ABA STONIER GRADUATE SCHOOL of BANKING CAPSTONE PROJECT

E-Channel Expansion

Amy M. Kotula ABA Stonier Graduate School of Banking Class of 2013 Beacon Bank Confidential February 27, 2013

Contents
Executive Summary ...................................................................................................................................... 1 Background/Introduction .............................................................................................................................. 4 Brief History/Locations ............................................................................................................................ 4 Business model ......................................................................................................................................... 5 Financial Condition................................................................................................................................... 6 Market Share ............................................................................................................................................. 8 Overall strategy ....................................................................................................................................... 11 Strategy and Implementation ...................................................................................................................... 13 Demographics ......................................................................................................................................... 13 Website ................................................................................................................................................... 17 Automated Online ................................................................................................................................... 17 Regulations ............................................................................................................................................. 19 Marketing ................................................................................................................................................ 20 Financial Impact.......................................................................................................................................... 23 Measureable Impact ................................................................................................................................ 23 Investment ............................................................................................................................................... 24 Option 1 .................................................................................................................................................. 24 Option 2 .................................................................................................................................................. 26 Option 3 .................................................................................................................................................. 27 Revenue .................................................................................................................................................. 28 Training ................................................................................................................................................... 29 Marketing ................................................................................................................................................ 30 Risks........................................................................................................................................................ 31 Results ..................................................................................................................................................... 31 Non-Financial Impact ................................................................................................................................. 33 Hurdles .................................................................................................................................................... 33 Overcoming Hurdles ............................................................................................................................... 34 Senior Leadership ............................................................................................................................... 34 Managers ............................................................................................................................................. 34 Employees ........................................................................................................................................... 35 Current Customers .............................................................................................................................. 36

Restructure .............................................................................................................................................. 37 Long-term effects .................................................................................................................................... 37 Conclusion .................................................................................................................................................. 39 APPENDIX ................................................................................................................................................. 40 BIBLIOGRAPHY ....................................................................................................................................... 42

Executive Summary
To continue in our Mission, To Be the Bank of Choice, Beacon Bank must move into the next generation of banking to attract and service their diverse portfolio of customers. Review of current demographics reflects a need to expand further into electronic methods of banking. Beacon Bank enjoys a high percentage checking account penetration with customer between 20 and 40 years of age. The review also revealed an opportunity to increase the number of

customers in that age demographic. A focused expansion of the eChannel would be beneficial to Beacon Bank by increasing Market Share, providing additional services for current customers and staffing model efficiencies without adding a branch to name a few.

Beacon Banks currently offers a number of electronic services such as online and mobile banking, eStatements, ezDeposit for commercial customers and eNews letters. However deposit account opening from the Beacon Bank website consists of the customer completing an online application, sending the application to a Retail Banker in the correct market and the Retail Banker making an appointment with the potential customer to come to a brick and mortar office to establish a relationship. Completion of due diligence to select complete online account opening software for deposit accounts is in order. However, the most sophisticated software will not be utilized by customers if our website is not visually appealing or easily navigated. Thus this project consists of updating the current website, obtaining fully electronic deposit account relationship software, creation of new e-products appealing to Generation Y as well as Generation X and Baby Boomers who prefer to conduct their banking electronically.

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Current demographics reflect that Beacon Banks customer basis is predominately over the age of 45. Growing Beacon Bank and increasing revenue and profit for shareholders is a strategic goal. Attracting the next generation and marketing to the way that generation conducts business is in order. This must be accomplished while continuing to build relationships and service current customers.

A number of eChannel opportunities are currently offered by Beacon Banks core provider. Beacon Bank subscribes to some of these. Heading into the future community banks will need to expand the eChannel as well as maintain traditional channels of delivery. A number of articles quoted within state that customers preferred method of delivery varies dependent on a number of things including age, technical skills and current product or service needed.

Using the following Community Bank model can fulfill all types of customer needs. Customers with different needs will be happy customers. Customers with changing needs will be happy. This style will allow Beacon Bank To Be the Bank of Choice.

Electronic Customer Communication

Brick & Mortar Branches Online Products & Services Community Banking

Intuitive Website Social Media

Mobile Products & Services

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Success in the e-Channel expansion will also need future considerations of person to person payments and ezDeposit for consumers. Future enhancements for commercial customers such as electronic lock box should be a future e-Channel enhancement consideration. Diversifying our portfolio with e-Channel enhancements from online automated DDA account applications to increased services will maximize efficiency, staffing and increase revenue.

While the project will always be continuing, the focus is to get started and ensure that current and potential customers have an intuitive website to use for their banking needs including automated account opening on the website will be the first giant step in eChannel Expansion. Creation of an eProducts and Services implementation calendar will take Beacon Bank into future of banking without putting undue stress on the annual budget.

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Background/Introduction

Brief History/Locations

Beacon Bank, a Sub-Chapter S corporation, is a wholly owned subsidiary of Excelsior Financials Services, Inc. The Excelsior Financial Services, Inc. Board of Directors consists of seven members. There are ten board members on the Beacon Bank Board of Directors. Five members of senior leadership and five business leaders with varying backgrounds, three from the Metro Market and two from the Duluth Market. To achieve Beacon Banks Mission Statement, To Be the Bank of Choice, the core values of Responsive, Reliable and Reassuring are implemented by all staff from summer tellers to Board Members. The inception of Beacon Bank was in 1989, when three of the current senior officers purchased the charter and two branches of First State Bank. First State Bank, chartered in 1906, was a family owned bank. It consisted of two branches located in Mayer, Minnesota and New Germany, Minnesota with focus on agricultural lending. Soon after the purchase, the charter was moved 24 miles east to Excelsior, Minnesota. In 1996 the focus turned to commercial banking from the agricultural banking associated with the rural branches. As a result, the two rural branches of Mayer and New Germany were divested. In 1999 the current headquarters located in Shorewood, MN, 21 miles southwest of Minneapolis, was constructed and the bank name changed to Beacon Bank. The Excelsior Office1 remains in full service today. These offices are located

