views about the three attributes that ranked highest on the list.

For example, we correctly assumed the “serves all your banking needs” attribute would be driven by perceptions of a bank offering a full suite of banking, lending and investment services.

Our analysis also showed, however, that serving all banking needs also means a bank must understand the needs of its customers. By doing so, a bank can make personalized product and service suggestions to connect the dots between the money a customer holds within the institution and the financial planning programs a customer may engage with through an employer or other institutions.

Similarly, in the case of “Is a good value,” the survey results confirmed our belief that price would emerge as a key driver. And the notion of value exchange, defined in our research as a bank that “goes above and beyond to deliver on its promises to customers” also played

a role. Therefore, a bank’s opportunity to be distinct by being a good value has as much to do with its service model and how it communicates with customers about pricing, as it does with price itself.

As expected, national banks are most likely to be perceived as winners in the category of “serves all your banking needs.” But direct banks challenge them in the “is a good value,” and “looks out for its customers” categories.

As for regional banks, they consis-tently get stuck in the middle or lag on association with the seven attributes. Those lackluster rankings indicate they either lack a distinct brand position or haven’t sufficiently marketed the distinct brand position they’ve developed. As a result, consumers don’t give those banks credit for being distinct.

Other attributes on the list can also ultimately help make banks distinct even if their customers don’t know it yet. For example, our analysis shows that consum-ers consider few, if any, banks as deliver-ing on “helps you plan for your future.”

It is clear that some banks are closer to staking out a distinct position than others. Several banks already have one, but haven’t done enough from a market-ing perspective to get credit for it from

the consumer. Many banks don’t know where to start.

And, of course, a bank needn’t focus on just the most important attributes. Differentiation can be successful in any area that is staked out by the bank as long it appeals to the target audience and it is well-executed.

In each case, the path to distinctive-ness requires alignment across all mem-bers of the organization. Internally, teams must be able to grasp the differentiated strategy itself, understand how customers and prospects should experience it, and know the role of every individual in the bank to deliver on the promise. Externally, banks must commit to building, drama-tizing and communicating the points of difference with the marketplace.

It is a shared responsibility that relies on every individual within the institution — from the personal banker in the branch to the marketing department in headquarters.

It is up to the consumers to decide if a bank is truly distinctive. But they can’t begin to make that decision until banks give them something to consider.

National Regional Direct/Online-only

61%

47%

58%

Serves all banking needs

Is a good value

40%

58%

42%

Looks out for customers

50%

62%

52%

Easy to manage finances

58%

52%

55%

Friendly &helpful

32%

41%

34%

Helps you plan for the future

37%

53%

44%

Leading online/mobile

PERCENTAGE OF RESPONDENTS WHO ASSOCIATED EACH ATTRIBUTE WITH INDIVIDUAL BANKS (BY BANK TYPE)

Source: Novantas Analysis

ABOUT NOVANTAS’ DISTINCTIVENESS RESEARCHOur Distinctiveness research was fielded in Q2 of 2017 and surveyed more than 3,000 US consumers. A set of 90 potential drivers — value-based statements describing potential products & services banks could offer, representing each of the seven Distinctiveness attributes — was tested using multivariate analyses to identify the tactics a bank can employ to increase its likelihood of being perceived as delivering on each of the attributes.

46%

64%

46%

WINTER 2017 | 25

BY MICHAEL RICE AND DAVID ROBERTSON

The commercial bank executive of tomorrow will look a lot like a quick-thinking technology execu-tive or a nimble start-up CEO.

Banks are starting to seek new traits from commercial-banking leaders who were historically coveted for relation-ship-building skills and an ability to navigate compliance issues.

While those characteristics are still important, the new commercial banker also needs to be a business leader who is well-versed in strategy, analytics, organizational leadership and customer experience. As a result, being a “super

LENDERS NEED TO SEEK

NEW SKILLSFROM COMMERCIAL BANKERS

relationship manager” (RM) is no longer the main prerequisite to assuming lead-ership of the commercial bank.

The shift is a logical outcome of the pressures of today’s market in which the post-crisis world is characterized by challenging macroeconomics, increased complexity and intensifying non-bank competition. Credit expertise and experience as an RM are still considered to be important, but so is the ability to grow and manage a business.

Banks need new leadership skills from commercial bankers who must be able to assess market opportunities,

as well as develop and oversee the execution of different strategies. They must embrace innovation amid the need to create distinctive propositions for high-value customers.

Today’s commercial bankers also need skills to transform workforces and cultures so that they pursue advance-ments in technology, including the move toward digital offerings.

It’s not the first time that banks have shifted commercial-banker strategies to keep up with changes in the industry.

