When Lisa G. Dandeneau first joined Navigant Credit Union more than 22 years ago, one of her first tasks was to help launch online banking.
At the time, online banking was a relatively nascent offering, but it clearly foreshadowed the industry’s future. The ability to access bank accounts from wherever there was an internet connection resonated with customers. Banks and credit unions scrambled to offer it.
“It’s about banking the way the customer wants to bank,” explained Dandeneau, executive vice president and chief operating officer at the Smithfield-based credit union.
Today, online banking is no longer new, but rather expected. And the rapid proliferation of technological offerings to follow in its footsteps – especially in the last decade – has shifted how banks and credit unions are integrating technology into finance.
“Technology is always at the top of mind for us,” Dandeneau said.
Keeping up with technological advances, however, isn’t cheap, especially in a heavily regulated industry such as banking. Therefore, it poses the following challenge: How do traditional financial institutions keep up with consumers’ expectations while not breaking the bank – so to speak – in the process?
Given the enormous amount of time and money spent on technological advancements, system maintenance and cybersecurity, Amy Martel, executive vice president and chief operating officer at People’s Credit Union in Middletown, wonders half-jokingly whether financial institutions shouldn’t also consider themselves technology companies.
“Technology has become such a huge part of our business,” she said.
To complicate matters, nonbanks and financial-technology, or “fintech,” firms – many operating with less overhead costs and fewer regulatory requirements – are nipping at the heels of traditional financial institutions and growing market share in lines of business dominated by banks and credit unions for more than a century.
In response, Rhode Island banks and credit unions must search for a balance between advancing financial technology and keeping expenses down.
Failing to do so could result in loss of customers, especially as younger generations who grew up with technology become an ever-greater share of the state’s population. And that could threaten investor confidence in an industry that long has been at the center of individuals’ and businesses’ financial needs.
“We don’t want to be too early in adopting technology that doesn’t end up lasting very long, but the trick is to not be too late,” acknowledged Mark K. W. Gim, president and chief operating officer at Washington Trust Bancorp Inc., parent of The Washington Trust Co. “As long as banks can be responsive, efficient and provide comprehensive services, we have a fair shot of staying very relevant long into the 21st century.”
TIMES ARE A-CHANGIN’
Technology – in its basic form – isn’t new to banking.
Before the 1970s, almost all banking – except some wireline services – was done in-person. That changed most drastically with the automated teller machine, known better as the ATM. The technology, albeit dating back to the 1960s, became commonplace by the 1980s and 1990s.
Its popularity and convenience pushed banks and credit unions to adopt the technology, and it was seen at the time as a revolutionary period in banking history. In retrospect, its significance was perhaps overstated.
“The thought was that ATMs would replace teller lines, but that didn’t really happen; it simply became something that customers expected,” Gim said.
Online banking took the 2000s by storm and mobile banking has emerged in the 2010s. Artificial intelligence could represent the next wave in technological advancements in banking, though the pace and impact of such changes always depend on what resonates with customers.
“Staying on top of customer patterns is more of an art than a science,” Gim said.
Where the ATM didn’t evolve much beyond its original design, the emergence of mobile banking has broadened the scope of what’s possible. In its infancy, mobile-banking applications allowed customers to more easily access basic retail services, including checking and savings accounts.
Today, banks and nonbanks alike offer all sorts of financial apps. Smartphones have become personal banking tools – small enough to fit in your pocket – and give customers access to information once unimaginable.
For example, a Rhode Island business owner walking to work in the morning could use the Fidelity Investments app to buy shares of Apple Inc. At lunch, she could open the TransferWise Money Transfer app and send money to a family member abroad. After work, the business owner could split a bill for drinks with colleagues using Venmo, and later balance her day’s spending using the personal budget app Mint.
Most financial apps are connected to bank accounts at traditional financial institutions. But the propagation of nonbank financial tools could one day leave some banks and credit unions playing second fiddle in the world of financial technology.
In Rhode Island the dynamic poses a unique challenge, especially for the small and midsized banks and credit unions that make up most of the banking sector.