http://maps.google.com/

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approximately one and a half miles apart in the southwest metropolitan area of Minneapolis and St. Paul known as the Twin Cities. In 2002 the opportunity to add an outstate market came, via the availability of a former bank president, who was a colleague of Beacon Banks CEO and plenty of office space to lease in Duluth Minnesota. Duluth is on the western shores of Lake Superior approximately 175 miles from the Twin Cities. Thus the Duluth2 Market was established with the opening of the Downtown Duluth Office and Duluth Auto Bank. Expansion into this industrial port city and the network of the Duluth Market President quickly increased bank assets. A second Duluth office was opened in 2003 on Miller Trunk Highway across US Highway 53 from the Miller Mall. This office was also located close to residential expansion in the Hermantown area of Duluth. The most recent Beacon Bank branch was opened in December 2006 in Eden Prairie, Minnesota. Eden Prairie is on the list of the top 100 cities in America to live, work and play in. It is located approximately 10.5 miles southeast of the headquarters in Shorewood. The commercial and residential opportunities in Eden Prairie made this a prime

location for bank expansion.

Business model A significant part of Beacon Banks assets are in commercial land development and commercial real estate loans. From 1998 to 2004 Beacon Bank had a mortgage department offering

construction, land development and secondary market residential loans. In 2004 this division

http://maps.google.com/

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was dissolved as the risk tolerance for these types of loans decreased. In 2010 the number one item on the Strategic Plan was to build core deposits to decrease use of alternative funding for loans. A goal of $30 million in new money was set and attained that year. Beacon Bank priced certificates of deposit near the top of the market to increase new customer base as well as build stronger relationships with current customers. Beacon Bank subscribes to a Relationship Management philosophy to work with both commercial and retail customers. Beacon

implemented a formal retention process by utilizing a database with functionality to automate a Relationship Management Matrix. This system utilizes multiple media to make contact with all customers. Both Retail and Commercial customers are segregated into: new customers; deposit only customers; and single product household customers and are then contacted accordingly. The database creates contact queues for both personal and business bankers. Account Officers work these queues by making calls with the knowledge that the customer has recently received contact to welcome them or a regarding a specific product. This assists in keeping Beacon Bank in the minds of customers when their needs arise as well as retaining their business.

Financial Condition

In second quarter 2010 with assets of $300 million, Beacon Bank was classified as an intermediate small bank on the Uniform Bank Performance Report. On December 31, 2011 Beacon Banks assets were $306 million. Through June 2012, Beacon Banks assets were at $302.7 million. During the Great Recession years beginning in 2008, Beacon Bank, like other financial institutions, increased their investment portfolio and Provision for Loan and Lease Loss. Beacon Bank has been successful in divesting some of their non-performing assets. It is necessary to replace those non-performing assets with new loans to maximize revenue. With
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91.8% of Total Deposits being Core Deposits, Beacon Bank is poised to fund new loans without the need for an alternative funding source.

UBPR Table 06/30/2012 (000s) 12/31/2011 (000s) 12/31/2010 (000s) 12/31/2009 (000s) 12/31/2008 (000s)

Real Estate Loans Commercial Loans

Allowance for Loan & Lease Loss

$113,888 $56,980 $3,749 $174,868 $276,654 $302,786 $228,660 $248,867 $31,650 $1,307 0.86%

$117,661 $55,898 $4,571 $176,626 $287,909 $306,228 $241,054 $261,588 $31,686 $2,367 0.77%

$132,724 $63,220 $4,847 $200274 $287,079 $300,541 $247,256 $260,351 $30,104 $1,042 0.35%

$148,770 $75,452 $3,359 $228,729 $267,228 $295,488 $177,900 $242,681 $30,010 $833 0.28%

$154,782 $77,932 $2,452 239,061 $264,437 $266,227 $145,166 4236,721 $27,771 $3,006 1.13%

Net Loans & Leases Total Earning Assets Average Total Assets Core Deposits Total Deposits Total Equity Capital Net Income Return On Assets

Federal Financial Institutions Examination Council (FFIEC) Uniform Bank Performance Report, 06/30/2012

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Market Share Analysis of Beacon Banks market share and its competition is broken down into the two markets. While two of the top three competitors in both markets are the same federally chartered banks, the Metro Market locations are squarely ahead in market share of the state chartered community banks in the respective markets.

The Metro Market locations of Excelsior, Shorewood and Eden Prairie have an 11.93% 4 market share among 16 banks in the southwest metropolitan area. There are a number of community banks in this market including: Voyager Bank, Bridgewater Bank, M& I Bank, Central Bank, Flagship Bank, First Western Bank & Trust and Fidelity Bank. Wells Fargo, US Bank, TCF and Bremer Bank are national banks in our metro market as well.

http://www2.fdic.gov/sod/sodMarketRpt.asp?barItem=2

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Market Share Table

Metro Market Institution Wells Fargo TCF National US Bank NA Beacon Bank Voyager M & Il Bridgewater Bank Bremer Bank Central Bank American Investors Flagship Bank MN Anchor Bank First Western Bank Mid Country Star Bank Fidelity Charter Federal Federal Federal State State State State Federal State Federal State Federal State Federal Federal State Number Offices 2 4 1 3 1 1 1 1 1 1 1 1 1 1 1 1

Inside Market Deposits (000s) $433,285 $260,459 $213,546 $211,460 $134,308 $106,722 $ 91,585 $ 70,469 $ 53,471 $ 50,110 $46,395 $ 35,441 $32,225 $ 19,809 $ 13,519 $ 266 Market Share (%) 24.44% 14.69% 12.04% 11.93% 7.57% 6.02% 5.17% 3.97% 3.02% 2.83% 2.62% 2.00% 1.82% 1.12% 0.76% 0.02%

http://www2.fdic.gov/sod/sodMarketRpt.asp?barItem=2

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Our Duluth Market has a 2.52% market share among 12 banks in the western Lake Superior area. Among these 12, seven are federally chartered and the list consists of: Wells Fargo, US Bank. Western Bank, Pioneer Bank, National Bank of Commerce, First National Bank of Proctor and TCF Bank. The five community banks in this market are: Republic Bank, North Shore Bank of Commerce, M & I Bank, Park State Bank and Beacon Bank.

