A collection of observations, ruminations, predictions and random thoughts from Cornerstone Advisors.

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May 20, 2015 by Jim Trautwein Jim Trautwein

Does Your Tech Plan Pass the Sniff Test?

Following some longstanding Federal Financial Institutions Examination Council guidance, examiners are making sure banks have technology plans and that these plans meet the regulations. As a result, banks are taking a hit from examiners at a rate that rivals door dings in an outlet mall parking lot.

If some recent conversations I’ve had are any indication, about 70% of banks don’t have a strategic technology plan that will pass muster in their next regulatory exam. According to the FFIEC IT Examination Handbook (positively riveting reading, by the way), institutions should have a strategic information technology plan that focuses on a three to five year horizon and helps ensure alignment with their business plans, including delivery of IT services, balanced cost and efficiency, and meeting the competitive demands of the marketplace.

Unfortunately, the tech plans of many institutions are little more than project lists, a collection of IT projects that chief technology officers want done in the next year or so. They rarely include projects that overly benefit the lines of business. They frequently carry over items year after year. They are basically a garden variety assortment of infrastructure projects, server upgrades and desktop refreshes.

The strategic plans of many banks fail to mention infrastructure upgrades among the corporate goals. They don’t include line of business plans. They probably do discuss technology as a strategic enabler, a competitive differentiator, a necessity for mobile and Internet channels. But the technology plan often doesn’t include these factors. And that, my friends, is a disconnect – a problem with real consequences.

Although technology planning has been in the guidebook for years, examiners have had their hands full with pesky little things like the financial meltdown and the rise of cybercrime. But they’ve finally started to take a more strategic and risk based approach to exams, and that’s where the tech plan can work against the bank.

Here are 5 Gonzo Tips to help banks move beyond designer shelf-ware and develop tech plans that actually work.

1. Good tech plans are pragmatic and easy to understand. A tech plan captures the debate and agreement between IT and business stakeholders. It is understandable by all. Sure, it will include some techy talk – after all, it is a tech plan. But it should be as much about enabling the business as the complex systems that support it.

2. Good tech plans are living documents. A tech plan is not meant to gather dust, cobwebs or serve as a prop to hold up other stuff in the bookcase. It doesn’t have to be a massive work of art or fiction. A tech plan isn’t a regurgitation of last year’s plan although it should acknowledge where the bank is coming from or where it’s been. It collects notes in the margins and the pages are dog-eared.

3. Good tech plans describe accountabilities. The tech plan should set the standard for IT service to the organization and what the lines of business should expect. These service level agreements become something of an internal contract to measure IT’s performance. But it’s not a one-way street. The service standards also discuss how the lines of business interact with IT.

4. Good tech plans are not about all the neato cool stuff. A tech plan should evaluate emerging technologies and see how they can enhance or replace what the institution has today. Some changes will be necessary and justified, especially when they replace what the bank already has and what it has is going away. Others are a natural evolution of technologies that can be planned into the bank’s environment at the next opportune refresh cycle. And some won’t have any business at the bank but might be interesting to research – especially to fend off the other executives that have heard the marketing hype.

For example, whether the bank believes outsourcing or cloud computing are the way of the future, it can’t ignore the momentum and demand they have created. The plan may delve into an emerging trend like cloud computing and evaluate its potential benefit to the bank. What are the opportunities and implication for cost, efficiency, security, risk, obsolescence and other factors? And if a new technology makes sense, how and when should the bank migrate to it and what else needs to change when it does? If it doesn’t make sense, the reasons should be documented so they can be reevaluated as the market changes.

5. Good tech plans consider the impact on the people. While a tech plan is about the technology, it’s also about planning for the team that has to live with it and support it. Planning to acquire or retire technology is easy. Planning for the systems that will change people’s lives and the way they work takes some finesse. Vendors will tell the bank it can get the new system in just a few weeks. The time it takes to prepare the support team and the users will take far longer and require deliberate planning.

A Look in the Mirror: The Risk Based Approach

A thorough tech plan is a combination of self-assessment and forward thinking. Examiners want to see that the bank has taken a hard look in the mirror to see how it’s doing and what needs to be changed. How is the market? How is the bank? Is IT getting the job done? What tech needs to change to get to the next level? If the bank has done a good job assessing itself – the selfie – then the examiners don’t have to.



Is your technology plan strategic – and flexible?

A financial institution’s IT policies, resources and architecture need to be responsive to a highly complex and regulated environment.

Cornerstone Advisors works with your organization to design a flexible IT governance structure that adapts to changing external forces and grows with you.

Visit our web site or contact us today to learn more.

