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BirdsEye View

branch automation and the impact of the payments business on it

My friend Wayne Booth, Chief Credit Officer of MidFirst bank (one of the companies that isn't suffering meaningful credit deterioration), sent me the following after reading my last BEV:

"Anat, I enjoyed this excellent reminder of 1980's lessons learned but that seem to be all too quickly fading away with that generation of surviving bank leaders. Many current banking executives piously shake their heads up and down and snap their suspenders as these lessons are recounted as you have here. Unfortunately it is obvious that their generation was too low on the proverbial totem pole during those days to actually know what was really going on so they are regretfully making the same mistakes that we did in the days leading up to "The Bust" of the '80's.

Mr. Ware was indeed one of the best Panhandle bankers at keeping his ship off the rocks. I was in charge of the OCC's regulation in the States of Oklahoma and Arkansas as well as the Texas Panhandle and far NE New Mexico during the '80's and Mr Ware's bank was within my area of responsibilities. My examiners closed two to three banks a week for several years and most of us experienced sleep deprivation for the first time in our young lives. The fundamental lesson that I believe Mr. Ware understood and that I came away with having watched so many banks fail and so many families lose their fortunes is that the ONLY thing in the whole world that can possibly repay a loan is CASH. Sounds too simple but it's a fact most of the bankers in my area of responsibility failed to grasp in the '70's and if you look real close at Mr. Ware's list you will see it standing in the background on every point.

Some bankers in those days thought their notecases bulging with collateral would save the day. But they lost sight of the fact that collateral has to be converted to CASH to repay loans. If the judge casts doubts on your loan documents and won't let you execute on your lien, if you can't find your collateral, or if you can't find buyers for that foreclosed collateral (Who have cash) then all the collateral in the world won't do your bank any good. It might help out the FDIC in the long run, but in the meantime your institution will starve for cash. It is the ONLY thing in the whole wide world that can possibly repay a loan. . . and the depositors lined up at the front door.

Some thought that the character of the their borrowers would stand up under the test. While I too believe that character is a first-fundamental for a good loan, the fact is character can't repay a loan. We charged off many loans to people who we believed were people of excellent character. But when those same borrowers were down to their last dollar, they naturally chose to pay the grocer for their family's food rather than pay the banker his interest...or principal. Maybe a portfolio full of well structured loans to good people with fabulous character will prevail in the long run (Lucky for the FDIC) but in the meantime, can your bank survive non-accruals, allowance provisions, charge offs and capital calls?. The absolute best and most moral people in the world have to have cash to pay a loan because it's the ONLY thing that can. "

And Alfred Rath, CCO of Hancock Bank, said: "Anat: I always read your "View" with interest. The comments from Richard Ware are very appropriate at this time. Many lenders (and their managers for that matter) have never lived through nor experienced such economic times as we are currently experiencing - not as lenders anyway. Unfortunately, many don't understand that it is not exactly "business as usual". There are good deals to be had - that's for sure - but, bankers need to really focus on the fundamentals on each and every deal in order to insure that reasonable Asset Quality is maintained until we manage our way out the other side of this cycle. "Dicey" real estate values certainly don't help the equation either. Time to "buckle up" and stick to the fundamentals! This is a time when Credit Officers need to stay really close to their lenders - especially the young/less experienced ones".

Also, my friend Bill Beitler sent me this gem, which I believe is always apropos and relevant: "Simplicity is a noble goal, even if you're knee-deep in complexity)."

This article was co-authored by my friend Mike Shryne, SVP at M&T Bank. Mike's knowledge and strategic grasp on the b usiness shines through the discussion below.

Have a great week,

Anat

BRANCH AUTOMATION AND THE IMPACT OF THE PAYMENTS BUSINESS ON IT

We have all read about the huge impact anticipated from the changes in the payments world. Many of these predictions seem distant "threats", some are "in process" (the checkless society?) while some are present today.

