In this episode of the Purposeful Banker, we take a look at Bank Director's 2019 Tech Survey and what it says about commercial bank strategic priorities and spending habits.
Helpful Links
How Banks Are Spending Money on Technology (Bank Director)
2019 Technology Survey (Bank Director)
How to NOT Buy Technology in a Bank (PrecisionLender)
Four Reasons Why Now Is the Time to Modernize Your Commercial Bank Technology (PrecisionLender)
Transcript:
Jim Young: Hi and welcome to The Purposeful Banker, the podcast brought to you by PrecisionLender where we discuss the big topics on the minds of today's best bankers. I'm Jim Young, director of content at PrecisionLender and I'm joined again today by Dallas Wells, our EVP of Strategic Initiatives.
Today we're going to be talking about the recent findings from Bank Director's 2019 technological survey. It's a survey of bank CEOs, technology executives and of course bank directors, from a range of banks. Most in the community, but definitely some above the $10 billion asset mark, but it's about their bank strategies and spending and development plans for tech in the coming year. We'll have links in the episode notes to relevant articles and information.
So Dallas, when I was looking at this survey from Bank Director and it's great stuff, but there were so many times if I looked at it, so many things, I went, "Oh, I'm curious what Dallas is going to say about ... Ooh, Dallas is going to have some thoughts on that one. This is going to be ..."
Well, let's start here with one of these things that I did sort of the Scooby Doo sort of, "What?" double-take sort of thing on here where it said over half the respondents' agreements with core providers come up in the next five years. 60% say they're unlikely to switch, which again, we've talked before about core providers and that it's not something you take lightly, switching from those, but that's before even considering other options.
So I'd guess it's higher than that. Like 60% saying they're not even going to do it. Out of the 40% that said they might, a bunch of them are still going to stay with it, but only 21% of them say they're completely satisfied with their core provider. So is this ... I mean, is it what I said, is this just inertia or is it lack of options or fatal realism? What is this?
Dallas Wells: I think it's some combination of all those. So first of all, it's interesting to me, five years is a long time. It's a really long time. And so it says, yeah, over half of respondents' agreements come up in the next five years. That's a whole bunch that don't. So the very first thing is that these agreements are very restrictive and they're long-term, and part of that is so that banks can amortize their costs over long time frames, too.
So these things are expensive and they're difficult and you're kind of locked into them just contractually. So that's right out of the gate, it's hard. The other part is lack of options. So if you're a Fiserv customer, what are you going to do? Switch to Jack Henry? And you're going to cross in the street the people going from Jack Henry to Fiserv? There's only so many realistic options, especially for a community bank. I think they feel like there's limited choices and you're trading one set of headaches maybe for a slightly different set of headaches, but everybody's got headaches.
And then of course the final thing is, just as you alluded to, it's really, really hard. One of the banks I worked at, they had done a core conversion five or six years before I got there. It was still, like people had these pained looks on their faces, they were still recovering from it. It was just brutal. Right? And there were still things that would come up and they're like, "Oh well we can't get to that year of stuff for our customers because it's from before the conversion." So it's like literally, you got to go down in the basement and microfiche style it. It's just, it's awful. And then, in more recent times there's been stories of banks in Europe that have tried to do a core conversion and they end up systems down for multiple days. Then there's lawsuits and regulators and so it's a scary thing. So 21% say they're happy. That's a whole bunch of people that are unhappy, but they just ... they don't feel like they have options.
Now, here's a place where I think this is changing, and this was news to me. I actually just heard of this in the last couple weeks, and I hadn't really thought of it this way, but you see a lot of banks doing some kind of direct business or they're kind of spinning out a business line where they're doing some things slightly differently. It's typically they're going to do some online account opening or a national ... national-ish anyway, push forward deposits or for auto loans or for whatever thing you're going to do more broadly. It's typically more tech focused. And what a lot of banks are doing is they're actually spinning up that business on a completely different core provider and they're doing this on one of the kind of new age core systems. So they're lighter weight, they're a little cheaper as far as the costs you have kind of per account. They're more efficient and they don't have just like the dead weight of all the legacy stuff tied to them.
