While many big US banks are still reeling from the
global financial crisis, the country’s smaller banks are taking
advantage of the opportunity to expand their customer reach. For
most smaller banks aiming to benefit, investment in technology to
enhance transactional banking capabilities is a key
Though many big banks in the US are enduring extremely difficult
times in the wake of the global financial crisis, this does not
hold true in general for small-to-medium size banks which in terms
of numbers make up the vast majority of the banking industry.
While many big banks have found themselves faced with
under-capitalised balance sheets, forcing them in many instances to
reduce credit lines available to corporate customers, many smaller
banks have been managed more conservatively.
The result is that a large number of smaller banks continue to have
extremely strong balance sheets, putting them at an advantage to
the big banks explained George Ravich, chief marketing officer of
US banking software and service vendor Fundtech, in a recent
discussion with EPI.
The small and medium-sized banking sector is enjoying substantial
growth in new deposits and credit lines and attracting many small-
and mid-sized corporates seeking capital or wanting to reduce the
risk of being exposed to the whims of one big bank, he
The result has been that Fundtech has seen a considerable increase
in interest displayed by smaller banks in upgrading their key
business areas such as payments and cash management systems.
To assess banking industry attitudes and the potential for
increased demand for technology solutions, Fundtech recently
convened a panel of five senior bank executives at its annual
client conference to discuss a wide range of issues facing the
financial services industry with the focus on transactional
Throughout the panel discussion the audience – comprising 80
bankers – expressed their opinions using a real-time electronic
The five panel members representing banks spanned the range from
the mid-size bank in terms of total assets to those in the
large-bank sector where total assets exceed $10 billion. The
• William W Montis, director of treasury operations at $70 billion
asset AgriBank based in St Paul, Minnesota;
• Tom McDonnell, executive vice-president, business banking
administration at the $15 billion asset Frost Bank, based in San
• Jeff Cross, vice-president, commercial products at First Bank, a
$10.5 billion asset institution based in St Louis, Missouri;
• John Baker, senior vice-president of product strategies and
treasury management at $8.4 billion asset Umpqua Bank based in
Portland, Oregon; and
• Andrea Talkington, vice-president, cash management services at
1st Source Bank, a $4.5 billion asset institution based in South
At the outset of the discussion there was widespread agreement that
the transactional banking space was filled with challenges created
by tough competition and, at the same time, opportunities.
Among members of the audience 74 percent said competition in their
markets had increased over the past 12 to 18 months with 42 percent
saying that it had become “much more competitive.”
However, when the audience was asked whether they believe the
global economic crisis is providing an unprecedented opportunity
for mid-size financial institutions to grow their transaction
banking businesses, 37 percent agreed that it has and a further 42
percent said they believe it has created a “slightly better
Notably, 50 percent of the audience reported that their bank is
investing more in transaction banking than other technology areas
at present, while 41 percent reported investing about the same as
in other areas.
By far the most effective way for banks to compete in transaction
banking during these times, stressed the panel, is to offer
personalised service and relationship-oriented banking.
Expressing the panel’s sentiment, Cross said: “The only way that
we’re really going to win in the market is to out-service
However, panellists stressed that mid-size banks can only build a
strategy around service once they have in place the same breadth
and depth of product functionality as their larger counterparts.
Notably, 65 percent of the audience said the best investment they
could make to differentiate from competitors was to purchase the
latest, integrated, easy-to-use technology.
Baker highlighted the importance of offering the latest in
technology. He explained that while Umpqua has put a lot of effort
into upgrading its image and creating what he termed a “cool vibe”
throughout the bank, it realised it also needed to offer
appropriate products to remain competitive.
He provided an example of the bank’s experience with a large loan
customer in Oregon that did not bring its deposit business to
Umpqua because the bank did not have the necessary breadth of
treasury management services. That changed, Baker said, once Umpqua
implemented Fundtech’s cash management solution CASHplus.
CASHplus is a multilingual, multicurrency internet-based product
offering functionality including information reporting, book
transfers, cheque management, bank reports, funds transfers,
automated clearing house (ACH) origination, loan information and
Baker continued that the customer is now using a full range of cash
management products, saving about $10,000 a month in fees, and is
much happier than it had been in its previous relationship with a
large national bank.
