Tech Companies Aren't Immortal and Banks Aren't Dead

Well, I’m shaking off my notebook and seeing what falls out after a very busy few weeks.

We’re holding it down in Scottsdale, Arizona. I’m Al Dominick, one of your hosts, along with my man Steve Williams.

Al, how are you liking Scottsdale summer? Isn’t it beautiful? Balmy. Relaxing.

It’s a dry heat.

UV index of 11. Dust storms. Rain showers. Monsoons. 119-degree temperatures.

Chamber of Commerce weather.

Exactly why we’re getting together in the studio today to talk about what’s happening in the world of banking.

We’re in the throes of summer strategic planning sessions. We’re gearing up for fall board meetings and retreats. So while we think about pulling the sweaters out and cooler days ahead, we’ve got some hot stuff that we need to talk about right now.

We also need to update and refresh our Spotify playlist that anchors all of our conversations.

I have five great bands that we’re going to use to get our conversation going.

Let’s break it down.

I’m going to surprise you because you’ve only seen me for about 20 seconds.

We’re going Oasis. We’re going Rolling Stones. We’re going Led Zeppelin, The Offspring, and Green Day.

All right.

Sorry, no Taylor Swift.

I love them all.

Think about Steve and me basically being the Gallagher brothers of Oasis.

We’re being reunited.

Do we fight a lot?

We do fight, but we also have fans who I think want us to come back together and do some cool stuff.

If we’re going to have a “D’You Know What I Mean?” moment, I think we’ve got to talk about this not being the summer to paint a rosy picture.

I say that because if I’m sitting in the role of a board member, I want to get the real, honest truth as to what my long-term future looks like and what the viability is of the business model that we’ve been using.

If you’ve been like me and traveling a bunch, you’ve probably read some interesting things.

One that really jumped out to me was a piece authored by Matt Harris of Bain Capital Ventures.

He talks about a “fog of war” approaching the fintech space and, by extension, the entire financial world.

I took a moment and jotted down a quote.

Want to see your reaction?

It’s a quote that’s been around a lot in my boardroom, so go ahead and read the whole thing because it was one of those quotes of the year, I think.

Quote of the year and could be in the running for a GonzoBanker award.

Probably.

Matt says, “I think we may finally be coming to the end of the American banking system with its 8,000 banks. At the end, the death rattle of that odd system could produce quarters and quarters and years and years of contracting credit for companies and projects of all types and have this really massive, in the near and medium term, tumultuous impact on everyone.”

That’s pretty scary.

Very inspiring.

Boo.

I think by 8,000, he means banks and credit unions because there are about, give or take, 4,500 banks.

Let me throw up a picture real quick.

We just had yesterday our 13th rate increase. Thirteen in a row.

Fed funds are well up, 5.25% to 5.5%.

This is what bankers have had to deal with, something historic.

You can see by this EKG of the last 15 years or so, this is what bankers have had to deal with.

This is part of their business.

Yesterday felt like a moment from Animal House, if you recall Kevin Bacon saying, “Thank you, sir. May I have another?”

This is what it’s felt like.

But I think in Matt’s case, I view this as something very historic.

What’s happened is historic, but I think it’s another cycle.

It’s another evolution of the banks.

I don’t think, and I hope, the community banking, regional banking, credit union system is going away.

I think we would both agree, if there are about 9,000 banks and credit unions today, in a decade we’re probably talking 5,000.

Agreed.

Everyone who’s listening knows this is an industry marked by consolidation.

This is not a new concept.

I just think Matt’s take is attention-worthy, and it’s something that, if I’m on the board, I want to talk about because I should be skeptical of a bank’s performance potential.

That’s not to say I’m not enthusiastic and opportunistic, but as a board member, I have a responsibility to ask the tough questions.

The difference this time is board members aren’t saying, “Comfort me about capital. Comfort me about credit quality.”

They’re saying, “With this liquidity crisis we saw, with technology changing, with operational risk, when you can have a Twitter-based bank run, do I have the right business model to create shareholder value in the future?”

That’s the big difference.

That’s where Matt’s right.

There’s an existential moment about business model in banking.