So if you want to do an online account opening thing, don't just call Jack Henry or Fiserv or whoever you're using. There's other options for that where you can kind of do it on the side and then you can do a much simpler, lighter weight integration between sort of the small new core and then the big legacy chunky thing. I think there are some options there where you'll see banks start to migrate some of their business to some new options. As that happens over time, I think hopefully they'll feel a little less stuck.
Jim Young: The grammar writer in me is pained by this. This is pretty much an oxymoron here, but are we just saying kind of like a decentralized core?
Dallas Wells: Yeah. Yeah, I think so. I think you're going to start to see just taking pieces of it away from that massive thing that you hate and it's expensive and you're stuck with it and really almost diversifying away from it where you can, which I think is smart.
Jim Young: So you mentioned headaches, which is an excellent segue into the next one because this stat made my head just hurt. And again, this is not going to turn into a core bashing podcast, it should just ... We're going to move on to other ones, but these two are particularly core oriented, but 60% said their current core provider is slow to provide innovative solutions or upgrades to their bank. Meanwhile, 60% said they ... And I don't [inaudible] it's the same 60% here, but 60% said they rely on their core provider to introduce innovative solutions. So at least some of that, because it's 60 and 60, there's at least an overlap. Some of these people basically are saying they're relying on the people that they don't think are innovative to help you innovate. Am I missing something here? Am I taking crazy pills?
Dallas Wells: Somebody's taking crazy pills. I think this is kind of the crux of the issue. Right? And you said we're not just going to talk about cores, but it's the first couple things we talk about right out of the gate. That's because for so many of these banks, they feel like it's the only place they can go. So when you ask them, "How is your technology strategy?" "Oh, I hate our core provider." Well, that's not what I asked you. Right? Those don't have to be one in the same and yet still as other vendors go in and try to sell to those banks, "Hey, here's this thing that we do and it's the only thing we do and we're really, really good at it and there's a positive ROI in it for you." "Yeah, but we like to keep everything kind of under one umbrella."
That's the part that I can't figure out, is why banks still think that that's the best option. Because in many cases, I don't even think it's a viable option. It used to work when you had four or five things that you were doing technology-wise. Sure, use the same vendor. They claimed it would be a seamless integration. It never really was, but it was maybe closer than you could do otherwise. Well, that's making decisions with a 15 year old framework. You know, just to put it bluntly. The idea that your core can better integrate their own stuff than you can integrate modern API, cloud based systems. That's crazy pills, right? That is just simply not true. So I think what that means is, especially for smaller banks, this is now enough of your ... should be enough of your strategy that you should have some people inside the walls, their own innovation.
I don't mean they're the ones that talk to your core provider, but they need to actually own what your strategy is. So there's still banks that when you ask them about customer service, what they think of is their loan officers talking to their customers or the people that come in the branch and their tellers are friendly to them. Add up how many interactions you have through your tech platforms versus how many you have in your branches or with your loan officers. The technology dwarfs the other stuff, even at a $200 million community bank in a small town. So someone should own that side of the shop from the bank's perspective. Don't outsource something that's become so important and rely on someone else to figure out what's next and what's right for your customers.
Jim Young: Gotcha. You're doing an excellent job of segueing here because then the next one here ... It's almost like you read my questions ahead of time.
Dallas Wells: Almost, yeah.
Jim Young: Which was just under 75% of the respondents pointed to ... said basically, "We've got a chief tech officer, that's the person who was responsible for handling tech buying." And on one level, kind of what you were talking about, that makes sense, right? You want to have someone who's in charge of sort of thinking about tech and that sort of thing, but on another level, and I don't know, this is one [inaudible] survey, so I don't know ... Crafting, believe me, done these crafting questions the right way and sometimes you get unintended responses. People read it a certain way. Because the way I read it was sort of, "Well, wait a second. Shouldn't the tech officer be sort of sharing that responsibility with the group that's going to actually use the tech?" Again, if you're looking for origination software, wouldn't you want the people that handle origination to be involved in that? Not just the chief tech officer saying, "Here's what I bought you."
