PNC Financial's Bet on Technology

By Motley Fool Staff Markets Fool.com

Investing in innovation is no longer a luxury for banks; it's a strategic imperative. With thousands of fintech companies circling the financial services industry and looking for vulnerabilities to exploit, the nation's biggest banks are pouring billions of dollars into new and improved technologies that will keep these fledgling upstarts at bay.

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One bank at the forefront of this is PNC Financial (NYSE: PNC). Listen in to the following segment of Industry Focus: Financials, as The Motley Fool's Gaby Lapera and contributor John Maxfield discuss the bank's strategy of staying ahead of the competition by improving the digital experience of its customers.

A full transcript follows the video.

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This video was recorded on April 3, 2017.

Gaby Lapera:We mentionedpreviously, they are looking to grow theirconsumer loan portfolio through credit cards and auto lending, but they're also looking atgrowing in other ways. One of the most interesting ways is investing in tech and innovation.

John Maxfield:Yeah. If youthink about where the banking industry is at right now,there are literally thousands of these so-called fintech firms, these aresmaller technology firms that are trying to creep into the financials space. In order for banks to be able to fend them off andprotect their competitive position in the years and decades ahead, theyhave to be innovating and investing in the digital experience of their customers, in order to continue to fend off these fintech companies. This is something that [CEO] William Demchak talked a lot about in his letter. Andthere's one thing in particular that he mentions in there that I found really interesting,it's this conversation about open APIs. What an API is is, basically ... [laughs] I don't know what it stands for, but, what it is, is, it allowsdevelopers on the outside of a bank toautomatically tap into the data streams in these banks. If you think about a Mint.com or something like that, or the Mint app, whereit can aggregate information from your bank account, your credit card account, your mortgage, other things like that. It'saccessing a lot of that information through an API. One of the things about APIs is that, while it allows those banking services to run through third-party apps, what it's doing is it's masking that bank brand behind that third-party app. So,it's a really interesting thing. Again,it's kind of like buybacks. Banks have to invest, they have to go down these routes,even if they could be disruptive to theirtraditional businesses, because in order to survive and in order to survive theinstitutional imperativethat's going on in the industry right now, in order to survive another day and continue banking in 10, 20, 100 years, they have to make these investments.

Lapera:Listeners,and Maxfield, API stands forapplication program interface.

Maxfield:[laughs] Thank you.

Lapera:You're welcome. But,more to your point, one of the factsbrought up in the shareholder letter is that 60% of PNC'sretail customers use non-teller channelsfor the majority of their transactions. That's basically mobile apps. So it's really important that they're expanding into this space. I think that's up from 40% just three years ago. That's anincredible growth.

Maxfield:Yeah,think about that. Sixty percent of their customers are using non-branch channels for a majority of theirtransactions, and that's up from 40%. A fewyears from now, it could be 80%,and after that, it could be 90% and then 100%. Itjust goes to show how revolutionary thechanges that are going on in the banking industry are right now.

Lapera:Definitely. Andone of the things they have to look at is,what are they going to do with the physical branches? It sounds like PNC has astrategy. They are shifting away fromfull-service branches to smaller -- to literally smaller-footprint buildings withfewer people in thembecause they don't really need as many human beings doing work. Which isinteresting. Actually, this segues perfectly into ournext growth opportunity,which is, they are interested in growing the middle marketwithout opening their middle-market business opportunities,without opening any branches. I was joking before the show that whenever you say middle market,it sounds weird and opaque,it sounds like some kind of business that has something to do withsome kind of financial vehicle thathas an acronym that's equally opaque, but it's not, it's just businesses that are somewhere between $5 million and $1 billion,because that's a small, manageable range,[laughs] you know?

Maxfield:It's not likethe black market, that's for sure.

Lapera:No,it's not the black market. They're not sitting arounddoing credit-default swapsor whatever it is. It's literallyjust lending to middle-sized businesses.I just think that's funny.

Maxfield:His point on that was great. He's saying, "Look,before, what we found was,in order to attract these corporate customers, these middle-market corporate customers,what we found is thatyou had to have an establishedretail branch networkin that area." Whathe's saying in this letter is, they are finding that in order topursue those marketsin specific geographical locations, theyactually don't need physicalretail branches there anymore. So they're going to move intoDallas, Kansas City, andMinneapolis,where they don't have physical branch networks,but they're going to start lending there much more aggressively. When you think about this, and you look at their footprint, PNC Financial could grow still significantly from where they are today in the future, which is different than those really big banks in the United States,because there's a limit to how much the grow,because they're already insome of these different markets.

Lapera:Definitely. This also speaks to theefficiency ratio that we were talking about earlier. They're keeping expenses down bynot opening new brancheswhen they don't need to open new branches, and they're doing that by testing and learning, which is one of the most important things that companies need to do in order to survive. Becauseif they just cruise alongdoing exactly what they've been doing for 100 years,it's not going to work out great,especially with how quickly things are changing for companies now.

Maxfield:Yeah. And to that point,he says in here, they'rein their fourth year of a five-year, $1.2-billion plan tomodernize the company's infrastructure and to build out keytechnological and operational capabilities. One of the things he says in that conversation is that, in 2017, the current year, they finally expect those investments to begingenerating netexpense savings. He goes on to say that willhelp to fund initiatives to enhanceinnovation and capabilities further. So, all these investments that they're making, they are now finally coming to fruition, and starting to impact the bottom line.

Gaby Lapera has no position in any stocks mentioned. John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.