Fundamentally, there really are only three major changes that are driving the payments revolution:

  1. Check 21 which was the last nail in the coffin of paper drafts and legally unleashed a tidal wave of changes into traditional payments;

  2. Consumer behaviors have materially changed in the last five years and are at the core of driving merchants, businesses & others to adapt and leverage different payment channels;

  3. Technologies have come into their own in the last couple years. The Internet, image clearing, image technologies, network bandwidth, and continued downward pricing of hardware and upward capability of software have transformed the landscape with both breakthrough capabilities and financial viability. These have served as both enablers of change and incubator for new applications of how payments are made.

All of us feel many of these changes personally daily, as the number of checks we write declines and our use plastic skyrockets, even for very small transactions. Card usage has become common in anything from a Starbucks cup of coffee to major, non-traditional purchases such as an automobile.

Much has been written about the impact of these changes on financial institutions, but an area that has not been fully explored is how these collective changes should influence decisions banks are making now, or in the future, about technology investment in the brick-and-mortar distribution channel.

Many experts have predicted the demise of the branch, only to later experience an epiphany and begin to evangelize the re-emergence of the branch. The pendulum of opinion has continues to swing. Some banks have made building out new brick and mortar distribution networks a cornerstone of their distribution strategy, while others have taken a more ad-hoc approach to their distribution channel strategies. Regardless to the approach, one thing all of these banks have in common is they have brick and mortar, it's expensive and it requires branch automation technology.

Banks are continuously refreshing existing technology or choosing new replacement technologies for the physical distribution channel. On average, major decisions are made to either refresh or introduce new technologies every 3 to 5 years. These decisions are typically very costly, disruptive to the business and require significant investments of capital and resources. For instance, a typical branch automation project whose scope is solely teller can cost upwards of $35,000 per branch fully implemented.

When considering branch investments, and what the possible future of the brick and mortar will be, some underlying assumptions need to be made that should frame decisions. Examples of such assumptions are:

  1. Checks are a dead business; they just don't know it yet. There will be some level of check presentment in the banking system into the foreseeable future but will be in continual decline and have a long "tail". Any decision on branch automation should consider this as a major influence on their investment decision.

  2. Business and Commercial deposits will include fewer checks.

  3. Official Checks and other negotiable instruments will be less frequent.

  4. The customer experience will increasingly be relationship-based and associated with by fewer financial transactions, coupled with an opportunity for a more consultative nature.

  5. Customers will increasingly look to the teller functions in a more universal, less differentiated way. And tellers will have fewer financial transactions involving checks.

If developing a strategy then and using assumptions such as those above as underlying the strategy formulation stages several directional thoughts come to mind:

  1. Limit investment in traditional software and hardware associated with checks. This might suggest then that investing in a back counter medium speed check image capture approach might be simpler, less expensive and more attractive than taking a perspective of integrating the solution into the actual teller desktop software and hardware configuration.

  2. De-emphasize check handling in branch design

  3. Optimize plastics by explicitly including into your tellering design. In other words, make using plastics easier than checks for customers as a way to conduct financial transactions. Some examples might include using a credit card for customer identification and self-initiated transaction determination (starting a deposit transaction for instance in which a teller will only conclude it, get cash, account to account transfers or making payments. This strategy furthers the migration toward plastics, paperless transactions and de-emphasizes the need for the more expensive checks.

  4. Eliminate teller cash drawers. Adapt and deploy cash recycling technology.

  5. Teller design needs to co-opt or minimally co-host full sales platform. In other words, the transacting and relationship/sales systems should be on the same desktop and transparent. There should not be standalone teller systems versus standalone sales desktops. The staff in the branch performing financial transactions on the teller desktop should be able to also sell on that same desktop. This concept extends into the traditional call center outbound sales as well and to a lesser extent to the internet channel. Given most banks have evolved their distribution channels over time independently they are likely using entirely different software, user interfaces, have differing functional capability and may even use different hardware platforms and operating software environments. Bank IT departments should evolve explicit strategies to reduce the differences, simplify the user interfaces to the extent possible and move toward a more seamless technical channel framework. What this buys is enormous benefits in usability, training, technical simplicity and reduced cost of ownership.