Dallas Wells: Yeah, and I think this is another thing that's been shifting over time and some banks have gotten this figured out and others haven't as well. And it's also kind of how you view your IT group. In some banks, you have an IT person who is that good strategic thinker and who kind of thinks with your customer in mind and best kind of ... the jobs to be done framework that we talk about a lot here, which is what's the job that we're trying to do for this particular customer and so what's the best way that I can enable that to happen? What's the tool I can give our bankers to make that work as well as it can? Unfortunately, not every bank has that group or even has that person to lead that charge for them. Instead, IT views their job is just sort of support, right? Like, my job's to keep the trains on time and and make sure that nothing literally catches on fire.
If you kind of break up the ... and I actually, believe it or not, once upon a time had an IT group report to me at a bank, which I think tells you kind of the importance the bank maybe placed on it. We actually started looking at "Well, how much time are each one of these folks spending doing what?" And so much of it was spent on literally resetting passwords and helping Susie in accounting figure out why her computer keeps crashing and no one else's does, right? There are some help desk things like that that your bank needs to do, but that shouldn't be what your IT department does exclusively. There should be some strategic thinking and they should work in partnership with the business.
So again, the business says, "Here's the problem, here's some things that I think would help solve it and how can we work together to find the right solutions?" Instead of expecting tech to go shopping for you and hand you a thing you're going to be happy with, the reality is you need them. You need to know how it's going to fit in with everything else and can we actually make this work here? But that should be ... And the banks that do this well now, that's like one of the last questions you ask. Instead, you should find the real solution first.
Jim Young: Yes. It's almost ... Due diligence is a little bit late, but almost that sort of thing. Like the first question is, is "Hey, is this thing, does this help?" Like you said, does this help solve a problem? And then it, "Okay, and can we make this work?" Rather than, "Hey, we can make this work. Does it solve our problem? Don't really know, but we can make it work."
Dallas Wells: Yeah, it's similar to, you can make an analogy between most of your customer interactions are happening through technology. Most of your work now is happening through technology too, so if you're responsible for selling stuff at your bank or you're responsible for a loan department or a credit group, so much of your effectiveness and efficiency is going to be based on what technology you use. I wouldn't want to leave that to someone else to pick for me. I would feel like that's part of my job, is to be informed about what's out there and what would work best and I should be taking things to the technology group and saying, "I would love to have this, will it work?" Right? Which is the question you should be asking. Not saying, "Hey, what are you going to get me?"
Jim Young: Alrighty. So then respondents [inaudible] asked to choose their top three tech objectives looking forward here, and two clearly stood out far above the rest. Improving the customer experience was ... 78% of the respondents had that as one of their top three, and creating a more efficient operation. 72% had that in their top three. Then the next one down was enhancing online and mobile platforms. That was just 46% had that in their top three. So big gap there, clear top two and then there was more of a scrum of their ... looking at what the third one would be.
So a few questions here. One, I guess, are those two top goals necessarily compatible? I guess, if you get more efficient, does that mean you get a better customer experience or vice versa? I guess what popped into my head immediately was sort of visits to the doctor's office, sort of in the ... and I don't want to go down any affordable healthcare debate here, but sort of the, there was a time when you can tell doctors were told to get more efficient. "You've got to start seeing more patients," with HMOs letting them know, "You've got to go through this sort of thing," and you could feel that as a patient/customer. It was like, we got our 10 minutes up, boom, you've asked your questions, you're out the door. It was more efficient. It was not a better customer experience. But I don't know if I'm over reading this or not.
Dallas Wells: I think the banking experience that matches is, I actually had to go into a branch a couple weeks ago and I went in and there was ... It was during lunchtime, so I guess they were rotating lunch hours, but there was literally one human being in that branch. She was operating both the teller counter for the lobby and the drive through teller lanes by herself.
Jim Young: Points for efficiency there.
Dallas Wells: Yeah, very efficient. My customer experience was, let's call it subpar. I'm guessing that the poor guy out in the drive through who was glaring at me through the window was having a similar experience. And was not her fault, right? I feel for her, she's put in a really tough position there and she's probably hungry. She didn't get to go to lunch yet. But I think you're right. This is really important of kind of like, how do you define efficiency?
