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» VISIT US ONLINE @ DSNEWS.COM 73 may give the regionals a boost but they tend to be investments that are outsized for the relative size of the bank. WHY IS INNOVATION DIFFERENT FOR REGIONAL BANKS? Young, digitally savvy, entrepreneurial professionals are migrating into less urban areas due to a number of factors including workplace mobility, starting or joining small businesses, and returning to family businesses. ey are also entering the regional bank's target market. ese customers will have very different expectations of what they need from a bank. Staying up-to-date with banking technology is critical to meeting these new customers' needs. As banks transition more of their operations digitally, the advantage of having local branches and individual relationships has become less valuable. Regional banks must remain ahead of this change and begin investing in digital technologies to remain competitive with larger firms. eir client base is different: banks at the regional and super-regional level also operate under different business models than the largest banks, with greater emphasis on commercial real estate and less on consumer lending. A quick review of the portfolio differences suggests that regional banks should adapt fintech to the demographics and market conditions of their respective region rather than take the one-size-fits-all approach of their national counterparts. For example: » Southwest regional banks tend to have less of their portfolios concentrated in commercial and industrial lending, while exhibiting much higher concentrations in commercial real estate. » Residential real estate lending concentration is marginally smaller for southwest regional banks. » Consumer lending concentration is four times larger in large banks than in smaller southwest institutions. » Southwest regional banks have a sizable agricultural lending business, which, by comparison, is almost non-existent for big banks. HOW CAN THIS BE ACCOMPLISHED FOR LESS MONEY THAN LARGE NATIONAL BANKS? Regional banks should not simply copy the "big bank" blueprint for fintech engagement. Fintech partnerships offer regional banks an opportunity to acquire digital capabilities without having to invest large amounts of capital. Regional banks should tap their strengths, building personal relationships not only with customers but with emerging fintech companies that also seek a personal connection. In speaking with CEOs and founders of fintechs across the geographic and services spectrum, one thing is relatively consistent: they are good at what they do, but they also recognize what they do not do well and they know that having the right relationship with strong business partners is essential to their success. is is where the regionals should deploy their greatest advantage, building personal and business relationships with fintechs in their backyards. Not only are they possible small-business clients; their product could also directly affect the regional bank's ability to innovate. New due diligence guidelines may need to be evaluated, but it's a new way to grow together with the fintechs that's different than incubators, and very different from investment or outright acquisition strategies. It doesn't require billions in upfront investments. As the Marcus by Goldman Sachs example clearly illustrates, you can start small and grow your capabilities over time, even starting from nothing. Regional banks are not immune to the "Silicon Valley" effect. In fact, one can argue they are even more vulnerable because of new digital capabilities, aging populations, national banks seeking new growth areas, and the effect of new regulatory expectations. Unless the response from the regional and super-regional banks is equally swift and strong, they will be more vulnerable and less in control of their own fate in the coming wave of consolidation and realignment. e views expressed are those of the author and do not necessarily reflect the views of Ernst & Young LLP. 69% 133% 225% 68% 124% 133% 17% 80% 30% 1% Loan Concentrations (Median % of Qualifying Total Capital) Commercial and Industrial Commercial Real Estate Residential Real Estate Consumer Agriculture 2017 - SW Banks Average 2017 - Big Banks Average

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