Revolutionizing Open Banking with Jim Reuter

Welcome back, Steve Williams. It’s been too long since we’ve had a chance to talk to a legendary banker. Good to see you. How about a toast with our Plugged In glasses?

Why not?

I’m Al Dominick. This is Steve Williams. We’re coming to you from Cornerstone Advisors’ global headquarters in Scottsdale, Arizona, for this very special episode of Plugged In.

We start 2023 with a lot of people thinking about tech transformation, and Al, we’ve got a legend here to talk to.

We do.

Let me introduce our guest.

He started his banking career with a large, growing, well-respected organization out of the Lakewood-Denver area of Colorado, FirstBank, in 1987. He’s done just about everything in this bank, whether it was overseeing online banking, the contact center, treasury, and more.

It’s great to have Jim Reuter here as CEO of FirstBank. Jim, welcome.

Thank you. And I don’t like the term “legendary.” Let’s just say hardworking. How does that sound?

I like that better.

How about notorious?

Notorious. There we go.

I think there’s a lot of great background here. Frankly, if you read the press, Jim, a lot of credit goes to your leadership style for how you’ve been able to attract talent, grow the bank, and earn such a stellar reputation.

I’m going to let my partner Al kick off with some questions about what’s going on at the bank and how you see the industry right now.

We’re going to frame this up like we do every episode of Plugged In. We have five rock songs that we’re using as inspiration for our conversation today.

I started to think about how we could bring something clever and creative to this episode.

I noticed, Jim, that you got your start in your career in Palm Desert, California.

I did.

I’ve got to tell you, I’ve been going out to the Coachella Valley for 30-plus years. My parents have had a house right off El Paseo, so I’ve walked the mean streets of Palm Desert.

I love the fact that you and I share that little California connection.

I don’t know if you realize this, but in the world of classic rock, Queens of the Stone Age are from Palm Desert, California.

We’re going to use that famous band to kick things off.

They have a few different songs. If you go onto Spotify, you’re going to find “No One Knows,” because that’s their main hit.

But the one we really wanted to use was “Go With the Flow” to get this going.

We’ve noticed some headwinds that banks of all sizes are having to address and acknowledge right now.

From a CEO standpoint, you’ve got to be feeling pretty proud about last year’s earnings. I think it was the second best in the 60-year history of the institution. By my count, roughly $287.5 million of earnings.

That’s a really cool way to start this year.

Of course, you’ve also got to address the risks in today’s environment and think about what’s going to get you to higher absolute earnings in the future.

We thought we might start with those headwinds that you’re facing at the moment.

I think we’re not that different from other banks.

We may be leaning into technology at different times and doing some things a little bit differently, but we still make our money by taking in deposits and making loans or investing it.

In terms of challenges and headwinds, there’s net interest margin.

Every one of us as banks has lagged our deposit betas a little bit on the front end of this increasing rate cycle.

We also have assets that are yielding lower returns than you’d like when a T-bill is out there north of 5%.

That’ll be one of the challenges.

But that comes down to discipline. Discipline in how you manage your expenses, but also discipline in your credit quality, which is something our bank has stood the test of time on numerous times, including the financial crisis.

I’m a big believer in numbers.

With the yield curve inverted as long as it has been, and now to the degree of the inversion, I have to believe there’s something coming on the other side of this that’ll make credit quality a bigger issue.

We’re stress testing. We’re looking at our portfolio and making sure things are well positioned.

While the conversation today is about net interest margin, liquidity, and mark-to-market, I think the next conversation is credit quality.

As bankers, the challenge we always have is to focus beyond the immediate and think about what’s next.

That’s the next thing.

It’s interesting, Jim. It’s been nine months now since Jamie Dimon’s famous “hurricane is coming,” and we’re kind of still sitting on the beach looking for clouds in the sky.

A lot of the credit risk has been identified outside of traditional banking, in leveraged lending, the subprime consumer market, or some of the big commercial real estate in places like Manhattan.

So far, to your point, it just hasn’t bubbled up yet.

But I do see chief credit officers looking a lot closer at where something could emerge.

A good example is that we do a fair bit of construction lending, as do a lot of other banks.

I look at the lack of demand for new construction loans, and eventually that ripples through.

There are fewer jobs for the folks working on the construction site, fewer jobs for the people who make the things that go into the building once it’s built, and there’s just a long tail when things start to slow down.

I think we’re going to start to see that here in the next quarter.

A lot of eyes will be on that.

I like the word “discipline” that you used.

