Tag: financial advisor

“FedNow can be another positive differentiator for our nation’s community banks, but we must be ready for this real-time service and its 24/7/365 requirements.”

We’ve been working toward a faster payments future for a decade now, and we’re finally seeing the fruits of our labor: the launch of FedNow. Our efforts to encourage the Fed to offer an instant payments solution have led to this result; it was our voices that expedited FedNow’s time to market, with the Fed updating the original timeline due to our focused advocacy efforts. By mid-2023, we will be able to begin offering this solution to our customers.

With FedNow entering the market, community banks can add in a missing payments link—instant payments—and help level the playing field with the nation’s largest financial institutions. FedNow will be a great equalizer for the industry, bringing real-time payment clearing and settlement to community banks across the country.

So, with FedNow’s launch on the horizon, what can community banks do to prepare? I, for one, have been speaking with our core provider, expressing our interest in FedNow and getting into the details of when it will be available to us and at what price.

While many providers are still ironing out their plans, we must actively seek information. It’s important to reach out and emphasize that FedNow is a priority. Think of it like you would an advocacy visit on Capitol Hill: Go in with your ask, and make it clear what you want from them and by when. Every executive reading this column should take five minutes to send an email to their core provider to inquire about FedNow availability, timing and pricing.

While you’re waiting to firm up those details, take steps to ensure your teams are up to speed on what FedNow will mean for your customers. From signing up for the FedNow webinar series offered by ICBA Bancard to subscribing to FedNow notification emails, resources exist that will help you deepen your knowledge of the solution and its potential.

In addition, having conversations with your Fed rep to understand how you should prepare will provide a firsthand perspective on the more nuanced elements of FedNow implementation.

Regardless of the steps you take, the time to act has arrived. FedNow can be another positive differentiator for our nation’s community banks, but we must be ready for this real-time service and its 24/7/365 requirements. We need to be able to upgrade our infrastructure and processes in a positive, strategic way to make the most of the opportunity. For community banks, it’s time to unlock FedNow’s potential and take advantage of all that this solution will offer.

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Brad Bolton, Chairman, ICBA
Brad Bolton is president and CEO of Community Spirit Bank in Red Bay, Ala.
Connect with Brad @BradMBolton

Illustration by Alex/Adobe

A convergence of economic and marketplace factors presents community banks with new opportunities for innovation and growth as they look to the new year.

By Charles Potts, ICBA

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The fintech landscape is shifting. Investments in new companies have slowed, valuations that some early-stage companies commanded last year are ratcheting back, and financial technology providers are tightening their proverbial belts. While challenging for some, this convergence of economic and marketplace factors presents community banks with new opportunities for innovation and growth as they look to the new year.

With community banks finalizing 2023 budgets, now is an excellent time to reevaluate current business partnerships and consider whether partnering with additional or different fintech providers would better meet the bank’s and customers’ needs.

For community banks that have yet to start evaluating digital solutions and providers, now is the time to act. Current market shifts have created a buyer’s market, putting community banks in a favorable position to renegotiate contractual terms and become more selective in their provider choices.

As community banks leverage these marketplace advantages, they should consider partnering with providers that bundle their services and solutions to meet customers’ demands. For the past few years, fintechs have worked to address specific challenges or niches, creating a siloed approach that resulted in multiple solution providers and platforms, creating unnecessary friction for community banks and their customers.

In response, community banks, like $779 million-asset Lead Bank in Kansas City, Mo., have begun investing in fintech providers that can arm them with the capabilities to bundle their services and streamline processes. We see this same trend playing out in larger financial institutions as well. Earlier this year, Bank of America announced its new super app, which facilitates bundling multiple solutions under one umbrella.

In this time of economic uncertainty, community banks also have an opportunity to remind their customers of their presence, value and stability. Through partnerships with robust solution providers and a keen focus on attending to customers’ desires, community banks can not only enhance customer loyalty but bring new customers into the fold.

Digital banking solutions remain a primary focus for ICBA, reflected in initiatives such as our renowned ThinkTECH Accelerator program, which we are bringing in-house in 2023. We’re excited to take the next step on this journey to build more comprehensive programming aimed at further addressing the emerging needs of community banks and the customers they serve.

Imagine the possibilities and embrace the opportunities before you. Seize the moment to explore innovation.

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Charles Potts (charles.potts@icba.org) is ICBA executive vice president and chief innovation officer

The two-day summit included presentations on the metaverse, instant payments and more.

At this year’s ICBA LEAD FWD Summit, up-and-coming community bankers gathered from around the country to strengthen their leadership, technical banking and advocacy skills. The leadership conference hosted 26 speakers that helped attendees prepare for the future of banking.

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Photo by Dragana Gordic/Adobe

Improving the small business loan experience is a great way to build new relationships and deepen existing ones. We spoke with industry specialists about the priorities for community banks as they build a digital loan process for small businesses.

By William Atkinson

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Digital lending capabilities are quickly becoming table stakes, particularly when it comes to small business lending. It’s critical for community banks to have online loan applications, process automation staff skilled in digitization and more.

However, banks should first consider their customers’ needs and the infrastructure and features needed in a lending platform before adopting a new digital strategy.

Benefits of digital lending

“Today’s customer, whether consumer or small business, has become very comfortable and accustomed to anytime, anywhere self-service,” says Charles Potts, ICBA’s executive vice president and chief innovation officer. “The necessities of a digital-first approach were greatly magnified during the pandemic, with many banks having to close branches and rapidly adopt new digital technology to address the needs of the PPP [Paycheck Protection Plan] loan. Providing a digital lending experience and, at the same time, maintaining a unique relationship banking model is now a critical ‘must have’ for most community banks.”

According to Kevin Wilzbach, director of technology product management for Wolters Kluwer Compliance Solutions, providing digital lending opportunities helps community banks stay true to their mission by providing the best customer experience.

“Consumers have a growing expectation to interact with financial institutions via online and/or mobile services,” he says. “Digital lending is one specific area where community banks can improve customer satisfaction by reducing paper-intensive processes. Additionally, it allows community banks to retain existing small business customers while improving efficiencies.”

“There are numerous reasons to support a digital lending solution,” says Michael Haedrich, a senior product manager at Finastra. Doing so can help community banks:

• Optimize the loan cycle
• Offer the ability to speed up the entire process
• Make it easier to capture applicant information
• Make quicker decisions
• Ensure a more consistent lending process
• Provide convenience by offering its use across multiple devices
• Take advantage of analytics

According to Haedrich, it’s critical for community banks to offer digital signature as an option. “Not everyone wants to sign electronically, but it needs to be offered,” he says. “As our customer base changes, convenience becomes more critical, and electronic signature is synonymous with convenience.”

Offering a combination of digital, hybrid and paper closing options is also critical, according to Wilzbach. “This allows the lender to meet every client’s needs,” he says. “We believe having a flexible digital closing workflow will deliver the best borrower experience, while creating operational efficiencies for each participant throughout the lending ecosystem.”

“When you go digital, you open new opportunities that you may have found unprofitable in the past because of manual intervention.”
—Michael Haedrich, Finastra

According to Potts, the most important aspect to any digital lending solution for a community bank is making sure there is always a way for the customer to engage with the banker. “At all stages of the lending process, the customer must know there is a banker available to them whenever they wish,” he says. “While creating a frictionless, efficient and seamless experience is critical to the overall efficiency of a digital lending, there should never be any technology disintermediating the uniquely important relationship a community bank has with its customer.”

Rolling out digital lending

What strategies can community banks introduce to make their digital lending program as seamless and easy for small business customers as possible? “When you go digital, you open new opportunities that you may have found unprofitable in the past because of manual intervention,” says Haedrich. He says it can enable opportunities such as microloans in the range of $100 to $1,500, bundled products offered at point of sale and preapproved credit card offers when a customer applies for a loan.

“Banks can apply internal data to make preapproved offers that customers can accept online with a few clicks,” he says. “This is taking advantage of the analytics you now have access to because of your digital lending.”

It is also important to select a provider that offers digital solutions throughout the lending process, according to Wilzbach. “This will create a more seamless borrower experience and provide significant operational efficiencies to the lender,” he says. “Selecting a trusted provider with deep expertise in the digital lending space, and one that can provide solutions for all asset classes, is a huge benefit in helping simplify a lender’s digital transformation.

He adds that community banks should focus on solution providers that can handle all variations associated with a digital lending closing. “Lenders may be hybrid-oriented today or may need to support wet-sign options as necessary,” he says. “It’s important to look for solutions that support you across the digital lending landscape as your needs change.”

