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

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September 15, 2014 by Steve Williams Steve Williams

Everyone Wants Under the Apple Tree

Well it happened. We knew it was coming. It may have even taken a bit longer than expected but it happened.

Never in the history of payments has there been such a media-frenzied, corporate disrupting and consumer-captivating moment as last week’s unveiling of Apple Pay as part of this week’s release of the iPhone 6. Make no mistake – this was a direct “pyrus malus” hit into an entrenched and profitable caste system of payment providers.

Changing the trajectory of an existing payment system is difficult because it’s basically a powerful, self-reinforcing feudal power system. Apple shrewdly coopted its greatest weakness as an inexperienced new entrant. It charmed the royalty, provided pressure about the villagers being restless and cut a deal with those who ruled the current kingdom. Cheerily waving flags for the new “knight of Apple” were the dukes of Visa, MasterCard, American Express and Discover, and the earls of Chase, Wells Fargo, Bank of America and Capital One. These cozy royal alliances today may not last forever, but for now a worthwhile truce has been established.

Terence RocheIn the world of issuers and card brands, there is now an innovator asking to take “just one thin wafer” of interchange revenue. Where does it go from here? No one really knows. Cornerstone Founder Terence Roche concluded, “It seems to me like the big question is whether Apple plans to disrupt that at some point.”

The key takeaway from last week was not necessarily that Apple Pay is guaranteed to end up being a popular consumer product or that near-field communication (NFC) is guaranteed to be the ultimate mobile payment standard. The key takeaway is that one innovative company has pierced the feudal payment system with serious strategic intent and resources to make every existing member of the system scurry.

September 9, Apple Pay Day, will be remembered as the day the payments industry woke up to mobile.

Now, GonzoBankers are a bit nervously thinking about what their banks’ response should be to Apple Pay. For the past week, I have been consulting the Cornerstone brain trust for its initial impressions and recommendations. It will take a few months for the dust to settle on the strategic reactions, but any bank should be focused in the following areas:

1: Formally Monitor the Threat Assessment

The growth of Apple Pay will be tracked by the growth of iPhone 6s at the consumer level, NFC-ready terminals with merchants and Apple Pay certifications at the card issuer/processor level. Although Apple expects to sell an amazing 70 to 80 million iPhone 6s in its first release, The Wall Street Journal reports that only 220,000 of the 9 million merchant terminals in America currently support NFC (2.5%).

Bob RothIn this instance it would be wrong to just assume Apple Pay and NFC will start conquering the market. Usurping the payments kingdom will be perhaps the biggest challenge Apple has undertaken to date. As Cornerstone Managing Director and payments guru Bob Roth predicts, “Expect the merchants to now work on their MCX payment option all that much harder.” Let’s look at it through the merchants’ lens. They now have to upgrade millions of POS terminals to handle EMV  [Europay, MasterCard and Visa] and NFC? And Apple’s going to start taking a cut out of their transaction fees? It may appear to merchants that they are essentially funding the ease of use for the customer.

Watching this interplay of devices, NFC and issuers will be critically important. Banks should now be checking in on a formal payments threat assessment at least every six months to their boards and executive team.

2: Closely Watch the Online and Self-Checkout Uptick

Ryan RackleyA sleeping giant in the growth of Apple Pay could have nothing to do with NFC. Online sales and the emerging world of self-checkout are also where Apple Pay will play. Apple will now work to squeeze out giant PayPal online and take its own innovative self-checkout processes to many national chains. Open Table is on board with Apple Pay because of its vision for consumers to not only make reservations online, but also to check out and pay their bill directly from the table – another fraud-reducer by never handing the card to some shady waiter. How fast until we are all purchasing a ton of goods in physical stores but acting like we bought them on line? This could happen much faster than expected because of the huge staff productivity benefit retailers gain. As Cornerstone’s Director of Contract and Payment Solutions Ryan Rackley noted, “Down the road this certainly opens an easy path for Apple to gain transaction volumes at card issuers’ expense.”

