Transcript
Coming up, a Steve Williams-inspired special episode of Plugged In.
It’s so bright in here I had to bring the Persols out because we’re going to be getting into some pretty hot topics here in the Arizona desert.
There we go.
It’s been too long.
Steve took a little pause on Plugged In. He’s been out working the airlines and seeing a lot of the country, so I thought this would be a really opportune time for the two of us to recap some of the more notable milestones from the first quarter of 2024 while, at the same time, looking ahead over the next six to eight weeks.
Hard to believe the first quarter is over.
That was fast.
Everybody tells me, “We just got back here,” and boom.
I feel like I just was playing Santa to certain family members.
So here we are, looking past spring break and into summer plans.
The Masters is in front of us, or depending on when you listen to this, behind us.
We’ve done now 25 or 26 episodes of Plugged In.
I think we’ve got a fairly good cadence, which is why, of course, we have to change it around just a little bit.
Last time I was in the studio, it was with Mary Wisniewski, who’s one of our colleagues.
She’s got a new podcast coming out called Money Isn’t Everything.
When Mary and I were talking, we used a format that I think we could try again today.
You got it.
Instead of going with five songs to inspire five different conversations, I’ve got two songs.
One to take us in, one to take us out, and then three big things that I think we want to cover.
An issue that we find resonating with CEOs and CFOs.
Something that ties into our Smarter Bank concept that we’ve shared in recent episodes.
Then we’ll wrap up with a mistake that banks inadvertently make that we think we might have some suggestions to fix, with an eye toward small-business banking.
What do you think of that format?
I can’t wait to hear the songs.
I love banking, but now I’m curious about the songs.
See, you leave for one episode and all things go off the rails.
We’re going to use The Black Keys and the song from their 2010 album Brothers called “Tighten Up” to get things going.
Because we’ve got to tighten this podcast up.
We can’t just go all over the place.
We’ve got to think about our listener and what they care about.
What I think is front and center for a lot of people is the business of banking staying very creative and compelling.
But there’s some stuff that we’ve taken note of, and I thought we should just share it.
We could talk about the earthquake that hit New York City.
We could talk about the eclipse.
A lot of good memes making fun of you guys from the Californians.
On the East Coast, you don’t know what it feels like to be shaking.
You get a little scared.
But we could go down the social path, or we could say on the banking front, what’s been interesting in the first 90 days of the year is really the scrutiny, if not attack, on banking-as-a-service providers.
When I think about all the different cease-and-desist orders, corrective-action directives, and the like, there’s just a lot that’s impacting those 80 to 90 banks that really do provide some interesting services.
Yeah.
I mean, I have heard from some of our team members out there that executives are lamenting, “I don’t think the regulators want anyone smaller than a $100 billion bank in this business, the way that we’re getting barbecued.”
I think that we’d like to step back and say these are the speed bumps along the way to innovation and business-model transformation.
I think some of that is still there, but this is a rough road.
We always predicted BaaS might be an area for very specialized, operationally sophisticated folks.
That doesn’t necessarily mean big, but it means good.
I think there’s a big shakeout of the rush to BaaS that has turned out to be, no, you’ve got to really have your game on.
Yeah.
I think BaaS as a concept will be in future conversations on Plugged In, but also in boardrooms and really across the industry.
That’s one thing I made note of.
Another, I was reading The Wall Street Journal the other day, and I saw Jamie Dimon has a concern about U.S. interest rates.
He has a maybe not-so-great feeling that they could go up to around 8% in the coming years.
I know we’re going to talk about Jamie and JPMorgan in a moment, but his outlook on the economy has been cautious for some time.
You see different news like this.
What are your thoughts?
I think he’s right on.
I think I’ve heard in my conversations with CFOs in the last few weeks, “Darn it, this higher-for-longer rate environment is here.”
What’s fascinating about what Jamie said is, “We’re modeling a range between 2% and 8%.”
Talk about a range.
Then he said, “Under many economic conditions.”
One thing he said that’s really interesting is the worst outcome would be stagflation, which is people aren’t really getting the employment and wage increases, but we’re getting inflation.
So I’m as worried about those kinds of things as he is.
One statistic that has really popped up, and I thank Tom Brown and his weekly newsletter for this, is the days that we’ve been in an inverted yield curve.
I think it’s about 688 as we speak this afternoon, the longest it’s ever been since 1978.
So we’re back into these historic moments.
Forty-six years ago, we were in this kind of inverted-yield-curve environment.
As you know, an inverted yield curve is not the easiest way for banks to make money.
Definitely, I think being very model-driven, very scenario-driven at both the board and C-suite level right now is huge.
Yeah.
You mentioned Jamie giving that 2% to 8% range.
