Transcript
Welcome to Plugged In, a brand-new 21-minute podcast for those seeking the insider scoop on what’s strategically moving financial services forward. We’re serving it up with the GonzoBanker flair that you’ve come to expect from your friends at Cornerstone Advisors.
I’m your host, Al Dominick, and I’m joined by my partner in crime, the very famous Steve Williams. Together, we’re going to geek out on the intersection of ideas and opportunities happening across the banking landscape today.
Think of us like your old-school SportsCenter hosts, where the two of us are going to try to hit the high notes with a little bit of wit and wisdom on things that you really want to know about today.
Steve, nice to be checking in with you.
You bet, Al. We’re always kind of crossing paths on the road. I know you’ve been a lot of places. I’ve been in Northern California, Florida, Connecticut, Chicago. How about yourself?
Okay, so you’re keeping the airlines in business. I think I’m doing the same because I’ve been to Canada twice. Let’s see, where else? I saw you in Chicago, I’ve been in Nashville, I’m holding it down in D.C. right now. Of course, I was at the mothership in Scottsdale, Arizona, which is where Cornerstone is headquartered.
Along the way, we’ve had a chance to see and speak to some really interesting executives who are pushing the boundaries of what’s possible right now. I think you and I wanted to use this inaugural podcast to tee up five areas of growth and change that we think are really relevant to banks of any size, and really to any organization that’s looking to differentiate and diversify the way they do business.
We still good with that concept?
Let’s rattle them off real quick, and then let’s tear into each one individually.
You got it. At Cornerstone, we like to talk about being wildly prescriptive. This isn’t like you’re going back to school. We’re going to give you the answers to the test before we even ask the questions.
There are five things that Steve and I have really made note of over the last few months. We’ll talk about the Twin Towers of Transformation, why every basis point counts, how to think about technology from a performance management standpoint, what this whole concept of scaling smart entails, and why it’s so important today that we depoliticize ESG.
Those are the five basic points we’re going to tease out in this 21-minute podcast.
Steve, do you think we could take a few minutes to talk about the first one, the Twin Towers of Transformation that we’re seeing take place, maybe first by defining what the towers are and what they look like?
You bet. I’m going to give a shout-out to a great CEO, Mark Hardwick at First Merchants Bank out of Muncie, Indiana. I was trading notes with him earlier in the year, and he said, “I just got back from a CEO conference, and every CEO is going through two transformations: a tech transformation and a talent transformation.”
It really dawned on me that those two transformations are what we’re all grappling with right now, and they’re also very intertwined.
As one example, Al, the unemployment rate for IT professionals is 1%. Everybody started demanding IT professionals after COVID, when we needed more of them. We’re struggling with that. How do we have speed to market? How do we keep moving forward?
The other side is the workplace. What does that next-generation workplace look like?
Trying to transform from a technology and experience standpoint while you’re transforming the workplace at the same time is, as I like to say, as easy as a golf swing.
You haven’t seen my golf swing. It can get a little funky.
With this whole Twin Towers concept, I want to give my apologies to anyone down in the Houston area who was hoping for a Ralph Sampson and Hakeem Olajuwon take.
It’s so interesting when you marry this idea that everything analog is going to be digitized. That’s something we heard Nigel Morris, who runs QED, mention in Chicago. The concept of digital being a journey, rather than necessarily a destination, is really important for banks to take hold of and make sense of.
You can only go so far with technology based on the team you have in place.
If you think about culture and how you have to get your culture right before you get your operations correct, once you get your culture and operations going, you can start to think about your financial performance. From financial performance, you can start to satisfy your shareholder and investor base.
It falls in line with that old Lean Startup concept that Eric Ries wrote about, which was all around people, products and performance.
I think it’s really important, as we think about the world we’re in right now, that we don’t try to divorce technology from talent. They really are, as you said, Steve, intertwined.
I think there are some prescriptions here. You’re going to have to buy some transformational talent. We see our executives out there mixing the gene pool with new people from Google, digital banks and other industries, and bringing in data scientists. That’s kind of the free-agent buy.
But we’re also going to have to build more technologists internally. We don’t have enough in the market to give us what we need for the next decade. I see some of my clients starting to take folks from the branches and contact centers and get them more involved in IT and digital.