Market Share Table

Duluth Market Institution Wells Fargo US Bank NA Republic Bank Inc. North Shore Western National Pioneer National National Bank of Commerce Beacon Bank M&I Park State 1st National Proctor TCF National Bank Charter Federal Federal State State Federal Federal Federal State State State Federal Federal Offices 5 7 5 7 3 3 2 3 1 1 1 1

Inside Market Deposits $664,858 $343,803 $221,309 $191,989 $104,489 $ 66,665 $ 49,779 $ 45,238 $ 36,195 $ 26,506 $21,634 $ 18,024 Market Share 37.07% 19.34% 12.34% 10.70% 5.83% 3.72% 2.78% 2.52% 2.02% 1.48% 1.21% 1.00%

http://www2.fdic.gov/sod/sodMarketRpt.asp?barItem=2

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Overall strategy Branch banking is quickly changing. The addition of technology a significant amount of technology requires banks to get up to speed or get left in the dust. In an article by Charles Passy in SmartMoney, Mr. Passy also suggests that the challenging economic times and regulatory environment, industry officials are saying they may not be able to sustain the vast network of branches theyve build over the years.7 Rapid migration of customers from branch banking to online and mobile platforms creates the necessity for banks to strive to stay on the bleeding edge of technology. Beacon Banks efforts to embrace this changing environment have been successful to date. Beacon Bank offers online banking, mobile banking, and bill pay within its arsenal of electronic services. Enhancing the E-Channel and offering additional electronic services is of the utmost importance to attract new customers to maintain and increase market share.

In addition, a review of consumer checking account penetration by demographics revealed a need to focus on relating to the needs of customers under the age of 40 to diversify and grow the portfolio. Beacon Bank has a need for online account opening for Demand Deposit Accounts, and to enhance social media to appeal to younger demographics.

http://blogs.smartmoney.com/advice/2012/03/13/banks-branch-into-yoga

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Website enhancement will kick-off this project.

The most sophisticated account opening

software alone will not draw customers on a run of the mill website. Beacon Banks website will need revitalization to give a potential customer a reason to pause and consider beginning a relationship with Beacon Bank. An eye catching website that is easy to navigate and contains products and services relevant to customer needs is the place for this project to start. Research and development of online new account software including deposit accounts, regulatory compliance, and evaluation of risk will be the second order of business. Review of current products and services to measure the electronic fit for the next generation of customers will also be in order. Marketing and Implementation of Beacon Banks new way to build Dependent on this

relationships will need to precisely reach our targeted customer base. projects success, the staffing structure may also need to be reviewed.

While staying abreast of technology is a necessity at a minimum, Mr. Passys article also notes that brick and mortar locations can provide meaningful opportunities to interact with established and prospective clients alike. Branches can also be part of a strategy to firmly root itself in territories its targeting.8 All banking channels still remain very much in demand, however

enhancing the E-Channel to meet and appeal to the ever changing needs of both Retail and Commercial customers is a task on every community banks list.

http://blogs.smartmoney.com/advice/2012/03/13/banks-branch-into-yoga

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Strategy and Implementation

Demographics

Exploring e-Channel enhancement is multi-purpose.

One is Retail checking account

demographics. Another is increased Non Interest Income. A review of consumer checking account penetration by demographics9 revealed a need for Beacon Bank to focus on relating to the needs of customers under the age of 40 to diversify and grow.

Retail Checking Demographics

15-20 21-30 31-40 41-50 51-60 61-70 71-80 81-90 91-99 100+ 0 200 400 600 800 1000 Retail Customers Age of Checking Customers

Checking Customers Total Customers

As shown in the chart, Beacon Banks Retail checking account customer base is primarily 40 years of age or older. The checking account penetration among customers 21 - 40 years of age is an average of 90.3%; and checking account penetration among customers 40+ years of age drops off to an average of 71.8%. While Beacon Banks Retail checking account penetration is nearly 20 % higher with customers under the age of 40, there are considerably less customers under the
9

Beacon Bank CFM Marquis database

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age of 40.

A concerted effort by Beacon Bank to appeal to the banking wants/needs of Checking accounts are sticky

Generation Y would result in an increased customer base.

products given the sticky services attached of Direct Deposit of payroll, Bill Pay, Free Debit Cards, online and mobile access.

In an article written by Brian OConnell10, he refers to a global study by Cisco of 5,300 global banking customers that shows that consumers still value face-to-face encounters with bank staffers. The study says 26% of consumers would take a hike if banks eleminitated personal attention from their menu of services. The last 12 month transaction volumes11 in Beacon Bank branches have been constant and not dropping off for more electronic means of banking. Debit card transactions have seen a slight increase over the same time period.

Paper vs Plastic
60,000 50,000 40,000 30,000 20,000 10,000 0 Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug '11 '11 '11 '11 '12 '12 '12 '12 '12 '12 '12 '12 OTC Trans POS Trans

10

http://www.thestreet.com/story/11587839/1/banks-shouldnt-close-branches-as-they-expand-online-study-says.html Beacon Bank Monthly Transaction Volume Report

11

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Thus Beacon Bank should not choose e-banking over brick and mortar expansion. However, enhancing the e-Channel options will draw increased customers under the age of 40 where there is a 90.3%12 checking account penetration. Increased volume of debit card transactions due to increased volume of checking customers will increase interchange income. Partially due to changes in regulations, Non-Interest Income has been declining since 2008. This chart shows Beacon Bank has realized a small decrease in non-interest income. Adding

additional e-Channel options has the potential to increase non-interest income with increased volume of debit card transactions resulting from an increase in consumer checking accounts with the implementation of this project.

