Key Trends in Retail Banking

Key Trends in Retail Banking
William Hippensteel EVP, Director of Retail Products Commerce Bank

Agenda State of the Industry Five Key Trends
Connecting to the MarketSim Model

State of the Industry

Quarterly Net Income (1Q89 – 1Q17)
Bank net income has mostly recovered Near record-level industry profitability Quarterly Net Income (1Q89 – 1Q17) 1Q15 … 1Q16 2Q16 3Q16 4Q16 1Q17 39.8 … Net Income ($B) Note: Net Income displayed is Net Income Attributable to Banking Operations Source: FDIC, Capital Performance Group Note: Net Income displayed is Net Income Attributable to Banking Operations Source: FDIC, Capital Performance Group analysis

Quarterly Revenue and Growth (1Q04 – 1Q17)
…and revenue had been flat since 2009 until 2Q 2016 when it began to rise. Quarterly Revenue and Growth (1Q04 – 1Q17) 1Q16 2Q16 3Q16 4Q16 1Q17 Revenue 172.7 179.2 183.2 181.8 183.6 Net Int Inc 112.3 113.4 118.7 119.3 121.1 Non Int Rev 60.4 65.8 64.5 62.5 Revenue ($B) Revenue Growth (%) FAS* Note: FAS accounting change in 1Q10 resulted in a one-time increase in revenue, by bringing credit card receivables back on balance sheet Source: FDIC, Capital Performance Group analysis

Returns are lower than before…
Quarterly Return on Equity, Return on Assets (1Q04 – 1Q17) Return on Average Equity (%) Return on Average Assets (%) 1Q16 2Q16 3Q16 4Q16 1Q17 ROE 8.61% 9.45% 9.76% 9.24% 9.37% ROA 0.96% 1.06% 1.09% 1.03% 1.04% Source: FDIC, Capital Performance Group analysis

New normal for bank profitability
Metric Old Norms New Norms New “High Performers” ROAA 1.25% 1.0% 1.2% ROAE 15% 10% 12% TCE Ratio 6.5% 8.0% 10.0% LLR/Loans 1.50% 1.75% LLR/NPLs 150% 200% Efficiency Ratio 58% 65% 60% Source: Sandler O’Neill + Partners, LP

What trends are having the greatest impact on banking?
Five Key Trends What trends are having the greatest impact on banking?

Five Key Trends Drive to Digital Scale & Efficiency Payments Landscape
Is transforming the industry Scale & Efficiency Are gaining market share Payments Landscape Is both disruptive and opportunistic Regulations & Risk Continue to impact decisions & resources Business Model Shifts require new approaches

1. Drive to Digital How is the drive to digital transforming your job and your organization?

Waves Upon Waves of Digital Disruption
Music Photography Video Rental Retail TV News Travel Recruitment Retail Marketing Automotive Finance Healthcare

Financial Impact of Disruption
Before Global Music Market $28B in 2000 $9B NASDAQ trading floor revenues in 2000 Percentage of US Retail sales through E-commerce .09% in 2000 US Newspaper Print Ad Market $65.5B in 2000 After $15B 2014 $2.5B 2014 5.8% in 2013 but 75% of growth is coming online $17.3B 2013 Music – iTunes – Consumer demand for singles & downloads is met by piracy then iTunes then streaming Trading – Decimalization – The SEC narrows stock spreads to make the market more efficient and investor friendly Advertising – If we included digital and Other with Print the total would be $23.3B Retail - Music Trading Retail Advertising SourceIFPI (Music), Securities Market by Richard J. Hillman (Trading), Statista.com (Retail) Newspaper Association of America (Advertising)

Pace of Change is Accelerating
Number of years to 50 million users 62 years 28 years 12 years 2 years Source: Brett King, Bank 3.0

Mobile Phone Adoption Music – iTunes – Consumer demand for singles & downloads is met by piracy then iTunes then streaming Trading – Decimalization – The SEC narrows stock spreads to make the market more efficient and investor friendly Advertising – If we included digital and Other with Print the total would be $23.3B Retail -

1. Drive to digital is transforming the industry
Omni-Channel Evolution Dramatic shift in branch personnel composition. Continued investment in new technology and new business partners. Greater integration of all channels for both information and customer experience. Integration and transformation of the delivery network 15

Omni-Channel Evolution Dramatic shift in branch personnel composition. Continued investment in new technology and new business partners. Greater integration of all channels for both information and customer experience. Integration and transformation of the delivery network Centralized Marketing Complete shift from traditional to digital marketing. Emphasis on use of analytics, social media, digital channels, integrated value propositions and mobile sales. Requires new talent in leadership positions for both customer facing and support functions. Shifting from decentralized branch to centralized digital sales model 16

Omni-Channel Evolution Dramatic shift in branch personnel composition Continued investment in new technology and new business partners Greater integration of all channels for both information and customer experience Integration and transformation of the delivery network Centralized Marketing Complete shift from traditional to digital marketing. Emphasis on use of analytics, social media, digital channels, integrated value propositions and mobile sales. Requires new talent in leadership positions for both customer facing and support functions. Shifting from decentralized branch to centralized digital sales model Migration towards putting the customer at the center of the business Shift from product to customer centric strategies. Connecting with your customer in different ways by using story telling. Creates a more personal and relevant connection. Meet higher level of customer expectations since experiences are based on outside the industry. Client Experience 17

Omni-Channel Travel What are the new service expectations?
Night before Day of travel Check in Pick seats Pay for bags Car to airport Mobile boarding Inflight internet Arrival What are the new service expectations? Car rental Hotel check-in Restaurant Instant information availability Ubiquitous access across channels Personalized service Direct control over the process Information for decision support Source: US Bank

Omni-Digital Banking Music – iTunes – Consumer demand for singles & downloads is met by piracy then iTunes then streaming Trading – Decimalization – The SEC narrows stock spreads to make the market more efficient and investor friendly Advertising – If we included digital and Other with Print the total would be $23.3B Retail -

Growing beyond omni-channel distribution…
The future is not always about customers coming to us Omni-Channel Seamless experience across our channels Customer-controlled Financial experiences across a customer’s life Shopping Wearables Partner Cloud Social Messaging IoT

Staff Functions are Shifting…
30. How has the number of people in each of these roles changed in the past two years?

Marketing Budgets are Changing…
22

to succeed tomorrow, Develop innovative brands & products today
New priorities will emerge as digital shift takes effect; long term evolution will be brand-led, with differentiated value propositions for key segments to succeed tomorrow, Develop innovative brands & products today Customer Analytics Sophisticated data collection and analytics to tailor offers and experiences Marketing & Branding Positioning bank first in minds of target customer segment Product/Experience Innovation Continuous improvement of products/experiences to meet target customer’s needs Partnerships & Acquisitions Increased sophistication about build, partner, or buy decisions Culture Emphasis on customer experience and ability to rapidly adapt to change Source: Novantas analysis

The digital maturity spectrum is expanding, with disruptors organizing around innovative digital-first models Focused on translating existing processes to the digital channel Innovation is low grade, often independent of core online / mobile banking Focused on experiences around customer journeys and brand standards Innovation managed in-house, includes target states for digital banking, socialized with LOBs Focused on digital-led target customer journeys for single-product solutions Innovation coordinated across functions and includes organizational alignment Low Maturity Medium Maturity High Maturity Source: Novantas 2424

Non-Financial Category Leaders
Although improving, satisfaction with traditional banks remains low in absolute terms Traditional Regional Banks FinTech Leaders Non-Financial Category Leaders Regional Bank Average 2525

Think like Hana Bank

2. Scale & Efficiency What is your bank doing to become more efficient and leverage your size?

Industry Consolidation
2. Scale and Efficiency are gaining market share Industry Consolidation Consolidation will continue as larger scale is needed to succeed and as regulations and risk costs continue to escalate and talent is hard to recruit. There are 6,891 banks, 7,351 credit unions, 4,446 brokerage firms, and 571 mutual savings associations. Still opportunities for smaller niche players. Industry challenges and over supply is creating a migration to consolidation 28