I think you have to do both on the talent side.
The other thing that’s really important is our Gen Ys and Gen Zs. They’re going to shop with places and work at places that represent good corporate values. We’ll talk about that later with ESG, but creating that workplace is how you’re going to have the transformational talent to execute on staying relevant.
Staying relevant is one of those themes we’ve heard in the past, and we’re going to continue to talk about it going forward.
I wanted to switch from the Towers of Transformation to this idea that every basis point counts. You and I have shared a few cabs recently, and we were brainstorming this idea that if you could save a basis point, you could do some pretty meaningful things.
You want to talk a little bit about this concept of every basis point really mattering?
I like to joke, Al, that if we’re not having some good arguments in the asset-liability and pricing committees right now, we’re doing something wrong. This has been a crazy time of volatility.
In 2022, the budgets we put together last November are obsolete. We’ve seen one of the fastest rises ever in short-term rates from the Fed trying to combat inflation. The first six months of the year, we had the worst stock market and the worst bond market in parallel in 50 years.
We’re seeing a lot more focus on active balance sheet management and making those bets. A lot of the profitability of banks going forward is going to come down to how well they can keep their funding costs in line as rates go up, the proverbial deposit beta.
What I’m seeing out there, Al, is people realizing that we have to be much more disciplined with analytics, pricing and how we look at overall balance sheet management.
When there was no cost of money, it was much more operational, much more sales- and growth-driven. Now, you have to dial in that profitability and risk as you’re looking to grow the bank.
I warned everyone listening that we were going to nerd out about some things, so let me give you some shorthand calculations when it comes to a basis point.
At a $1 billion bank, a basis point is $100,000. Al, what would you do with $100,000 if you had it because we knocked out another small basis point of net interest margin?
I’d be looking for some of these digital account-opening players. For $1 million or $1.5 million, you could do something really compelling. You can build new deposit-gathering opportunities that are going to make you more relevant and more compelling because you’ve been able to reduce in some places and redirect those resources somewhere else.
That’s it.
When people say, “We want to change, we just don’t have the resources,” we have to bear down and look at every nook and cranny, both in how we actively manage the balance sheet and how we actively manage our legacy operations today.
The next topic is all around performance management. Really, we’ll call it technology performance management.
When Steve and I were in Chicago, we were spending some time at Tom Brown’s Second Curve CEO Retreat. We were hearing about the state of fintech and what’s going on there. We were hearing about applications of new concepts and investments people were making to create a more holistic digital experience.
This is one of those concepts that sounds kind of catchy, but it has so many nuances to it that I thought we should dig into technology performance management as we sit here in October, thinking strategically about what the next 18 months could hold.
Absolutely.
What comes across to me, and what I like to say to my clients, is that up in the C-suite, where the power and resource allocation often reside, we’re in the midst of our next M&A deal. We’re in the midst of asking what credit quality looks like. We’re in the midst of our budget variances.
Are we in the midst of technology and the customer experience? Not as much.
To me, a lot of the next decade is about how we bring more visibility around tech, digital and the client experience into the C-suite so we can allocate resources properly and bring in that transformational talent.
It’s really interesting to me how little we know in banking about how much we spend on technology, where that tech spend is going, and what kind of outcomes it’s giving us.
You and I recently saw Brian Moynihan, the CEO of Bank of America, speak. One thing I love about Moynihan, and I encourage everybody to go out and look at his quarterly investor decks, is that he ties technology to business outcomes.
He’s very proud that the consumer bank is originating 50% of its sales through the digital channel. He’s very proud that there are now more Zelle payments than checks processed.
To us, that’s the question: How do we start bringing those outcomes for the business and the creation of shareholder value into the tech budget and the portfolio of vendors that we manage inside the bank?
Getting granular and getting gritty was something Mr. Moynihan showed firsthand as he talked in incredible detail about his bank’s performance.
You mentioned payments. There’s something on the side that we have to acknowledge. There’s some really crazy stuff happening in the world of regulation that’s going to impact the performance of banks and their income opportunities.
Can we take a slight detour? We’re talking about technology performance management, and you were right in saying we have to think about business outcomes, rather than necessarily the activities we’re chasing after. But sometimes things happen while you’re going to work every day that are outside your comfort zone.