You and I have shared text messages around margin and margin protection, not necessarily margin expansion, being a theme that we continue to run into.

Thinking about the liability side of the balance sheet makes perfect sense right now.

We’re in the middle.

Probably four to one, people are saying soft landing versus recession.

There’s also this kind of moment we’re going to talk about where there may be some real hope for how to navigate through this.

The next thought would be focusing on the long term.

I guess that’s the second one.

This is where Robert Plant, Jimmy Page, John Bonham, and John Paul Jones, who formed Led Zeppelin, would say you’ve got to give a “Whole Lotta Love” to the future of your business.

You can’t get so sideways with what we’ve dealt with since March Madness this spring.

I think you’ve got to think about your funding positions, your asset deployments, what you’re doing with investors, your employees.

You can’t lose sight of the fact that just because we’re dealing with the moment now, there isn’t a responsibility to think further ahead.

I’m going to hold up one more chart.

This is the KBW Regional Bank Index.

You can see we had that moment with SVB, but it’s been crawling back from a low of about 35 in early May, now tipping 49.

That’s a 40% return in about 75 days, plus a 3.8% dividend.

This has been hotter than the FAANG stocks in the last 60 days.

Now, I know it’s recovering from a trough, but I think it gives you that data point.

There’s a long term here, and there’s a restructuring going on in the industry that’s going to be healthy.

It’s interesting, as we think of earnings and what we saw, it seems like with bank stock prices, a lot of the bad news has been priced in.

If you’re an optimist and you’re saying, “Are there better days ahead?” you could say maybe there are.

The data definitely gives you some confidence.

Here’s what I think a soft landing means, if there is one.

First of all, I think you do scenario analysis for every scenario out there.

But for a soft landing, I think what that means is you’ve got to not pull back so much on lending that you don’t take advantage of some of the opportunities for good, well-priced loans to put your balance sheet to work.

That’s why we see banks everywhere restructuring their balance sheets, taking some hits here and there.

It’s very important for bankers.

You’ve got to price up.

You’ve got to get paid for your risk, paid for the fact that there’s not as much liquidity out there, and put that balance sheet to work.

Now, everybody has had to tank their cost of funds to get back in the market on liquidity.

But now we can balance out that balance sheet and not lose the opportunity by being too risk-averse.

As you’re saying this, I want to flip it over from the long-term perspective to the employee retention side.

We can talk numbers. We can talk graphs.

But the people are the secret sauce.

Absolutely.

If I’m in a bank and I’ve been on this roller-coaster ride for the last three or four years, where it’s just been constant reaction to bad news, troubling news, deposit challenges, what can and should people be communicating more frequently to their employees?

Good point.

I had a CFO lament last week.

He was really excited about hiring a finance guy until he said, “You know, I’m just not really excited about banking because of all the troubles in the industry.”

Bad press, obviously, a little oversalacious.

I think it’s that whole strategy around talent and workplace.

I do believe regional, community banks, and credit unions are going to be great workplaces in the future if they take a very progressive attitude toward that.

I think what’s really important is to show your strategic vision and plan, not in glossy terms, but in very definitive priorities and goals to the team right now.

Answer the question that’s most important: What’s in it for me?

How is my income going to grow?

What’s my personal wealth-management plan at this bank?

I think good entrepreneurial banks do that well.

I think this ties in with some of the social media lessons that we’ve learned about communication.

You cannot keep your story tightly held.

That applies to how you attract people into your organization.

If somebody says, “That’s a thorny problem. I don’t want to address it,” that’s probably not the right person for you.

You want folks who are ready to get in there, roll up their sleeves, and do some stuff.

This is not a boring industry.

I hate to say it, but you look at a lot of banks’ LinkedIn pages and you’ve got someone who posted a press release 75 days ago, and that’s it.

When you see a great bank and their social media footprint, you want to get the signal that this looks like a fun place to work.

It looks like a very active place.

It seems like they’re doing a lot.

I think that’s one thing we don’t do well in the industry.

We don’t show the world what a great workplace we have through social media.

Again, just in our travels, we spend time with really interesting bankers who are doing some pretty cool things.