I wonder if I asked my wife, “Can I play golf if I come home between two and eight?” Would that be okay?
Yeah, exactly.
Must be nice to have that type of liberty.
Third point that I made note of was U.S. bank M&A activity.
It reached a 23-year low last year.
Again, pulling up some data, there were under 100 announcements, and that pace that some people thought might accelerate really has not come to pass just yet.
Right now, if I look, we’ve had just 28 announcements through April 1 of this year.
When I think about de novo activity, it’s even slower.
This is important because from an economic standpoint, you want to have pressure from below that is forcing some interesting conversations.
That’s not happening.
On the merger front, we continue to hear a lot of interest in pursuing a dance partner, but we’re not necessarily seeing something announced where you say, “Okay, you found a suitable pair.”
Yeah.
There’s a lot of math here in terms of a few things.
One is the bond losses that exist on the banking industry’s balance sheet, roughly $600 billion today.
People were hoping for rates to go down.
When rates would go down, that would stem some of those book losses and make it easier to do a deal.
That’s one thing.
Also with rates, if rates started going down, you might see price-to-earnings ratios of bank stocks go back up.
But both this higher-for-longer environment and a regulatory environment that has been grabbing more revenue from the banking industry, I think, is keeping us down at this low multiple.
We haven’t got any multiple expansion yet on bank stocks.
Then that, plus the bond losses because higher for longer is slowing it down a bit.
It’s still out there to happen.
How many people have we talked to, Al, in the last month who just keep talking about, “We’re too small. We’ve got to scale. We’ve got to get that power”?
Well, we’ve talked about this.
I’ve started to hear that $5 billion, $50 billion, and $500 billion are the new asset thresholds that people get excited about.
If you’re a bank that’s nearing the $10 billion mark, you’re not going to dip your toe over the line.
You’re going to figure out how to really look at some size and scale.
Those two words continue to resonate.
But even if you get to $12 billion or $15 billion, you still have to figure out how to get up to $25 billion or $30 billion.
Once you’re at $25 billion or $30 billion, naturally it invites conversations around, “How do you get to $50 billion?”
In some ways, a sweet spot might be a $60 billion or $65 billion bank where you’re not going to be pulled over the $100 billion threshold at the moment, but you have that size and scale to spread certain costs in a different way.
You can invest in some people, not necessarily new technologies, but you might want to in some compelling fashion.
I just think we’re in this really interesting spot.
Yeah.
I’ve never heard one executive say, “We don’t expect deals in the next year.”
It’s just when.
When is it going to happen?
Everybody knows the rationale for it.
Again, when does the math line up for this to happen?
A little inside Cornerstone baseball, there is a lot of activity that’s being discussed.
We’ve been brought into various deals, so we know that as much as people predict the third quarter of 2024 is going to see a return to activity, you can kind of set your watch by the number of conversations that are taking place.
So it’s really more a matter of when, not if, the mechanics work.
Living in D.C., I understand the regulatory uncertainty is also creating a bit of a pause.
That will shake out in November.
Nobody knows which way we’re going to wind up, but that also is contributing to the pause in M&A activity.
Right.
We recently saw our three regulators who had the majority votes on the FDIC board kind of say, “We need to put more scrutiny around mergers.”
The environment hasn’t been real supportive.
Even though everybody says the government wants fewer banks, they haven’t been real supportive of, “Let’s make it fairly straightforward how we merge.”
I think about some of the clients we have who’ve had real long holdups for no real rational reason.
It was just getting through stakeholders.
It’s bureaucracy, in my opinion.
Well, bureaucracy is not going away, unfortunately.
Nor is this number-one challenge that we keep hearing from CEOs, and CFOs to a lesser extent.
They’ve also acknowledged some concern.
It’s something that JPMorgan addressed earlier this week.
An orderly CEO transition in the medium term is one of their board’s top priorities.
When you think of Jamie Dimon and the figure that he is and the shadow that he casts, identifying by name potential successors is nothing new for JPMorgan.
But at the same time, I think people are circling this as, “Yeah, this could actually happen.”
Yeah.
This reflects what Steve and I are hearing in our travels.
In a leadership sense, there is a real concern about who’s in the number-two seat.
What I would encourage every executive to do, you’ve got your bond portfolio maturity, and we’ve certainly looked at that.
We’ve got our commercial real-estate maturity report.
You need your management maturity report.
You need to take their age and say, “Who’s retiring next year, the year after, and the year after that?”
When you put that on one page, and I’ve seen my clients do it, it gets compelling.
“Eighty percent of our leadership team will be gone in the next five or six years.”
What are we going to do about that?
A lot of folks have said, “I don’t have that internal candidate.”
So this is as important as the numbers here right now.