All of a sudden, we’re hearing about Reg II coming from the Fed.
We’ve had some new rulings on Reg II related to card-not-present transactions and the need for a second network. I won’t get technical and geeky here, but we’ve got some great experts, Brandy Gregory, Tony DeSanctis and others at Cornerstone, who really dig into this all day long.
You have that coupled with a bill in Congress related to the regulation of credit card interchange. It’s definitely under fire, Al.
We encourage our bankers out there to really engage in this stuff. More and more, we have to keep maturing our payment strategies. Who are our payments executives and product owners inside the bank?
It needs a much brighter light than maybe it’s had because it’s been a nice source of non-interest income for banks for decades.
We’ve talked in years past about banks needing a payment strategy. This is putting a light right on the idea that if you’re not talking about it, and if you’re not really understanding where there’s opportunity and risk, you’re missing a big opportunity.
Steve, we live in this banking world of ours that has been marked by consolidation. It’s wave after wave. People have talked about this for years. It’s an eat-or-be-eaten type of setup, and that ties into this concept of scaling smart.
There haven’t been many M&A deals struck of late, but we know at some point we’re going to start to see mergers of equals return. We’re going to see straight bank-on-bank acquisitions. We may see some specialty opportunities pursued, like we found in past years when healthcare organizations were brought into traditional financial institutions.
Talk a little bit about this concept of scaling smart.
We talked about geeking out on data, so I looked at banks today between $5 billion and $50 billion across America. Then I looked back at those same banks and asked how big they were a decade ago.
The median was about one-third of its current size.
These banks have tripled in size over a decade through a combination of organic growth and M&A. What’s interesting is how fast that’s happened.
They’re getting big very fast. They’re getting busier and more complex very fast.
They’ve done a good job on their efficiency ratios. They’ve actually lowered the efficiency ratio during that decade of growth and consolidation. However, I think a lot of that efficiency came from doing bigger lending deals, leveraging the balance sheet and benefiting from a very nice period of low-cost funding.
That gave some great revenue lift to the balance sheet.
At the same time, I don’t know if they matured marketing, digital experience, enterprise risk and analytics at the same pace that they grew their balance sheets.
I have a lot of CIOs and COOs out there asking, “How do I mature how I operate as a bank now that I grew so big, so fast?”
To do that, you’ve got the old adage: I have to run the bank while I transform the bank. I also have to merge the banks that I acquire.
There are almost three paths of work that folks have to do. It creates a lot of gray hair for the folks in the back office.
What’s really important now is figuring out how we apply automation, analytics and process design to do this. There’s a bit of catch-up to do among regional and community banks.
As you’re saying that, what can’t be lost is the idea of culture, culture, culture.
As you scale, one of the things that was shared with me a few years ago by the CEO of First Horizon, who was in the process of acquiring Iberiabank, was that as you grow in size, you become further away from the clients who helped you get to a certain place.
Yes, this is an industry where size and scale absolutely matter. But you also can’t lose sight of the fact that you have to maintain your culture. You have to maintain your identity, and that is a challenge.
There are the numbers you talked about. There’s efficiency. There are different ways of thinking about who you want to be, rather than necessarily who you are.
As you scale, that’s one of those hard conversations that bank boards in particular have to take account of. Yes, the industry will consolidate. Yes, there will be opportunities to grow. But it’s no longer defined by just your geographic reach or presence because your community is now what you make it. It’s not necessarily where you are.
There are two things I’ve seen over the years in a great company or bank that scales.
One, they have a great middle-management team. These folks know how to manage change. They know how to build processes for scale, rather than just fight fires.
Secondly, you can almost judge how well a scaling company is going to do by the relationship between the front office and the back office.
If it’s viewed as a partnership, it’s engaging and there’s a lot of compromise and design thinking going on, great. If it’s dysfunctional and antagonistic, you probably have peaked as a franchise.
Looking for that real partnership between the front and back office as you scale is important.
You talk about dysfunction. There is some dysfunction that I note when I walk around Washington, and actually I could cite a lot of things that are dysfunctional in our nation’s capital, which is a great place to live. I’m not throwing any shade at my home of 17 years.
But it does strike me that this whole concept of ESG has become a political hot potato, which is incredibly disappointing because there’s so much opportunity and upside for banks if you could just take the temperature down a little bit.
Steve and I, as we’ve been on the road and talking about these different issues that are front and center for folks, thought it would be unfair not to acknowledge that elephant in the room.
ESG, whether you like the concept or not, has become such a political issue. I think we have to depoliticize how we approach this.
Steve, I think you said it best as we prepared for today’s pod.
One thing I’d be happy to report, because I go from board meeting to board meeting and town to town, is that the sincerity out there among the banking and credit union industries is sky-high.
This is not being viewed by boards or management as a check-the-box compliance exercise or an eye roll. There is a sincerity around asking, “How can we really have an impact?”
For a lot of regional and community banks, this has been in their DNA for some time. They’re just trying to understand how to start building this into how they operate and how to show impact to all stakeholders, rather than just shareholders.
I think what everybody is a little worried about is if it gets too brittle in terms of technocracy: “I’ve got to meet these very specific, check-the-box requirements, and that’s going to define how good of a corporate citizen I am.”
Instead, how can we really show meaningful impact?
I think there’s a real opportunity out there. What I’m most encouraged by is that I see executives wanting greater diversity. I see executives wanting to show more community impact.
I think it’s becoming less antagonistic around community benefits agreements and more about bringing in folks with different perspectives to say, “Let’s really show some impact.”
I totally agree.
Keeping anything from becoming brittle should be the job of a leader. You want to have flexibility. You want to have the ability to bring in diverse thoughts and perspectives.
We’ve seen repeatedly that when you have a diverse leadership team, you have better financial results than peers that don’t have that same level of diversity. So it’s not simply a feel-good exercise. It’s something that can strengthen your business and position you to be more attractive to the communities you serve.
Again, we think that if we can take the temperature down just a little bit, there’s a great opportunity for us to have some really cool conversations.
Okay, we’ve hit on five things, and I think we might have time for a quick bonus round, if you’re game. What do you think?
Quick bonus round. I’m game. What is it?
Guess your weight.
No. It’s becoming more and more clear that if all you’ve ever done is all you’ll ever do, then all you’ll ever get is all you’ve ever gotten. It’s one of those old clichés that rings so true right now.
There are three things we find that aren’t necessarily working the way people thought they would six months ago. The first is crypto. The second is buy now, pay later. The third is all this whiz-bang artificial intelligence and machine learning stuff.
Those are three things that I don’t think we want to sleep on, but I think we can move them back a little bit in the conversation queue.
Is there anything else, Steve, that you think you’ve heard that people need to continue to prize rather than put aside?
That’s a great question.
On all those things you just mentioned, the discipline we need as bankers is to avoid simply pooh-poohing them as competition that has funding today or doesn’t tomorrow, or has issues today or not.
What are the use-case blueprints these entrepreneurs are showing us? They’re trying to build better mousetraps, and we should always be looking at those blueprints.
On the buy now, pay later point, point-of-sale isn’t going away. There’s going to continue to be some degree of convenience at the point of sale, so we have to use that as a blueprint.
For crypto, I think the horse is out of the barn door. We’re going to enter an era of regulation of crypto, and obviously it will continue to be part of the landscape. But it does give us a chance to play the long game and not panic on those things.
What strikes me loud and clear, though, Al, as we sit here this morning, is our digital experience when it comes to a storefront: how we generate mortgage, consumer and small-business loans; how we open deposit accounts; and how we onboard new customers and engage them in self-service.
Self-service isn’t simply checking my balance. It’s replacing a card. It’s doing something with a beneficiary.
There is so much efficiency still to gain in how we do digital sales and digital engagement that I can’t understand why we’re not all hands on deck getting that done over the next few years.
That’s a no-regrets investment. It’s a no-regrets capability to have. We all have C-plus, B-minus experiences today.
Well, no regrets on my end for spending a little bit of time talking with you, Steve. This was fun.
This is the first of many Plugged In episodes that we’re going to do. We invite you to take a listen, bookmark and share with your friends.
Again, I’m Al Dominick. He’s Steve Williams. We appreciate you taking the time to get Plugged In with Cornerstone Advisors.
Thanks so much, Al.
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