3: Determine Your Bank’s Tokenization Road Map

Michael CroalIn the past week, bank technologists and payments managers have been digging into the technical specs of tokenization. At Cornerstone, our very own rain man Michael Croal was drawing flow charts and war gaming what tokenization will mean. As Croal concluded: “It appears the agreement between Apple and a bank is for Apple to be allowed to convert the card number into a routable token before the merchant sees it. The merchant and merchant processor only need the first six digits, the BIN [bank identification number], to know how to handle it. Since the real 16-digit card number is only exposed from Visa back to the issuer, and the Big Apple ‘doesn’t save it,’ Apple Pay should be more secure and bring more tokenization strategies from Apple competitors.”

The faster banks that understand their position with this technology, the better. Roth notes that Visa and MC came up with this concept almost a year ago. This process would eventually eliminate the need for merchants to analyze and read magnetic stripe info. Adoption up to this point has been minimal. Roth concluded, “Apple Pay will be the first major payments method to take advantage of this. This is a big win for MC and Visa and a major step forward in eliminating the simpler forms of card fraud.” Roth sees industry players quickly jumping into the world of tokenization, as demonstrated by industry giant Fiserv rushing to communicate its tokenization strategy last week.

Sam KilmerTokenization has just also moved to a priority requirement for payments vendors in the community banking and credit union space. Cornerstone Senior Director Sam Kilmer noted: “Right now, everyone is saying banks are winners. No one is telling the segmentation story. Bigger banks are winners with early adopters because they are ahead on the app process.” Like many new innovations, community banks and credit unions will need to determine how quickly they can become fast followers. As Kilmer noted, “I could see a segment of loyal Apple users switching banks over this purely on timing and perception of their bank being backward.”

4: Redouble Efforts to Create a Slick Mobile Banking Experience

Banks today are seeing a rapid merging of Web and mobile channels, and new companies are seeking to disrupt a staid Internet banking vendor market. Integrating payments is one of the hot new areas of functionality in which vendors are competing for the business of community banks. The release of Apple Pay underscores the fact that a killer mobile banking experience will be table stakes going forward. Banks today are woefully under-resourced in the E-channel area, and the Redirect of delivery resources has just moved to Defcon 1.

5: Blow Your Customers Away with Payments-Related Customer Service and Fraud Monitoring

Who does a consumer call when Apple Pay has an issue? Naturally, Apple is a technology company that has no interest in becoming the “back office” of payments. Banks have traditionally done the gritty work that innovators get bored with fast. If bank CIOs are drawing flow charts to review NFC, tokenization, mobile and BINs, think what the CIOs’ parents are thinking about emerging payments. The truth is, banks have a decade of education and migration opportunities with their customers. Front line knowledge of a bank’s payments offerings and delivery channels should be off the charts if banks are going to fend off the continued encroaching threats of payments innovators.

6: Recognize That EMV Marches On

Apple Pay’s sexiness aside, there is ramp-up time and future competition. Apple’s move is not an EMV killer at this time. As Cornerstone’s Roth observed: “I don’t see momentum ebbing on EMV. The industry finally drank the Kool-Aid on this, and I am seeing a wholesale movement to EMV. For one of our clients to ‘leapfrog’ the need to do EMV would be to assume that they can cut a deal with Apple and then get close to 100 percent of their transactions over to NFC and tokenization before the October 2015 deadline. That would never happen.

“For community financial institutions, an EMV roll-out needs to be branded with customers as a continued focus on security and privacy. It’s a great ice-breaker to begin a long-term discussion of being THE trusted payments providers with customers.”

More to Come

In the next few months, GonzoBanker will dig deeper into the strategic scurrying that has been set off. Competition is always good and fun in an industry – so let the competition begin. The early scores are in. As Roth concluded: “Overall, this is a huge win for the evolution of the payments industry, but it’s not a great deal for merchants and issuers. This seems like a loss for small and mid-size financials. Nothing good can come out of it all. Banks can ride the apps, and if they have to pay to ride the apps then it would seem like another loss of revenue.”

Scott SommerFor now, it’s a mad rush for players of all shapes and sizes to figuratively sit under the Apple tree. Maybe Cornerstone CEO Scott Sommer said it in the most sophisticated and profound way last week: “I just think it’s so totally cool ;-).”


Filed under: Cards & Payments, Retail Banking, Vendor Buzz, Web & Mobile Banking

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September 3, 2014 by Terence Roche Terence Roche

Do We Need Better System Integration or Fewer Systems to Integrate?

140902a“We are stuck with technology when what we really want is just stuff that works.”
―Douglas Adams, the Salmon of Doubt

If I were to go to most bankers today and ask them what one thing they would do to improve their systems environment, a large number would say better integration of the systems they are using.

Ten years ago, if I had asked them that same question, the majority probably would have said – hang on to your hats here – better systems integration. Despite a lot of focus on middleware, application programming interfaces (APIs) and other tools, this issue has never stopped being top of mind with system users.

So this brings me to another, related question. How many readers have waited to board a delayed flight that was supposed to take off in 20 minutes but there was no stinkin’ plane at the gate and the gate agents were completely silent and pretending nothing’s wrong? Maddening, wasn’t it?

It’s funny how that doesn’t happen to me anymore. The late part does, but not the lack of information. This week, I received an alert from the airline telling me my flight would be delayed, and I got it before the gate agents were notified. In this case, the gate agent asked me if I’d heard anything yet.

Why? Because she and I both had access to the exact same system, but it so happened that I got notified first. So did about 20 other people. My frustration with the flight being late was there, but I had no problems with the experience. In fact, it’s better.

So let’s ask ourselves this: in banking, why does crossing channels still equate to crossing systems that then need to be integrated? In other industries that rely on digital and physical channels, there is a very clear design principle: there is one system for both customer self-service and employee delivery to customers. There are just different levels of permissions and configuration. Think about it. Did Amazon design one system for employees and another for customers? Uber? Fed Ex for tracking shipments? Of course not. They never even thought about it. And, to boot, they started their system design from the front end (consumer experience) and designed the back end second.

140902bJump to our current set of banking delivery systems. I just finished sitting through the third omnichannel presentation in two weeks telling me that customers want a seamless experience when crossing channels. Really? Like I thought they wanted it to be choppy? (For a more thorough discussion of the current state of omnichannel delivery, check out Scott Hodgins’ recent post, Meet Brock Thorpe. Pretty much summed it up.)

Now, to be fair to the banking industry, we had to have systems designed for employees long before customer self-service was an issue. Branches, lending, call center – they were built after the back-end system was written, and they were built on the older platforms that were available at the time. Then, years later, we had to design self-service solutions that we couldn’t use the older tools to build. The result was different systems for customers and employees. OK, there was really no other way it could have played out. But where does that leave us now? Well …

  • In most financial institutions, if a customer starts a deposit application on line and wants to finish it in the branch, data has to pass to the branch platform system.
  • If a loan application gets started on line, data is usually passed between the application system and the underwriting/closing/doc system.
  • If a customer corresponds with the FI via the online app system (a question, a problem), it never gets passed to the core or CRM contact history file.
  • The customer digital self-service channel tool for commercial banking is this cool 20th-century system called “send-an-e-mail.”

These are just a few examples of multi-system design results that need to be improved to provide the experience customers get in other industries. The question we have to discuss, banks and vendors, is this: over time, how much of this do we want to accomplish by building better integration between systems, and how much do we want to do by rewriting systems following the design principle of other industries – customers and employees use a common system and the front-end experience is the start point?