It’s the people.
It’s huge.
Again, we’ve talked in the past about people, products, and performance.
If you can get the people and the products right, your financial performance should naturally follow.
When you start to think about just the changing composition of teams and what you need, it ties into a second conversation starter for us, which is all around becoming a more efficient, if not hyper-efficient, organization.
If you’re concerned about your team and the transition that is in front of you over the next five years, I think you also have to be looking at, “How do you create a more effective operational structure right now?”
Yeah.
What you and I have talked about, and what I worry about for our regional banks, our midsize commercial banks, and some of our credit unions, is that as they look at maturity, they’re going to say, “Let’s get some experienced bankers.”
That’s fine.
But part of what they have to be thinking about is the management team of the future, not just the well-resumed, central-casting management team of today.
I worry that we’re going to end up killing the innovation.
What we need to bring in are leaders who understand marketing.
They understand how to develop talent.
They understand technology.
They understand data.
I think you have to keep an eye on, “What does my transformative leadership team look like five years out?”
You’re bringing up a Seinfeld meme.
You know, you’re killing Independent George.
Relationship George is needed.
But when I think about this concept of hyper-efficiency, to build on your point, this is where finding real use cases and outcomes for artificial intelligence becomes so important.
It’s about disrupting the industry’s cost structure.
I kind of liken it to what cloud and mobile did in the past 10 years is what AI is doing right now.
When you think about the teams that you would employ pre-mobile phone, pre-cloud, they’re different from what you have today.
On the AI front, it continues to gain a ton of attention and press.
But I think this is still one of those areas that bankers have to dig in and say, “Hey, just because we’ve done it a certain way in the past doesn’t mean we’re going to be able to do it in the future.”
Right.
I think you have to tie AI to the whole tech stack, to the whole process stack, and to the digital strategy.
It’s not just, “Oh, we do ChatGPT in marketing now,” or something.
That’s not going to give you the boost.
I kind of say when digital self-service meets a very analytic, AI-driven data environment, meets the process automation that platforms can give you now, and that kind of variable cost from the cloud, you put all those together with good knowledge workers.
It’s about as easy as a golf swing, Al, to use your favorite sport.
Not anymore.
I’ve decided to give that up.
I think there’s almost a danger in narrowing it to AI.
It’s AI’s part in that whole transformational look at how you run a financial institution in the year 2030.
Yeah.
Right under our noses, everyone’s been thinking about AI, but there’s the maturation of the blockchain technologies that people were excited about and investing in.
For me personally, I think about tokenization and what’s being done, and the programmability of certain aspects of the financial sector is really compelling.
When you think about authentication, identification, the whole concept of trust in the digital world, there are things that are maturing.
We’re just not paying attention to them like we were a few years ago.
I’m not asking you to look at Bitcoin, Ethereum, or other cryptocurrencies.
I’m thinking about the actual tech stack of the future where, to your point, it’s going to be an amalgamation of different opportunities for people to build.
I just finished a great book called Read Write Own from one of the Andreessen Horowitz guys.
I agree with you.
Blockchain is the sleeping giant here.
Bitcoin and crypto were the first blockchain use case, but it’s blockchain.
Even Jamie Dimon will say, “I don’t like crypto, but I love blockchain.”
You’re talking about books.
You remind me of Ben Horowitz, who wrote The Hard Thing About Hard Things.
There are lessons in history that we should not ignore.
You can go back and find some great perspectives from three or four years ago that have started to come to fruition.
I think for bankers, that’s the big challenge.
There’s just so much that’s hitting all at the same time.
How do you prioritize where you put your intellectual curiosity?
One of the things I wanted to share, when we were talking about what’s been on the street this last month, our head of research, Ron Shevlin, put out some really interesting consumer-research data.
I’ll go to the book The Innovator’s Dilemma by Clayton Christensen, where Ron’s headline, and it got a lot of arguing on social, was that Chime has more primary checking customers than JPMorgan Chase.
It was done through asking consumers, “Who do you use? Which one’s your primary?”
Everybody could pooh-pooh that and say, “Chime doesn’t make money. Those customers aren’t profitable. The average balance is X, Y, or Z.”
But the point is that they’re getting attention.
They’re getting brand equity.
They’re getting usage.
That can be a sleeping giant.
No, those customers will not help fill my balance sheet with liquidity this morning.
But we’ve got to keep an eye on those sleepers out there.
This is a generational thing that we’re seeing.
We don’t understand the generational marketing, and this is an area we’re focusing a lot on.
I think that ties very neatly into this mistake that banks accidentally make, really in terms of small-business banking.
When I think about things that you read and make note of, there’s an American writer named James Baldwin.
