The banker took a sip of his scotch and soda and put down the glass with a sigh. “I’ve told my son not to even think about being a banker,” he confessed as the waiter took the other bankers’ orders. “I’ll keep at it, but this is no business to start out in today. Too much regulation, too much stress.”
Just a middle-aged CEO who’s had a bad exam or two? He’s not alone, judging by bank conference dinner conversations this fall. Some bankers feel shell-shocked and don’t seem to think things will get better. Perhaps you’ve heard such sentiments about warning off the next generation, perhaps more than once.
But now turn to Dan Blanton at Georgia Bank & Trust Company, Augusta. Georgia took a pounding during the Great Recession, and even Blanton’s $1.7 billion-assets bank took some lumps. And yet . . .
“We have six or seven children of senior managers who grew up around this bank,” says Blanton, president and CEO, “and they all wanted to come back to this bank to work. I take pride that this is where they want to work.”
One of Blanton’s children, also named Dan, is a lender there, so you know the father means it when he says, “I think the future of banking is great. And there is certainly a great need for it.”
Blanton is no cockeyed optimist, and he would be the last to deny that much about the industry has changed in the last five years. But even that has a qualifier: “The way we execute is completely different,” he says of the actual business of banking. “But the mission of what we do as bankers hasn’t changed.”
Likewise, he groans with all bankers under the added regulatory burden. But as he looks ahead, he isn’t throwing in the towel. “It is what it is,” shrugs Blanton, “and it takes up a lot of our time and our resources.”
However, he observes that what older bankers complain about, younger bankers regard as normality. “It’s what they are starting with,” says Blanton, “and you know what? They are handling it.”
Bankers are realists—any industry that makes loans has to be. Dan Blanton is not alone in seeing a strong future for banking, even with its many challenges.
A business that evolves
You can’t blame bankers for feeling like the room is spinning: generational change, technological change, tectonic regulatory and political change. But bankers we spoke with for this report suggest taking a serious look at what has and hasn’t changed.
“Every business evolves, and I wouldn’t want banking to stay the same,” says Jane Haskin, president and CEO, $196 million-assets First Bethany Bank & Trust, Bethany Okla. “That’s stagnation, and that’s unhealthy.” In her career, Haskin says, she’s seen women bankers advance to senior posts and industry diversity improve, seen the advent of the banking sales culture as opposed to passive order taking, and seen the system come out the other side of two crises.
Beyond that, she says, banks of all sizes offer products unimagined even a decade ago, and she expects nothing less looking forward: “We’ll be providing products tomorrow that we don’t even know about today.”
Ask New Jersey banker Frank Sorrentino about industry change and he may show you his technology—perhaps five pounds of it. He travels with several handhelds and more than one computer, so he can manage anywhere and blog and tweet.
Says Sorrentino, chairman and CEO of $1 billion-assets ConnectOne Bank, Englewood Cliffs, N.J.: “We take deposits and make loans in our local communities; yes. But will those deposits continue to come in through physical branches? Will they come through a mobile phone? Will loans be made for the same type of businesses? Will borrowers see loan officers in person? Or will it be on Skype? Or FaceTime?”
While banking clearly continues to evolve, even the chief of a leading innovator like $55 billion-assets Zions Bancorp. counsels a reality check: First, says Harris Simmons, “banking is fundamentally a more constant business than many, if not most, other businesses. What we do as bankers has been done for a very long time, and I expect will be done for a very long time to come. The tools and technologies have certainly changed and will continue to change.”
Second, Simmons points out that sometimes change isn’t as pervasive as even bankers may think. Zions, for instance, is a ten-state organization. The company has trimmed branches by almost 9% over four years, yet it’s still opening new ones where selected opportunities occur.
And while “we have online customers in every state in the country,” says Simmons, “that’s not the preponderance of our business today. And I don’t think it will be for a long time to come. Fundamentally, I still really do believe that banking remains a very local business.”
Simmons’ points underscore something all bankers interviewed see: Banking remains an integral part of the American economy.
“The fundamental offering from financial services institutions remains constant,” says John Hairston, CEO and COO at $19.3 billion-assets Hancock Holding Co., Gulfport, Miss. “That offering is among the most honorable in America, which is twofold: to provide a safe place for people to store their money, and to serve as a clearinghouse between those who want to store money and those who are willing to pay to use that money.”
Perhaps these functions are so basic that they are taken for granted. Says Hairston: “These two offerings are the backbone of economic growth, and any impediment to the clearinghouse is a bottleneck for growth.”
Washington’s uber involvement
The banking business and the economy run in cycles, and so does the regulation, and regulatory attitude, that applies to the industry. During ABA’s recent Annual Convention, a speaker said it was time for banks to “stop whining about regulation.” And the bankers interviewed here agree.
It’s hard to ponder a day when the Dodd-Frank Act in its totality will have fans. Yet consider that before FDIC was created, many in the industry opposed the formation—and the related costs—of the insurance fund. In time, bankers came to fight to protect its use and maintenance. Similarly, the industry is learning to work with the Consumer Financial Protection Bureau, even while pushing for changes.
Simmons makes the point that banking and regulation are closely intertwined: “As bankers, we need to understand why regulation is there, and to acknowledge that this is an industry that has an enormous public trust vested in it, and that regulation is fundamentally important to our ability to do what we do.”
Simmons uses the analogy of a kid flying a kite. The kid may think of how much higher his kite could soar if only the string were severed. “But it turns out that the string is actually what keeps the kite in the air,” he says. “Much as we would sometimes like to cut the [regulatory] string, it’s fundamentally important to our ability to function with the kind of confidence the public has in the industry that is so critical to our success.”
But Simmons also argues that the industry should demand that those competing with banking be subject to the same rules. In this regard, he suggests, as CFPB widens its activities to include more nonbank financial services providers, it could potentially be helpful to banks. However, the industry must carefully watch where CFPB spends its resources. Banking, with a built-up compliance mechanism, can be an easy industry to target, but that should not draw attention away from other players, he argues.
“CFPB isn’t the boogeyman,” adds Hancock’s Hairston.
Regulators also must recognize that banks don’t have a business if they don’t take care of their customers, say other bankers.
“Get over it” is something the community bankers interviewed advised in regard to all the new regs. Dodd-Frank isn’t the first law to dump a truckload of new rules on banking, First Bethany Bank’s Haskin notes. “We figured out how to deal with them before, and we figured out how to go on down the road,” she says.
A newer wrinkle is an increased and enhanced risk management philosophy that permeates much of what regulators now put forth and expect, says Hairston. “It has become vogue to add risk management requirements to banks—all good ideas, like capital stress testing, risk management infrastructure, etc.” But he worries about the bigger picture.
“Risk management isn’t very important,” Hairston warns, “if our government defaults on its own debt and collapses our economy. Recent changes have clearly been beneficial, but we are about a half-bubble off plumb when it comes to balancing the need for economic growth and the need to manage bank risk.”
In another area, Simmons maintains that federal regulatory pronouncements about compensation hold confusing dangers for the industry. Much of this affects larger banks, on paper, but he sees the impact trickling down to all banks in time.
“We should hope that at the end of the day, the regulatory establishment will understand that if you’re going to attract strong, capable people to an industry, that they have to be able to make decisions—and to make mistakes,” says Simmons. “And they have to be rewarded for successes.”
The bankers all point out that recognizing the need for regulation, and sucking it up, doesn’t equate with slavish compliance and no pushback.
“‘Getting over it’ doesn’t mean you shouldn’t respectfully lobby and point out weaknesses in regulations that don’t work the way they should,” says Georgia Bank & Trust’s Blanton.
Some bankers see growth as the way to cope, financially. Having grown his eight-year-old bank to $1 billion, ConnectOne’s Sorrentino sees the need to grow still larger and more profitable. “Standing still, it’s very difficult to absorb those expenses.”
Does the model still work?
The basic banking model Hairston sketched out earlier—safe keeper of funds and payments provider—has been tinkered with, departed from, competed with, and even attacked. The allure of the fee-based business, as opposed to a traditional spread-based model, always beckons.
Yet for many, the role of intermediary, even in the face of today’s tight spreads, remains the core source of profits.
Veteran banker Blanton has heard many bankers vaunt fee-based functions, but when you look at the numbers, he says, they often aren’t major contributors to the bottom line. At his bank, he says, while Trust will see a 15% improvement in results this year, “it will be 15% up from not much.” Even the return from mortgage banking can come and go.
Sorrentino actually goes out of his way to give away what other bankers charge for, or try to charge for, in the cause of building the deposit and loan relationships that really produce profit for ConnectOne. “Many people think I’m crazy,” he says. “I told an audience of institutional investors recently that my bank had the worst noninterest income level, relative to total income, among New Jersey-headquartered banks. I said that I was actually proud of that, and everybody just erupted in laughter.”
But being “worst” is something Sorrentino wants to be best at. “I want to provide our clients with a no-fee, or very low, or almost nonexistent fee structure, to make life real simple for them.” The idea: Grab market share; work the spread.