There are some places where those two will go hand in hand, right? So if you're more efficient in processing alone and you cut that down from 60 days to 15 days, will your customers be happy? Yes. They will be thrilled and actually you'll get more business out of it. If you cut your staff in the lobby down from three to one, are you more efficient? Yes. Are your customers happier? Doubt it. So that's sort of a blunt force approach that some banks I think maybe go overboard with. Those don't have to be mutually exclusive, but I think a lot of times they end up being that way.
Efficiency should be like, "Where do we make mistakes? Because that ticks people off, and where do we make people wait where they shouldn't?" Those are efficiencies that I think banks can chase and actually end up with a little bit of both. There's still plenty of room for those in banks big and small. That's what you should chase with efficient. Not just ... I've seen banks do this, too. Let's sort non-interest expenses from biggest to smallest and just start chopping some of the top ones because they're big. That's not always the right answer. In fact, I think it should be the other thing, right, is where are things just sort of messy and we can clean them up? That's what you should aim for.
Jim Young: All right. The next one may sound a bit jaded, and this may come from my role as director of content in which I read a lot of banking content. The phrase "getting more efficient" for me feels like a horse that's been ... continues to be beaten well beyond its death here. My sort of ... what [inaudible] I was like, really? We're still talking about this as a goal? And then I started to feel like this was kind of a Zeno's paradox where banks keep getting a little bit closer to maximum efficiency, but the ultimate goal is unreachable and each set of gains gets a little bit smaller and smaller, but that still keeps being thrown out as, "Man, we got to get more efficient." But again, I am jaded, so tell me if I'm being ...
Dallas Wells: You are cynical, Jim, I'll give you that. But I think you're right here and the numbers will back this up. So take the efficiency ratio of banks, right? And we've done this in some conversation with banks recently and we chart that out over the last couple of decades. It's been a steady march lower, lower is better for efficiency ratio. So banks are getting more efficient, they're spending kind of less dollars on expenses to generate a dollar of revenue. I think a lot of banks have gotten to the point where it really feels like, gosh, if we have to cut that by 5% again, like if that's my goal again, things kind of get ugly and it gets really, really painful. So there is only so much that you can squeeze out of that.
Now, every bank in the world has some inefficiencies and they'll have some things where you look at them and you kind of ... it's the face palm thing of, "Can't believe we do that." Right? That's a really inefficient, messy way of doing things. So I'm not saying that you should just give up on efficiency, but I think the important thing here is it's shaping your technology strategy, right? So if you start every year saying, "Where can we spend on technology that it's going to reduce overall costs?" I don't know that that's going to lead you to the best outcome. Instead, I think there's some other places where it should be, "Where can we spend on technology to improve at X, Y, or Z?" Instead of just, "Are there ways that we can get more efficient?"
I think a lot of banks have equated that to "Is there technology where we can replace humans?" It kind of goes back to the ... We've talked a lot about using technology to sort of empower humans and make better at what they do. I like the way Carl Ryden, our CEO, puts it, as kind of we're building Ironman suits instead of terminators. You want to make people really good at what they do and take their natural abilities and amplify them. There's not many banks that view technology that way. Not enough, anyway.
Jim Young: Yeah. So that brings us to our last one here. I may need you to take a deep breath, maybe say a little serenity now, and if this was live radio, I'd have my finger on the dunk button on this one. With that prelude here, let me just read this one straight through. Just 30% say that driving top line growth fuels their technology strategy, which indicates that most banks see technology as a way to save money and time as opposed to generate revenue.
Dallas Wells: Okay, you're right on this one. This one drives me insane. On that same plot, where we're plotting the efficiency ratio, here's the other number, and do this for your own bank please. I beg of you. If it's the only thing you actually go and do from this, just go look at the dollars of revenue that you're generating per dollar of asset, right? So net interest income that you're generating, noninterest income, and then compare that to your total asset base. So here's what's happened to the banking industry as a whole is banks have gotten really good at growing assets, but they've gotten really good at that because they have to, because the amount of money that they actually make on their asset base is going down. So for each dollar of assets that you painstakingly grow and sort of whip your salespeople into generating, you're generating fewer and fewer and fewer dollars of revenue out of it. This is a 20 year kind of straight down trend that that gets worse all the time.