Industry Consolidation
2. Scale and Efficiency are gaining market share Industry Consolidation Consolidation will continue as larger scale is needed to succeed and as regulations and risk costs continue to escalate and talent is hard to recruit. There are 6,891 banks, 7,351 credit unions, 4,446 brokerage firms, and 571 mutual savings associations. Still opportunities for smaller niche players. Industry challenges and over supply is creating a migration to consolidation Scale Matters The transformation to digital experiences are pushing organizations to a more centralized marketing approach. Greater importance on analytics, digital communications and sales. Larger organizations are winning here. There is a fight for talent in improving digital customer experiences, sales, information and mixing virtual & physical. . Larger banks finding success in leveraging analytics, digital marketing and national brands 29

2. Scale and Efficiency are gaining market share
Industry Consolidation Consolidation will continue as larger scale is needed to succeed and as regulations and risk costs continue to escalate and talent is hard to recruit. There are 6,891 banks, 7,351 credit unions, 4,446 brokerage firms, and 571 mutual savings associations. Still opportunities for smaller niche players. Industry challenges and over supply is creating a migration to consolidation Scale Matters The transformation to digital experiences are pushing organizations to a more centralized marketing approach. Greater importance on analytics, digital communications and sales. Larger organizations are winning here. There is a fight for talent in improving digital customer experiences, sales, information and mixing virtual & physical. . Larger banks finding success in leveraging analytics, digital marketing and national brands New Distribution Networks Mixture of banks approach to branch closures and expansion. Branch transactions are migrating to both mobile and contact centers. Emphasis on investment advisory and small business skills to drive more revenue Build networks that appeal to future generations. Migration to digital means different distribution strategies 30

Branches are changing ….
Asked question about how they are making their branches more efficient. Lots of answers around automation/technology and training/cross-training of employees (who are still there, as #s are thinning). 49. How has the number of branches in your institution’s network changed in the past 12 to 24 months?

The number of banks is in a steady decline
Number of Banks and Drivers, YTD Other major markets (Canada, UK, Europe, Australia) have 4 to 5 major players. Why is the US different? Restrictions on branching/merging from “dual regulation” Political involvement of community banks Source: FDIC, OCC, Novantas analysis

Organic retail deposit growth (historic)
Regionals used to grow organic deposits at near-parity with big banks, but the dynamic has changed Organic retail deposit growth (historic) Source: FDIC, Novantas BranchScape database, 2013

Regionals used to grow organic deposits at near-parity with big banks, but the dynamic has changed
Organic retail deposit growth (historic) Organic retail deposit growth (recent) Source: FDIC, Novantas BranchScape database, 2016

Scale is increasing in degree and value
Larger players are gaining share through scale Scale is increasing in degree and value IT/Operations Scale driven Digital Greater scale than physical network Analytics Translates data into value Brand Awareness translates to multiple areas Advertising Purchasing power & strong digital media staff Source: Novantas

Scale is increasing in degree and value
Larger players are gaining share through scale Scale is increasing in degree and value Value relevant, impact not as strong Local Presence Scale exists, not as much as digital Client Knowledge Assists with sales & credit, big data strong Client Preference Impactful for 1:1 but analytics better for e-channel Customer Touch Impactful but lesser as clients move to e-channel IT/Operations Scale driven Digital Greater scale than physical network Analytics Translates data into value Brand Awareness translates to multiple areas Advertising Purchasing power & strong digital media staff Source: Novantas

Generation Z 38

How are changes in the payments area affecting your bank?
3. Payments Landscape How are changes in the payments area affecting your bank?

Mobile adoption within payments is transforming landscape
3. Payments continue to create disruption and opportunity Shift to Mobile Mobile has become the fastest growth channel in bank history. Mobile is also the lowest cost and serves bank’s most valuable clients. Challenges are with monetization and positioning in the payments space. Rapid expansion of mobile functionality. Mobile adoption within payments is transforming landscape

3. Payments continue to create disruption and opportunity
Shift to Mobile Mobile has become the fastest growth channel in bank history. Mobile is also the lowest cost and serves bank’s most valuable clients. Challenges are with monetization and positioning in the payments space. Rapid expansion of mobile functionality. Mobile adoption within payments is transforming landscape New Players New players include retailers , established technology providers and start-ups. Attractive market entry given significant profitability and non-financials have brand, service and cost advantages. Emphasis is on who will control the customer and the payment information. Lack of barriers to entry is bringing a new breed of competitors

3. Payments continue to create disruption and opportunity
Shift to Mobile Mobile has become the fastest growth channel in bank history. Mobile is also the lowest cost and serves bank’s most valuable clients. Challenges are with monetization and positioning in the payments space. Rapid expansion of mobile functionality. Mobile adoption within payments is transforming landscape New Players New players include retailers , established technology providers and start-ups. Attractive market entry given significant profitability and non-financials have brand, service and cost advantages. Emphasis is on who will control the customer and the payment information. Lack of barriers to entry is bringing a new breed of competitors Data Integration Integration of simplified technology and client wallet Understanding what and where your customers buy is extremely powerful. Focus is on enhancing customer experiences by providing useful customer data and unique value propositions. . Linking payment information with buying behavior is powerful

Data Integration Innovation:

Data Integration Innovation:
Erica: Bank of America

Business Innovation: Data
Transactions Banking Offers Settings Capital One Spark Pay. Spark Pay is Capital enables small business owners to take credit card payments and manage finances using their own mobile and digital devices. Capital One provides merchants with payment information to manage their inventory and marketing. They can also create custom offers for customers, customize receipts with social media links, manage inventory across channels, and more.

Consumer Innovation: Mobile
Motif Investing is an interesting robo advisor company where you have the option to choose 30 stocks around a specific theme or “motif.” Popular motifs have followed current trends – such as Recent IPOs, Biotechnology, and 3D Printing – and investors are able to predict trends ahead of the market may see substantial returns and trade with no commissions except for a $9.95 fee to set up each motif

Consumer/Business Innovation: Biometrics
Wells Fargo Bank’s is using two innovative technologies for both consumers and businesses that provide a fast and simple alternative to traditional authentication methods: Face + Voice, and Eyeprint. These technologies provide a quick, easy and secure way to authenticate and no more token codes.

New Partnerships are Forming…
There is a fintech startup today for any bank service….

Who is Driving Change in the Payments Industry?
Start-ups Technology giants with payments ambitions Banks Payment schemes Established payments technology vendors 20% 40% 60% 80% 100% 70% 28% 2.5% 0% Payments schemes and payments technology vendors are aggressively investing in innovations. But they have limitations and deficiencies and are therefore partnering/acquiring payments start-ups (acquisitions in recent years by ACI, First Data, FIS, MasterCard and Visa result in a significant injection of infusion of innovation into these companies). Acquisitions by banks are much less likely an endgame for successful payments start-ups because most FinTech firms partner with and/or supply services to multiple banks and therefore being owned by a single bank could be a problem (exceptions: Barclays’ acquisition of Logic Group, BBVA’s of Simple, and Commonwealth Bank of Australia’s and Tyme) Jury Report, 2016

CitiFinTech: New Vectors of Growth
Source: Citi-Fintech, 2017

Chairman, Financial Services Club
“Banks are structured to manage paper. Technology companies are structured to manage data.” Chris Skinner Chairman, Financial Services Club

The New Commerce Experience
Shopping isn’t what it used to be Connect Discover Incent Pay Reward Manage Social Networks Affinity Groups Search Location Based Coupons Deals Online Physical Store Mobile Points Coupons Accounts Offers Loyalty Connect with groups you trust or have in common to narrow your initial search, find recommendations Milo, Red Laser = take a picture or scan a bar code and find out where you can find the product, including locally. Go to a store and pick it up or have it shipped. Apply a special deal or coupon that is immediately available Use another “deal” or reward that you have been saving for or previously stored AFTER the purchase, continue to manage your relationship with ongoing values – rewards, offers, potentially even alter the initial method of payment The delivery of this process is occurring across the functions discussed on the prior page – blurring of roles – leveraging existing rails and accounts at the base but using new technologies and entities around them to create a fundamentally different consumer experience. “Omni-Channel ”

Banks can succeed in the digital age…
Leverage their large customer base and access to rich transactional data to offer integrated financial services. Concentrate on ridding themselves of legacy (legacy technology and processes) systems. Develop balanced multichannel delivery models. Deepen their data analysis capabilities. Play a larger role in their customers’ lives (cross the path of purchase to influence behavior).