Filed under: Best Practices, Information Technology

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May 8, 2015 by Daryl Jones Daryl Jones

Digital Lending & The Biggest Conference Bankers Aren’t Attending

“Silicon Valley is coming.”
-Jamie Dimon, CEO, JPMorgan Chase

Jamie Dimon, CEO of JPMorgan Chase, said it best in his recent letter to shareholders with his reference to emerging digital lenders. Ironically, his comments came a week before the biggest conference for these companies was about to begin. The annual LendIt conference was held last month at Times Square in New York City and GonzoLender descended boldly on the scene to evaluate the mysterious underbelly of digital lending.

The opening remarks by Lending Club CEO Renaud Laplanche adequately summarized the perspective of lending platforms attempting to solve a problem traditional banks have been woefully unsuccessful at solving: “Banking is an engineering problem.” As the sessions progressed a theme began to manifest that the traditional banking model has failed our customers and these digital lending platforms intend to reshape the industry, one process at a time. The lending attack on community banks and credit unions has been waged.

It would stand to reason that a conference agenda packed with topics as relevant as “Online Loan Applications/Originations,” “Marketing to Prospective Borrowers,” “Risk-Based Pricing,” “Auto-Decision Rates,” “Lending to Millenials,” “Credit Scoring Engines and Models” and “Loan Servicing” would bring in loads of banks and credit unions from across the country. Outside of some stout representation from the likes of Citibank and CapitalOne, there was only one credit union and one community bank in attendance. I’ll repeat that: one credit union and one community bank.

For all the banks and credit unions that did not make it to the LendIt conference, here is GonzoLender’s take on the event.


It’s fair to say digital lenders are disrupting banking just like Amazon, Facebook, Uber and Google disrupted their respective industries. While it may not be any one individual platform directly taking on the entire banking model holistically, the cumulative effect of all of the lending platforms across all verticals is substantial.

Digital lending platforms are looking to displace traditional financial institutions by providing superior technology and analytics supported by more efficient processes. A factor further supporting their case is not having to contend with reserve requirements and fund expensive branch networks. In addition, their ability to market, acquire, service and collect from customers on a massive scale is something with which community banks and credit unions just can’t compete.

These companies are thinking outside the traditional banking box and hiring non-banking whizes to execute. Perusing the backgrounds of the platform owners and employees it’s easy to see there is an abundance of education, talent and experience from the likes of Harvard, Yale, Princeton, Google, PayPal, Facebook, MasterCard and eBay. The staffing, approach and execution thus far is spot on.


There has been a vast influx of platforms and they are varied by geography, type of platform (e.g., peer-to-peer or Marketplace) and lending vertical. These lines are blurring quickly as platforms expand into other countries, shift their source of funds model, and tiptoe into new verticals. Consolidation among these companies is likely as they continue to expand, and interesting battles will certainly arise when crossing into new lending verticals.

Consumer Lending

The major players here are Lending Club and Prosper with SoFi, LendKey, Avant and others trailing the pack with a collective lending volume of roughly $9 billion in 2014. The vast majority of the traction has been in the unsecured and credit card refinance space where borrowers can swiftly and easily move to a more attractive option. The low hanging fruit is getting harvested by the truckload. The ability to drive partnerships and intervene with point of sale lending opportunities will be necessary to keep feeding their customer pipelines.

Small and Midsize Business (SMB)

The SMB market is dominated almost equally by OnDeck and CAN Capital. The really hard nut to crack with SMB is product. It’s very hard in an online environment to identify what product a small business needs without some personal interaction. But the opportunity here is tantamount considering the typical community bank and credit union have a notoriously hard time processing, underwriting and approving such loans, and certainly not with the same speed as these platforms. As presented during the conference, 40% of small businesses want a loan under $50,000, and these must be executed more efficiently.

Residential Real Estate

A number of players share this highly competitive space, including SoFi, Lending Home, Money360 and LendZoan. Of all the verticals, this has the largest potential opportunity. Mortgage lending is the fat-cat vertical and is relatively untapped at this point. With that, however, comes some challenges. The loan decisions for residential real estate are much harder to automate because of potential fraud, and the completion process is more complex than personal loans due to appraisals, physical inspections, state/county requirements, etc. But, the payoff could be massive, especially considering the delivery advantage these platforms have with their ability to process a mortgage loan in two weeks compared to 30 or 40 days for the average FI.

Other Verticals

The remaining providers can be grouped into a variety of other verticals such as student lending or point-of-sale lending opportunities including doctors’ offices, furniture stores, car dealers and/or geography such as those in the United Kingdom, Australia, Canada and China. The market in China alone is more than double all of the other markets combined.


Throughout the event the ongoing comparisons between digital lending platforms and traditional FIs rivaled the number of flashing bulbs a few short steps away in Times Square. With the exception of a couple of rougue outliers, the tone was predominately weighted toward these emerging platforms doing a better job.