Yet the traditional model must be reexamined from the customer eye as well. A Zions business lender recently told Simmons about a sales call on an online retailer. The visit included the lender and a treasury management officer. Not long into the appointment, the retailer’s CFO figured out who did what and asked the lender to bow out. “It’s the treasury management guy who really adds value to this relationship,” the officer said.
Simmons found this edifying. “I think they figure they can get credit anyplace, but to them, getting help with their various payment streams is a non-commodity part of the relationship,” he says.
In a related vein, the future of the branch, bankers say, is tied up with business banking—more so than it is with consumer banking. No one argues that transaction-based traffic is declining as other channels become more popular.
“Forty years ago, few banks had drive-ins; now they all do,” points out Hancock’s Hairston. “I’m sure that 40 years from now, we will wonder why these big lobbies existed to handle transactions.”
Consultation, and sales, will increasingly be the role of the branch, with a bent toward business.
“There are still clients who want to go to a physical bank,” says Sorrentino. “And small business owners still need to come in and talk to their banker about whatever they are doing in their business, and they like to do it in person.” But bankers broadly agree that fewer branches, fewer new branches, and smaller branches describe the future.
Don’t get duped by demographics
Many assumptions are made about customers based on demographic factors, such as age, and those assumptions can blind the unwary, or at least cloud their vision.
Take the assumption that the millennials are all about electronic banking, and that they’d no more want to visit a branch than play an LP on a record player (“A what?”).
First Bethany Bank’s Haskin opposes such typecasting because it belies her own experience. “Consumers want a choice of how they do their banking,” she says. “We have young people who use checks as a budgetary tool, for instance. And I have some senior citizens who love internet banking. You can’t draw lines and box people into them. A lot of it is just education.”
“Listen, most of the millennial generation isn’t going to put their cash under a mattress,” says Simmons. “The fact that they don’t want to come into banks gets back to evolving distribution channels.”
Indeed, for the business banker, “relationship” remains the key word. “Most business people still need to pick up the phone and talk to somebody,” says Sorrentino. “They still need to create a relationship with a banker.” And that applies to young business owners as well, he says.
Georgia Bank & Trust’s Blanton says banks err if they discount the customer loyalty that comes from the influence of the older generation on the younger generation. “Sure, you have to be able to provide the technology they want,” he says. “But in our business customer base, there is loyalty to this bank in the younger generation. I see a lot of children of my customers who want to be part of this bank and see the bank succeed.”
It also pays to consider that while a customer may go for years without visiting a branch for routine business, when something out of the ordinary comes up—such as handling an estate account—suddenly the confidence that comes from working across a desk with a real, live banker becomes evident.
Payments: Innovation needs space
Much has been made about banking still being a batch-processing industry in a day when customers have grown used to instant updates. Bankers are aware of the challenge here, but they also worry that newer, nonbank players mix banking and commerce in ways that may not be safe. “That’s not typically worked out well in history,” points out Sorrentino, which confirms, he says, that thinking hard about how far new players are permitted to work in payments is critical.
Banks are the backbone of payments, and Simmons worries that banks are fettered by regulators’ concerns. “The intent is absolutely right,” he says, but meanwhile, the Googles, PayPals, and Squares innovate without controls.
Hairston is concerned that regulators’ strong recent emphasis on vendor management in the payments space, among others, will slow down technological improvement. “Remember, banks are clearinghouses,” he points out. “We are not islands without connectivity.”
Indeed, Haskin thinks that a more cooperative effort among banks would help. Early on, for instance, banks realized that the way to build strength in ATMs was cooperation—shared networks and such. In time, advances in newer channels, such as mobile banking, could follow a similar path, she suggests.
Looking to the future
Pundits say that people need banking, but perhaps not banks. The bankers interviewed don’t buy into that. As noted earlier, they reflect an optimism about the industry’s future, despite its many challenges.
“Tons of opportunity” for today’s generation and tomorrow’s is Jane Haskin’s outlook, overall. Dan Blanton sees this generation and the next complementing each other, with the experience of the “gray hairs” balancing the enthusiasm and energy of newer bankers.
Adds John Hairston: “As long as the country has capitalism as its base, it will need banks for [building] homes, expanding businesses, creating a better life. That’s what we do for a living. It is an honor and privilege to know that [at any time] somewhere in the bank, people are helping people.”
Frank Sorrentino has no doubts that the best days are yet to come for the banking business. “Yes, we’ve gone through some rough times,” the New Jersey banker says, “but we’re at the dawn of another great recovery. Think about the world in which we live. Think about the products coming out, the grow-local movement, and everything that’s going on in technology. When did you ever have a time when you can basically work from anywhere and have the ability to service people in such a proactive way? It’s incredibly exciting.”