How is the regulatory environment changing your business?
4. Regulatory Impacts How is the regulatory environment changing your business?

4. Fraud ®ulatory continue to impact resources
New Regulations Addressing compliance issues has been number one focus. Only 65% of the Dodd-Frank Bill has been implemented. Increasing pressure from the Consumer Financial Protection Bureau to change policies, products, procedures, pricing and disclosures. Banks are making significant investments in time & people to meet new guidelines

4. Fraud ®ulatory continue to impact resources
New Regulations Addressing compliance issues has been number one focus. Only 65% of the Dodd-Frank Bill has been implemented. Increasing pressure from the Consumer Financial Protection Bureau to change policies, products, procedures, pricing and disclosures. Banks are making significant investments in time & people to meet new guidelines Fraud Threats Regulators and management are placing greater emphasis on staffing, technology and reserves. Trying to create strong balance between authentication, protection and customer experience. Cyber fraud listed as greatest potential threat to the industry. More resources are being directed to protect customers and the bank from fraud

Attention to credit and interest rate risk models are a primary focus
4. Fraud &regulatory continue to impact resources New Regulations Addressing compliance issues has been number one focus. Only 65% of the Dodd-Frank Bill has been implemented. Increasing pressure from the Consumer Financial Protection Bureau to change policies, products, procedures, pricing and disclosures. Banks are making significant investments in time & people to meet new guidelines Fraud Threats Regulators and management are placing greater emphasis on staffing, technology and reserves. Trying to create strong balance between authentication, protection and customer experience. Cyber fraud listed as greatest potential threat to the industry. More resources are being directed to protect customers and the bank from fraud Managing Risk Rising interest rates will provide an increase in short term profits, but growing competition for liquidity. Managing credit risks in the new dynamics. Congress is concerned with the size of the largest banks and “too big to fail”. Attention to credit and interest rate risk models are a primary focus

5. Shifting business models
Is your organization adopting to the new business models?

5. Shifting business model requires new approaches
Reinventing the Workplace Continuing to better leverage the workforce to increase productivity. Attracting different types of talent including more analytics, digital marketing and communications and social media. Need to reduce resources in “business as usual” to areas of growth. Banks are transforming themselves to better meet the future

Reinventing the Workplace Continuing to better leverage the workforce to increase productivity. Attracting different types of talent including more analytics, digital marketing and communications and social media. Need to reduce resources in “business as usual” to areas of growth. Banks are transforming themselves to better meet the future Focus on Analytics & Benchmarks Migrating from data to intelligence Greater use of benchmarking, clearer goals, greater reports and more incentives for defined performance Utilizing customer information in better ways. Greater use of data and insights to make informed decisions

Reinventing the Workplace Continuing to better leverage the workforce to increase productivity. Attracting different types of talent including more analytics, digital marketing and communications and social media. Need to reduce resources in “business as usual” to areas of growth. Banks are transforming themselves to better meet the future Focus on Analytics & Benchmarks Migrating from data to intelligence Greater use of benchmarking, clearer goals, greater reports and more incentives for defined performance Utilizing customer information in better ways. Greater use of data and insights to make informed decisions Impact of Innovation Few innovative players are driving higher customer expectations and forcing others to follow quickly/ Innovation is often driven by visionary leadership, crisis or outside of the industry. Adopting an innovation culture to adopt and experiment quickly is the key to success. Innovation is driving a greater impact on differentiation & shareholder value

New Approaches – Home Plus in South Korea

Who is the most innovative bank in the world?
Global Innovation Who is the most innovative bank in the world?

