Looking for ways to diversify revenue, regional and midsize banks are increasingly leaning toward offering online brokerage alongside their existing online banking offering. Jim Goodwin, President of Riperian, Inc., discusses the drivers behind this trend, as well as the main challenges and ways to overcome them.
Q: What current industry trends are driving the need to integrate the bank and the brokerage channel?
A: Most banks have offered investment products through field-based advisors for many years. Beyond capturing branch banking traffic, though, banking and brokerage haven’t been traditionally integrated in either product or channel. Some of this lack of integration was driven by business silos, but more was driven by financial and technical feasibility issues. The cost to implement an online brokerage platform has significantly decreased over the past five years, giving midsize firms that were looking to add online brokerage capabilities from a strategic standpoint, a new financial case for putting projects in motion. As a result of brand traction or good service over the lifespan of the relationship, most banks have a loyal online banking audience. Yet there are other elements that banks can employ – and are employing – to further improve the bank/client relationship. For instance, many banks are featuring improved platform usability, have expanded their mobile capabilities and are reaching out to clients above and beyond simply through their websites, turning to social media such as Facebook and Twitter.
Many of these clients would take advantage of self-directed brokerage capabilities if their bank made them available. The financial gains from the self-directed brokerage business are often sufficient to pay for the platform implementation.
Along with giving banks a competitive edge by capturing greater market share, implementing an online brokerage platform also provides financial institutions with an infrastructure base for future initiatives, such as retirement offerings and structured product delivery.
Q: Why have platform costs become more affordable?
A: This is driven by a combination of more efficient clearing costs, new a la carte services from clearing firms, and more robust and flexible front-end offerings from technology providers like Scivantage. Many clearing services have become more accessible, and front-end platforms are now easier to integrate. This shortens project timelines and reduces costs.
At the same time, a firm’s ability to control the end-user experience has increased as a result of improved technology. Companies can now enter the direct brokerage space with a focused offering and directly bind it to the brand that they’ve already built on the banking side.
Ultimately, the lowered barrier to entry enables smaller banks to penetrate the self-directed brokerage market as competitive players from the onset, requiring less time to get off the ground and demonstrate competency to their banking customers.
Q: Does this level the playing field for the regional and midsize banks?
A: Against each other, yes, it does. Years ago, the bigger players built their platforms themselves and most spent many tens (or hundreds) of millions of dollars to do so. Today, you can spend significantly less, depending on what you want to integrate, and can immediately offer robust functionality. Investment product offerings are less limited, third-party research and tools are easier to integrate, and firms are learning how to best position brokerage alongside their deposit offerings. Most midsize banks are looking for ways to diversify revenue in the current economic climate and they’ve typically exhausted their options in the credit and deposit space. Banks have a loyal, convenience-seeking customer base eager to use services if they’re available, and the self-directed investor market continues to expand. Now is the right time for many banks to expand their Investments business, or at least to extend their channel offering past the advisor. According to a recent Aite Group report, 40% of young investors consider a bank to be their primary investment provider, indicating a growth opportunity in the space.
Q: What are the most important standard execution elements firms should focus on when starting?
A: Several elements have to be in place in order to successfully present and position online brokerage to online banking clients:
- Account linkage is one of the first factors to take into consideration – it’s imperative to have seamless and robust access to account viewing privileges.
- Once account linkage is in place, there must be the ability to display balances in the clients’ online banking and brokerage interfaces.
- Once the balance display is in place, firms should work on providing clients with the ability to navigate over to the brokerage side from the bank side, and sometimes vice versa, via single sign-on.
- Finally, banks need a framework that facilitates money transfers.
Once the basic elements of account linkage, balance display, single sign-on and money movement are in place, the focus will turn to operating the online brokerage–building sales sites, opening accounts, servicing clients and executing on a product roadmap to continually enhance the offering.
Q: What are the top challenges firms face when integrating bank and brokerage capabilities?
A: Technology integration is probably the biggest issue. These projects typically require compatibility between mainframe and web technologies. Often, the staff and the architecture are not equipped to do the level of integration necessary between and among deposit systems, brokerage systems, and the web side of online banking and online brokerage. These systems are constructed to operate independently, so competent (and sometimes complex) middleware is required to enable them to perform together. Projects take less time when there isn’t the need to run a lot of batches or move large files after endless mapping processes.
There are also cultural integration challenges between the bank and brokerage teams. Since firms are usually going to cross-sell brokerage services and products to online banking customers, they need to begin a dialogue between the product and operations professionals that typically manage the brokerage side and the bank product and channel employees that usually manage the bank side. The teams need to work together, but there are steps that must be taken in order to calibrate program scope and risk management so that these terms mean the same thing on both sides. Compliance and operational risk need to be linked, and traffic and sales accountabilities need to be specified.
Q: What are the tactical steps firms can take to address all of these challenges?
A: Firms need to set the priorities for an online brokerage program and ensure that their end goal is clear – building a platform, extending product reach, deepening wallet share, or enabling specific strategic programs. Then, they need to make a decision on the level of integration they’re going to drive. If the firm is going after online banking customers, all four of the key execution elements (account linkage, balance display, single sign-on and money movement) must be in place to facilitate a seamless integration.
The next step is execution. Finding the right leaders internally is crucial. When there’s a single decision-maker on the bank integration side and a single decision-maker on the brokerage platform side, the project will naturally be less complex. When integrating an online brokerage channel, banks need to understand the types of decisions required over the first nine months and structuring the project correctly is a huge step.
Q: What role does technology play in successfully integrating the two channels?
A: In the integration process, the presence of interoperable and adaptable technology becomes critical. If you have intelligent middleware, good messaging layers, and real flexibility in how you move data, along with robust APIs web services, then it will shorten your project lifecycle and decrease complexity and risk. That’s where technology can really make a difference. Agile technology that is designed to bridge systems from the beginning will accelerate the project and future enhancements. But core capabilities in the main transactional systems also need to be robust. Flexible architecture can help extend channels