Transcript
You're listening to the Plugged In podcast presented at free by Cornerstone Advisors. Coming up, Steve Williams and me, Al Dominick, are not only talking about the business of banking, we're going to dive into some of the hotter topics in the fintech world.
We're thinking about AI playbooks, creating a culture of creativity and helping industry executives get a little smarter, a little faster. Over the next 20 minutes or so, we'll do what we do by basing our comments on some musicians and lyrics you may be familiar with. This time we're pulling out some Drake, Kendrick Lamar, Dua Lipa and others, so I have to apologize to all those classic-rock aficionados.
We're killing the classic rockers on this one.
We are, but we're going to keep it classy, of course. Some of these lyrics are not for the faint of heart, but that's pretty much the business of banking, right?
Steve, before we get into some of the fintech fun, I wanted to talk with you about where we are as an industry given that we've both been crisscrossing the country, attending different events and speaking on behalf of a great industry.
In some ways, it feels like we started the year with all this incredible optimism. I almost want to pretend I'm a Kansas City Chiefs fan before the Super Bowl. They're riding high on the excitement and potential of their team, and then all of a sudden they get smacked in the face by the Eagles. They had to adjust, and they didn't really pick themselves back up. No offense to the Kansas City Chiefs fans out there, but the Eagles really laid the smackdown.
Then this guy named Jalen Hurts basically plays a perfect game.
Doesn't it feel in some ways like bankers entered the year riding high, chests out, with a lot of optimism, and then all of a sudden you get hit with something unexpected?
Yeah. Our chief research officer, Ron Shevlin, talked about this new wave of optimism in our What's Going On in Banking survey of 300 executives. They were feeling really optimistic going into 2025. But it's like that first quarter where you get hit, somebody drops a pass, you get a penalty and you're going, "What's going on here?"
We're recording on St. Patrick's Day, so there's a lot of green, the Eagles, and it's my stepdaughter Sienna's birthday, so happy birthday, Sienna. But year to date, bank stocks are down about 6%. They were riding high with a big recovery going into the end of 2024, but like most of the market right now, uncertainty is the theme.
The yield curve is showing that uncertainty. Are we becoming fiscally responsible with DOGE and that's why rates are going down, or are we headed for a good old recession and that's why rates are going down? That uncertainty has cast the feeling of a first quarter where you're certainly not ahead by two touchdowns.
Uncertainty is the name of the game here in Washington, D.C., where I live. So much is happening. I feel like this is a great opportunity for us not only to look behind us but also to look ahead.
If we do pause and remember where we're coming from, essentially two years ago we saw a single tweet help take down a $200 billion bank in less than 48 hours. It wasn't DOGE. It wasn't bad loans. It was really the pace of fear and uncertainty spreading across the internet.
We're talking, obviously, about Silicon Valley Bank, a company that financed a lot of the entrepreneurs in this country. What we saw is that banks don't fail slowly. They can fail as quickly as SVB did.
We know a lot of banks today are still running on some of the legacy infrastructure SVB was using. You don't have to look hard on LinkedIn to find naysayers who say some leading financial institutions weren't built for how businesses operate today. I thought this would be an interesting opportunity for us to get into one of the three topics we want to cover.
To do this, I'm going to use Drake as our inspiration. I've actually seen Drake live. That's how hip I am.
You're very cool. I want all the listeners to know.
I was dragged to Drake. I wouldn't say it was my top choice, but it was a fun show.
You've been listening to Nokia on repeat, I bet.
Because we want to keep this a somewhat cleaner version, we should use his song Headlines as inspiration, since AI is always in the headlines these days. We've been engaging a lot of interest around AI playbooks for financial institutions, both why you should do it and why you shouldn't.
I think this is a crucial topic at the moment as more and more financial institutions look to implement AI but are unsure where to start. Steve, maybe we could talk a little bit about that starting point for an AI playbook.
I think a lot of the debate can be bottom-lined this way: everybody we talk to is basically in the same spot. They've had both an opportunistic toe in the water and a healthy fear of AI. The first 18 months out of the chute have been pretty tepid. We're testing Copilot for employees. We're starting to build a knowledge base that uses AI for procedures. We have vendors and tools we're using in the contact center.
At the end of the day, the debate is whether this is the end of the world and huge, or whether it's been overblown. You've seen articles arguing both sides.