Increasingly, the evidence points to the latter option and we can see it already taking hold:

Mortgage. You can see the progress and the benefits. A ton of mortgage lenders now have employees input the app in the same system the customer uses. Loan status notifications get sent to the employees assigned to the loan and the customer at the same time. One database. No interface. Man, you have to give it to Mortgagebot and Prime Alliance. Maybe a lot of it wasn’t planned at first, and their original idea was only to get an online 1003, but look where mortgage application systems are now. Those guys started a big ball rolling.

  • Prediction: This is over. There is one mortgage application tool for customers and employees. More and more of the back-end functions will be rolled into the application tool over time and we’ll be down to one system.

Deposit Account Opening. In at least half of the system selections we have done in the last two years that involved branches, the system selected for online applications was also deployed in the branch new accounts area. Customers and employees see the same information and update the same file, just with different permissions. Same system, same application that a customer and an employee works on sans integration. And, for grins, let’s throw in Consumer Loan Applications, which are being designed on the same platform. Meridian Link http://www.meridianlink.com/ got the early lead in this area, but there are several very credible solutions offered by core and independent vendors that have the same design and intent. Now, I understand that the pushback right now on these systems is that they don’t yet do all of the maintenance transactions, and they can be expensive. My response? First, where do we put our dollars: integrating two systems, or building out maintenance and other capabilities in the front-end application system? I vote the latter. And, as for cost, it will not slow this trend. Cost always gets rational and commoditized.

  • Prediction: There will be one system used by customers and employees for deposit origination and consumer loan applications in the next two to four years at most banks. The online application system will replace the current branch deposit opening system. Maintenance and other transactions will be added to the origination system. Adios to the traditional new accounts software. Let’s get on with it.

140902cTransaction Processing and Servicing. I am going to include teller systems, call center systems, Internet banking and mobile in this discussion. And, just to sweeten the pot, let’s add small business to the retail customer base. Here’s my take: can’t we already see the merging of service transactions? Let’s look at behavior. Customers deposit checks on their own, and we do it for them. They look up history, we look up history. They look up images, we look up images. They look at transaction history, we do too. They renew CDs, we do too. They use portable devices much more, and we are talking about branches where employees are walking around with mobile devices. Both customers and tellers end up out of balance at the end of the day, trying to find the $20 they’re short (well, speaking for myself, anyway). Question: this being the case, why should customers and employees use different systems to do all of this? What makes the question even more interesting is that among the other things mobile devices and software bring to the table is the long-term ability to pull this off on one system. Several vendors, Malauzai being one example, are already showing this thinking in their designs.

Now I can hear the pushback. What about all of the teller transactions that have nothing to do with customers? Buy/sell cash. Place a 2-sig required hold. Why would we want to do that?

My answer? Where do we want to spend our money – maintaining different systems for employees (many on older platforms) and customers, then maintaining a raft of integration (CRM, imaging systems, etc.), or writing one system everybody can use and integrating these systems once, with the added bonus of designing an experience and service level that makes customers feel like they are dealing with a digital-age company? I think this dude’s vote is clear.

  • Prediction: We will start this conversation in earnest with the long-term goal of having one servicing system for customers and all employees, and the system/design that will survive is …. mobile. Yes, Gonzo devotees, tellers will ultimately use an amped-up mobile app. Call me a nitwit if you like, but at least give me that I left the box. So, let’s get on with it.

Commercial. A tougher conversation, because there is a lot less self-service that occurs in these relationships. But, we can all see the early design in commercial lending systems that incorporate the customer into the employee workflow tool. We need new financial statements or tax returns. We track them in system workflow. The customer accesses the same system to provide them and clear the item.

  • Prediction: There will be a single system used by employees and customers for any decisioning or servicing interactions that require both parties to do something. Good news – we’re already getting on with it.

I don’t underestimate the cost, effort and frustration all this would entail. I get the years of design that would be given the axe. I even get that by now some readers have decided that my IQ is slightly below that of a tree stump.