Beacon Bank Non-Interest Income as a Percentage 6/30/2012 0.34%

13

12/31/2011 0.30%

12/31/2010 0.46%

12/31/2009 0.40%

12/31/2008 0.49%

Beacon Bank has mobile banking applications for both I-Phones and Androids.

However

Beacon Mobile is the least utilized way of accessing account by Beacon Bank customers over the past 12 months. ATMs, online and phone banking are the most utilized with ATMs making a summer spike.

12

Beacon Bank CFM Marquis database Federal Financial Institutions Examination Council (FFIEC) Uniform Bank Performance Report, 06/30/2012

13

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Account Access
3,000 2,500 2,000 1,500 1,000 500 0 Sep '11 Oct '11 Nov '11 Dec '11 Jan '12 Feb '12 Mar '12 Apr '12 May '12 Jun '12 Jul '12 Aug '12

ATM Trans Mobile Users

BankLine Online Users

14

Increasing the under 40 years of age customers demographic would increase mobile banking use. Effective marketing of Beacon Mobile and all e-Channel services would also increase use as well as ensure that our customer base over the age of 50 who are curious will jump in to test the waters of electronic banking. Customers have and will continue to become savvier e-Channel services users and will bank where they can do so. Beacon Bank needs to meet and exceed customer needs in this demographic to successfully move into the future within the banking industry. Within five years, due to increasingly improved technology and a very mobile

customer base, eChannel services will be the most prevalent way banking is conducted by the younger generation.

14

Beacon Bank CFM Marquis database

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Website

Navigation of the current Beacon Bank website is cumbersome. Researching and implementing the most sophisticated, automated account opening software will not be effective if it is not part of an appealing website that is user friendly and easy to navigate. Two things need to done regarding Beacon Banks website. The first is research our current website provider to determine whether or not its capabilities are being fully utilized. The second is to obtain a proposal from the current website software vendor for enhancements to the current website to include implementation of automated online account opening. Current Beacon Bank vendors Marquis, BancVue and JackHenry offer website design software. Demonstrations of website software should be scheduled and obtain proposals for potential website software to include automated online account opening. Selection of website provider needs to be made and implemented by end of first quarter 2013.

Automated Online Our high tech world has brought a Smart Phone of one type or another to almost everyones hand. Everything is mobile; phone calls, emails, the internet, driving directions, banking,

investing, and the list goes on. Time is a valuable commodity in our current world. To be competitive in this world, we must value current and potential customers time. Making opening a checking account for consumers a 5 minute process like ING boasts would show current and potential customers that Beacon Bank values their time.

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15

Enter your personal info Agree to Terms & Conditions Make an electronic deposit from your current checking account Review your info, hit submit and call it a day

Beacon Banks e-Channel products and services currently include online banking and mobile banking but there is a need for an automated online account opening tool. At present, potential customers can apply for a Demand Deposit Account via the website. However, the application is forwarded to a banker, printed and the customer is contacted to make an appointment at a branch location to open an account. Beacon Bank current vendors BancVue, Wolters Kluwer and JackHenry all offer automated online account opening software. Research and due diligence of the software as well as proposals from vendors are needed by the end of 3rd quarter 2013. Presentment to Senior Management would be scheduled for January 2014 and Board of Directors March 2014. Implementing online account opening will realize efficiencies in time for Beacon Bank. Lobby New Account customer can be served utilizing this software as well. Bankers will have more time to cultivate and cross-sell within new and existing relationships to ensure customers wants and needs are exceeded.

15

https://banking.ingdirect.com/openaccount/initial.vm?type=4000&openOption=ExistingPersonalCustomer

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Beacon Banks current Rewards Checking account is the most popular account among Generation Y customers. The focus of the Rewards checking account is a green account with no service charges or minimum balances. E-Statements, debit card transactions, ACH debit or credit each month are rewarded with a higher rate of interest and ATM fee refunds. The profitability of this account as well as the structure of all checking accounts should be reviewed and a possible restructure instituted to ensure that our account appeals to our e-Customers. This review should be complete by end of 3rd quarter 2013.

Regulations

According to the FFIEC E-Banking IT Examination Handbook, E-Banking varies significantly due to a number of factors16. Beacon Bank should choose their e-banking systems based on four factors: Strategic Objectives for e-banking Scope, scale, and complexity of equipment, systems, and activities Technology expertise Security and internal control requirements

Any or all e-services can be supported internally or outsourced.

Ultimately the Board of

Directors and Senior Management are responsible for developing the institutions e-banking strategy. This e-Channel enhancement project will complete the due diligence, cost benefit
16

http://ithandbook.ffiec.gov/ITBooklets/FFIEC_ITBooklet_E-Banking.pdf

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analysis and risk assessment to give the Board of Directors and Senior Management the information to give final approval for it.

