Twelve months ago, the U.S. economy looked like a bubble that could pop at any time from rising interest rates and inverted yield curves.
But the Business Journal heard from OC bankers who, tracking the revenue and payments of their clients, were cautiously optimistic.
They proved correct.
This year, we again asked OC bankers for their take on the local economy and they’re even a bit more bullish. We also asked about fintech changing
the way banks do business, the future of brick-and-mortar branches and dangers presented today by fraud. Their edited answers follow.
Ivo Tjan
Founder/CEO
CommerceWest Bank
OC’s economy will be similar to last year: we don’t see a slow down or big acceleration in the economy, but trends consistent with 2019.
The elephant in the room is the presidential election; we believe it will have psychological effects on how businesses and business leaders think about future growth.
Business leaders often talk about the difficulty in acquiring talent, but there’s a lot of it in Orange County. Even with low unemployment, we seem to find capable people to fill these jobs—though technology over the next several years will continue to displace workers.
The challenge in fintech is twofold. One is client acquisition cost, which is often underestimated. Second, banking is a long-term success business model, not short term.
When banks provide a $100,000 30-year fixed-rate home loan, the bank gets paid over 30 years, averaging about $3,000 a year. When Apple sells a MacBook for $3,500, they get paid that day: $3,500.
Apple has a much lower risk and collects the money upfront.
CommerceWest competes with fintech companies with strategic investments in products and services delivered digitally to client’s mobile devices or computers. Technology has also forever altered branch offices: there’ll be fewer of them and location selection will be more discerning.
For business banks, the future is more about bankers going to businesses to discuss their needs. Clients should never have to visit branch offices in the future to establish or enhance banking relationships.
Technology should take care of their day-to-day banking needs with automated cash management products for wire transfers, ACH, remote deposit, and so on. Think about what AI could do for our banking clients in the future.
Mark Sederquist
Consumer Banking & Investments
California Division Executive
Bank of America
Our brick-and-mortar financial centers are as much a competitive advantage as our industry-leading technology, and our “high tech, high touch” approach has been well received.
We’ve maintained more than 85 locations across Orange County for several years, modernized to reflect how clients tell us they prefer to bank. As more common transactions are done on mobile apps and online, financial centers are freed up to provide more personal experiences for clients to discuss complex financial needs, especially life events like college, starting a family and retirement. Orange County is a highly desirable, competitive and evolving market; we need to stay relevant to our clients for all their life stages.
Financial centers are also an important pipeline for entry-level careers at the bank, including a significant effort with nonprofits to provide job training in financial services to people from lower income communities, as well as military veterans finding civilian work.
The cybersecurity landscape continues to evolve rapidly and protecting information and data should be a priority for every company. Client trust is fundamental to our business; banks need to invest in people and technology to protect their information and identity.
Key considerations to cultivate a cybersecurity culture—one that protects organizations and client data:
• shift the mindset from compliance to commitment: make resistance and resilience in cybersecurity a business goal
• accountability goes a long way: reinforce that every employee “owns” successful cybersecurity
• foster collaboration: work within your industry to share best practices and lessons learned
Finally, execute and measure: ensure the cybersecurity program has prevention and protection in place, and annually assess performance by industry frameworks.
Keith Kobata
Orange County Region Bank President
Wells Fargo
With more daily technology use and new fintech firms in the industry, banks must shift how they connect with consumers, and drive innovation through new products to serve customer needs. The focus should be better control, simplicity, convenience and transparency in how people bank.
Many current resources make it easier for people to accomplish simple transactions: money transfers, check deposits and accessing monthly statements or other financial documents. The goal is to give customers options based on their preferences for the more common needs and to give our employees more time to serve as trusted advisers providing guidance during more complex interactions.
Customer satisfaction increases when using both branches and digital, and the more features a customer uses digitally, the higher their satisfaction overall.
This means banks are collaborating more with newer and technologically advanced firms: regularly working with fintech firms and startups on a wide range of services helps banks explore big ideas with innovators outside of the bank and the banking industry. This can help shape future customer experiences in analytics, mobile, payments, cybersecurity, user-interaction design, artificial intelligence, virtual reality and operations.
Startup Economy
A six-month startup accelerator program companywide invests up to $1 million in early-stage financial services firms, helping refine their ability to approach and sell products or services to Fortune 500 companies where the demand, scale and needs are unique.