But you know what? I keep hearing that the industry needs to be relevant in customers’ daily activities. And hip. And that, more and more, it’s about the customer experience being consistent across channels. And that their yardstick for rating our experience is Apple, and Amazon, and lots of other non-bank players.

They only have one system for everybody, not different ones they integrate.

So, let’s get on with it.

Where do you fall on the customer experience yardstick?

A financial institution’s technology solutions play a major role in its growth and success. A Technology Assessment from Cornerstone Advisors can help you determine whether your organization’s systems and processes are supporting its strategic goals and helping you stay competitive – or leaving you behind.

Contact Cornerstone today to talk about reaching best practice levels for your technology management.


Filed under: Best Practices, Branch Sales & Service, Call Center, Commercial Banking, Consumer Lending, Core Processing, Information Technology, Loan Ops & Collections, Retail Banking, Small Business Banking, Strategy, Web & Mobile Banking

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August 22, 2014 by Scott Sommer Scott Sommer

Lack of an M&A Strategy May Leave You Dateless at the Prom


In 1984 a record high 18,000+ banks existed in the United States. Thirty years later we find that the number has plummeted to 6,700 with all indication pointing to further consolidation. The vast majority of exits came from banks with less than $100 million in assets, and more than 10,000 of these institutions left the financial services landscape between 1984 and 2011 due to mergers and failures. At the same time, the pace of new bank charters has dwindled to near non-existence. For decades and decades, dozens, if not hundreds, of bank charters were issued each year. Between the end of 2010 and 2013, one new bank opened in the United States.


20 years ago10 years agoToday
Total number of institutions12,6449,1296,739
Total number of banks $1 - $50B in assets554553642
Total number of banks $50B+ in assets82737
Total number of banks less than $500MM in assets11,6888,0225,382

While GonzoBanker’s mother ship Cornerstone Advisors works with banks of all sizes, our sweet spot is the “mid-size” bank space, which we define as banks with roughly $1 billion to $50 billion in assets. And that, my friends, is where I believe all the action will be for the next 10+ years. A few predictions based on the data above: 

  • The number of banks will continue to shrink from the present 6,700, and we won’t ever see more banks than we have today. While we may see an uptick in the number of new bank charters from the near zero we have today, too many other industries with less regulation will attract capital.
  • 140822bFor better or for worse (probably worse), banking has become a scale business. The costs of regulatory compliance, investments in new technology, investments in physical and digital channels, and thinning industry margins mean banks will need to be of a “certain” size to succeed long term. A decade ago the Cornerstone team would pontificate that that number was around $500 million. If you ask me now, I would say the minimum scale point has probably doubled to the $1 billion range. The fact that the number of banks under $500 million has shrunk by more that 50% in the last 20 years appears to bear this out. [See chart above.]
  • Mergers of equals are hard to pull off and are fewer and farther between than outright acquisitions. For this and other reasons, I don’t think we’ll see a tremendous amount of $500 million and $600 million banks combining to reach that magic $1 billion threshold. Instead I think we’ll see $1 billion and $2 billion banks acquiring banks that size.
  • In 10 to 15 years, that $1 billion scale threshold will likely be closer to $5 billion.

Pundits have been predicting the demise of mid-size banks for quite some time, but the chart above obviously paints a very different picture. Mid-size banks are in the proverbial catbird seat – they can offer most of the products and sophistication of the top national banks combined with the service culture, community involvement, and local market knowledge of a smaller community bank. In fact, I think as the Millenials start to age they will be attracted to mid-size banks from the “go local” movement, knowing that their dollars will be put to work in their communities and not siphoned off by a national bank to fund some market rate swap in New York City.