La Caixa Bank-Segur Caixa Auto
Full integration of car shopping, insurance and financing. In just 7 months this application of Caixa Bank has had more than 89,000 downloads, and it has a score of 4.7 in Google Play. Eric Thomas speaking. Axioum face recoginition for Boston Marathon

CaixaBank Innovation Process Is Based On 3 Main Sources
1 In-house Talent 2 Our Customers 3 Talent Beyond the Company

Talent Beyond The Company
A leading Hackathon for young developers, designers, creators and innovators. Last Edition’s Goal: creating mobile application prototypes for financial services 4 editions: 2011 – 2012 –

Next Waves for Innovation?
La Caixa’s “Connected Car” integrates both bank location and payment system information into the car’s computer. Also a pioneer in wearables.

Next Waves for Innovation?
La Caixa’s “Connected Car” integrates both bank location and payment system information into the car’s computer. Also a pioneer in wearables. Bank of Tokyo using robotics in branches that utilize biometrics, voice recognition and speaks 19 languages. Cost per robot is $8,000.

Main Strength of One Click Mortgage
Hana Bank – One Click Mortgage Hana Bank introduced the first fully processed online mortgage product platform developed to simplify the complicated mortgage process. The process is conducted entirely online from e-application to e-closing. During the process, the potential borrowers do not need to visit branches. Approval is within minutes. Closing can be within 48 hours. Main Strength of One Click Mortgage Application by Internet & mobile phones without visiting branches e-signing ,e-registration, Less required documents. Save the Cost by online e-registration Fast One Click Mortgage Direct Cost Saving Paper -less Loan Application by Internet & Automatic Underwriting E-application 1 2 E-underwriting 3 E-signing 4 5 E-Registration E-document One Click Mortgage Process includes five easy online steps

“Creativity is thinking up new things. Innovation is doing new things
Theodore Levitt

Market Simulation Model
What does all this have to do with winning the Market Simulation Game?

Market Simulation Model
What was the key to winning MarketSim?

Create a unique brand and position within the market
Achieving success rests on several factors Market Positioning Clearly defined target markets that you passionately serve and are well positioned. Extremely customer-centric in your market approach. Great integration of all channels for both information and customer experience for unique segments. Create a unique brand and position within the market

Achieving success rests on several factors
Market Positioning Clearly defined target markets that you passionately serve and are well positioned. Extremely customer-centric in your market approach. Great integration of all channels for both information and customer experience for unique segments. Create a unique brand and position within the market Value Proposition & Pricing Everyone within your organization has a very clear understanding of the purpose of your organization. The mission and vision of your company dictates all of your business decisions. Requires new talent in leadership positions for both customer facing and support functions. Develop a differentiated value proposition

Achieving success rests on several factors
Market Positioning Clearly defined target markets that you passionately serve and are well positioned. Extremely customer-centric in your market approach. Great integration of all channels for both information and customer experience for unique segments. Create a unique brand and position within the market Value Proposition & Pricing Everyone within your organization has a very clear understanding of the purpose of your organization. The mission and vision of your company dictates all of your business decisions. Requires new talent in leadership positions for both customer facing and support functions. Develop a differentiated value proposition A product that truly provides customer value. An offering that can be clearly differentiated within the marketplace. Program delivers strong customer experience and profitability. Co-creation process in design of products, pricing, delivery and communication. Instill a strong message, personality and purpose Company Culture

Name me a purpose- driven company.

Building a Purpose-Driven Company
“Purpose driven organizations outperformed general market companies & comparative companies 15:1 & 6:1, respectfully.” Jim Collins Author of Good to Great

GE connecting employees for a purpose

Finding Success in MarketSim
Through market positioning, pricing & product mix, analytics & group dynamics Summary Drive to Digital Is transforming the industry Scale & Efficiency Are gaining market share Payments Landscape Is both disruptive and opportunistic Regulations & Risk Continue to impact decisions & resources Business Model Shifts require new approaches

Key Trends in Retail Banking
William Hippensteel Chief Content Officer Bank Administration Institute

Key Trends in Retail Banking

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