In the 1980s, college graduates seek-ing a career in banking wanted a position

26 |

COMMERCIAL

in a leading bank’s RM training program because it was considered to be a path toward career advancement. In those days, lending money — and the author-ity to extend the bank’s capital — was a great responsibility to be extended to a bank employee. A well-rounded RM had to have the analytical chops to uncover and mitigate risk, while also displaying a strong EQ in developing rapport with senior decision-makers — both internally and within client organizations.

Commercial banking changed in the 1990s with the repeal of Glass Steagall via the Graham-Leach-Bliley Act (GLBA) and the swelling of the soon-to-burst dot com bubble. The role of the RM was overshadowed by the cachet of the investment banker as institutions were permitted to pursue both lines of busi-ness. These highly-compensated deal makers may have lacked the empathy of a good RM, but made up for it in aggres-siveness and financial engineering skills.

The financial crisis further trans-formed the RM role by completing the segregation of underwriting from selling and relationship management, as well as formalizing processes around customer management and lending activities. While an RM was still expected to know

how to identify risks and structure a deal, deep technical expertise was dele-gated to a credit center of competency.

Additionally, compliance require-ments became not only a bigger part of the job, but also a constraint in meeting the needs of clients in a timely, flexible manner. The job of RM became narrower in functional breadth, while simultaneously more complex due to regulation and intensive cross-function-al coordination. Accordingly, advancing to the head of the commercial bank increasingly emphasized the ability to ensure compliance through appro-priate management processes and to collaborate effectively.

While conducting an informal review of promotions to the head of commercial banking during the current decade, Novantas found that banks are indeed already seeking new skills for the job.

Among some notable examples:• A top 10 large regional bank

turned to the bank CFO, a deeply analytical business leader, to assume the role of Commercial Bank head. This individual led a significant expansion of the bank’s Wholesale Banking busi-ness while enhancing the financial

discipline and focus of the unit.• A “Big 5” Canadian bank recently

turned to a strategic business lead-er to head their commercial bank-ing segment. This individual honed business skills through a career in consulting, followed by successful stints in retail distribution, digital banking, and payments.

• A top 10 large regional bank selected a business leader with a background in risk and prod-uct management to head its commercial bank.

Although they came from different backgrounds, there is a recurring theme: they all demonstrated an ability to interpret the market environment, focus resources on opportunities and over-see disciplined execution of effective strategies. Moving forward, Novantas expects more banks to search for these critical skills.

YOU’RE HIRED: A SNAPSHOT OF THE CHANGING SKILLS REQUIRED OF COMMERCIAL BANKERS

David Robertson Managing Director, New Yorkdrobertson@novantas.com

Michael Rice Managing Director, Chicagomrice@novantas.com

“Legacy” Leadership Skills

Success as RM — sales, relationships, credit analysis

Collaboration and partnering

Team leadership and coaching

“Next Generation” Skills

Strategy

Market / opportunity assessment

Marketing (proposition development / positioning)

Ability to apply analytics, MIS and governance systems to produce business results

WINTER 2017 | 27

BY GREG MUENZEN AND MANOLIS DAVRIS

The prospect of rising interest rates and more competitive pricing is challenging one of the banking industry’s traditional ways to value deposits.

The longstanding practice of behav-ioral life measurement, in which banks analyze historical deposit product behav-ior to help determine how to invest non-maturity deposits, needs to shift to a forward-looking view. That is because observations made during the near-de-cade long flat interest-rate environment may not be representative of customer behaviors when rates rise.

The growing concern is that behav-ioral lives will shorten considerably as customers allocate balances to higher-re-turn savings accounts, including those from the growing number of direct bank entrants. This is a reality across the depos-it spectrum, including both consumer and commercial deposits.

SENDING THE

The issue is important because behavioral-life assumptions are essen-tial components of funds transfer pricing (FTP) methodologies, long used by Treasury functions to assign internal value and cost to sources and uses of funding, respectively. In doing so, FTP affects product and business profitabil-ity measurement and also drives pric-ing decisions, business planning and ultimately compensation.

Leading practitioners are working speedily to revisit the analytics that under-pin behavioral life assumptions. Novantas estimates behavioral life assumptions for garden-variety interest-sensitive deposits such as MMDA and Savings are poised to shorten by 1.5 to 2.0 years on average, reducing FTP credit rates by 10bp to 30bp. Rate-sensitive balances without a relationship component are expected to react even more strongly.

Novantas believes banks that fail to

Industry Advancements in Behavioral Life Measurement

RIGHT SIGNALS

respond are, at best, putting themselves at a competitive disadvantage and, at worst, are exposing the balance sheet to considerable interest-rate risk.

The most powerful advancement in behavioral life measurement is the use of statistical modeling and forward-looking scenario analysis to understand potential future behaviors. A common model framework involves using models to predict account attrition (i.e., customers closing their accounts) and average balance evolution (i.e., customers adding or removing funds from their accounts). This framework enables “what-if” sce-nario testing around the relationship between funding stability and pricing, market interest rates, and other macro-economic factors. The right models allow banks to quantify the effect and send the correct pricing and profitability signals to the front line. In this way, banks are wisely shifting from backward-looking to

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MODELING

forward-looking views of customer behav-ior, which for many U.S. banks began with CCAR stress testing exercises.

Banks must also decide how to mea-sure the behavioral life of products with contractual characteristics that offer the customer “future optionality.” For exam-ple, certificates of deposit (CDs) provide customers the option of renewing into different terms and sometimes allow for rate renegotiation at maturity points. While balances might persist through these changes, some think the renewal should be viewed as a discontinuation of the account’s behavioral life. In this

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MOVING TO A MODEL-DRIVEN APPROACH ALLOWS FOR TESTING OF SCENARIOS, FOR EXAMPLE AROUND PRICING RELATIVE TO THE MARKET

DECIDING HOW TO TREAT CUSTOMER OPTIONALITY, FOR EXAMPLE IN CDS, CAN HAVE A MATERIAL IMPACT ON MEASURED BEHAVIORAL LIFE

context, CDs with same-tenor renewals and no rate renegotiation may be treated one way, and CDs that renew from short to long tenors and/or renegotiate rates may be viewed differently.

Novantas believes banks should recognize balance persistence as a con-tinuation of behavioral life, that reflects account characteristics changes for differ-ent segments of customers. This does lead to some complexity when banks consider term deposits alongside non-maturity deposits, given that there is substantial balance switching between CDs and NMDs that can be more difficult to track.

Deciding how to treat these behaviors is critical as rates rise and customers’ prod-uct and term preferences change.

A second prerequisite for modeling is to segment deposits in a way that best explains variance in behavior across account and customer characteristics. Best practices expand the view from the industry standard analysis by line of business and product to include pricing level, balance size, depth of customer relationship, region, and industry for non-retail customers. The need for this is obvious in that different segments will react more- or less-strongly to changes in deposit prices in the marketplace.

Having obtained granular behavioral life analyses, it is obvious to use insights to guide business decisions. Longer term, behavioral life scores could be used for targeting customers, for example, but there are additional considerations in doing so. While the front line cannot change the fact that a customer is a retail or small business customer, they may be able to influence the funding balance of the account, or encourage the customer to also open a transaction account, thus steering a customer toward a more favor-able FTP treatment for the business.

Such “internal arbitrage” could dete-riorate the historical information content in the segment over time, and undermine the original behavioral life signals.

These advancements are part of a broader Treasury transformation which is driven by the need to manage the bal-ance sheet in a forward-looking way. As banks embark on new strategies to fuel growth in a more vibrant period of mar-ket interest rates, leading practitioners must revisit historical behavioral life assumptions to send more accurate prof-itability signals. We believe that winners of the next cycle will be determined in large part by Treasury excellence in ana-lytically-informed profitability signals.

Manolis Davris Principal, New Yorkmdavris@novantas.com

Greg Muenzen Director, New Yorkgmuenzen@novantas.com

At market price 10bp above market price

20bp above market price

CD Renewal Treatment 1 CD Renewal Treatment 2

WINTER 2017 | 29

Novantas executives are regular speakers at industry events. Here’s a look at what we have been talking about and where we have been.

AT THE PODIUM WITH NOVANTAS

CATHRYN GREGG, managing di-rector of Treasury Strategies, a di-vision of Novantas, spoke to more than 100 companies at a Nov. 9 we-binar. The event was hosted by the Financial Executives Networking Group. She discussed using their account analyses and the Novantas NDepth product as a starting point for improving bank relationship management. The presentation ma-terials and audio can be found at treasurystrategies.com

STEVE TURNER, managing director, and GREG MUENZEN, director, pre-sented at the CFP Liquidity Risk Man-agement USA conference on best practices for integrating liquidity ana-lytics into business line management and decision making. The conference took place Oct. 17-18 in New York City. Their presentation is available upon request at novantas.com

CHRYSTAL POZIN, director, hosted a networking event for senior wom-en leaders in Commercial Banking and Treasury Management at the annual AFP conference in San Di-ego, CA on Oct.16. This event was the third in a series Novantas hosted in 2017 designed to generate ideas on diversifying leadership talent in commercial banking.