“Some of the large institutions can make investments in developing their own technology at a considerable cost, but for us and our midsized competitors, the issue is ensuring competitive parity,” Gim said.
Demographics also play into the decision-making process. Generation X, which has lived through the rise of technology, and millennials, who grew up with technology, are increasingly expectant of its integration into products and services in all industries.
Millennials, meanwhile, now make up nearly one-quarter of Rhode Island’s total population, marking the 10th-greatest percentage of any state in the nation, according to a Brookings Institution report.
Yet the state, like much of the rest of New England, also has a large percentage of elderly residents, many of whom are accustomed to in-person banking.
Local banks and credit unions continue to find immense value in physical locations and face-to-face services. Navigant, for instance, expanded its physical footprint last year, opening two new branches in Kent County and taking over another in South Kingstown.
Washington Trust, meanwhile, has been relatively consistent in adding one new branch per year in recent years.
The addition of branches in a digital age may seem counterintuitive, but banking executives explain it fuels deposit growth, helps market the company in new communities and provides retail services for those customers who prefer in-person banking.
Executives also say customers – regardless of age – still want to talk with a human when it comes to big financial decisions, such as buying a home or car.
“You need to have a [physical] presence in the market,” Dandeneau explained. “As convenient as mobile banking is, if you have a problem or are talking about a big investment … you want to talk with a person.”
For bigger banks, such as Bank of America Corp., the technology strategy is a little different.
Bank of America, a financial giant with $2.3 trillion in assets, spends billions of dollars each year on technology development.
The investment gives the North Carolina-based bank an edge to explore and test new financial technology. In March, the bank announced the expected launch of “Erica,” an artificial-intelligence chatbot company executives hope will be the next big thing in mobile banking.
The technology – from the perspective of the customer – is like the personal assistants of Siri for the iPhone, Alexa for Amazon and Cortana for Windows 10. It will allow users to execute financial transactions using only their voices.
“Everybody needs an assistant. Soon you’ll have one,” Bank of America wrote to customers in a marketing teaser of the technology. “When she gets here, she’ll be ready to learn and help take care of your banking needs.”
For smaller banks and credit unions, such technology research and development isn’t economically feasible.
That’s not to say smaller institutions are uninterested in providing technological products and services to customers, but the correlating costs of research and development without any guaranteed return represents a risky investment.
‘For us and our midsized competitors, the issue is ensuring competitive parity.’
MARK K. W. GIM, Washington Trust Bancorp Inc. president and chief operating officer
To achieve competitive parity, as Gim calls it, banking institutions without giant technology R&D budgets largely depend on third-party fintech companies.
Citizens Financial Group Inc., parent of Citizens Bank in Providence, is the largest Rhode Island-based bank, with $152.3 billion in assets. In the last few years, the company has put a strong focus on the advancement of its technology products and services, partnering with various fintech companies.
“For much of the last five years, we were playing catch-up in terms of technology spend,” Bruce Van Saun, Citizens chairman and CEO, told investors in January.
The bank this year started offering “Zelle,” a person-to-person payment system like Venmo. Citizens customers can now send and receive money using only an email address or mobile number. The funds can be sent to and from other customers enrolled in Zelle at many U.S. banks.
Zelle, a subsidiary of Early Warnings Services LLC, is integrated into Citizens’ online and mobile-banking technology, meaning customers may not notice the service is owned by a third party.
The integration keeps the customer coming back to Citizens, as opposed to a nonbank competitor, allowing the bank to again play a primary role in the customer’s financial actions.
And Zelle is only the most recent step Citizens has taken toward integrating similar technology with its services.
The bank last year launched a digital financial-advising service called SpeciFi and recently partnered with Fundation Group LLC, a small-business lending service integrated into the bank’s website.
Van Saun, who has described the strategy as “plug-and-play,” told investors that future technology dollars could be spent on loan origination and fulfillment platforms to create efficiencies and improve the customer experience.
“The good news is that we’re now … largely caught up, [and] we can focus on playing offense,” Van Saun told investors.
PLUG AND PLAY
The plug-and-play strategy is shared by others in Rhode Island.