Marketing A 2007 interview with Professor Tim G. Richardson posted on Witiger.com17 provides the reason why segmentation is vital to marketing is that we have so many types of customers. Groups of customers have: Become more numerous, resulting in many more types of segments. The differences among groups have become more distinct. The groups have become large in number. The groups have become more mobile

Market segmentation is the process of determining a specific customer type, value system, etc. to market to as opposed to general marketing to all types of customer which is expensive if all customers reached or ineffective if too general. Beacon Bank must get the word out to the Generation Y segmentation group to ensure the success of this project. Beacon Bank

successfully implemented a Facebook page in July 2012. In addition to a new/updated website as a result of this project, utilization of Social Media will allow Beacon Bank to focus on the segment of customers that are looking to save time and prefer to do their banking electronically and also want the personal service of a community bank. Beacon Bank Facebook Administrator

17

http://www.witiger.com/marketing/marketsegmentation.htm

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should consider a contest on the Beacon Bank Facebook page18 for new Beacon Mobile users similar to the current contest that enters names of people liking Beacon Bank on Facebook into a drawing for an iPad. Search Engine Optimization is the process of improving the visibility of a website or a web page in a search engines natural or unpaid search results.19 As part of this project, research on how to take advantage of Search Engine Optimization to ensure that Beacon Banks website will rise to the top in a web search. This will also contribute to getting out name out there with Generation Y.

Of the four banks that are just below Beacon Bank in Market Share in the Metro Market; Voyager, M & I, Bridgewater and Bremer; fifty percent of them already have online account opening capabilities. E-Channel enhancements will allow Beacon Bank to maintain or improve their current market share. affect multiple facets: Increased Retail customers that have the highest checking account penetration Current customers will have more value and buy more Increase Non Interest Income Potential for continued enhancements of automated consumer loan applications as well as commercial services Enhancing e-Channels will appeal to Generation Y and positively

18

https://www.facebook.com/beaconbank

19

http://en.wikipedia.org/wiki/Search_engine_optimization

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My first priority as project manager is to obtain buy in from Senior Management and the Board of Directors. To accomplish this, a timeline for involved departments to complete research is crucial. It will assist in getting employees to embrace the change. Input on vendor due diligence as well as ensuring the strategies to enhance Beacon Banks e-channel are followed and due dates are observed to ensure timely implementation. The e-Channel strategy timeline located in the Appendix to implement enhancements allows for the project to be completed by year end 2014. The 2014 e-Channel Strategies Timeline is a living document that will require frequent monitoring and updating. Timely completion of research tasks will prove this project can be implemented on time and within budget so efficiencies and revenue generation can begin being realized.

All banking channels remain very much in demand. ING has built brick and mortar branches albeit coffee shop like atmosphere gives ING a local presence the Chicago, Los Angeles, Philadelphia, Wilmington, Honolulu, New York City and St. Cloud markets.20 Jonathan Veline, Executive Vice President Wells Fargo and facilitator of the Delivery Channels & Strategies class at the 2012 ABA Stonier session stated: Customers that use more channels, buy more. While a virtual branch to replace brick and mortar branches is not what every community bank needs, expansion of the e-Channel to meet the ever changing needs of both Retail and Commercial customers is a task on every community banks list.

20

https://helpcenter.ingdirect.com/contact.aspx#cafes

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Financial Impact
Measureable Impact

The measurable financial impact of this project is somewhat difficult to determine. There are no hard savings or quantifiable increased revenue factors. There are only hard implementation costs associated with this project. The current economy and regulatory environment does not lend itself to spending budget dollars on unmeasured outcomes. However, sound due diligence can mitigate implementation costs and project an analytical recovery of implementation cost as well as predict potential income of this endeavor and its timing. While being the first to offer new technology can sometimes make you the trouble shooter for others that will follow in offering the same technology, falling behind in technology is more costly than staying abreast of it.

Implementation costs can be amortized or calculated into the budget of the implementation year. Short term financial impact will include implementation costs. Long term financial impact is based on increasing the number of households as well as the number of products and services each household maintains. Expansion of the e-Channel will attract new customers, grow existing single product relationships into multiple product relationships as well as solidify and retain profitable customers. Attempting to be all things to all customers is costly as well. Selecting our niche and remaining focused will allow Beacon Bank to be the Bank of Choice for Generation Y. Choosing the right automated online account opening package will also allow Beacon Bank to retain their reputation for being a progressive community bank.
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Investment

Updating the Beacon Bank website is necessary to implement automated online account opening. The contract with our current website vendor includes hosting our website, compliance, trend reports and minimal image editing monthly. Options with other vendors are available ranging from only hosting our website and compliance to including 30 web pages, one workflow, scripted functions; to 80 web pages, current weather, stock prices, submit-ready files and multiple workflows; to completely subcontracting the website to a vendor.

The same is true of automated online account opening software. Automated online account opening software packages vary in pricing and capabilities. From the basic fillable form that is printed and processed in branches to a sophisticated, all inclusive Customer Identification Procedure compliance; credit, address and social security number verification; document preparation and account funding. There is a vendor that is all inclusive of website, automated online account opening and marketing. All have an installation fee, monthly support fees and some version of per account fee. This project can be put together via three options. Each option is viable with positives and negatives.

Option 1 This option is about merging resources of multiple community banks to form a national brand of products and services. Being the first to implement this option in our market would be appealing.
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Once an additional community bank in our market implements this program, we would appear to be one in the same bank because the marketing focuses on products rather than the bank. Another reason this option is appealing is that it is all inclusive. The vendor for all intense purposes controls everything. Beacon Banks responsibility is to use the vendors products as directed by the vendor, handing over the reins on the website, marketing and automated online account opening and remit payment for invoices.
Option 1 Pricing Fees Annual Marketing Local Marketing Refresh Fee Website Hosting Package Automated Online Account Opening Set Up AOAO Monthly Fee, Annualized DDA, Savings Packages, Per Account Fee Total

Amount $ 20,000.00 $ 89,000.00 $ 9,250.00 $ 36,400.00 $ 12,899.00 $ 13,071.00 $12,471.00 $193,091.00 1247142.00

Option 1 S.W.O.T Analysis

Strengths All Inclusive Strong Analytics and Consulting Opportunities Expansion to Automated Online Loans Facilitates New Customer Acquisition

Weaknesses Expensive Upfront Not Integrated with Core System Loss of Localized Marketing Control Only Retail Accounts