Traditional FIs have the advantage with low-cost capital to deploy and a constant borrower pool to tap. Digital lenders have an edge with deployment of technology and origination fulfillment capabilities in tandem with a lack of regulatory controls. We can argue who wins the credit analytics game – for now at least, until there are seasoned portfolios to review and proper performance can be measured.

The analytics these platforms are using is clearly more robust than the typical FI. Borrowers can be qualified from more than just traditional FICO data and in some cases against as many as 30 different credit tiers. Analytics drive deep to the heart of design and are quite scientific. Fraud rates are segmented down to the applicant’s computer browser to determine higher levels of risk, and a variety of application templates and navigation options are constantly tweaked and tested for correlated success rates. The next community bank or credit union that GonzoLender witnesses using comparable methods will win a sweet prize, anything from a gift card to a t-shirt!

Also, the technology is clearly better. It is not uncommon for these platforms to tout cool functionality such as 90% plus auto-decision rates and dynamic, point-of-sale usability, the ability to “vouch” for a borrower, and real-time adjustments of loan terms as the borrower makes changes, e.g., a slider that enables a borrower to change his requested payment amount and the rate and term dynamically change with it. And, for starters, the web sites are excellent. To prove it, check out Able Lending, LiftForward, Upstart and Funding Circle as a few examples.


POS Disintermediation: Closer ties with point of sale lending opportunities will be a key development. Lending Club unveiled at the conference what it is calling “The Cube,” a seven-inch box that allows for a paperless loan application, backlit digital display, WiFi connectivity and voice recognition, and it can stand in virtually any POS location including car dealerships and bank branches. Activities like these are bound to choke origination opportunities from traditional FIs.

Technology: In a few years, the ability to create stunning, fresh technology won’t be a differentiator among peer platforms, but it will be when compared to community banks and credit unions. Robust analytics and transparency of data will continue to be important for everyone.

Regulations: There is much debate whether regulations will ramp up in this industry given the fear of potential predatory lending. However, the lack of a fully developed market and unclear ownership for regulatory oversight are the leading reasons additional regulatory requirements may stay at bay.

Consolidation: The number of platforms being created today is staggering. As they continue to grow into other countries and lending verticals, the overlap and potential inability to generate sufficient returns will cause concerns with investors. Only a handful will likely make it public and survive the next five years.

Partnerships: The ability to arrange partnerships with banks and others will define these platforms’ survival. Institutional and individual investors alike are lining up to fund these loans, but the borrower pipe must stay full to keep these engines running, and partnerships with banks and credit unions will likely be a prime source. A number of recent partnerships have already been announced such as Lending Clubs partnerships with BancAlliance and Citibank as well as LendKey with Navy Federal Credit Union.

The interesting dichotomy is this: while these platforms are attacking every lending vertical relevant to the community FI, they need partnerships with FIs for a consistent source of borrowers. Even Jamie Dimon stated in his letter to shareholders that he may be looking to partner with some of these digital lending platforms where it makes sense.

GonzoLender’s advice to the community FI: Keep your eye on these platforms as competition, but don’t shortchange the potential opportunity to partner with these platforms if the conditions are right.


Are You Running a Next-Gen Mortgage Shop?

Or are you missing out on a huge opportunity while you live with the nightmare of outdated systems?

At Cornerstone Advisors, we have seen mortgage loan origination systems in financial institutions of all sizes. We’ve seen the great and the not so great. Visit our Web site or contact us today and we’ll talk about steps you may need to take to put your mortgage operations to work capturing market share.

Cornerstone Advisors


Filed under: Commercial Banking, Commercial Lending, Consumer Lending, Mortgage Banking, Small Business Banking, Web & Mobile Banking

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April 27, 2015 by Ron Shevlin Ron Shevlin

What’s the ROI, Kenneth?

I’ve noticed that a lot of GonzoBankers have a high tolerance for pain.

I’m not talking about physical pain, rather, the mental anguish that comes from listening to countless fintech vendors’ bogus claims about their technologies’ returns on investment (ROI).


My latest experience with this form of agony came from a vendor that was briefing me on its big data analytics platform (the ROI on a meaningless buzzword—double the pain). At one point, the vendor put up a slide that said its platform delivers an ROI of 650%. Here’s a snippet of the ensuing conversation:

Me: How was that ROI calculated?

Vendor: It’s based on the revenue that was generated from the marketing campaign that was executed using our platform. The analytics work we did identified consumers who were the most likely to accept an offer for the product in question. Offers were sent out, and we calculated an ROI based on the response rates.

Me: (Somewhat perplexed, but sensing an opportunity to shred the logic to pieces) OK, I might have a few questions here. For starters, wasn’t it really the development of the propensity model that should get the credit for the ROI on that campaign?