As you’re talking about this focus on certain segments that you’re banking, it reminds me of a conversation I had with Richard Davis when he was still the CEO of U.S. Bank.

He was reminding folks that banks are kind of like the canary in the coal mine. They have a real early view as to what might be happening in economic terms, so they can see downturns far faster than most could.

The fact that we’d be sitting on a beach nine months after Jamie Dimon says something.

It doesn’t mean that we’re burying our heads in the sand.

I think there are folks like Jim who are saying, “Hey, look, there’s stuff that’s out there. We just don’t know when it’s going to drop, but we have a sneaking suspicion that it’s going to happen.”

As we’re talking during this podcast, we wanted to talk a little bit about controlling your destiny and how you take ownership of the risk that you’re facing.

I started with a classic Palm Desert band.

If you live in Palm Desert, at some point you get bored and either drive up to Los Angeles or down to San Diego.

I figured we won’t pass the mills that take the wind and turn it into energy like you’d be going up the 10 to L.A. Instead, we’ll go down toward San Diego for our next band.

This is Blink-182.

They got their start and did some cool things. They sang some songs.

But if we’re talking discipline, it’s really “All the Small Things” that made Blink-182 famous, and I think that lines up very nicely with FirstBank and how you’ve been able to control your tech destiny.

Jim, I’m looking at an article from a few years back about how a bank in Colorado became a fintech force by investing in employees and community.

As you’ve scaled the organization, now knocking on $30 billion, you’ve always had a lot of in-house technology and haven’t necessarily relied on all the outsourcers.

There’s probably a philosophy and management style that goes with that.

As one of the organizations that, for the longest time, has taken control of its tech destiny, why is that part of FirstBank? What’s made it successful?

We really believe that if we can control our destiny, that’s always the best option.

As you said, we have about 400 people in IT.

For a bank that has 2,800 employees and is our size, that’s a pretty healthy number of folks.

Our core is developed in-house.

We’ll talk later about Finxact and some things we’re doing there, but what we really like is that we can choose to go where we want to go as a bank.

I’ll give you a good example.

We were the fourth bank to be part of clearXchange, which is now Zelle.

The reason we did that is we owned our own data.

We could see how many of our customers were using Venmo, Square Cash, and different things.

We looked at that and said, “People are speaking with their feet on how they’re using these apps and what they’re doing.”

I had a conversation with the CEO of clearXchange at that time, and I said, “Look, it’s the three banks that are starting that, and you put us in that, and you have over 60% of the deposits in the Colorado market.”

That was as close as you were going to get to ubiquity at that time for a P2P solution.

Last year, we did nine million Zelle transactions.

The reason that control of our destiny matters is those deposits sit in our bank versus a PayPal wallet or Venmo wallet.

The last time I looked, I think the average PayPal wallet had $500 in it that earns 0% interest.

At the end of the day, as a bank, it’s about net interest margin and income.

Controlling our IT allows us to make decisions, but we don’t do it simply because we like to control things.

It’s good for the bottom line to be able to pick and choose where you want to invest and differentiate.

A lot of the bigger banks are dealing with technical debt now.

They’ve been on big iron for a long time, or they’ve had a “legacy tech environment.”

On an in-house basis, there’s always the question of how you stay current.

How do you and your 400 IT folks avoid becoming insular and moving too slowly?

How have you built an IT team to move more quickly in today’s world?

It’s a mix of keeping people on the team who know our history and where we’ve been, while bringing in new people who know new languages and know how to code in the new world.

It’s also staying connected to the outside world.

We’re very plugged into Canopy, the fintech fund.

We attend a lot of conferences. We study what happens outside of banking.

If you look at what customers are doing with digital apps and other parts of their lives, it’s usually a pretty good predictor of what they’re going to do with their banking.

Banking tends to move slower because it’s their money, but eventually it comes over.

We saw lots of people who hadn’t used technology get to it during the pandemic to make life easier.

They’re now using mobile deposit capture features within the bank, and they weren’t doing that before the pandemic.

Getting outside and seeing what’s going on in the rest of the world matters.

Which leads to our next question.

There was a big headline recently, and I think we’re going to start this question with another San Diego reference, aren’t we?

Another one.

There are some really cool folks who have called San Diego home.

One of them, sometimes it’s hard to understand what he’s saying, but boy, he’s a great singer.

Eddie Vedder.

Of Pearl Jam.

Right.

A surfer from San Diego.

What do we want to quote out of Pearl Jam to get started? Is it “Even Flow”?

I don’t know.

Jim’s already given us the quick look that we want to talk Finxact.