Technology is shifting consumer preferences; banks must adapt. We’re moving as an industry from a “do for me” to a “show me how” approach and that’s good. Giving customers options for routine transactions lets us focus on more complex transactions and advice.
We want to better understand each customer’s financial goals. When and where we can incorporate technology and digital advances to meet those goals, we will.
Rick Nogueira
Region Manager, Middle Market Banking
JPMorgan Chase
We’re seeing businesses across Southern California remaining upbeat as economic expansion continues at a steady pace this year.
Small and midsize business leaders across California expect continued growth for their companies this year. Compared to the rest of the country, they’re more optimistic about their company’s performance (85% to 76%) and more expect higher revenue (82% to 70%) this year.
Fintech offers untold growth and we’re encouraged by its potential. JPMorgan Chase has 52 million digitally active customers, up 6% year-over-year, and 37 million active mobile users, up 12%. They’re more satisfied and engaged and have deeper relationships with us when they use digital channels.
On-ground teams are still strong; we’re opening 20 new U.S. locations in the next five years and 70% of deposit growth comes from branches—but today’s branch isn’t a one-size-fits-all retail shop. They serve different needs of different communities with new formats, including an emphasis on digital offerings at the site.
Last year, the first JPMorgan digital branch in Southern California opened in Newport Beach. One element: virtual reality home tours of open houses.
We talk about the escalation of cyberattacks every day with clients—security breaches, new schemes from criminals trying to gain access to systems, how to defend against them. Businesses of all stripes and sizes are targeted—even a laundromat or the corner store.
Investments in detection, identification and mitigation of threats is key, as is collaborating with financial services firms, emerging tech companies and government agencies.
Cybersecurity preparedness doesn’t have to be expensive—especially compared with the cost of lessons learned from a cyberattack, in the form of lost business, reputation, revenue and assets. Strong return on investment can come from just training and testing—phishing drills and tabletop exercises with your staff.
An old fence can still keep people out but finding and mending gaps in that fence is critical, and repeated training and practice is one of the simplest ways to do that.
Scott Kavanaugh
CEO
First Foundation
We have a positive outlook for Orange County’s economy this year; it feels healthy right now. Employment will remain strong through 2020 and into the first part of 2021, largely due to wage pressure and the fight to retain quality employees. We’ve also seen housing remain strong here and in other key areas in the U.S. Frankly, there are few major headwinds right now.
Fintech is helping advance the industry, but likely not in the ways many think. We don’t think of them as disruptors, but rather partners to help us better serve our clients. They’ve pushed us as an industry to be sharper and better as they enhance how people interact with their money. They’ve extended boundaries on what’s possible and banks can implement much that fintechs offer.
But they currently lack the regulation—providing security and structure—the banking industry affords consumers. Interaction with money is easier but there are no new ways to underwrite a loan.
Being a partner not an adversary in these changes gets clients the security of a traditional bank with the features the fintechs have built. In the end, the consumer wins.
Changing Branches
Branch offices are indeed changing but there’s a place for them in the future. Clients tell us the branch has become even more important when they need help. Call centers and online chats are helpful but can only offer so much in personalization and custom advice.
Many clients require, and desire, face-to-face interaction. They don’t want to come into a branch and be directed to use a machine; they want the personal relationship. When that happens, we will be there.
It’s important to find the balance between a comforting physical presence and convenient digital offerings: what’s best for our clients? Technology advances are great but money is a personal item and people still need to interact with helpful, knowledgeable humans.
We’ve seen industry changes in cybersecurity—it’s a separate audit now, by regulators, to ensure we’re addressing this issue at every point.
We’re working to keep clients safe: stand-alone working groups dedicated to cybersecurity and fraud prevention, for instance, and we have dedicated quite a bit of resources to these areas. We’ve implemented strict protocols, use a dual authentication model, and so on.
Part of our focus has been educating people on how not to be victimized. Criminals in this realm have grown good at finding the entry points on the consumer side—something as easy as a phishing email, for instance.
We work to ensure our team and clients know how to identify these threats before they cause damage.
Joseph Hensley
Market President, Orange County
U.S. Bank
Orange County business leaders are more upbeat and see little to worry about in the near-term.
County GDP was $296 billion in 2018 and indications are growth of about 5% last year to $309 billion—OC has an economy bigger than 28 U.S. states.
Employment growth will continue at a moderate pace: about 16,000 new jobs in 2019 and 14,000 in 2020—just less than 1% for each year. Unemployment will creep up to about 3% to 3.5% over the next two years.