KEVIN RUIZ, principal, moderated Treasury Strategies “Quarterly Cash Briefing” on Oct. 12, addressing a global audience of more than 600 corpo-rate treasurers, bankers and asset managers. Along with TONY CARFANG, Treasury Strategies managing director, the panelists from Federated Inves-tors, FitchRatings and the Association of Corporate Treasurers discussed several topical cash flow and money market issues, including the view that central banks continue to play an outsized role in the global economies and diverging policies will lead to volatility in 2018. Listen to the recording at youtu.be/G2ozO_YmqGY

ANDREW FRISBIE, CHRYSTAL POZIN AND MARC HARRISON hosted our 15th annual Commercial Banking Executive Forum at the an-nual AFP conference in San Diego, CA on Oct. 16. They led an interac-tive discussion with approximately 50 senior bankers, which also in-cluded a panel discussion with sev-eral corporate treasurers.

THE TREASURY STRATEGIES TEAM at Novantas recently produced three white papers that addressed U.S. mon-ey-market fund regulatory changes implemented in October of 2016. They were prepared as background for a House Financial Services com-mittee hearing on money-market reg-ulations. The papers can be found at treasurystrategies.com

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NEWS YOU MAY

HAVE MISSEDA snapshot of relevant

developments in recent months

SEPTEMBERPayments provider Square Inc. applied for a charter to provide banking ser-vices to small businesses. The new Utah-based bank would be called Square Financial Services, but wouldn’t operate any branches. “Square believes that there is a large unmet demand to provide financing to small business sellers to help them run and grow their businesses. Although small businesses make up the clear majority of businesses in the United States, they are generally underserved in terms of funding by traditional lenders,” according to the application. Online lender Sofi filed a similar application in June.

OCTOBERThe IMF issued its Global Financial Stability Study, finding “the global finan-cial system continues to strengthen in response to extraordinary policy sup-port, regulatory enhancements, and the cyclical upturn in growth.” The report noted that balance sheets are stronger due to improved capital and liquidity buffers at a time of tighter regulation and heightened market scrutiny. “How-ever, some banks are still grappling with legacy issues and business model challenges, where progress has been uneven,” the report said.

JP Morgan Chase & Co. announced plans to acquire WePay, a platform that provides payment capabilities to busi-ness platforms like GoFundMe and other crowdfunding websites. JP Morgan said it plans to roll out the technology to its four million small-business customers. Terms of the deal weren’t disclosed. Federal Reserve Governor Jerome Pow-ell, who was nominated in November to serve as chairman of the central bank, delivered a speech on how technology is changing the delivery of retail banking and payment services at the 41st Annual Central Banking Seminar sponsored by the Fed. “Policymakers and the financial industry must assure that enhanced con-venience and speed in financial services do not undermine the safety, security and reliability of those services,” he said.

NOVEMBERIn a speech to the Brookings Institution, FDIC Chairman Martin Gruenberg said that recent banking regulations have strengthened the industry and warned that any loosening of those regulations could weaken the resilience of the finan-cial system. “History also shows that the seeds of banking crises are sown by the decisions banks and bank policymak-ers make when they have maximum confidence that the horizon is clear. It is also worth keeping in mind that the evolution of the global financial system towards greater interconnectedness and complexity may tend to increase the fre-quency, severity, and speed with which financial crises occur,” he said.

Keith A. Noreika Acting Comptroller of the Currency, said recent changes in laws and regulations have decreased the value of the banking holding company structure for small institutions, while increasing the costs associated with it. “Bank holding companies may contin-ue to serve a useful purpose for large, complex companies, especially those seeking to engage in activities abroad, but they may provide less value to sim-pler, more traditional banking firms,” he said in a speech to the American Enterprise Institute. Mr. Noreika has since stepped down from the post and was replaced by Joseph Otting, a former regional banker.

Reuters reported New York Federal Reserve President William Dudley told students at Rutgers University that the central bank has started thinking about offering digital currencies even as he has stressed that investors should be cautious. “At this point it’s really pre-mature to be talking about the Federal Reserve offering digital currencies. But it is something we are starting to think about: what would it mean to have a digital currency, what would it mean to offer it, do we actually need it,” he said, according to Reuters.

TODAY’S NEWS

ABOUT NOVANTAS

Novantas is the industry leader in analytic advisory services and technology solutions for financial institutions around the world. We create superior value for retail and commercial banks by delivering information, analyses, and automated solutions to improve revenue generation across pricing, product development, treasury and risk management, distribution, marketing, and sales management. For more information, visit www.novantas.com

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Novantas Review is published quarterly by Novantas, Inc., 485 Lexington Avenue, New York, NY 10017. © 2017 Novantas, Inc. All rights reserved. “Novantas Review” and “Novantas” are trademarks of Novantas, Inc. No reproduction is permitted in whole or part without written permission from Novantas, Inc.