So you've gotten really good at efficiency. In fact, the assets per employee over the last 20 years is up two and a half times. So each employee's responsible for 2.5 times and more of an asset base than they were 20 years ago. Still you're coming back again for your 2020 budget and saying, "We want to spend more money getting more efficient instead of this thing that we frankly suck at, which is generating revenue off of the assets that we're actually getting." So every year when you come back to budget time and you give your sales, your retail folks, and your commercial lenders and your mortgage lenders, they always have a bigger growth goal for next year than they had last year. Those numbers keep getting bigger and bigger and bigger.
We're starting to talk to some of our client banks now. "Hey, what's your loan growth goal for next year?" And a lot of them are like, "10%, 12%." Are you kidding me? I mean, these are big numbers. The reason is is because that's the only way they can get earnings growth is they have to grow that fast. So that means it gets more competitive. You cut your pricing a little more to try to win some of the volume, and at some point the risk will come home to roost. That is inevitable, it happens every time. That's why we have these cyclical, nasty swings in banking is because of what's happening right now where you have to go generate more assets to make the money.
So here's the other thing that I think is worth paying attention to. For the majority of people that will hear this, you're working at a bank that has below 10 billion in assets, just because that's the majority of banks. So that 30% that you quote there, that's the total of banks that are focused on enhancing top line revenue growth. For banks over 10 billion, that number is 50%, and for the banks below, you're talking like 24%, for one of those size categories. So the small banks are trying to beat the big banks at the efficiency game. Is that something that you think you can win? If you had a local retailer come to you wanting to bank with you and they're saying, "You know what we're going to do, we're going to out efficiency Walmart." You'd probably say, "I think that's a bad business strategy," right? But that's what these banks are doing.
Now, in all fairness, there's some catching up that they have to do, right? The big banks are pretty darn efficient because they're big and they have scale and the small banks still spend more money just kind of keeping the lights on. So they have some efficiency to be gained, but they're facing the same trend. I think this is one where you can actually go out and find some banks that have spent money looking for top line revenue growth. You can find the ones that are investing in that and you ... Go look at their results. I think you'll see that maybe zig, when everybody else is zagging might be something worth considering here. Rather than get your efficiency ratio from 50 to 48 next year, maybe say if you can take those same dollars and allocate them to something that might generate some new customers. It might make you actually better at making money on the customers you have. So I think I did ...I don't think there was any cuss words in there, so I think I did pretty good, but I'll leave it at that.
Jim Young: I was going to say, I'm honestly a little bit disappointed at how measured you were.
Dallas Wells: You've been waiting for this all week, haven't you?
Jim Young: Yeah, I really have. Yeah. I should've gotten Carl in here. Carl would've ...
Dallas Wells: Well, we knew better than that. We'd probably send poor Carl to the hospital with that one. So we'll just leave it at that.
Jim Young: Yeah. Yeah. And I will just say, dude though, I mean, what you're describing, I've said this before, I wrote it in a blog post when I first got here about three and a half years ago, is sort of the newspaper spiral. Where it became this thing of, "Hey, we got to figure out how to continue to get this number, and the only way we feel like we can do it is by getting more and more efficient," which in that case meant laying off more and more people.
Dallas Wells: Yeah, fire more writers, and that way we'll survive. Right?
Jim Young: Right. Which eventually hurts the product, right? Yeah. Still that 30% that do believe in it. It'd be interesting, too, as bank director, to do this because ... I can't chase all that down, but I'd be curious to know if they could track down say the performance of those 30%.
Dallas Wells: Yeah, that would be interesting. Yeah. Just to lay those two out and say which strategy wins? Because I have a hunch.
Jim Young: Yeah, which one won ...
Dallas Wells: Obviously, but it would be interesting to see the data on that.
Jim Young: Yeah, absolutely.
That'll do it for this week's show. Now for a few friendly reminders. If you want to listen to more podcasts or check out more of our content, you can visit explore.precisionlender.com or you can just head over to our homepage to learn more about the company behind this content. Finally, if you like what you've been hearing, make sure to subscribe to the feed in iTunes, Google Play or Stitcher. We love to get ratings and feedback on any of those platforms. