For most banks, the “do it all” days are over: here are their options

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While most midsize banks have performed well during the pandemic, these institutions are now facing an acceleration in factors they were already facing before Covid. To underline the urgency of change on several fronts, a report from Deloitte predicts that in 2021, mid-sized institutions will see their net interest margin, as a group, fall below 3%, compared to 3%. , 9% in 2019.

Twin challenges:

Increasingly, midsize banks must manage a dual set of changes, one focused on operations and the other strategic.

Success in the future will depend on achieving a series of strategic and operational changes on several fronts, according to the report. But in addition, many mid-sized banks will have to decide on the type of institution as they can actually be successful. Gone are the days when midsize institutions could still be everything to every client, according to the firm.

Deloitte also suggests that the days of midsize banks trying to compete with domestic banks at all levels are coming to an end.

“Mid-sized banks rely heavily on interest income,” says Val Srinivas, Research Leader, Banking & Capital Markets, in an interview with The financial brand. “It’s a disadvantage compared to their larger peers who have more diverse business models and higher paying businesses. Srinivas says expanding non-interest income businesses needs to be a higher priority for most midsize players. At the same time, they need to pick and focus on activities they can be good at, rather than trying to get a dog for every fight.

According to Deloitte research, developing and strengthening this expertise will depend not only on emphasizing the specialties that institutions already possess, but also on selecting the right M&A partners as well as building strong relationships. with financial technology companies whose services need the customer bases that midsize banks bring.

“The types of businesses that banks engage in will sometimes involve expanding the banking value chain, upstream and downstream of the services they currently provide,” said Richard Walker, director of Deloitte Consulting LLP, during the presentation. same interview. “Instead of just providing credit to businesses, for example, they’ll need to provide advice on how best to deploy capital and treasury services to help manage credit usage and more.”

The consultants discussed strategies for midsize banks, which Deloitte demarcates between $ 10 billion and $ 100 billion in assets. However, smaller institutions can also consider similar strategies in many cases. Walker and Srinivas drew on two Deloitte resources, “The Future of Midsize Banks: A New Playbook for Supercharger Growth” and “CIO Tech Spend Survey: Moving into the Digital Future” Size Bank Coalition of America (MBCA).

Many midsize institutions see the need for change

In some quarters, mid-sized establishments have been criticized for not growing fast enough, if at all, to accelerate their pace of change. Experts blame them for not revamping their technology fast enough, failing to see the threat of digital competitors, even having older consumer bases compared to national banks and other players.

Challenging this view, Walker says that too much has been done. Although there are problems, there is more dynamism among these institutions than some realize. He points out that about half of the main paycheck protection program lenders were regional banks. “They saw an opportunity to strengthen the impact of the brand and the community by participating,” says Walker.

“Arguably, if you were to create a whole new banking environment from scratch, it wouldn’t look anything like what we have today,” Walker notes. But history, not logic, brought about what we have today.

According to research, one of the factors detrimental to many midsize banks is the lack of technological talent and significant “technology debt” due to existing systems. Replacing that last cold turkey is costly and disruptive and is compromised by the fact that a large portion of banks’ technology budgets are spent on operating existing systems.

Walker says the joint investigation with MBCA demonstrates that the need for such changes is not lost on the midsize institutions that responded to the survey. For example:

  • Fintech partnerships: 90% are interested in developing them to accelerate new technologies.
  • Cloud computing: 64% of mid-sized establishments that responded have committed to a strategy to help increase agility and profitability.
  • New IT staffing philosophy: 59% expect IT staff to work remotely, which can both expand the IT talent pool and fill gaps in current hiring bases.
  • Digital platforms: 29% have adopted open application programming interfaces, both to improve access to existing technologies and to enable access to new platforms.
  • Robotics: 17 bots were deployed, on average, among responding banks.

A costly technological arms race:

The pockets of mid-sized banks are not deep enough to follow everyone. The total IT budget for all institutions belonging to the Mid-Size Bank Coalition of America is equivalent to the average IT budget for a large national bank.

More and more midsize institutions will need to rethink the way they get IT services. 72% of the joint study sample has at least one data center, using “home” computing. This approach may not last in the long run.

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Recommendations on how medium-sized institutions can improve their technical side

In the company’s playbook report, Deloitte makes eight recommendations:

  • Scan the institution back and forth.
  • Ace the digital customer experience.
  • Encourage a digital culture.
  • Forge dynamic alliances.
  • Modernize core systems with modular solutions.
  • Expand fee-based business models.
  • Streamline and redesign the business footprint.
  • Use mergers and acquisitions to increase your profits.

Role of Mergers and Acquisitions for the Mid-Sized Banking Industry

Partnering with fintechs can be the way to solve part of the technological challenge. In fact, mergers with fintechs could be part of the future. The agreement reached by Lending Club, by buying Radius Bank to become LendingClub Bank, is an example of this.

“Fintechs are already bringing the technology,” says Srinivas. “So they’re looking for a distribution. They are looking for a permit. Maybe they’re looking for a brand name.

That said, Walker suspects that most transactions between banks and midsize fintech will consist of the bank’s purchase of fintech, rather than the other way around.

“If fintechs want a banking charter, a medium-sized banking target would involve too much complexity and too much of a premium, just to get the charter. They would go after the small banks for that.

While midsize banks will acquire fintechs, Walker predicts that most M&A activity among midsize banks will involve consolidations, “with banks buying other banks for complementary lines of business, either with geographic expansion, ie within a coherent geographic footprint “. Walker adds that a key opportunity will be the acquisitions that will develop the profitable lines of business. How this strategy plays out will depend, in part, on how the Biden administration’s policy on bank mergers evolves.

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Business banking could be the midsize bank’s best asset

The two consultants believe that for mid-sized banks there will be many more opportunities for growth and innovation on the business side of the bank. Walker points out that even under current conditions, midsize institutions that focus more on commercial banks tend to have high ROEs.

This emphasizes the need to choose and focus on specialties.

“The big national banks have one of everything,” says Walker. “They are universal in their model but they often differ very little. “

This makes them multi-line operations. In contrast, midsize institutions that concentrate are more like monoline finance companies.

“For decades, monolines have consistently outperformed multi-line financial services companies. Thus, mid-sized banks could benefit from the monoline performance with the possibility of adding selective companies to the mix to produce exceptional returns. “

– Richard Walker, Deloitte

One of these activities is banking as a service, which has generally been the preserve of smaller institutions. The company’s own report suggests this could be a two-way street for some midsize institutions, with some intriguing possibilities.

“Given their lower revenue growth, latecomers might consider experimenting with this model to generate commission income from partners accessing their BaaS platform,” the report said. “In addition to generating revenue, this model could also allow them to offer greater personalization of their products and services and enable their partners to deploy new solutions that are both timely and more profitable. “


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