Home appreciation has leveled off and will stabilize in the period, with moderate appreciation. The median price of a home in OC is $800,000, the highest ever, and median income rose to about $90,000 in 2018.
Fintech Evolution
Fintech continues to evolve. Many banks and fintechs are now customers and partners of one another, rather than competitors. U.S. Bank has bought several companies to bring the best solutions to market for its clients.
As consumers use digital and mobile banking more, banks are reconfiguring branch networks to complement and align with [the growing] digital experience. More of our customers engage digitally but they still want to go into the branch. What they’re going there for is different: help with digital offerings and goals-based advice, rather than every day transactions. Branches will continue to play a role into the future.
Cybersecurity will remain key. We anticipate emerging threats through risk-based, intelligence-driven, predictive strategies: adaptive security enhancement and dedicated staff monitoring potential threats 24/7, among them.
We constantly review processes, asking if we’re collecting the right data, have the right controls in place, and, most crucially, are customers safe? We also offer seminars to discuss cybersecurity with clients and what we’re seeing as current threats.
John DeCero
CEO/President
Mechanics Bank
2020 looks bright for the general economy as a whole and for Orange County businesses. The longest economic expansion in U.S. history, strong employment and GDP growth that’s steadily hovering in the 2% range, Orange County’s general business climate shows few signs of weakness and many signs of continued strength.
Today’s consumers and business owners often exhibit the prudent combination of cautious optimism and the discipline to grow at a measured pace. Most banks and lenders remain relatively disciplined in underwriting business and consumer credit.
When businesses choose to invest in their growth, they have lending opportunities with many different financial institutions. Mechanics is the fifth-largest bank in California and in sectors including commercial and industrial, commercial investment and development and local homebuilding we expect to be a very active and competitive statewide lender.
Interest rates are low globally and local banks are trying to scale to become more efficient as low rates compress banks’ earnings. Therefore, we are also likely to see continued bank merger activity for the foreseeable future.
Today’s fintech headlines often infer banks will become irrelevant, that technology companies will step in. But the bond between banks and innovative technologies is older than the first ATM. Banks will remain relevant because of a long record of harnessing new technologies to deliver convenience, speed and security—and earn client trust.
Our secure, high-volume wire transfer platform is a great example of a technology solution winning the confidence of clients, including large escrow and title companies in the state. Configured in their environment by our IT staff, a dedicated computer terminal connects directly to our data center. It provides a robust and secure channel that greatly diminishes the risk of today’s rampant cyber threats for high-volume, large-dollar users.
We embrace technology and so do our customers. But today’s brick-and-mortar branches remain an important asset. They’re still the top channel for establishing relationships, new accounts, general customer support and they are vital to small-business owners on Main Street.
Richard Cabrera
EVP Head of Commercial
& Corporate Banking
Umpqua Bank
My outlook for Orange County is fairly bullish. Our lending pipelines are robust right now and new opportunities are developing. We’re seeing our clients pull the trigger on large capital expenditures in areas such as real estate and plant expansion.
We saw a shift in thinking in the fourth quarter last year. Companies are more interested in directly pursuing M&A strategies they might have postponed last year. There’s been increased sales activity, which has paved the way for greater marketing budgets and business line expansion.
Before the fourth quarter, some macroeconomic issues put a ceiling on any optimism. There was uncertainty about interest rates, plus ongoing trade tensions. The feeling now is interest rates are going to be fairly stable, and détente in the trade conflict with China has put people at ease.
With this positive mood, we see a lot of opportunity in Southern California. Many clients are in expansion mode and several OC industries are thriving, including distribution, retail and product packaging. Equipment rentals are doing well, riding the coattails of the region’s construction activity, which remains strong.
This all translates to expanding working capital financing, buoyed by greater revenue growth. Companies are using term financing for capital expenditures, including M&A to make opportunistic purchases.
The solid market of course brings its own challenges. We’re continuing to see upward pressure on wages. Businesses have been dealing with this for several years, and it’s not going to go away. Attracting and retaining talent in the current environment is the top risk to growth of companies between $10 million and $500 million in revenue.
While things look good going forward, we still remind clients to be prudent. Don’t stretch too far. If you’re making a big investment, make sure you have enough revenue there historically—and prospectively—to make it work. Give yourself a buffer.
If people are operating with a sense of soundness—that the world’s not going to be entirely different tomorrow morning—that’s reason to be optimistic.