Threats Long Term Viability of Vendor/All In Possibly Lose Identity Compliance Tightrope

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Option 2 This option is centered on Beacon Banks current core provider. There are multiple website support options as well as an automated online account opening product that can be as simple or as complex as you care to make it. The appeal to this option is implementation will be seamless as the software is already compatible with our core software. Beacon Bank maintains its

individual reputation. Though Beacon Bank would need to devote time to develop any type of new product and/or rewards account, they would totally control how the product fits into Beacon Banks niche. Beacon Bank would control implementation, create their own marketing strategies and branding for both automated online account opening and any new products.
Option 2 Pricing Fees Programming, Marketing, Training Website Hosting Package Automated Online Account Opening Set Up AOAO Monthly Fee, Annualized Product Software Package, Per Account Fee Grand Total Amount $ 45, 000.00 $ 35,635.00 $ 28,399.00 $ 15,477.00 $11,448.00 $135,959.00

Option 2 S.W.O.T Analysis

Strengths Integrated with Core System Marketing Directed to Meet Branding Manageable Implementation Costs Opportunities Expansion to Automated Online Loans Easily Restructure Accounts Facilitates New Customer Acquisition Expansion to Business Accounts Weaknesses Beacon Bank Marketing Development Time Beacon Bank Managing Analytics Time Threats Beacon Bank Product Development Time

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Option 3 This option is to implement the bare minimum website option from Beacon Banks core provider in anticipation of additional upgrades in the future. This option is the least expensive and does open the door for the future. This option would possibly allow the window of opportunity to pass. Generation Y will be fully engulfed in a financial institution already offering such

technology if Beacon Bank chooses a deliberate implementation schedule. Beacon Bank may be sacrificing its age demographic penetration success.

Option 3 Pricing Fees Website Hosting Package Marketing Grand Total Amount $ 35,635.00 $ 20,000.00 $ 55,635.00

Option 3 S.W.O.T Analysis

Strengths Least Expensive Start Opportunities Expansion to Automated Online Accounts Expansion to Automated Loans Facilitates New Customer Acquisition Weaknesses Beacon Bank Marketing Development Time Beacon Bank Managing Analytics Time Threats Too Little, Too Late Window on Generation X Closes Beacon Bank Product Development Time

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Revenue

Each option does have a foreseeable return using fee income forecasts to pay for the project. Assuming a 10% increase in total DDA accounts, interchange income and service charge income in year one and an 8% increase in the same categories in years 2 through 4; option 1 will be profitable in year 4 by $16,315, option 2 will be profitable in year 3 by $17,856, option 3 will be profitable in year two by $46,706.

Year 1
Totals
21

Year 2
Totals 8% increase 5173 $290,306.00 $305,451.00 414 $23,224.00 $24,436.00 $47,660.00 471 $26,391.00 $27,768.00 $54,681.00

10% increase

4702 $263,915.00 $277,683.00

DDA accounts Interchange Income DDA Service Charge Income Increased Income

First two year income increase

$102,341.00

Year 3
Totals 5587 $313,530.00 $329,887.00 8% increase 447 $25,084.00

Year 4 DDA accounts

Totals 6034 $338,614.00 $356,278.00 8% increase 482 $27,089.00 $28,502.00 $55,591.00

Interchange Income DDA Service Charge Income $26,390.00 Increased Income $51,474.00

Second two year income increase

$107,065.00

21

Annualized Beacon Bank Year To Date Non-Interest Income 10/31/2012

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Recapture of implementation costs using only interchange and DDA service charge income will take two to four years depending on the option chosen. This method does not include anticipated volume increases to other Non-Interest Income sources from the increased number of DDA accounts such as overdrafts, savings account service charges, e-banking service charges to name a few.

Implementing this project will realize a market share increase in both the Duluth and Metro markets. With a new website and Beacon Banks Facebook page to distribute the news that Beacon Bank has automated account open account opening in addition to all their other technology, Generation Y will become loyal customers knowing Beacon Bank will be there for them well into the future offering everything that comes with it.

Beacon Banks current Rewards Checking Account will serve as a smart checking account option for all types of tech savvy customers. The versatility of implementing option 2

Automated Online Account Opening gives Beacon Bank the ability to restructure products with ease in the future.

Training

Training employees to utilize the automated online account opening software is necessary. Option 1 would include a one-time Train the Trainer function by the vendor. Beacon Bank would then be responsible for training going forward. Option 2 and 3 would again leave the
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control of training with Beacon Bank including resources provided by our core provider. This would also give Beacon Bank the latitude to empower current employees.

Efficiencies gained using the automated account opening software to include accounts opened in branches may allow for restructuring of duties. Additional time can create more focus on the customer experience and relationship building and to encourage sustainable customer behavior. More efficiently completed tasks, whether for internal or external customers will add to the bottom line.

Marketing

Marketing of automated online account opening is vital. The investment into such software will be lost if Beacon Bank does not develop a marketing strategy to ensure potential customers will enjoy easy access that is user friendly. Option 1 takes the entire local marketing budget, leaving nothing for special promotions throughout the year. Beacon Bank would need to commit to this option wholeheartedly for at least the term of the contract. At that time it would also be expensive to change focus, should Beacon Bank decide to change banking models and/or their niche. Option 2 leaves Beacon Bank with total control of local marketing as well as the ability to restructure products and/or where their selected niche in banking is. This option also utilizes the current CFM database to electronically contact our new and existing customers in a relatively inexpensive manner. An onboarding set of emails that are dependent on what products and service the customer already utilizes has already been implemented. This would also be true

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with Option 3. However there would most likely not be many marketing budget dollars assigned to Option 3 which only consists of a new website.

