This week we talk to Chris Nichols, Chief Strategy Officer at CenterState Bank. Nichols outlines the state of community banking and strategies for the future, including the possibility of offering an omnibus account.
Do you think community banks are falling behind? If so, how?
My concern is that community banks don't have the mindset or the infrastructure to develop products and services now. Large banks, by contrast — whether it's USAA or Wells Fargo — already have the innovative framework in place. Community banks need to develop the talent and process to be able to compete.
In the future, community banks will continue to see the migration of retail and commercial customers to mobile channels, the reduction of traffic in branches, and the move to more digitized cash. We will also see a reduction in the types of deposit accounts offered as banks seek to streamline operations. Within the next ten years, community banks will move to real-time core system processing, which will let trusted third-parties tap into the platform and help bank customers better manage their households and businesses. The result will be a simple banking application that helps customers manage risk, optimize cash management, and monitor credit. The platform will consist of everything from alerts to accounts payable/receivable to lockbox to deposited pay to disbursements.
One other critical area where community banks are falling behind their regional and national bank competitors is in the area of financial management. To compete in the future, community banks will need to expand their financial management offerings and improve the delivery of those offerings. Community banks need to get innovative in what they provide. The solution from MX would be one of many.
Going forward, community banks need to be able to make a buy versus build decision. Today, in the world of open APIs, it's gotten even easier for banks to leverage existing vendors and partners. When you look at the economics, it makes more sense now than ever. At CenterState we can never hope to create Bank of America's branch network, but we can certainly move faster and more efficiently in the role of technology. And although we don't have the same scale, that matters less when it comes to technology than it does with a physical presence. It's still very economical for me to produce an application. For example, we have partnered on SmartBiz, the only completely automated SBA platform. The customer fills out the information, the system checks databases, and renders a decision in five minutes. That allows the customer to get their money in five days, which is at least five to seven times more efficient than our current process.
That's what community banks can do if they put their mind to it. It’s all about adapting to a changing industry.
You mentioned that there will be fewer account offerings in the future. What is your vision for that?
There are a variety of traditional deposit account structures that make less sense now than they did in the past. In the next ten years, we will see the rise of the omnibus deposit account, which will be presented in a very personalized way. We will make it so one account can handle a customer’s checking, savings and money market needs. Pricing and account attributes will be tailored to meet the needs of each specific client.
Right now we tend to treat all customers in one account the same. For example, everyone in the entry-level checking account faces the same fee structure, the same tiers, and the same potential interest rate. The reality is that everyone is different, and so we need to evolve to dynamic pricing and dynamic risk management in banking. Accounts that use more services or present more risk should be priced differently than accounts where the funds just sit there.
Further, I should be able to segment or track funds with more granularity than I do now. Under our current structure, banks force customers to open up multiple accounts if they want to set funds apart to save for retirement or a piece of equipment for their business. In the future, we will handle sub-accounting all through technology.
What are you thinking about in terms of dynamic pricing?
It's a combination of risk, usage, profitability, and need. And so to the extent that I'm using the account more, I will face lower incremental pricing, but maybe higher total pricing. If I'm a riskier customer with overdrafts and foreign wires, I would be priced up to compensate the bank for that risk. The same goes for interest-rate sensitivity. Most banks don't understand how sensitive or non-sensitive their customers are to changing interest rates. It may be that by paying certain customers a little more, they could raise materially more deposits. A bank may want to increase or decrease the rate to a customer in order to elicit a certain behaviors. If Amazon can target me to drive my behavior, certainly banking can as well.
Today banks tend to price by looking in a rearview mirror. We look at what has happened and then determine where should price today. In the future, banks will instead start looking ahead for what future pricing is going to be and what the expected usage is going to be.
Can you explain more about the omnibus account? What would happen to what we now term as checking or savings accounts?
I don't know if I need to separate my funds by what I'm doing with my money. After all, an interest bearing checking account, a savings account, and a money market accounts look relatively the same these days because they are all liquid. The only thing I really want to know is how long I can commit that my bank will have my money and what account attributes I need. I don't need a separate account structure to do that.
What would the customer see in that scenario?
It would look like investment accounts look today. You would have a single account with different allocations of funds. Just as you might look into your investment account and see a portfolio of stocks and bonds, you would look into your omnibus account and see the percentage of your funds dedicated to pay upcoming bills, the portion in longer-term investments, and the amount of free cash.
What are the benefits for customer?
The main benefit for both the customer and the bank is a simplified account structure. A customer could move from five accounts to one account all while getting better risk management, reporting and analytics. This may seem like just a minor improvement by today’s standards, but it becomes more important when funds are moving at a greater velocity.
Right now banks process account transactions in a batch format at the end of the day. That means during the day we are estimating the activity in any given account and truing everything up the next day. That is a lot of effort and confusion for both the bank and the customer as different time periods needs to be reconciled. There is no reason why it should take checks three days to clear some institutions. I should be able to share secure data with other financial institutions so that we can settle transactions in real-time, instantaneously. When this occurs, both banks and customers will know exactly what funds are in the account and what funds are available at all times. That is a huge improvement in both risk and convenience.
We don't even do the basics on this end in community banking yet, but this is where we want to go. It's all in the works.
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