I’d probably go for “Alive.”

That’s a big announcement.

You’re partnering with Fiserv and Finxact.

When we hear a new core strategy, it’s often, “What does that mean?”

What’s the partnership with Finxact going to look like for a group like you that has built its own technology for decades?

One of the things we went to probably 15 years ago, certainly 10 years ago, is that even with our own core system, we took all the apps we built, mobile banking, treasury management, and others, and plugged them into that core using APIs as though we had purchased that core.

We didn’t realize the wisdom of that decision until today.

Now we can look at Finxact, which is really a headless core.

Its main role is to crunch the numbers and do the basic accounting, but the idea is that you can plug other things into it easily.

It’s in the cloud.

As a result, we’re able to look at taking out our core, because it’s old. We’ve had it for a long time, even though we built it ourselves, and plug in this headless core.

When we started that, they hadn’t been acquired yet.

We’ve had conversations and are assured that they’ll remain independent.

I think you guys can appreciate that’s always everybody’s concern when a partner gets acquired by someone else. Do things change?

So far, they’ve left it alone.

We’re going to stand up a savings account initially.

This is not a big-bang core conversion. We don’t need to do that.

That’s the nice thing about our API plug-and-play approach.

We’ll plug in things. We’ll have savings, and then we’ll move on to transaction accounts.

It’ll be largely consumer-focused.

This is a multiyear effort to stand it up, but we like the real-time nature. We like the language it’s using. We like that it’s in the cloud, and we love that it’s headless.

We can go out and plug in best of breed, whether we’ve built that or decide to buy some of it at some point in time.

Have you set a target?

There are some peers of yours who’ve had these core migrations that have gone on for some time.

In your mind as the leader, have you set a target that says, “It’s going to take many years, but I want it done within a certain timeframe”?

We would like it done within two to three years.

You get much longer than that, and there’ll be new technology.

At some point in time, you have to move aggressively to that.

Things like how we calculate fees, we’ve already built a new version that’ll plug into Finxact.

The same thing with our mobile apps.

We’ve readied a lot of the peripherals.

Once we get comfortable with the accounting, how it works, the UI, and the different things that we’ll put in front of it, we’ll be able to move pretty aggressively from that point forward.

Sounds great.

What I think is cool is I remember back when Chip Mahan was excited to be bringing Frank Sanchez on to architect Finxact.

To see the investment, approach, and discipline that company took to get to where they are now, and then to look at an organization like yours that has also taken that same type of entrepreneurial stance where you want to control outcomes and you’ve got ideas to be tenacious, I think that’s a really cool thing.

It lines up with what a modern commercial bank needs to think about.

Steve and I don’t spend nearly enough time listening to music together.

As we were putting together this setlist, we realized there are just so many incredible bands from the state of California that we could cherry-pick from.

What comes to mind as we’re working our way through this podcast?

There’s Mötley Crüe. There’s Van Halen.

Who else?

The Eagles.

Green Day. CCR.

Go to San Francisco.

They’re north of where Jim first started banking.

Journey and the very famous “Don’t Stop Believin’.”

Tie it in now to a commercial bank.

One of the great things about FirstBank is that it’s a leading commercial bank.

You do construction. You do commercial real estate. But you’ve also got a lot of great C&I and small-business banking.

Al and I have a bias that this is one of the areas of banking that has maybe been least disrupted in terms of technology, use of data, and digital experience.

Our question to you is, what would you like the modern commercial bank at FirstBank, your C&I lenders and treasury management, to look like three to five years out?

That’s a great question.

I look at some of the approaches other banks are taking.

They’re going to target a vertical. They’re going to say, “Let’s bank all medical nationwide,” or “Let’s go bank this vertical.”

We’ve really started to explore the idea of being an open bank on the business side.

Our treasury management product would plug nicely into lots of software that people could go buy on their own, to be quite honest.

We know a lot of companies find accounting software or something very specific to their industry.

What they’d love to do is be able to use that and have it plug into the bank seamlessly.

Our goal, both on the consumer and business side, is to be the Intel chip, if you will, inside all of our customers’ relationships.

That may mean at times our brand might be disintermediated.

But at the end of the day, our goal is to acquire deposits and turn around and make investments and loans.

Anything we can do to better position ourselves to be the landing point for all their deposits, even if it means partnering with some other fintechs by being a great open bank, we think that’s the right strategy.

I think that’s right.

If these ERP systems are going to create great new business functionality, or there are going to be treasury portals that allow them to do things, being the depository in the background is important because someone will be.