Risks

By utilizing technology, Community Banks are able to offer cutting-edge products and services of larger national banks. One inherent risk is compliance. Option 1 and Option 2 both include full security compliance with stringent requirements in the pricing. Implementing the project and choosing not to advertise the availability of Automated Online Account Opening would seriously impede any increase in market share and Non-Interest Income. Creation of a kickoff of the new website and Automated Online Account Opening via Beacon Banks Facebook page would mitigate this risk. Option 3 holds the risk of too little, too late. The window of

opportunity for Beacon Bank to utilize their excellent checking account penetration of customers 40 years of age and younger will be closed if only a new website is implemented. Option 3 is really not a viable option. Beacon Banks is known as a progressive bank and wants to maintain that reputation. Putting that reputation at risk could be debilitating as the future draws near.

Results

Implementing the complete package including website, marketing, training, automated account opening would be a huge step and all inclusive is enticing. It also gives a considerable amount of control over to the vendor. It would accomplish objectives the most quickly as well as be the
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most costly. Recovery of investment and attaining profitability will take longer. Choosing the all-encompassing Option 1, would not be desirable. This option, though it utilizes the assets of many community banks, it leaves all marketing to look the same as some competitors. Beacon Bank believes it can be uniquely individual in accommodating customer needs.

Worst case, Beacon Bank chooses to remain status quo and automated account opening goes on the back burner. The opportunity to appeal to Generation Y and the tech savvy will pass. The checking account penetration Beacon Bank enjoys with the younger demographic customers would be wasted. Choosing to do nothing and just stand still in time and maybe even get left behind would be costly as well.

The practical way to move forward is to implement automated account opening and then be to commit to annually implementing one e-product or e-service that our current core provider offers. Progressively implementing additional e-Channel products and services will allow

Beacon Bank to manage costs, recover each investment and realize income over a shorter period. While this approach may seem drawn out over time, it allows for a smaller investment in our current economy and decisions to be made each budgetary period versus the all or nothing, large upfront investment.

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Non-Financial Impact
Hurdles

Since the inception of this Capstone Project, Beacon Bank Strategic Plan shifted to predominately commercial banking. Enhancing the e-Channel by implementing Automated Online Banking and Website enhancement may not be a priority. Thus the biggest hurdle is

garnering support. Buy in from Senior Leadership. Buy in from Department Manager. Buy in from staff. Buy in from customers.

Changing the way accounts are opened and the way Beacon Bank works with customers may draw some resistance as well. Change Management can be a make or break project

implementation in any business. A Businessballs.com Change Management tip states: Do not sell change to people as a way of accelerating agreement and implementation. Selling change to people is not a sustainable strategy or success.22 Change should involve employees change should not be imposed upon employees.

22

http://www.businessballs.com/changemanagement.html

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Overcoming Hurdles

Senior Leadership

Projected increased revenue impact will assist in obtaining Senior Leadership approval. Automated Account Opening can enhance a relationship with a commercial customer as well. Offering the convenience of online account opening and desirable products to commercial customers employees will further build that commercial relationship. Beacon Bank will provide Responsive Reliable and Reassuring service to the commercial customer and their employees. This will create loyalty from the commercial customer which is the focus of Beacon Banks Strategic Plan. Showing the costs, timeline for recovery of implementation costs and

possibilities of future endeavors will sell senior leadership team on e-Channel enhancements being a long lasting, viable way to reach all types of customers.

Seeing forecasted results come to fruition will ensure that this project will have longevity and be in place for years to come. Spending money now wisely will really result in more

households, more businesses and more loyal customers. Scheduled updates from the inception of the project will put their mind at ease.

Managers

This project will directly affect multiple supervisors. Orientation, training to new accounts positions and the possibility of establishing a call center environment will all be affected with additional focus on e-Channel enhancements. Supervisors input needs to be sought, encouraged
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and incorporated.

They ensure that the nuts and bolts of all types of day to day branch

operations, whether brick and mortar or online, run systematically without disruption to customers. Utilizing their knowledge and experience in the implementation of this project is imperative. Ensuring supervisors are informed and trained allows them to train their staff accordingly and portray a positive light on the project to their direct reports. Empowering supervisors will assist them in seeing positive changes and passing it on will surely be a benefit.

Employees

Frontline employees are the eyes and ears of Beacon Bank. Whether brick and mortar or a call center, the employees with direct contact with customers and potential customers must ensure the voice of the customer is heard. Challenging employees to look forward to new enhancements and see the possibilities for customers as well as their career path will keep attitudes positive. Ensuring adequate training and soliciting feedback from staff will give them a sense of ownership of making e-Channel enhancements a success. Show employees that automation allows them more time to work with more customers, learn additional processes and cross train to other channels of banking which diversifies their banking background. Attaining the ability to work in multiple channels of banking empowers the staff to decide which vein of banking is their passion.

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Current Customers

Utilizing our commercial relationships would be a great way to kick-off Automated Account Opening. Rolling it out to Beacon Banks commercial customers employees will get the word out that Beacon Bank has the technology to make banking convenient. In an American Banker article, Brad Anderson states Convenience is king for many of todays consumers, and banks should adjust to this changing behavior. Customers are flocking to online, mobile and ATM banking like never before. By the end of 2013, the Federal Reserve expects 42% of bank customers to use their smartphones for banking. demographics are going to accelerate these trends.
23

Rapidly changing technology and

Beacon Banks consumer checking account demographics show a number of life experienced customers. Beacon Bank will be challenged to change the mindset of these loyal customers. Enhancing the e-Channel appeals to their children and grandchildren and they will be confident that Beacon Bank meets their needs. Beacon Bank can still operate within the brick and mortar, schedule an appointment with your favorite banker as well as offer convenient e-Channels to meet the full spectrum of automated needs.