Vendor: Absolutely. But it was our analysts who developed the model.

Me: But your analysts could have used any BI platform to create the model. OK, forget that. Why didn’t you factor in the costs of providing the service or product sold into the equation?

Vendor: We didn’t have access to that information.

Me: (Stunned, but pushing ahead nonetheless) Ooooookaaaaay, but why would you base the whole ROI estimate on a single project? What makes you think other firms would achieve the same results?

Vendor: The ROI we’re showing here is for illustrative purposes.


It’s painful just recalling that encounter, but these claims run rampant in the industry. The real question that needs to be addressed is: Why do fintech vendors feel compelled to make bogus claims about their technologies’ ROI?

The answer: Because IT buyers want those ROI estimates to justify IT investments.


IT project sponsors know that, in order to get funding for an IT investment, the executive team is going to ask, “What’s the ROI?” So project sponsors either rely on vendors’ estimates (incredulously), or make some assumptions about how that will play out in their own organizations.

I don’t really need to tell you that, even if the vendors’ ROI claims were accurate, one firm’s returns are no indication of, or representative of, the ROI that other firms will generate. Different markets, different capabilities, different execution tactics, etc., all combine to make one firm’s ROI completely irrelevant.

But how accurate could the internally-generated estimates really be? Will the firm really be willing to let people go in order to achieve cost savings? Will deployment , integration and execution costs for the new technology really be in line with the vendor’s estimates? How realistic are assumptions regarding conversion rates on marketing offers, or adoption rates on new technologies?

Asking “what’s the ROI?” of a technology investment before the actual deployment begins—that is, before all the hard work about what needs to be done, what’s going to get done, and when it’s going to get done given all the other things going on—is no more of a rational question than stopping Dan Rather in the street and asking, “What’s the frequency, Kenneth?”


This begs another question: Why do executives ask project sponsors for the ROI of the project? Anyone who thinks it’s because the ROI is needed to justify any IT investment is wrong. Dead wrong.

At a meeting of chief risk and credit officers from 15 of the 50 largest card issuers in the United States, someone asked the group “How many of you have ‘360-degree-view-of-the-customer’ projects currently under way?”

Every one of the execs raised their hands.

I quickly jumped in with this question: “How many of you did ROI projections on those projects?”

Not one person raised a hand. Not a single bank represented in that room felt compelled to estimate what the actual financial benefit—in terms of reduced costs or increased revenue—of spending millions of dollars to integrate customer data files would be.

They made the investments because they believed it was the right thing to do.


So, let’s ask again: Why do execs ask IT project sponsors for ROI projections? The answer might be a tough pill to swallow, but “what’s the ROI?” is code for:

  • I don’t want to make the investment in the technology, and/or
  • I don’t understand what the technology can or will do.


Asking project sponsors for ROI projections is a way for execs to say no. “Sorry Jim, but we have other projects with more lucrative ROI projections than yours that we’re going to fund.

Asking project sponsor for ROI projections is a way for execs to say—without having to actually say it—”maybe if you give me ROI projections on this social media monitoring technology it will help me understand what exactly it’s supposed to do, and how it will benefit us.


If ROI projections done during the justification phase belong in the fantasy or science fiction—and not the non-fiction—sections of the library, does this mean banks shouldn’t forecast the ROI of IT projects?

No. It simply means that ROI projections shouldn’t be used as justification for a project moving forward from the concept phase. Business strategy, competitive analysis, and lots of other qualitative reasons should drive that determination.

ROI projections—done at the start of a funded project—should be used to gauge a project’s success and to provide management with goals and targets to determine if a project is on track, or if a completed project met it targets. ROI forecasts done at the justification phase are just not reliable enough to be the guide for tracking or performance analysis.

If done at the start of a funded project, however, project sponsors might just be able to reliably answer the question, “What’s the ROI, Kenneth?”

Personal note: I’m excited to be joining Cornerstone Advisors as Director of Research and contributing to the GonzoBanker site. Cornerstone Advisors Senior Director Sam Kilmer and I will be at the 2015 Financial Brand Forum in Las Vegas April 29 to May 1. We’d love to connect with fellow GonzoBankers there. The first five GonzoBankers to find me at the conference and give me a business card (and tell me how much you loved this post) will get a signed copy of my book Smarter Bank.

One point of clarification: You can’t just give me anybody’s business card–it has to be YOUR business card. And you have to work for a bank, credit union, or fintech vendor.


Filed under: Branch Sales & Service, Cards & Payments, Core Processing, Information Technology, Marketing, Mortgage Banking, Retail Banking, Strategy, Vendor Buzz, Web & Mobile Banking

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