Camden R. Fine
President and CEO, Independent Community Bankers of America
24th World Congress of Savings and Retail Banks
Thursday, Sept. 24, 2015
"What "Main Street" community banking really means"
Thank you. Since we’re here today talking about Main Street banking in a digitized world, I wanted to start by taking a look at what Main Street community banking really means. Before I came to ICBA, I owned and operated a small $45 million dollar community bank in Ashland, Missouri. Today, Ashland has more than 3,000 citizens—a real metropolis—but in my day it was quite a bit smaller. So when we named our bank Mainstreet Bank, we weren’t kidding. In Ashland, Missouri, just like in Coldwater, Ohio, or Taos, New Mexico, or any other local community across the country, we had to do right by our customers. It’s just part of our business model. Community bankers have to serve our customers as best we can,, because we see them every day—at the hardware store, at the weeknight PTA meetings, at church. And let me tell you, if your customers think they’re getting a bad deal from their community banker, they’re going to let you, and everyone else in town hear about it.
That’s the model we represent at ICBA: locally based financial services, and local accountability that maximizes utility for consumers. It’s a model that reinvests local deposits into local economies, and promotes personalized service to customers. It’s a system that has served the United States well for 200 years and counting. And make no mistake: It’s a business model that is under attack. Fintech: Disruption is the New Normal Let’s be perfectly clear: The traditional community banking model is under attack from the financial technology industry, or FinTech. FinTech firms—a catch-all term for companies using technology to provide financial services—are offering new avenues for consumers and businesses to access loans, mobile payments, financial data, analytics, and even new currencies. This means PayPal and Square in the payments sector, Kickstarter for startup funding, LendingClub for personal loans, and Funding Circle, a marketplace for small-business loans. Global investment in FinTech firms grew 200 percent last year to more than $12 billion dollars, with new start-ups coming online just about every day. Now, what is remarkable about FinTech companies is not just that they offer new channels to financial products and services. It’s that this industry is causing massive disruptions to traditional providers - particularly commercial banks. These services entice consumers to bypass banks -- even those of us who have served our communities for more than a century. Let’s take a quick look at the kinds of disruptions I’m talking about. In my view, FinTech is responsible for four key disruptions to Main Street banking: 1. Retail Customers: Millennials and Underbanked The first disruptor is the growing base of customers most prone to using FinTech in lieu of community banks: millennials and the underbanked population. Some of you might be sick of hearing about millennials. But a generation of nearly 80 million with more than $1 trillion dollars in purchasing power cannot be overlooked. Millennials have shown a strong tendency toward mobile financial services that provide 24/7, real-time services. And distrust of banks is rampant for a generation that grew up during the Wall Street crisis. Most would rather manage their finances with smartphone apps rather than face-to-face at a bank. In fact, many have never even been into a branch. ICBA’s “American Millennials and Banking” study found that millennials were less likely than the total population to say they’d prefer to bank with a local institution. Meanwhile, the underbanked—those who have a bank account but also use alternative financial services outside the banking system—make up fully 20 percent of U.S. households. That’s nearly 25 million households, according to the FDIC. With the underbanked often preferring to use prepaid and mobile options to manage their finances, they represent another natural customer base for FinTech companies that promise disruption for traditional institutions. Millennials, and the underbanked, are the low-hanging fruit. Make no mistake, disrupters will have ample opportunity to serve these markets. 2. Small Businesses and Merchants FinTech disruption also strongly affects community bank relationships with merchants and other small businesses. Payments, lending, and financial management services for small and medium-sized business are being integrated with other services. The result is entirely new business models that go well beyond the payments transaction, such as new bundle and cross-sell options to compete with the likes of Square, Braintree and NCR Silver. In the process, they are capturing the small business relationship, leaving banks with the risk when things go wrong. 3. Technology and Data At the same time that mobile technologies offer opportunities for Main Street banks to maintain and grow their customer reach, FinTech companies are not only disrupting the banking relationship with customers, but also offering new sources of financial data to customers and providers alike. Data analytics afford businesses, including banks and FinTech companies, the ability to personalize their service to the individual customer, often before they even ask. This has been the essence of the banking experience, and it is being digitized. As with any threat, there is opportunity. Main Street banks can embrace analytics to enhance the customer relationships, and provide the intense personalized products and services that customers demand. Data analytics and digitization, coupled with the strong service that Main Street banks offer, will allow them to partner and collaborate with their customers. Whether it’s data-driven segmentation of top-priority retail and business customers or improved risk management, we have to leverage this access to technology and data to better understand our opportunities and the changing customer experience. 