What I love is when an organization is growing in asset size, but it doesn’t want to lose its entrepreneurial spirit.

They prioritize how they keep their identity even as they do some things that would maybe prohibit somebody from thinking this is going to be anything but a stodgy old bureaucracy.

Maybe the most important executive in this next era is the head of talent and how they create that talent strategy for the future.

Interesting.

Thinking about talent and strategy, it’s kind of fun to think about what’s happened over the last 12 months just in terms of conversations about creativity and talent.

This time last year, we probably would have led off this podcast talking about banking as a service and what’s going on in the world of fintech and BaaS.

I think BaaS is kind of having its moment, but maybe not in the way that we would have described it a year ago.

If I queued up the music from The Offspring with “The Kids Aren’t Alright,” I think that probably lines up.

From Blue Ridge to Cross River, you can look in the news and find examples of some of these BaaS providers getting a little sideways with their communication to regulators and some of the things that they’re doing.

Not to throw shade on the individual organizations, but I do think right now there’s some stuff going on in the BaaS space that’s not as sexy and not as cool.

It doesn’t mean it’s going to stop, but I think we also have to acknowledge it.

It’s gone from that early shiny object that everybody was saying, “Should we get into it?”

Then everybody had a liquidity crisis, so most people put that on ice.

For the active players, I think the lesson is it’s early in the innings.

This stuff is hard.

The fact is that compliance, risk management, infosec, and everything else are capabilities you’re going to have to have to deliver tech-driven financial services.

Tech companies, they’re not big fans.

Even if they say they are, I’d be hard-pressed to find anyone who’s like, “I can’t wait to go do compliance.”

I think it’s a signal.

Tech companies aren’t immortal, and banks aren’t dead.

They have to work together.

I think they’ll get through this.

I think there will be fewer players in BaaS who are really good at this regulated BaaS environment.

Those that can show their partners they do this right time and again, it’s that rinse and repeat, rinse and repeat, rinse and repeat.

If they can be deliberate in their activities and communicate in a way that people can appreciate and not be surprised by, then I think you’ve built something.

There are some great BaaS providers out there.

There’s some great tech and great process management that’ll mature.

We just kind of got out there in the market faster than that maturity.

That’s my take on it.

It will come over time with fewer players.

Let me give a little shout-out to a BaaS provider up in New York City and a lesson learned from Revolut and Metropolitan Commercial.

Again, just to stick with this, “My Own Worst Enemy” by The Offspring could be the music that you’re listening to.

I’d use “My Own Worst Enemy” for Revolut, not for the bank.

According to the Financial Times, Revolut was erroneously refunding transactions with its own funds when certain transactions were declined.

This resulted in a $20 million loss in its U.S. subsidiary.

I was reading through this FT article and thought it was interesting how they were doing this.

I wondered how they woke up to it.

It turns out their partner bank, Metropolitan Commercial, had noticed it had less cash than anticipated and was able to flag this as something for Revolut to look at.

I take that as an example of a good, healthy relationship where you can say, “Hey, there’s a little mustard on your face. Let’s make sure that’s taken care of real quick.”

Over time, that’ll be one of the service promises of a bank like Metro or Cross River or Blue Ridge.

I also want to bring up a recent story.

Apple Savings has probably been the embedded finance story of the year so far.

It certainly got a lot of attention as we all look in our Apple wallets and see that offer.

Our chief research officer, Ron Shevlin, pointed out something very interesting about clients having trouble with slow money movement or clunky money movement and Apple extending a refund, which I think is great of Apple.

Ron calculated the cost.

It’s another example of an almost immortal tech company having a bank-operational problem.

Embedded finance is coming.

It’s going to happen.

It’s going to be much more of the value chain in the future.

I’m not saying pooh-pooh embedded finance.

We just have to understand that there are things we can contribute to that activity along the way because, again, tech companies, that’s not what they think about all day long.

They think about the next great piece of software or the next great app.

Ron’s been bringing the fire on social media.

If you’re not seeing what he’s writing, check him out on LinkedIn because some of the stuff is getting incredible impressions and engagements.