He once wrote, “Not everything that is faced can be changed, but nothing can be changed until it is faced.”
I was thinking, we get so accustomed to doing what we think is the right thing, but we don’t pause and say, “Is there a better way? Is there a more effective way? Is there a more efficient way?”
If we could find some white-space opportunities in niche markets, if we could target underserved segments and deliver higher-value services, that is a really massive opportunity that not everyone is thinking about.
Yeah.
I think it’s great for your strategic planning meetings this year.
Everybody’s going to pump their chest.
“We’re a commercial bank. We’re a relationship bank. We serve businesses. That’s our niche.”
Then ask yourself, “Where are we innovating?”
I think we can look back on, yes, we serve them.
But where have we changed their experience?
Where have we innovated?
Where have we used data around small business?
Where have we given them a seamless mobile experience?
That’s where there’s a lot of work to do to be a great commercial or business bank of the future.
We can’t rest on the fact that we have good credit guys.
That’s not the future.
You talk about pumping up your team and feeling good about what you’ve done.
An interesting exercise might be, “Let’s give ourselves a grade on X.”
But be a little bit more granular.
Be a little bit more pragmatic about your business and what you want to accomplish.
Have you talked about the outcomes that you care about?
Your point earlier about generational marketing, there is some really sophisticated data and tools that are available that could help you with Gen Z, Gen Y, pick a bracket, that I bet banks aren’t using right now.
In fact, I’ve seen different slides, and hopefully we’ll be able to pop one up for those who are watching, that show how industries innovate and where they’re getting creative.
I think that we’ve got to remember that banking, there are really two sides of the brain here.
The side Jamie was talking about on the 2% to 8%, that’s the side that needs to be conservative.
It’s about balance-sheet management, pricing discipline, capital management.
We have to be risk-averse because we borrow 90% of the money that we use.
We’re a leveraged business.
There’s another side about customer experience, products and services, and niches.
We have to be more like a tech company.
I saw this chart I showed you from a company called CultureX that surveys team members and employees and says, “Tell us about your culture.”
They survey on innovation, execution, and agility.
The industry in the basement with a negative score is financial services.
We’re just losing on that right side of the brain right now.
We can’t manage it with the left-side-of-the-brain process.
We have to have two management structures.
One is a backbone that’s risk-averse.
One is a test-and-learn, go-find-those-niches, go-into-the-market, know-your-customer-in-new-and-exciting-and-creative-ways structure.
I promised two songs.
The first to take us in and one to take us out.
The one that’ll take us out is the Beastie Boys.
It might be their most well-known, but “Sabotage” is going to be playing in our minds when we think about this.
We’re not trying to sabotage a business, but we are trying to provoke some discussion that things can change.
You can find opportunities.
Here’s a great example of a guest who joined Plugged In a few months ago, April Clobes from Michigan State University Federal Credit Union.
She talked about the NIL deal that she struck with the Michigan State women’s basketball team.
The women’s Final Four and the women’s championship game outdrew the men’s Final Four and the men’s championship game.
Wasn’t that killer?
Which was amazing.
You think about pre-positioning yourself to ride that wave.
It’s not just Caitlin Clark that’s generating excitement and interest.
It’s not just an individual getting a paycheck for one season and being gone.
Investing in some of these teams, different sports, and different ideas is really cool stuff.
The more we can think just a bit differently and realize it’s the cultural stuff that banks participate in that can drive change, that will attract business in the future.
That’s what I find really compelling and creative.
Agreed.
I agree.
It takes moments like a Caitlin.
I heard, and I just smiled so wide, the South Carolina-Iowa game, the cheapest seat was $1,000.
Who would have thought women’s college basketball would do that?
That’s that kind of visionary side of things.
The world is changing.
The world will change.
It’s cool stuff.
As you say that, the only reason I want to bring this up as a close is you think about how people changed and how many people embraced this game.
But ESPN still put the women’s game on at 3 p.m., and they put the men’s game on the following night at 9:20 p.m.
There are still some legacy mindsets, legacy behaviors, that keep companies from taking full advantage and participating in the groundswell of support.
I just don’t want banks to follow the ESPN model when they have every opportunity to follow the Iowa-South Carolina one.
Yeah.
Very cool.
Anyway, this is always a fun opportunity for Steve and me just to reflect on what’s been happening in the banking space and to look ahead to what’s going on.
We appreciate everyone taking a little bit of time to get Plugged In with the two of us and with Cornerstone Advisors.
We’ve got some really great guests coming up, so we hope you’ll keep us dialed in over this late spring and into the summer.
Yeah.
I know we’re bankers, but get in touch with your Beastie Boys and your Rick Rubin.
Your creative side.
It’s “Sabotage.”
“Sabotage.”
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