“We couldn’t have moved them over without the CASHplus product,”
Baker said. “It’s a prime example of the ability of a mid-sized
bank to be able to compete with a large bank to gather these
significant deposits that we couldn’t have gotten otherwise.”
Another key issue for bankers in the transaction banking business
is fraud, which 75 percent of the audience attending Fundtech’s
conference said has increased compared to a year ago. To counter
the increased threat 72 percent said their financial institution
has expanded the amount of resources directed toward combating
The type of fraud institutions are experiencing today is serious,
noted Talkington: “It’s not some kid on his computer. This is
organised business that’s very hard to combat.”
She continued that 1st Source is managing fraud risk in three ways.
To prevent key logging, in which hackers steal passwords by gaining
access to a user’s keystrokes, it is requiring customers to use
virtual keyboards, in which they click the letters of their
passwords on screen. 1st Source has also initiated an effort to
audit its customer’s computers to better understand the security
features they have in place. The bank is offering ACH blocking and
filtering software to its customers for free, to help prevent
incoming ACH fraud.
Bankers in the audience agreed that fraud is capable of driving
customers and their banks apart.
“If a customer truly believes that it has fulfilled its
responsibilities with respect to preventing fraud, but fraud occurs
on the customer’s watch, then you’re talking about separation of
the customer relationship,” said McDonnell.
On Frost Bank’s strategy to combat fraud McDonnell said it included
customer education and that it had engaged in a “huge
communications effort” when it implemented a change in the way
customers access the bank’s wire system. However, he stressed that
the bank realised it was willing to walk away from some customers
who were reluctant to adopt the changes.
Meeting changing customer needs
Montis broached another important aspect to be considered by
banks aiming to deliver top-rate transactional services: They must
keep pace with increasingly sophisticated needs of their
Even farmers have increasingly sophisticated needs, said Montis who
represents one of the largest of five banks in the national Farm
He explained that today’s farmers often access financial
information from their laptops, while riding around on their
tractors and are also are conducting more business internationally
and using more sophisticated financial tools, such as derivatives
and foreign exchange.
“We’ve had to bring technology to them to manage their finances,”
To accommodate farmers’ increasingly sophisticated needs AgriBank
partnered with Fundtech to develop a version of CASHplus that gives
farmers “access to all their credit needs while they’re
AgriBank’s experience is also consistent with findings from the
audience polling in which 31 percent of bankers said the most
important technology program they currently are investing in is
integrating systems for more seamless customer access to
This investment objective is second only to investment in the
online channel which was reported as the top priority by 33 percent
of the audience.
Hard dollar revenue
Also highlighted at Fundtech’s conference was that investing
improving transactional banking services to customers brings with
it the advantage of being able to generate more “hard dollar” fee
For example, McDonnell noted that the bank has begun charging for
services that it used to provide for free, in keeping with a
growing trend. Indicatively, 61 percent of the conference attendees
said they are charging more hard dollars for services compared to a
At Frost Bank, the switch to hard-dollar fees has resulted in a 100
percent increase in cash management fees collected from January
2008 to January 2009, as well as much greater visibility of the
business to senior management, according to McDonnell.
He continued that with customers spending more time evaluating
whether they need particular services, Frost Bank has found it
needs to articulate a strong value proposition, which it sums up as
“excellence at a fair price.”
He added: “What we have to do is deliver on excellence, and in
order to do that, we’ve got to have the best technology.”
Excellence in technology and service delivery is also vital at a
time when some business clients may be in a stronger negotiating
position than in the past when it comes to purchasing transaction
banking services. According to the conference attendees, 41 percent
of customers have about the same amount of negotiating power they
held a year ago while 30 percent said that customers hold more
pricing power compared to a year ago.
Countering this power shift between banks and certain customers, it
emerged from the conference that financial institutions appear to
be responding with two strategies: Forty percent of attendees
reported that their banks are striving to win multi-product versus
single-product relationships, while 37 percent are engaging in
consultative account management.
Summarising the conference key findings, Fundtech noted that as the
economic crisis grinds on, it is clear that a number of factors are
driving the transaction processing business: the need to
out-service competitors, keep fraud at bay, meet customer needs and
Underlying all these factors, said Fundtech, is that bankers agree
that only top-notch technology can make it possible to compete on
all those fronts.
In its concluding remarks Fundtech stressed that with the financial
services business in disarray there exists a unique opportunity for
small to mid-size banks who have a clear understanding of their
market and the will to compete.