The comments and conversations that he’s sparked are fascinating to participate in.

Here’s to you, Ron Shevlin.

Here’s to you, Ron.

All right, final topic.

We want to share what we’re paying attention to.

I’m pulling Green Day’s “Basket Case” out because we’ve got a basket of things that we find interesting.

I mentioned Matt Harris to kick things off.

Matt with Bain Capital Ventures also had a really fascinating field guide around artificial intelligence.

If you have an opportunity to look at that, to understand the difference between traditional AI, which has been around for some time, and generative AI, which is all the buzz with ChatGPT, this is a really interesting exploration of where there are very practical applications of certain ideas and concepts.

When you think about where investors are putting money, I always think that’s a really interesting canary in the coal mine to pay attention to.

They see something that we may not be paying attention to at the moment.

If they’re going to throw some cash in, they think there’s a return.

That return is probably 10x what they stake.

That’s one thing I’ve been watching.

Real quick on AI, because I’m hearing a lot about this in my strategic planning meetings.

The call to action right now for bankers is: Let’s inventory the potential use cases for AI.

Everybody’s asking Cornerstone for that.

We’ve got our summer interns working on that, doing deep research.

What are the use cases, and who are the players?

Use cases for alternative credit, fraud detection, marketing.

That’s one big thing that we really see out there right now.

The other thing I thought McKinsey recently pointed out last week was that the future of using AI rests with middle management.

I believe that every one of my middle-management leaders needs to be in that continuous-learning loop right now.

Most have very little, other than playing with ChatGPT, practical use yet.

That needs to change very quickly in the next couple years.

We’re going to be surfacing different ideas as quickly as we can so you’re not wasting your time.

You can go down rabbit holes if you’re not careful.

That’s one thing that we’re paying attention to.

Another one, you talked about interest rates going up.

The same day the rate increase was announced, I think it coincided with two interesting bank transactions that hit the newswire.

We haven’t talked bank M&A in how long?

We were saying it’s coming, and it even came maybe a few months sooner than I thought.

It’s good to see.

I think this is indicative of people seeing value, but value that needs to be restructured right now to right the ship for the next chapter of banking.

The two deals.

We like Atlantic Union and American National in Virginia coming together.

I thought that was pretty cool.

Then we see PacWest and Banc of California also being announced.

The PacWest-Banc of California deal kind of felt like it had to happen.

But there are great opportunities there.

That’ll become a $36 billion or $37 billion institution in the state of California that could really do some meaningful work for the communities that it serves.

I’ve got to give credit to the fact that PacWest was on a lifeline in early May.

We kind of said, “Don’t panic and shut these banks down.”

I think this is a market solution to what’s occurred.

You had PacWest saying, “We may not have the same premium we had a few months ago, but we need to preserve shareholder value.”

You saw a merger that creates, really, a balance-sheet restructure.

This is all about a balance-sheet restructure.

The gravy is they have a great local franchise they can try to build.

Then we talked about the fact that $400 million of private equity is coming in.

Maybe that’s a canary signal that there’s value in this current pricing.

I think that maybe sets the floor for restructures and starts to get people thinking about these deals where we come together, restructure our balance sheet, and shore up liquidity.

One thing I want to point out, though, even post-deal, PacWest-Banc of California is 80% uninsured.

What does that mean?

That doesn’t mean there’s going to be another run.

What it means is you have to show the strength to the marketplace much more than before.

We’re FDIC-insured, but business customers will underwrite their bank from now on.

You’ve got to make your underwriting package very impressive.

I think that’s a huge thing for all our commercial-focused business banks out there.

You are being underwritten by your customers every week now.

Be ready for that.

Be ready.

That’s maybe our big takeaway.

Just be ready.

We’ve got a lot of things hitting our desks.

We just wanted to take a few minutes to share what we think is really interesting.

Again, we’re going to be pulling some new guests into the studio in the weeks to come.

Both Steve Williams and I just want to say thanks for getting Plugged In with Cornerstone Advisors.

Thanks.

Let’s go outside and enjoy the Arizona heat.

Let’s go get some sun.

Thank you, guys.