4. Security FinTech, and our increasingly digitized world, raise major concerns over data and cyber security. While the highly regulated banking industry is subject to strict security standards, questions over security practices of the unregulated nonbank sector remain. Recent data breaches at retailers such as Target and Home Depot, amid a constant threat of cyber-attacks from hacktivists and nation states, has put security at the forefront. The U.S. financial services industry is collectively spending billions of dollars per year to cover the costs of fraudulent transactions, card re-issuance, and ongoing efforts to shore up security in all channels. In the payments card space, the chip/EMV liability shift is just a few days away. And while chip cards are a step in the right direction in terms of payment card security, they are not a panacea because they will not protect against fraud in “card-not-present” transactions. Payments-card security experts tell us that we will need to implement tokenization and end-to-end encryption to thwart cybercriminals. There are countless other industry initiatives underway to strengthen online and mobile banking channels. Earlier this year, the new top-level domain “Dot.Bank” became available to banks all over the globe. Over time, Dot Bank will replace Dot.Com for bank websites and email addresses. Dot Bank is owned and operated by the financial services community. It is a trusted, protected and more secure online location for banking services, with only verified members of the global banking community eligible to register domains. Dot Bank is poised to be the recognized online platform for security, growth, and innovation in the banking sector. There is much work to be done in the area of security, and the financial services industry is committed to ensuring that consumers and businesses maintain their trust in the banking industry’s ability to keep personal information and money safe. This is an area where we have the upper hand over the FinTechs, and we must work to ensure that remains the case. Clearly, FinTech and our digitized world are rapidly changing the financial services landscape, and disrupting Main Street banking. So now what? Here we are --- gathered in Washington—what can we do to ensure that Main Street banking continues to thrive? I see three key priorities for the community banking industry: 1. Bank-Centric PaymentsWe have to continue to advocate bank-centric payments. Our industry supports emerging technologies that are safe and secure, and enable banks to play an active role in the customer relationship. But we cannot allow the disruption or disintermediation of bank-centric payments.Banks provide a proven, secure method of moving money. There are tested controls, security protocols and customer protections in place, including deposit insurance.Bank-centric payments are competitive, progressive and secure. Cutting the bank out of the payment transaction puts the customer in a lawless, unstructured environment. Banks add security and stability to payments, and offer security to protect their customers’ money. 2. Consistent Regulation of FinTechWe need consistent regulation of bank and nonbank financial services providers. The emergence of non-bank disruptors can add risk -- and threaten the integrity of the banking system—by capturing the customer experience without managing the related risks, and by procuring customer-related data and mining it or reselling it for other purposes. Regulators should enforce consistent compliance of consumer protections among bank and non-bank providers alike. Innovation should be embraced by the banking industry. But these products must evolve in a way that protects consumer privacy, accommodates bank-centric payments, and allows all financial institutions an equal opportunity to access and provide these products.Main Street banks are ready, willing and able to compete, but we need to do so on a level regulatory playing field. 3. InnovationFinally comes the hardest part. We have to innovate! There are several ways that Main Street banks can accomplish this:First, we need to collaborate with innovators to offer flexible, personalized solutions within the safe, secure banking relationship. Second, we must improve existing banking and payments infrastructure to meet the expectations of millennials and other customers. Core attributes of any faster payments system should include end-user payment experience, ubiquity, efficiency, inter-bank compensation and strong oversight by financial institutions.Third, we have to maximize our nimbleness. Main Street banks pride themselves on being able to offer personalized banking to make sound, localized decisions. We have to capitalize on this dexterity, while using the tools this digitized world provides, to innovate and continue meeting the needs of our current and future customers. Closing -"The future ain't what it used to be"We’ve come a long way from Main Street in Ashland, Missouri. But let me tell you something, Main Street ain't going anywhere. Our local communities—whether in urban neighborhoods, suburbs, or rural areas—will continue to be what make this country great. It is up to us, then, as local bankers to find ways to continue serving these communities. It is up to us to tap into this increasingly digitized world, so we can continue practicing personalized banking. And if we want to survive and thrive amid the forces disrupting our industry, it is up to us to innovate, to compete, and to fight for equitable regulation. We are going to have to lean into this digitized world, so that we can continue to serve our customers well into the 21st Century.