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William Atkinson is a writer in Illinois.

Upside-down yield curve offers some possibilities.

By Jim Reber, ICBA Securities

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Some rumors are true: There is an historical relationship between the phenomenon known as an inverted yield curve and a subsequent recession. This isn’t any idle talk among Fed watchers and other pundits this time around, nor is it peripheral to the management of financial institutions, including community banks.

Being the Master of the Obvious, I’ll point out the treasury yield curve has been inverted since July, often by as much as 40 basis points (0.40%). This presents dilemmas, and opportunities, for bond portfolio managers. And for those keeping score, every curve inversion in the past four decades has been followed by a recession within a year.

It occurs to me that the conversations my associates at Stifel and I have had recently with our customers have followed a pattern, driven by the interest rate cycle. Rates fall and the curve steepens, and bankers need reminding how to lock in yield and harvest gains. Rates rise and the curve flattens, and bankers want to know how to manage their unrealized losses. And then, the curve inverts, and it seems that everything we learned about risk/reward has gone haywire. So we will devote the rest of this column to discussing why curves invert and where value may appear in the various investment sectors that matter to community banks.

The what and why of inversions

When the Fed determines it’s time to begin raising rates, the most visible tool at its disposal is to increase the effective fed funds rate. Whenever the overnight rate increases, so do other shorter-term yields, which most analysts take to mean two years and less. Longer-term buyers, which include, but aren’t limited to, depositories, have wholly different investment objectives and risk tolerances. Long investment yields, the proxy for which are 10-year bonds, are more affected by inflation expectations.

Every Fed fund hike should, in theory at least, give longer buyers some added comfort that inflation will be well behaved. In a year like 2022, which has seen three full percentage points in rate hikes on the short end, we’re almost certain to see the curve flatten, and possibly invert. As investor sentiment by a number of measures now expects inflation to remain off its peak from earlier this year, the final component for a curve inversion has entered the mix.

Here’s the dilemma: If an inverted yield curve is a reliable predictor of an impending recession, and interest rates both short and long are going to fall soon, where should investors place their bets today? In theory, it should be on the long end, which leaves money on the table—today.

MBS, too

As we dig into the less-is-more narrative of upside-down curves, we can now add mortgage-backed securities (MBS) to the list, which is highly unusual. It is a rare condition indeed when shorter MBS out-yield longer ones, and this has to do with prepayment expectations. As home mortgage rates have doubled this year, anyone with an existing loan is going to sit tight and pay only the minimum amount of principal each month.

That means the lower rate pools will be longer in duration, and also lesser in yield, than more current ones. To put a pencil to it, a FNMA 15-year pool with a 4% stated rate will yield about 4% at the moment, whereas a 15-year 3% pool will produce about a 3.5% return. When we add that the 4% MBS is expected to be nearly a year shorter in average life, one can see why the “up in coupon” trade makes full economic sense in 2022.

Muni curve still steep

I need to mention that a sector that is quite important to community banks is not now, nor has it ever recently been, inverted. Tax-free munis appeal to many buyers, including individuals. In fact, most of that sector is owned by retail investors, whose needs (and marginal tax brackets) are different than your bank’s. Retail demand sets the yield curve for all muni buyers, and mom and pop tend to load up on short bonds, which keeps short yields under wraps.

As of October 2022, the investment-grade muni curve was positively sloped by about 70 basis points (0.70%) for C corps, and even more for S corps. This is proof that the municipal sector has a mind of its own. It is the least affected, for better or worse, by Fed activity.

Equal amounts of short- and long-term investments … will work out fine, if either a) the curve inverts further; b) the curve begins to steepen; or c) the curve remains flat.

Here’s a thought

So what do we make of all of this inversion business? The yield curve is on a 40-year winning streak of predicting slowdowns. It’s also clear that short yields have gotten to levels that can make some money for community banks, whose deposit costs have remained quite low. So how about this as a suggestion: a barbell structure.

Equal amounts of short- and long-term investments (you get to define those limits) will work out fine, if either a) the curve inverts further; b) the curve begins to steepen; or c) the curve remains flat. And I’d say there’s a good chance of one of those results occurring. So my advice (no surprise here!) is to invest at different parts of the curve, in a variety of products. And you can leave the tumult of the yield curve’s shape to the pundits.

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Jim Reber, CPA, CFA (jreber@icbasecurities.com), is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks