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The Bottom Line

The banking industry’s biggest service providers, sometimes referred to as “battleships,”  have grown largely  through acquisitions. When market demand moves toward a new channel for delivering financial services (e.g., smartphones) or potential for a replacement solution opens up a new market tier (e.g., digital banking among regionals), these “battleships” acquire other entities to keep pace and/or unlock a new opportunity for revenue growth. Often, they wait for an upstart to gain some market traction then give its investors an exit strategy worth multiples of their initial stake.

For years, small businesses have gotten very little help from their financial institutions – and no market segment gets a pass on this one. From mega-nationals to community-sized institutions, small businesses have seldom found the assistance they need. Instead, many institutions have either pushed them to retail accounts or offered these small business owners treasury/commercial services.  

While community bankers were already weighing options on core processing and digital solution strategies before the pandemic, these decisions weigh heavily enough now to quickly tip the scales of survival. We’ve already shared our thoughts on how the “shelter in place” environment and its aftermath gave a serious jolt to any bank or credit union leader still on the fence about the importance of a robust digital backbone. 

We are spending a lot of time thinking through the near- and mid-term ramifications of the coronavirus pandemic, especially impacts to the financial services industry. SRM has already shared several perspectives on this topic, including similarities/differences between today’s downturn to 2008’s financial crisis and financial institutions’ latest wake-up call concerning digital channels. Now, our lens focuses on what adapting to post-pandemic consumer banking and spending behaviors might look like. 

There is a business cartoon that has been circulating around social media – a group of employees is holding court in a conference room. The manager at the head of the table declares, “Digital transformation is years away – I don’t see our company having to change anytime soon.” Meanwhile, outside the window just behind him swings a giant wrecking ball labeled “COVID-19.”  

The term “bank” never appears, but there is no sector for which the message rings truer. While the migration of banks and credit unions to digital channels has been underway for several years, of course, the national brands have been the most aggressive, creating an online capabilities gap over most community financial institutions. Given the pandemic-prompted closing of most branches and the energetic push of customers of all stripes toward remote channels, those investments by the largest institutions seem more prescient than ever. 

Being prepared for any potential downside is something bank and credit union executives take quite seriously and, since the early 2000s, have been required by regulators to maintain a pandemic crisis plan. Now all of these plans are being put to the test, especially after the announcement by the WHO that the coronavirus is officially a pandemic.

Even as the business world improves at predicting and defending against risks, Black Swans will always be a possibility. As is characterized by such an event, it’s easy in hindsight to say, “We should have seen this coming,” but the fact remains that we don’t know what we don’t know; e.g., the impacts on the stock market and disruptions to daily life brought on by COVID-19.

Protecting Share, or Poking the Bear?

I asked a good friend of our firm, Ginger Schmeltzer, owner and principal of GDS Advisors, to comment on the recent announcement that PNC was blocking its customers from using their accounts to fund Venmo transactions. Ginger’s take echoed a number of comments made around the industry concerning the news.

The Pew Research Center defines Generation Z as anyone born in 1996 or later. A watershed event occurred in 2007 with the introduction of the first iPhone, which maps well to the generational differentiator about Gen Z having little experience with pre-smartphone technology.  

Last Tuesday, NCR acquired D3 Banking Technology (D3), a digital banking software company that provides solutions to regional banks. This comes just six years following NCR’s purchase of Digital Insight, a move that NCR explained would allow it to offer financial institutions a complete “omni-channel consumer experience.” Others saw the purchase as part of a “makeover” that NCR needed to survive. Whatever the case, the $1.65 billion paid for DI would suggest this was no trivial action on the part of NCR.

Is D3 another arrow in the quiver as NCR continues to remake itself? Does the acquisition signal a “reboot” to the makeover centered around DI that has stalled? Could the purchase suggest an attempt by NCR to go to market with two technologies, one more fit for smaller institutions and the other an up-market option? In fact, in the July 2 press release announcing the deal, NCR claimed that the latter question could be answered in the affirmative. The news release noted that D3 “immediately expands” NCR into new markets, notably “U.S. large banks and over time, international banks.”