Banking Is Gonna Make You Sweat | Plugged In 1x34

Coming up, another interesting conversation around the business of banking. We’re trying something a little bit different today. Steve Williams from Cornerstone Advisors, Al Dominick from Cornerstone Advisors, still holding it down, but we’re doing it in a slightly different capacity.

Normally when I talk to Steve, he’s sitting in an office, or really in a location that’s warmer than where I am on the East Coast. Today, I flipped that script. I’m down in Southern California in the Coachella Valley at La Quinta Resort. I decided to brave 106-degree temperatures outside so Steve would understand that I feel his pain when he has to show up in Scottsdale in the summertime.

So this Plugged In is going to be a little hot and spicy. I’ve got the sunglasses on and the sunscreen liberally applied, so hopefully we can get into some topics that certainly won’t bore you. Steve, what’s happening?

Hey, buddy. Well, I know for a fact, looking at the video here, banking is going to make you sweat in this podcast. Welcome from the high desert of California. You’ve been talking to both fintech executives and bankers at some conferences, and I want to get your take on what’s on the ground right now as we’re going through strategic planning season.

Topic number one: Santa Jay Powell’s rate cut. It finally came. Folks have obviously been a bit excited about this. Importantly, one thing I noticed and wanted to bring up is something called the 10-2 yield curve spread. It’s the difference between the yield on the 10-year Treasury and the two-year, and it’s been negative for some time now. What that usually does is predict a recession.

Today, we’re looking at the two-year around 3.5 and the 10-year around 3.7, so we finally have an uninversion. Anyway, what that means is: Are we going to have a soft landing or a recession? What are you hearing from bankers this week?

Well, first of all, Steve, I thought you told me there wouldn’t be any math on this episode. So already, the 10-2 spread. It’s interesting. That 50-basis-point rate cut, I think, is something of a turning point, especially for regional banks.

As you’re talking, I’m just thinking about all the different challenges that we’ve heard from our banking clients, whether it’s pressured net interest margins as deposit costs rose, fairly anemic industry loan growth as borrowing costs increased, and then you can’t go to any type of banking conference and not hear about credit quality concerns and trends focused on commercial real estate.

When I saw that rate cut, I started to wonder if this is going to potentially flip those proverbial headwinds into a different direction where banks might benefit.

Absolutely. For a lot of regional banks and midsized banks, this rate cut means tens of millions of dollars of revenue that they can think about for their budget, and maybe use some of that to keep investing in new markets and transformation.

If I’m a CFO right now, the big question mark is, what is my credit quality and my loan-loss provision? Do I give some of that margin improvement back? But the good news is, I remember hearing earlier in the year that margins would be at their worst by the second quarter. So happy times. That margin is improving, meaning more revenue in banking right now.

Next topic: talent. We’ve talked a lot about this, but this is one that’s near and dear to your heart. I know you’re thinking about the smarter-bank workforce of the future. It’s interesting, in strategic planning this year, the talent pipeline has come up almost as much as the loan pipeline. You want to share with the audience what you’re hearing out there?

Yeah. Again, I’m thrown a little bit for a loop because I sit in the seat normally where Steve is. I use music as a reference point, but I guess we’re just going to ignore all the classics, C+C Music Factory and others that could have been tossed in. So the challenge is there, Steve, if you want to pick it up later in the episode.

When it comes to the talent pipeline conversations, you and I were together with a bank on the West Coast that was explaining how they thought about bringing people into their business and focusing on the pipeline like you would a sales pipeline.

Every quarter, they can review the top of the funnel all the way down. Who’s been able to make it all the way through? What does that pull-through look like? Why has it occurred? Who’s responsible for it? They’re starting to pull some interesting data points that allow them to be more predictive in their approach to making smart hires.

When you and I talk about smarter banks, it’s always with the understanding that data will drive performance. It can really help assist on outcomes. If we think about the ways that people focus on sales and translate that over to talent, if you focus on your people and your acquisition strategy in the same way, you might see some different results.

Absolutely. We’ve been in some meetings where people are saying it’s hard to find talent, and then we say, “Well, what intentionally are you doing in your markets to identify, talk to, and keep connected to that talent?” It’s not really intentional in a lot of cases. It’s a great opportunity for bankers right now, especially with disruption in other places like tech.

I want to bring up a data point, though, that we’ll flash up on the video version of this podcast. It’s a study from KPMG that came out in The Wall Street Journal about a week ago, and it surveys CEOs asking them when workers will be back to the office full-time. Eighty percent of CEOs think all workers will be back to the office full-time, not a hybrid environment. What was your reaction to that KPMG data?

I think there are a lot of bank executives who got really excited about it, and I think there are a lot of bank employees who just shrugged their shoulders and said, “Not another study that says we’re going to be back in full-time.”

It strikes me that there are certain banks that never went remote, and you know who you are if you’re listening. Even at the depths of COVID, you still had a workforce coming in, and you probably had them wearing their coat and tie.

As we think about how the industry continues to move and shift, there is some real benefit to bringing folks into the office, having those water-cooler conversations, what we think of as serendipitous moments where you can brainstorm and troubleshoot.

But I also think the flexibility that certain organizations have leveraged for their benefit shouldn’t be ignored. It’s not as easy an answer as some people would like it to be.

If I’m running a bank, I want my revenue-producing executives to be out and about all the time. I don’t want to have this artificial expectation that they’re going to be in the office for three, four, or five days. I also think it’s entirely appropriate to set an expectation that you work better in person than you do on Zoom all day long. What about you?

Well, the thing is culture. Amazon’s CEO is saying, “We’re all coming back because we’re going to have a better culture.” I would bet against this survey in Vegas that everybody’s actually going to come back full-time.

I think we’re going to have more office time dedicated to the fact that there is productivity, collaboration, and culture that comes out of that. I think you’ll see a doubling of hybrid office time, but it’s not going back to full-time.

I did like Eric Schmidt, former Google CEO, shaking things up in Silicon Valley when they said, “How did Google lose its AI lead that it had four years ago?” He said, “Because entrepreneurs sleep in their office and Google employees want to come in one day a week. You’re going to fall behind.” I thought that was provocative. He had to walk it back, but I thought it shook up the right thing.

I agree. Here’s where, again, you can look at both sides of the coin on this one. Amazon drives a lot of business conversations, whether it’s the number of pizzas you’re supposed to bring in for a meeting and that influences the number of folks that can be at the table, to whether you should be working full-time in the office.

But that’s Amazon. That’s not your business. It’s the job of an executive to figure out what you don’t want to do before you figure out what you do want to do. That’s the whole strategy concept.

I think it’s nice to feel inspiration from outside of the financial sector, but I wouldn’t be so seduced by the moves of some large tech company that it makes you feel like you’re lagging the field.

Speaking of strategy, this is interesting. We’ve probably been in dozens each of strategic planning meetings this summer. We’ve been around board members and bankers. What’s interesting is that a lot of the great professionals we hang with have backgrounds as accountants, attorneys, credit officers, entrepreneurs. But what kept coming up this summer was technology.

You and I joked that we heard the term API more this season in strategic planning and board meetings. We’ve seen so many initiatives that are dependent on and tied to tech in order to execute, whether that’s a new digital strategy, new platforms for the sales force to use, or AI and data. Let’s finally use it for impact.

I think what’s really interesting there is how often tech came up. Something you talk about is a lot of folks saying, “We’ve written the check, but we don’t have an ROI yet on tech investment. How do we make that strategic?” It was very common. What was your take on that as it kept coming up over and over?

It’s that return-on-tech concept that resonates especially well at the board level. When you think about the fintech relationships that have been established over the last eight to 10 years, there’s this great promise that there’s going to be an acceleration of business opportunities, relationships being strengthened, and new markets being served.

But unless you’re really focused and effective in using the information that your team is collecting, you don’t necessarily know where the gaps are. When we think about that return-on-tech concept, I think it’s so fundamental to the way businesses operate today.

Steve, I was in Nashville last week and I heard the CEO of Western Alliance talk about not waiting for the action to come to your business, but going where the action is. I’m paraphrasing a little bit, but I think that concept applies on the tech front.

As much as we’re trying to pull back and save money as an industry, where it’s all around expense control and making sure we’re getting the right return, we can’t ignore the fact that there are phenomenal shifts in consumer expectation and commercial behaviors that we have to be able to service.

If we’re not providing the tools to our teams to deliver, then that talented base is going to go find somebody else who does have the tools in production.

Interesting tied to that, because boards look at these initiatives and go, “Do you have the resources?” I’ve gotten two calls in the last month by CEOs who have a succession plan going for their chief information officer role.

What’s interesting is they asked me an interesting question: “Can I really fill this with one person, with everything we have on our plate, plus the fact that I’ve got fraud, cybersecurity and business resiliency? Do I need a chief technology officer who manages my infrastructure, plumbing and architecture? Do I need a chief digital officer who uses digitization and data to grow the business? Or do I need a chief data officer like Jamie Dimon has?”

I see this. Remember when we had Brent Beardall on the podcast from WaFd, and how he started Pike Street Labs to be that digital product studio while he kept a CTO position within the bank?

I’m seeing a lot of that. I think for the bankers out there, look at your IT. You may need to expand leadership to play different roles in this environment. Are you hearing that?

I am. I think it builds on the last few years where there’s a recognition that technology is so big and so broad that you need some people to keep the lights on, to keep the servers running. If you’re thinking about data and how you’re using it, that’s different from how you’re managing third-party relationships.

I believe the spend on the tech front is so significant that to put it into one individual’s bucket is maybe not the smartest, and it certainly doesn’t create any business redundancy should that person leave.

If you and I think back to when the whole tech department in a bank would roll up to the CFO because it was seen as a cost center that had to be managed with expenses controlled, I believe that is no longer the case.

When Jamie Dimon comes out and says, “We’re going to have a chief data officer because it’s too valuable of a position to combine with others,” that’s where I think it’s okay to look at a large organization and say, “If they can make that change and they can have that cultural recognition, what’s stopping us from doing the same thing?”

Speaking of culture, part of what we’ve been trying to do is partner with fintechs and think, we don’t have to build it all in-house. Let’s partner and deploy.

However, this year we’ve had Evolve Bank, we’ve had Synapse and things going on, and basically fintech has been dragged before Congress. Fintech has been all over the press.

Al, you just got back from the Association for Financial Technology. You talked to a lot of fintech execs, and you had some somber news, which was that appetite for doing initiatives quickly is starting to slow, and maybe that’s a risk for our bankers on transformation, right?

Yeah. We have so much talk of concentration risk, and really it’s, what’s the future of banking as a service? Is it going to move upstream to larger organizations that can assume the compliance responsibilities?

There’s just a lot that’s impacting the BaaS space that I think is going to grow and really impact the industry as a whole, because it throws into question how a bank can properly diversify itself as it grows. It opens the door to talk around embedded finance, partner risk, and really where you want to participate in the tech world, which you can’t ignore.

I worry about this, that yes, there was some sloppiness that bankers would be embarrassed at in how fintech and BaaS were operating. However, now with the regulations, it could be that even with my most basic fintech partnerships, I’m going to kill those with a due-diligence bazooka and slow that decision-making where we want to be moving fast.

The other thing I’d say to the fintech execs, though, is I think a lot of folks are wondering, if I partner with you, how am I going to integrate you into my experience and into my environment right now and not get in trouble from either an operations or risk standpoint?

The whole world of APIs, architecture, having an integration team, and having fintechs who understand they can’t just sell you a solution. They’ve got to talk to you about how they work with you to integrate it into digital banking, payments, et cetera. That’s going to be the next big wave I see with bank-fintech partnerships.

I 100% agree. One of the interesting things we’ve read is obviously the FDIC’s proposed approach to deposits and who’s doing what on that front. But I want to take it back one quick step.

The banking-as-a-service space grew maybe a little faster than it could have because it was so attractive to banks that were really struggling to have an identity and to have a better economic profile than they did.

If you start to dig into some of the examples of folks getting sideways with their regulators or their customers or on their data front, you saw that they cut corners. But that shouldn’t reflect the industry as a whole. There are some really strong businesses that are doing some really great things.

Larger organizations have been coming in. Fifth Third announced an interesting partnership just a few weeks ago. But it doesn’t have to be the biggest of the big that are carrying this industry forward.

I think this comes back to themes that you and I regularly address, which is there is a very real need for a healthy community and regional bank system, and the banking-as-a-service space still offers some real potential. You just have to be more aware of the risks that you’re assuming.

That means starting the conversations differently with your potential partners so expectations from day one are set for both sides, not just for one party.

I think some of the ones that are also going to be at the community, midsize and regional bank level are going to be very focused. They’re not going to be these very broad, blue-sky BaaS strategies. They’re going to be, “We do one thing very well with a partner.”

One last thing. It is interesting times. I look at the KBW Regional Bank Index. Back in the days when First Republic had failed and we were worried about some other folks, PacWest and even Western Alliance, which is doing great now, that index had fallen to 35. This week it was up at 58 or 59. There are really some thoughts about things coming back.

But the last statistic I want to talk about is that we saw an interesting study out there on branches. It was from a group I can’t remember, and they’re predicting that bank branches will be extinct by the year 2041 based on the trend line of branch closings.

What’s interesting is people are still looking at branches, obviously smaller. But I joked, I really would like to interview on Plugged In that last branch manager in 2041. Could we get them on the calendar maybe 17 years in advance?

We’ll break out our crystal ball. But it’s just that it’s the sound bite, it’s the attention-grabbing headline that people latch onto. You can make the math work in any number of ways.

The idea we’re not going to have branch networks, come on, let’s get real. That day is not going to happen, especially when you think of JPMorgan dropping branches throughout the Midwest. I was in Iowa City last month hearing about JPMorgan showing up there.

If we think there won’t be any branch networks because everyone’s moved to digital, it’s kind of like when we talk about the robots replacing the humans. The AI will just have taken over, and you and I will be sitting at the pool here at the hotel letting others do our bidding.

But there is a need for the more sophisticated relationship to have a physical location for people to work toward and gravitate to. So I will call BS on that prediction that we’re not going to have any branches in, what, 15 years?

Yeah. I think they’re right that it’ll be more than cut in half and it’ll be a different profile of those branches, and they’ll be wound around digital like you can’t believe.

It’s interesting, though. Our friends at Bancography, a great research company, still show in any market, the more branches you have, the higher average deposits per branch. Tom Brown talks about this S-curve, and Chase probably more than anyone is showing that you can have a less-dense branch network, but you have to, in fact, have a certain threshold of branches.

I think that’s the future, and that’s the kind of data we should see tracking.

Our last guest, David Findlay, was talking about why he has the network he does in Indiana, and even if the branch is low-performing, it still gives him a competitive advantage over others that would want to step in and compete with him.

There’s the business rationale that a spreadsheet jockey who’s 25 years old can come up with, or you can take somebody who has 25 years of banking experience that says, “Maybe there are ways we could turn performance around or do something a little bit different.”

But having our footprint with a physical location, call me old-fashioned, I think there’s still a place for it.

I think there are lots of analytics to put around that. One thing I give Dave credit for, and he just said it, he said, “I’m going to keep some branches just to literally retain those deposits because of the low cost that it takes to maintain them, and why wouldn’t I want that on my balance sheet?”

For that reason, I think it’s more nuanced than just that last branch manager shuts the door in 2041.

Al, we were stress-testing your physical prowess. Could you stand in 106-degree heat for 20 minutes? You have done it. The computer hasn’t melted. The microphone is still intact there.

I’m not sure we should be doing this all the time, but I do feel, with all the travel you and I have coming up, all the different board meetings that are on the schedule, not just for you and me but for a lot of the Cornerstone crew, it’s important to remind listeners that when Steve and I get together and share things, typically we’re out on the road and we’re bringing ideas back.

We’re able to pull some of our team together and say, “Hey, are you hearing this? Are you seeing this?” There’s a lot of work happening behind the scenes across the industry to make sure people stay relevant and competitive.

That’s one of the reasons why we want to have these periodic check-ins where we can just say, “This is happening,” and more than one person is saying, “I’m spending a lot of time trying to figure out where I want to position myself.”

Next time we do this, we will know the outcome of the election. We decided we don’t want to get into politics today, but obviously there’s a fork in the road called regulation and banking post-election that we’ll deal with.

But I think at this time you’re in Palm Springs. You need to order something classy like a Tom Collins and enjoy some quiet time there.

That’s me ordering something classy. I might just look for that top-shelf margarita and call it a day.

All right, buddy. Take care, and we’ll see you soon. Thanks to everyone for getting Plugged In on this episode with Steve Williams and me, Al Dominick.