I follow someone on X called "I Rule the World." I don't even know who he is, but he looks at what's happening with things like DeepSeek, OpenAI and Grok. He argues society isn't even close to ready for the intelligence boom and that we're cruising toward a profound disruption of the knowledge economy, one that could redefine jobs, expertise and even human purpose.
When he shows things like an agent doing 50 tasks at once in a coordinated fashion, you kind of go, "Holy cow, we're in for it."
At the same time, you and I and some colleagues were texting this weekend about a Wall Street Journal article by an author from Ireland who basically argues companies should not have an AI strategy. His point is that even if a well-crafted AI strategy somehow magically landed in a CEO's inbox, most organizations wouldn't be able to implement it because they haven't done the foundational work.
I think that's one thing we're seeing in banking. Yes, we can dip our toes in the water, and yes, we should consider this extremely seriously, as Ron Shevlin says. But it comes down to foundational work because it's hard, it takes time, and we frankly keep kicking that can down the road.
Our executive survey showed that data is still not something executives are proud of in our industry. This whole operating model of the future depends on data.
I don't know who the author of that X account is, but I feel like Ron Shevlin would love to take credit for it because it's a pretty interesting follow. When you see 50 social media sites being run in parallel, that's an amazing and scary thing to see firsthand.
To me, OpenAI saying they'll give you agents for thousands of dollars a month that can perform human knowledge work is another sign of how quickly this is moving. They're saying this is coming this year. We'll see how hyped it is, but it still shows something moving very quickly. We wouldn't have predicted this two years ago when Silicon Valley Bank was having a tweet attack.
I remember when we had Sarah from Bain Capital Ventures on and she was talking about the hype, the hope and what's happening. I think that's still a useful mental framework for executives.
This is also one of those moments where, if you're sitting in a leadership position, you have to account for the whole run-and-protect-the-business responsibility while you're trying to grow and change it. The Wall Street Journal author lays out a smart case for why you may not want to put a big AI plan together. On the flip side, I've been lucky to be with CEOs who are taking pencil to paper and writing their own strategy, saying, "We're not going to delegate this to others, and we can't afford to wait for something to impact our organization."
There are entrepreneurial spirits who look at this moment of fear and concern and get excited. Others are going to pull back. From a playbook standpoint, this is why it's so important early on to talk about ideation, data preparation, model development, testing, deployment and monitoring, along with what you expect out of people.
You need governance and ethical considerations as AI becomes more embedded into financial life. Have the frameworks developed so you can add to them while ensuring fairness, accountability and transparency. Those are words everyone in banking can get behind.
This is an intervention moment like digital was in 1999 or mobile was in 2008. What's important is that this is all about applying technology to the business.
When executives ask me what they should be working on with AI, I say, pragmatically, go into the executive suite and ask every direct report one simple question: "Can you walk me through how we categorize and index data at this bank, and then what we use that categorized and indexed data for?"
Everybody likes to say, "We've spun up a data lake and a data warehouse, and now we've moved it to Azure." Go back to the secret sauce of data, how it's categorized and indexed so models can use it and we can put things on top of it.
Where we really get an F in the industry is categorization and indexing because it's hard work. Since it's St. Patrick's Day, it's like walking out into a pasture in Ireland to a bunch of sheep and asking them how they categorize and index. How do you get everybody in the organization around that common vision?
That's what it's going to take. If you did 10 months of that kind of work this year, it would be very valuable.
We also have to be fair and own it ourselves. Steve and I are lucky. When I think of Cornerstone and where we are as a tech advisory firm, we get to dig into customer-focused and operations-specific opportunities and figure out immediate use cases. It has to be sleeves rolled up and really educating yourself. You can't substitute critical thinking for how this is all going to roll out.
You and I have talked about pricing and product design and how some AI tools enable a more dynamic, data-driven pricing model. We talk about being hyper-targeted and personalized as a smarter bank. There are opportunities to evaluate variables you may not normally think about, look at cash flow and industry trends, and optimize loan rates and fees.
Are there products you're offering, treasury services or SBA loans, where commercial clients can get more real-time information than they realized was there? Simulation and scenario planning are other examples. Banks can start to incorporate some of this into their behavior without exposing customer data or getting too far away from what makes them a trusted resource to their community.
In addition to indexing and categorization, I would encourage rapid discovery and learning from all the smart people in the fintech ecosystem who are trying to do these things. In fraud, there are companies like Feedzai. In cybersecurity, Darktrace. In lending, Zest AI is an example. Blend is applying AI in the mortgage process. You mentioned Numerated, recently acquired by Moody's, which has this idea of the AI-driven credit memo.
There's a lot to be gained by engaging those fintech folks because they're trying to figure out the use cases. I think it's best characterized as a time of rapid discovery. We don't necessarily know exactly the design and how we should execute, but we should be getting our fingernails dirty with smart people right now.
This is where you find out who you're working with that really has curiosity in their day-to-day behavior, because there's so much you can go and see.
One thought I'll leave you with, Steve: I've got to be in front of a few different bank boards, and I know they're going to be thinking, if I have a roadmap or playbook, at some point I want to achieve some type of efficiency gain or ROA improvement over a fixed period of time.
I'm starting to think about how they can allocate a certain amount of money for that "data unification" that has come up at conferences like Acquire or Be Acquired and the GAC event here in D.C. How do you target efficiency gains by really getting your arms around the data, like you've just described?
Interesting times. It also ties into a second big theme that I think we've both realized over the last 90 days: the importance of personalization with tailored financial services.
We started with Drake, and now we'll put a little Kendrick Lamar spin on things. Kendrick has been a creative and commercial superstar that few outside of Taylor Swift have been able to match. Even if you're not a big Kendrick fan, you have to give the guy credit. The Super Bowl and the memes were on fire.
He's got a song, Luther, that opens with the thought, "If this world was mine," and continues with, "If it was up to me." I like that spirit when we think about really personalizing and being hyper-focused on customers. Are you seeing people who are doing this well right now?
I think it's early stages. If you look at the marketing funnel of a bank, how well are we at the wide end of the funnel using social media and digital to build awareness? How friction-free have we made the move into looking at solutions and products that are personalized using data? Then how do we make origination friction-free, bring customers in and engage them with more data?
I'd say we have a ton of work to do, but I see a lot of folks doing interesting things. One thing I'm seeing is a real focus on product management and product experience, something Ron Shevlin says fintechs do better than banks.
They don't simply mean a checking product or consumer loan product. They mean the overall experience. What does that app provide in terms of features? How do I keep rolling out new improvements? I'm seeing organizations start to structure themselves around product that way.
I'm also seeing some gritty midsize financial institutions apply data better through that marketing funnel. There are vendors out there focused on marketing personalization, and in the service world you've got firms like Nuance and Posh bringing more personalized experiences and using AI.
I think you're going to see that explode over the next few years, but it's going to take mistakes, testing and learning.
Another interesting question is whether this environment favors the large or the small. It's a very disruptive environment. If I were a community bank or credit union, I'd be trying to act and think like a disruptor and use these tools more effectively.
I mentioned to you that I read an interview with a JPMorgan executive talking about what a $4 trillion bank is doing with AI. It was a lot of the same stuff: a large language model for employees, a bit of AI in the call center, and work on models and integration for the future.
They're no further ahead, in my opinion, than the average entrepreneurial shop, and maybe behind some fintechs. It's time to think like a disruptor if you're a regional or community bank.
You can get inspiration from a lot of places. I posted something about Andy Grove's Only the Paranoid Survive. That book has been in circulation for quite some time, but think about the message Intel had when he was CEO. He essentially had to walk himself to the elevator, "fire" himself, walk around the building and come back up to rehire himself with a fresh perspective on how the business might run.
That's where we all have opportunities to say, just because we've done it a certain way doesn't mean we have to continue doing it in the future. No matter how regulated we are or what the privacy and data expectations are, we still have opportunities.
I love your point about size. Size never, in my mind, equates to ambition. You can be a really entrepreneurial business. We recently had Malcolm Holland from Veritex talk about how he grew that Texas bank from really just an idea to roughly $14 billion in size. We've had Dave Brager from Citizens Business Bank out in California, a roughly $15 billion bank, with the mindset of, let's be creative, disciplined and perform really well.
Being personal, efficient and hyper-focused doesn't have to be limited to the JPMorgans of the world.
Steve, let's flip to our third artist. I hope you've listened to a little Dua Lipa and probably done a little dancing with your wife, Katherine, because I know my wife Amy and I happen to enjoy that on a Saturday night if we're out and about.
I think about how we balance being responsible stewards of capital with trying to drive change and creativity. It's like walking a tightrope. You and I have had conversations with folks about a culture of creativity and productivity. It's possible, but you almost have to put on a private-equity-firm hat, sitting in the shadows saying, "We still want to see outcomes."
How do you balance being a responsible steward of capital with being a creative, idealistic individual?
I would take a step back and look at the power dynamic of a traditional bank. Very candidly, in a commercial bank, it is the finance group that runs the numbers and does M&A deals, and the credit group that does the big loans and drives the big relationships.
That power dynamic has historically determined who is in charge, who gets resources and how we look at the business model. I think it has tended to disempower IT, talent management, marketing and operations.
If I were really trying to change things, I would look at some rock stars in those transformational areas and potentially give them resources to run the bank well while charging them with transforming it. Some have the grit. You may bring in transformational talent in data, digital and integration, but get this group together that knows how to roll up their sleeves and start testing things.
Whenever I see a great, fast-moving community bank or credit union, they've got this group, a coalition of the willing. Typically, executives empower them rather than saying, "Just run the bank and we'll see what we can do about that extra-credit stuff."
I've seen people come to Cornerstone out of frustration because they had a vision for transformation but couldn't get the budget or attention of the powers that be. If I were a CEO, I'd check myself: am I still giving too much power to the old model? How do I rebalance that going forward?
It doesn't have to be dramatic. It can be letting middle managers have resources to run the bank while others start doing rapid discovery.
That's awesome. We're in an industry where some things have historically been the norm, and you've identified a few of them.
To wrap things up, one of the norms of banking has been the M&A cycle. When we started the year, we thought it was going to be pretty robust. I still think we're going to find a lot of deals, but I jotted down some from the first quarter that were worth noting.
Moody's acquisition of Numerated was pretty compelling. It expands Moody's lending technology solutions. Sam, who runs our fintech practice, talked about how it creates an end-to-end loan origination and monitoring solution, something Moody's has struggled with for years. Let's hope that gives it more oomph.
Check out what Sam wrote in GonzoBanker about that. There were also other fintech acquisitions enhancing digital account-opening and lending capabilities, so there are notable deals happening in the digital banking space.
On the traditional side, we saw several early-year bank transactions. We also saw another credit-union acquisition of a bank, which is worth pointing out because that activity is continuing.
It's a buyer's market in some respects because there's a backlog of sellers. Sellers don't necessarily have the best pricing expectations given how many sellers are out there right now. That's what's holding it back somewhat. But credit unions doing cash purchases has been attractive to some community banks, and I think that will continue.
Then there are regular bank deals as well, including activity in Florida and the Midwest. There is definitely stuff happening, and you and I remain cautiously optimistic that we're going to see more activity on the M&A front. Want to wrap us with that?
There's this feeling that the new administration and Treasury are willing to tolerate a rough beginning if it creates lower long-term rates and ultimately supports a growth agenda. I do think there's a boom in M&A coming later in the year, or at least in the second half, because time keeps passing on those bond losses that make the math so tricky.
The 10-year is down quite a bit from where it popped up in the fall of 2024. If you just look at that, plus sellers coming more toward reality on price and bond math getting easier, and the simple dynamic that we need consolidation and have a huge number of banks that want to sell, you're going to see activity happen.
It's like everybody looking at Zillow and putting their house on the market at the same time. They all start with the value they think they should get, and then they start to get to reality.
I also think there are strong banks that aren't going to drop a napkin on somebody's table with a number, but are getting solicited by strong organizations that see a brighter future if they tie up with some of the higher performers out there.
That'll be our prediction as we hit the second quarter of the year: we're going to see M&A deals.
One last thing I'd bring up is what has kept commercial bankers busy the last few weeks, thinking through their portfolios and how tariff wars could impact supply chains and underwriting. All these businesses are global businesses now, whether they're in Iowa, Idaho or Florida.
I hope that settles down because it makes it really hard. These tariff deals are changing by the hour, and everybody is trying to underwrite businesses that operate globally, at least from a supply-chain standpoint.
The business of banking is never boring, as I hope you've picked up in this conversation with Steve Williams. On behalf of the entire Cornerstone team, I'm Al Dominick. Thanks for getting Plugged In with us today.
Thanks, Al.
Al for
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