23

http://www.americanbanker.com/bankthink/convenience-is-key-to-increasing-bank-profits-in-2013-1055544-1.html

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Restructure

Effective implementation of this project may require a reorganization of current staff to effectively handle online interaction. As stated in the Strategy and Implementation section, Automated Online Account Opening should be used to open DDA accounts for walk in customers to realize maximum efficiency. Restructuring current staff to meet the needs of customers such as Generation Y, answering the phone by the third ring, as is currently in place at Beacon Bank, and empowering them to handle online accounts, online password resets, debit card maintenance requests, etc. These employees can also handle lobby requests of the same type. Creating a call center type atmosphere from current staffing model to service e-Channel products will also realize efficiencies without sacrificing service.

Long-term effects

Where is your dry cleaner or your pharmacy? Where do you grocery shop or do your banking? The commodity of time is becoming almost invaluable. To compete in our fast moving world, community banks need to be available and convenient. Expanding Beacon Banks current e Channel allows customers to bank on their terms whatever the terms of their day may dictate. The American Banker article by Brad Anderson also states: A decade ago, new bank branches were popping up on corners seemingly overnight. This trend was driven by customers choosing banks based on location. But the internet is changing the traditional model. Customers are now

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able to choose a provider based on their product needs, and this may or may not be their local branch.24

As stated earlier in this paper, staying abreast of technology is more cost effective than playing catch-up. The reputational risk of lagging in technology may have a lengthy recovery. Beacon Banks core provider offers a number of e-Channel products. A commitment to annually

enhancing our e-Channel will continue to make Beacon Banks product and services sticky. Retention of profitable customers and augmenting single product households to multiple product households will increase market share thus revenue as well.

24

http://www.americanbanker.com/bankthink/convenience-is-key-to-increasing-bank-profits-in-2013-1055544-1.html

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Conclusion

Even as Beacon Bank strategic plan flows into the commercial banking niche, implementing this project streamlines the process for opening personal accounts. Efficiencies gained can be

directed toward the commercial banking niche. It also leaves the door open for utilizing the software for commercial automated online account opening and automated consumer loan decisioning with few system upgrades. Deciding to maintain status quo will leave Beacon Bank in a stagnant or catch-up mode where the window of opportunity will quickly close. eChannel expansion is a worthwhile investment for Beacon Bank. Proud community bankers will always be ready to serve all types of customers. Structuring a comprehensive eChannel with the capacity to grow into the future will serve every customer.

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APPENDIX
Action Item Description 2013 e-Channel Strategies I. Website Website Design Define project and implementation team Identify vendors (Cavion(current provider) BancVue, Mills Marketing) Determine if current vendor has available enhancements Research and request additional vendor demos and complete due diligence Request proposals from vendors Create decisioning matrix Select website vendor Search Engine Optimization (SEO) Online Account Opening Define project and implementation team Identify vendors (JHA, BancVue, Wolters Kluwer) Research and request additional vendor demos and complete due diligence Consult IT for Risk Management Input Research/Confirm Regulator Requirements Select Online Account Opening Vendor Obtain Management & Board Approval Online DDA Account Opening Rollout II. Products & Services Checking Product Review Define project team Identify vendors (BancVue/JackHenry) Create decision matrix Pricing analysis (profitability of existing accounts) Product positioning (what segment does it appeal to?) Sr VP Retail IT Manager Compliance Manager Sr VP Retail Champion 4th Qtr 2013 1st Qtr 2014 2nd Qtr 2014 3rd Qtr 2014 4th Qtr 2014

Marketing VP

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III.

Action Item Description Marketing Onboarding and Reboarding Programs Research portfolio for opportunities within existing customer base Develop cross sales strategy to deepen existing relationships (Matrix) Matrix Creative Development Develop acquisition strategy

Champion Marketing VP

4th Qtr 2013

1st Qtr 2014

2nd Qtr 2014

3rd Qtr 2014

4th Qtr 2014

Social Media (Facebook) Define strategy for social media integration into project Design Contest for New Mobile Banking Users (i.e. drawing for an iPad) Complete In Process Overdue Target Completion

Facebook Administrator

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BIBLIOGRAPHY
1 2 3 4 5 6 7 8 9

http://maps.google.com/ http://maps.google.com/ Federal Financial Institutions Examination Council (FFIEC) Uniform Bank Performance Report, 06/30/2012 http://www2.fdic.gov/sod/sodMarketRpt.asp?barItem=2 http://www2.fdic.gov/sod/sodMarketRpt.asp?barItem=2 http://www2.fdic.gov/sod/sodMarketRpt.asp?barItem=2 http://blogs.smartmoney.com/advice/2012/03/13/banks-branch-into-yoga http://blogs.smartmoney.com/advice/2012/03/13/banks-branch-into-yoga Beacon Bank CFM Marquis database http://www.thestreet.com/story/11587839/1/banks-shouldnt-close-branches-as-they-expand-online-study-says.html Beacon Bank Monthly Transaction Volume Report Beacon Bank CFM Marquis database Federal Financial Institutions Examination Council (FFIEC) Uniform Bank Performance Report, 06/30/2012 Beacon Bank CFM Marquis database https://banking.ingdirect.com/openaccount/initial.vm?type=4000&openOption=ExistingPersonalCustomer http://ithandbook.ffiec.gov/ITBooklets/FFIEC_ITBooklet_E-Banking.pdf http://www.witiger.com/marketing/marketsegmentation.htm https://www.facebook.com/beaconbank http://en.wikipedia.org/wiki/Search_engine_optimization https://helpcenter.ingdirect.com/contact.aspx#cafes Annualized Beacon Bank Year To Date Non-Interest Income 10/31/2012 http://www.businessballs.com/changemanagement.html http://www.americanbanker.com/bankthink/convenience-is-key-to-increasing-bank-profits-in-2013-1055544-1.html http://www.americanbanker.com/bankthink/convenience-is-key-to-increasing-bank-profits-in-2013-1055544-1.html

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

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