Dandeneau described Navigant, with $1.9 billion in assets, as a “fast follower” when it comes to technology products and services, meaning the credit union follows industry trends, watches what works well and then integrates the technology.
The credit union relies heavily on its technology vendors – including a Massachusetts fintech company called Fiserv Inc. – to keep it abreast of emerging technology trends both for internal and external purposes. The partnership allows the credit union to spend more time focusing on what it does best: financial services.
“Our expertise is to provide banking services. We rely on the experts to sort out the technology,” Dandeneau explained.
Last June, Washington Trust, with $4.5 billion in assets, struck a deal with SEI Wealth Platform, an outsourced wealth-management trading software. The partnership gives its customers an established technology platform, without the Westerly-based bank having to spend millions developing it in-house.
According to federal filings, the bank is spending less money on in-house equipment and more on outsourced services, a noninterest expense that grew 35.4 percent to $6.9 million in 2017 compared with $5.1 million in 2015. Gim said a good portion of that cost is related to technology.
“If you can’t do it yourself, it’s about selecting the right partner, at the right time, with the right outlook,” Gim said.
People’s, meanwhile, takes a highly involved role in the vetting and choosing of its technology products and services. Martel said it was difficult to discern how much the credit union, with $460.9 million in assets, spent on technology each year because it is closely integrated into everything it does.
“It’s so intertwined,” she said.
Nonetheless, she counted at least $1.1 million in technology-related costs, a figure she said has grown in recent years.
The credit union signed an agreement with MotoRefi, an online auto loan refinance company based in Virginia.
Although the company offers its services throughout the country, smaller lenders – such as People’s – can partner with it within a geographical footprint.
Here’s how it works: A Newport resident finds MotoRefi online while looking for a new car-loan rate. The refinanced loan – albeit sourced from the MotoRefi website – is backed by People’s, which is introduced to the borrower in the process and eventually takes over entirely.
People’s pays MotoRefi a fee for service and the credit union yields a return from the interest on the new loan. Martel sees the partnership as an opportunity to expand its technological offerings, but also to reach new customers.
‘If we only waited for new customers … I don’t think we’d be here 10 to 15 years from now.’
AMY MARTEL, People’s Credit Union executive vice president and chief operating officer
“If we only waited for new customers to walk through our door, I don’t think we’d be here 10 to 15 years from now, and certainly not 50 years from now,” Martel said. “We have to be looking beyond our walls, and we now have the means in a new way” with technology.
The widespread financial-technology partnerships between banks and nonbanks signal a more collaborative future between once-fierce competitors.
Within those partnerships, however, come newfound challenges related to costs and security. Parsing out total technology costs at a financial institution is difficult, as everything from employee cellphone bills to contract agreements with fintech companies is spread out across the income statement.
Nonetheless, technology is an expensive and fast-rising cost for most banks and credit unions. At Navigant last year, technology expenses totaled about $6.6 million, and the credit union spent another $1.1 million in capital investments.
“Aside from our employees, which are our No. 1 asset, this is the next biggest expense we have,” Dandeneau said.
The doubled-edged sword for financial technology is that it’s trending away from software and physical equipment and toward cloud-based services.
The trend signals potential cost savings on the seemingly never-ending and rising expenses related to upgrades and maintenance for in-house technology. But it poses new and expensive challenges related to security.
“This isn’t just about investment in technology, it’s also the security that goes along with it,” Dandeneau said.
Indeed, banks and credit unions – as custodians of cash – have long been targets of criminal activity. As more information – both personal and financial – moves to cloud-based services, cybersecurity becomes key to maintaining the trust of customers.
Banks have worked toward regaining a certain level of trust among customers lost after the financial crisis of 2008. Gim sees it as an area in which banks – many with longstanding reputations in the financial sector – have an inherent advantage over nonbanks and burgeoning fintech companies.
If banks and credit unions can effectively balance tradition, trust and technology, says Gim, it could be a recipe for continued success well into the digital age.
“If we can provide competitive services and competitive access to technology, then we’re not too worried about whether we’ll be around as an industry in 30 years,” Gim said.