If it’s not us, someone will get that shelf space.

We’re just not going to out-innovate across all those vertical tech-targeted solutions.

There’s a group of people starting up a new tech company right now very much focused on property management.

Historically, banks would provide all these solutions to their customers.

I think that’s an impossible outcome in the new world.

Best figure out how to plug and play and be really good at that.

Plug and play.

It’s kind of like the banking-as-a-service analog where you plug and play not just deposits, but all those payment services that we can provide securely, the know-your-customer piece, and everything else that comes with that.

I want to push back a little bit.

When you say you might not be able to out-innovate, innovation isn’t limited to the technical side. It’s also on the people front.

What you’re talking about is setting a leadership stance that others can emulate within your organization.

That will also attract businesses that want your help and support or the services that you provide.

I think innovation sometimes gets too narrowly defined in technical terms because banks aren’t going to have a DevOps shop that competes with Jony Ive from Apple anytime soon.

But you can have leaders who empower their teams to do something that really puts customer success at the forefront of the business.

I think that’s another reason you’ve had continued, recurring success.

You’ve been able to get your team to understand that taking risks is a positive experience, not a negative one.

When we see people talk about you, Jim, in industry circles, your leadership style comes up.

It’s very much, I guess, what Jim Collins would call the Level 5 leader, not trying to grab all the attention.

I even pulled a quote here about how Jim always likes to be the last person present at a meeting to speak because you like to listen first.

Al and I were interested in how you dial that into transforming the bank.

When there’s change, new strategies, or new priorities, you don’t like to be taking the microphone. You like to be listening and then reflecting.

Tell us how that works in action.

I think, first, if you hire smart people, you should listen to them.

I really believe that sitting back in a meeting, whether it be with peers or within your company, you can learn a lot.

The other thing is that you get a chance to slow down.

I always say, “To go fast, you have to slow down.”

When you sit and listen, you slow things down.

As a result, you take in an idea from four or five different folks, and sometimes it’s a combination of those ideas that really is the one everybody’s chasing.

At the end of the day, nothing is more motivating for people than to be empowered and to be heard.

Every leader says it, but it’s super important to surround yourself with smart people.

If you don’t listen and let them go first, you won’t really know how smart they are.

Jim, what you can cue up for your playlist would be the Grateful Dead and just tell the team to “keep on truckin’.”

That’s right.

I want to point out one thing.

I read a great profile of Chris Winward, FirstBank’s CIO, and how he came up from the teller side.

Something that was really interesting from a talent perspective is you guys created a position within the IT group called a career navigator.

I really like that.

The whole point was, let’s give this IT team real career paths and real development and training opportunities.

I’ve never seen that.

One of the things banks are dealing with is IT turnover everywhere.

It sounds like you guys have really committed not only to having IT talent, but to keeping them there and making them part of your culture.

If you can create multiple careers within your company, that’s the best thing you can do.

I’m in my sixth year as CEO, and I’m bored.

This is the longest I’ve done the same job for the company.

We start everybody in management as a management trainee.

I started in Palm Desert and made loans.

I made enough bad loans that they said, “Let’s move this guy to the IT operations area.”

But the bottom line is, we want to build leaders.

If you look at our senior leadership team, they’ve worked in every part of this bank.

We’ve taken that same philosophy into IT.

We have people who were on the mainframe side who are now working in Java and C and working on all different parts of the organization.

We move people around.

That not only builds knowledge, but it makes people want to stay here and have a long career.

The boredom thing is big.

You say you’re bored, Jim, but people get bored if they’re not challenged, if they’re not getting trained on new tools and capabilities, or if they’re not seeing the fruits of their work.

“I’m working on IT,” but it’s really about customer experience, driving a new business, or creating a new open-banking platform.

I think that’s how you’ve avoided becoming an old bank IT department that needs the stimulation of the outside.

You’ve kept stimulating internally with how you develop talent and how you partner.

More of that, I hope, in the future.

That’s great to see.

I think that’s how the midsize regional banks continue to make a lot of trouble out there competitively and grow shareholder value.

We appreciate Jim, as a troublemaker, joining us and talking about building leaders and controlling one’s tech destiny.

I think it’s a really cool thing that you’re doing, and it’s a reason we put Plugged In together, so we could surface and highlight examples just like this.

Jim, we want to say thanks for joining us.

He’s Steve Williams. I’m Al Dominick.

This is Plugged In from Cornerstone Advisors, and we’ll catch you again in the very near future.

Thanks so much, Jim.

Thank you, guys.