If my predictions bear out, the vast majority of M&A activity/consolidation will take place in the mid-size banks either with smaller mid-size banks buying community banks or with banks at the upper end of the mid-size scale acquiring $3 billion, $5 billion and $8 billion banks. Will the number of $50 billion+ banks grow from the current 37 over the next 10 to 15 years? Sure – but slowly. Simply put, the current top 20 banks are literally so big that practically any acquisition they would undertake wouldn’t materially change their balance sheets. Add to that the tremendous amount of regulatory scrutiny and political backlash that would likely occur as the top 20 banks got even bigger in our “too big to fail” environment.

This data leads me to conclude the following: While I have always been a long time proponent of having a solid organic growth strategy, mid-size banks will need to develop AND execute upon a solid M&A strategy to survive. After spending over a decade in management and board retreats facilitating strategic planning sessions, rare is the bank client I have worked with whose M&A strategy couldn’t best be described as “opportunistic.” Most of the time that means waiting for the investment banker to call with a proposed deal. This simply won’t cut it in the fast-consolidating, commoditized industry we call banking today. This is a call to arms for mid-size banks to develop their M&A strategies. While space and time won’t permit me to lay out a complete framework, what follows are some key areas your M&A strategy should address.

  • Define Your Value Proposition. Think e-Harmony or Match.com. You need to define what makes you an attractive acquirer and why someone would want to go to the prom with you. The list of possibilities are endless, but to get the creative juices flowing think things like: increase in shareholder value for the acquired bank; generous management payouts; a board seat(s); your track record of performance; the ability to negotiate over system choices; your willingness to make management decisions based on merit rather than clearing the decks of the acquired bank; or maybe a business model that allows the acquired bank to maintain its current brand and management team in a holding company type structure.
  • 140822cIdentify M&A Partners. Define “filters” for your framework to narrow down what targets make the list. Useful filters could include qualities like geography, asset size, branch network, balance sheet mix, capital levels and niche businesses. Once the filters are in place, tools like the FDIC Web site or SNL can help you produce your target list. Ideally, you should stack rank your target list starting with most attractive prom date to least by assigning weighted values to your filters.
  • Cultivate the Courtship. If you are the acquirer, you won’t find a prom date by waiting for the phone to ring (or receive a text in today’s world). An active outreach program must be developed that includes management, directors and shareholders depending on the target. There is more art than science to courtship, but your outreach program needs to involve a consistent manner in which your value proposition is communicated to your target banks. Courtship could also involve some dating techniques like offering to provide shared services for a common core platform, inviting select management/directors to your strategic planning session, or offering the target the ability to outsource from you your more sophisticated trust/wealth management platforms and expertise. The point here is to get creative.
  • Define the Merger Value. Once you find someone who responds to your pickup lines, you will need to paint a clear picture of the value a merger will bring to shareholders and possibly management of the target bank that goes beyond the pro forma financial model. The target bank will want to know about management team composition, board seat(s), branch closures, surviving systems and products, efficiency targets, headcount reductions, branding, etc.
  • Conduct Due Diligence and Begin Negotiations. If you’ve made it this far, the M&A strategy and framework you have laid out is obviously working. Have at it!

At the end of the day, mid-size banks, you have two choices: rely on your current, decades-old organic growth strategy, or get in the game and execute upon a carefully defined M&A strategy. The risk of being left behind as other mid-size banks scale up is not one I would want to take with my bank. The underlying theme for the conference “Acquire or Be Acquired” has never been more relevant than now for mid-size banks. Happy deal-making!

All for now.


With new partnerships come new challenges 

Any financial institution involved in M&A activity can expect to experience big organizational and cultural differences. Add to this the reality of “marrying” each organization’s technology systems, and the prospect of a successful integration can seem overwhelming. 

Cornerstone Advisors  can help smooth over the rough patches of your new relationship. From the early stages of negotiation and due diligence to when the final deal is inked, we work with you to instill the integration mindset that is so critical to a winning partnership

Visit our site or contact us today to learn more about Cornerstone’s Mergers & Acquisitions Solutions.



Filed under: Best Practices, Strategy

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