Innovation By Design

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With planning and patience, every community bank can innovate effectively by focusing on what customers need and what will drive profit

By Karen Epper Hoffman

State Bank & Trust Co. in Atlanta recently introduced a tablet-based cash-management software for its commercial banking clients. That application was “looped up the list of priorities” and quickly brought to market once the bank’s executives realized the software would address a specific need stated by its commercial customers, says Mike Fitzgerald, the bank’s executive vice president and chief revenue and deposit officer.

Given an “absolute commitment to be nimble and quick” and follow customers’ preferences, State Bank & Trust has offered such leading-edge services as well as any of its much bigger rivals, Fitzgerald says. “We pay a lot of attention to what our clients tell us, and that’s why our counterparts are on defense and we’re on offense.”

The $2.6 billion-asset community bank’s aggressive stance on innovation is paying off in financial terms as well. Over the past two years, State Bank & Trust has increased its noninterest-bearing income from 10.2 percent to 22 percent, and Fitzgerald boasts that 72 percent of the bank’s commercial checking customers use at least one additional treasury service from the bank.

“Consumers’ expectations of ‘service’ is increasingly about how they want products and services customized to their unique needs and preferences, and they now expect those services to be provided anywhere, anytime in any manner they choose to receive it,” says JP Nicols, CEO of Clientific LLC and co-founder of the Bank Innovators Council.
Hence, engineering innovation in every area—from the front retail lines to the backroom operations—is more critical than ever.

But, ultimately, every community bank operates on vastly more limited budgets and resources than the biggest banks have. Every community bank would go broke offering every new product or service available in the marketplace. So every community bank must make choices about the innovation it will pursue.

So how can community banks know when it has traveled from the leading edge to the bleeding edge?

Fitzgerald says community banks can experience this when they receive “tepid demand for what you think is a wonderful solution.” However, he encourages community banks to try new approaches and technologies and have “the courage to be wrong in what you are developing.” Further, he suggests that community banks should not allow innovation to become “an island in the company,” but rather a process with a formal business case development involving multiple executives.

“The challenge for both [leading and bleeding innovation] edges is the time frame, for any positive return is based upon adoption.”
—Bob Legters, Payments and Technology Expert

There are, of course, limits to getting creative within a budget. Nicols points out that community bank innovation should be to generate business results—draw new revenue streams or protect existing ones, improve customer experiences, cut out operating expenses and so on. “Bleeding- and leading-edge innovation efforts can be difficult, expensive and time consuming, and I don’t think that’s where most community banks should be focused,” he says. “They should spend their time building a deep understanding of the unique problems and opportunities of their customer base and then innovate, cocreate or buy new solutions to meet those opportunities.”

H. Terrie Cloud, senior vice president with ICI Consulting Inc., a firm in McLean, Va., that provides financial institutions with core processing and ancillary systems consulting services, believes community banks should base their innovation choices largely on their customer segmentation—based, for example, on whether they have a higher preponderance of retail or commercial customers, or whether they would be more or less interested in online or mobile services. Similarly, Christina Churchill, director of management consulting for McGladrey LLP, believes there isn’t one right answer for innovation, but rather it depends on a community bank’s locations, customer base, core systems and risk appetite. 

“There are a number of new and exciting products in the market today, but finding the right mix for your bank is key to managing your budget, having a successful implementation and achieving ROI.”
—Christina Churchill, Management Consultant

“Often the first step is to reach out to the customer base and get a feel for the voice of the customer. Understand what they really want and need,” says Churchill. “There are a number of new and exciting products in the market today, but finding the right mix for your bank is key to managing your budget, having a successful implementation and achieving ROI.”

Most banks go over the edge, she points out, when they lose sight of their customer base and try to push innovation too far, too soon. “It’s tempting to ‘keep up with the Joneses,’ but you have to know your customers and your own capabilities. If an idea is so big and so new that you can’t execute on it efficiently or your customers aren’t interested, you may be taking an unwise risk in the name of innovation.”

Mark Dittman, CEO of Integrated Bank Technology Inc., a technology and core software provider in Cedar Park, Texas, says that while community banks might be overwhelmed by all the potential technologies and products they can offer,

“It always comes back to the business plan. ‘Does that product help more than this product?’ You just need to stay the course.”
—Mark Dittman, a Software Provider

As Bob Legters, senior vice president of product for the payments group at FIS Global Inc., the technology and core software provider in Jacksonville, Fla., sees it: “The leading edge includes things that have been discussed for some time—EMV, mobile wallets and payments—but are now growing in adoption. The bleeding edge includes Bluetooth LE technology, completely virtual cards and new form factors such as wearable jewelry. The challenge for both edges is the time frame, for any positive return is based upon adoption.”

But how can your community bank not only innovate on a budget, but ensure that it will see a return on its investment? Experts say: Plan and measure, measure, measure.

The most effective and cost-effective innovation can be measured by looking at your community bank’s local competitors and then more broadly to its extended peer group, says Churchill, and aligning with your bank’s strategic plan will help meet its long-term goals. “How do you want to be seen in the market? Do you want to be a leader? Do you want to be perceived as cutting edge or technology friendly?” she says.

Spending Smart on Innovation
Focusing on well-ingrained mediums like social media and mobile may offer the best bang for the buck

Steve Jobs famously said that innovation distinguishes between a leader and a follower.

For a community bank, both being a leader and sticking to a budget can be a tall order. But by embracing ubiquitous mobile technology and social media and by spending wisely, even the smallest community banks can lead the way when it comes to new products and services, technology planning experts say.

Social media offers a great way to “be innovative without spending much money,” says Joshua M. Juergensen, manager in the financial institutions practice for CliftonLarsonAllen LLP. Community banks have been very slow to dive into sites such as Twitter, Facebook, LinkedIn—all of which are free to use and offer banks a great way to interact with their customers, he says. For community banks that want to dip a toe in the social media waters, he suggests “jumping all the way in.” That includes interacting with customers, and using that interaction to promote specials or promotions your bank is offering as well as discuss its involvement within its community.

Christina Churchill, director of management consulting for McGladrey LLP, sees mobile banking is evolving from “there’s an app for that to truly mobile banks.” She is also finding more community banks examining electronic document management and digital wallets. Many are also looking at how to improve the alignment of their product mix and payments strategies with what their customers need and want.

Churchill encourages community banks to focus innovation and change on where they can make a tangible impact and where they can reduce expenses that would cover the cost of technology. For example, she says, the reduction of paper and related activities often offsets the costs of imaging, and typically most banks aren’t fully utilizing their existing systems.

“There may be things you already own that will allow you to grow,” she says. “I would also evaluate changes that can be made to your website and mobile applications that will make the products more sticky. When your products and services are fully integrated into your customers’ daily routine, it becomes very hard for them to leave you.”

While the return-on-investment for technology projects is a little more difficult to measure, as it is often a mix of existing systems and new, Churchill says that when focusing on customer-facing products, leaders can and should define and track metrics to help assess progress and justify the investment. Depending on the project, those metrics might include customer acceptance, ramp-up time, and fees or expense reduction.

Says Legters: “The best way to know you are innovating is to measure your growth. Growth can be measured in a number of ways—revenue, number of accounts, increased cross-sell opportunities and much more. Migrating existing customers and attracting new ones into innovation is important, but growth is a good indicator that you are doing the right things. It’s also a warning sign if you’re not.”

To determine if a particular product or service is driving new accounts or transactions, he adds that banks should measure activation rates, monthly transaction counts and number of accounts (penetration rates), as well as cost per account based on marketing, processing and internal overhead. 

“The best way to know you are innovating is to measure your growth.”
—Bob Legters, Payments and Technology Expert

Nicols also encourages metrics to measure progress, although he counters that it’s “tempting but dangerous to start measuring results in dollars right away.” He vividly recalls a conversation with a senior bank leader a couple of years ago after helping put together an internal innovation team. “We had just spent a whole day thinking about new ways we could serve customers and generate new revenue streams, and we ended the day with an agreement to start working on a new project that everyone was excited about,” Nicols says. “The very next day I received a phone call from the executive, who told me, ‘That was very interesting, but nothing we talked about will help our bottom line for several quarters. We have a problem meeting our goals this very quarter!’”

“I reminded him that he had 300 people under leadership whose full-time focus was hitting this quarter’s numbers, and that our purpose was to create a better future. Who was going to do that if we didn’t do it?” Nicols adds. “It’s like the old adage of the lumberjack who was so busy cutting down trees that he didn’t have time to stop and sharpen his saw. Innovation requires patience and a long-term perspective.”


Karen Epper Hoffman is a writer currently working in Europe.