Long before banking transformation became synonymous with digitization — before advances like mobile check capture, peer-to-peer payments, and FedNow — innovation in this business took many other forms. Simpler perhaps, but sometimes just as profound.
In the case of First Valley Bank back in the mid-1970s, innovation came with a pair of wings.
Veteran banker Jay Sidhu recounts how he joined the Bethlehem, Pa., bank not long after grad school, at the urging of Dick Ehst, one of its executives. Ehst remains a personal friend to this day and served until retirement in 2021 as president and chief operating officer at Customers Bancorp, where Sidhu, 71, is chairman and chief executive.
Ehst was in charge of improving efficiency at First Valley. Back then, that often involved finding better ways to move paper checks.
“Remember, there was no electronic banking at this time,” Sidhu writes in his autobiography, “Never Ever, Ever Give Up!” “The Federal Reserve ran everything, so checks traveled by land and would take at least three to five days to clear. That time lag was problematic.”
Ehst and two other First Valley officers arranged to buy a small plane for the bank, and Ehst’s father, a retired fighter pilot, agreed to fly it every day. His mission: Getting local businesses’ check deposits into the Federal Reserve’s clearing system overnight.
After loading up in Bethlehem, the pilot — sometimes with Sidhu riding shotgun — would buzz up to the bank’s branch in Wilkes-Barre, Pa., roughly 70 miles away, and then to Philadelphia, about 150 miles away. This would get the checks to the Philadelphia Fed before the daily cutoff time.
It meant First Valley’s customers could have access to the funds as early as the next morning instead of four or five days later. That speed was revolutionary for a small bank and became a selling point, Sidhu recalls.
Then, the CEO died, and new leadership shot down First Valley’s courier plane, killing same-day deposit service. Before long Sidhu moved on.
As he sees it, the plane was the victim of cost-cutting and traditional thinking. This early experience helped shape Sidhu’s views of what community banks must do to prosper, as did many other lessons over his long career spanning a variety of roles. He has been CEO at several banks, including at the predecessor to Santander US.
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Banking on Innovation Means Seeing It Through
Quashing innovation seemed wrong to the young Sidhu, especially when it was working well. He became a believer in fostering innovation via both technology and people.
His general approach is: adopting as much leading-edge technology as possible, but never forgetting the human element, and hiring and training to make sure the latter doesn’t fall by the wayside.
Customers Bancorp, based in West Reading, Pa., has done this for the past 12 years, going from what was essentially a startup on a troubled institution’s chassis to a $21.8 billion-asset, business-focused bank. It blends high tech and high touch, a strategy Sidhu thinks would work for many institutions.
But too many bankers still seem to pine for the old days before an obsession with technological disruption became a matter of survival for community banks, Sidhu says in an interview.
Sidhu — who also serves as executive chairman for his company’s banking unit, called Customers Bank — takes part in a peer group that holds retreats to discuss the industry. “Many of them — it’s not all — are still complaining that the world was so much better yesterday. They do that rather than embracing that the world could be so beautiful if only we got our institutions to the level that we need to get them to.”
If you think of tech adoption in terms of a clock, most banks are still in morning business hours — 9 a.m. or 10:00 a.m. — Sidhu says.
For more than a decade, fintechs have held center stage in much of the industry’s thinking and dominated much of the media coverage. Sidhu thinks this reflects poor decisions on banking’s part, the result of both conscious and unconscious dismissal of the critical importance of technology and all the things that are needed for innovation to thrive.
“Fintech is something that banks should have done, but many chose not to do,” says Sidhu. “It’s nothing but the effective use of technology in the financial field.”
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All Community Banks Need to Prioritize Technology
Many community bankers mistakenly believed that concentrating on “banking” was sufficient to compete, even on the business side, Sidhu says.
But “we’ve got to use technology to match or beat the bigger banks,” he says. “You’re talking about the business customer who doesn’t understand why they can’t get their information on their smartphone as well as on their desktop.”
These customers expect the same flexibility and functionality in a bank’s app that they get from nonbank providers. Institutions that don’t keep up will not retain those customers when they want business credit, says Sidhu.
Even internally, Sidhu feels that most institutions need better technology for employees to be able to work efficiently and intelligently. Many banks are unable to put real-time data at management’s fingertips, so they can’t assess where things stand right now when making decisions, he says.
The failed Silicon Valley Bank and Signature Bank, for all their involvement with tech-forward customers, lacked this ability internally, according to Sidhu, who insists it hastened their demise.
“Honest to God,” says Sidhu, “what gets measured is what gets done.”
He thinks it would be wise to start assessing community banking leaders by how well the institution keeps up technologically. This doesn’t happen now, “so they give no priority to technology,” he says. At least half of banking institutions “aren’t up to par at all.”
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Treating Customer Relationships with More Respect
Sidhu spoke at a 2015 conference called “Exponential Finance,” which brought together banking and fintech players.
He shared his changing views of pricing and customer relationships, growing emotional at times. He reeled off the many fees that banks charge consumers, going into some detail about overdraft charges, almost in a tone of confession.
“I used to be addicted to these fees,” Sidhu told listeners. “I decided: Never, ever again. I want to be part of the solution now.”
Eight years later, The Financial Brand asked his opinion on how banks are doing.
On overdrafts, he says the industry has improved, chivvied along by Congress, federal regulators, the Consumer Financial Protection Bureau and other bankers who came around to the same way of thinking as Sidhu.
“Very few banks have eliminated overdraft fees. But they have actually taken some positive steps in the right direction to try to minimize the nuisance fees that they were gathering.”
—Jay Sidhu, Customers Bank
However, a continuing industry error, in Sidhu’s view, is not paying more for deposits in ordinary checking and savings accounts. It’s been going on for years and worked because of customer inertia when rates were low.
More institutions are paying up on high-yield savings and CDs, but Sidhu says that many are still holding the line on other accounts. He believes that this is going to erode relationships that bankers think are solid.
“When you don’t have fairness, relationships fall apart,” Sidhu explains. “This happens in human life; it happens in corporate life also.”
Sidhu says supposedly sticky deposits won’t stay sticky if banks don’t rethink this practice. If relationships don’t become more of a win-win for customers and the bank, he says, painful lessons will be learned when customers decide to walk. (Currently Customers Bank pays 2% on consumer checking accounts, 1% plus an extra point for people who utilize direct deposit or bill pay service.)
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Don’t Believe Everything Big Banks Say About Branches
Customers Bank has a high-touch strategy, but that doesn’t mean opening a lot of branches, because it is predominantly a business banking organization.
In fact, the bank, which had 12 branches in 2010, has nearly halved that number in recent years, to seven. (There are several additional offices, where services are typically available by appointment only, but those are not branches.)
Sidhu says that bankers have to separate the pro-branch rhetoric from long-term plans by big banks to funnel consumers into digital channels. He’s convinced the branch expansions are a stage, not a destination. To him, they represent a very visible way to reach out for new deposits and lending. He doubts they are permanent.
The big banks often pay high bounties to attract new accounts — though their fee structures remain in place and their rates are lower, he said. They also have “too big to fail status,” a major draw.
Eventually, their market share will be even greater, the marketing dollars being put into the expansion will get diverted to other priorities, and this branch phase will come to an end, Sidhu says. “My prediction is that within the next 10 years you will see Chase and BofA shut down 50% of their branches.”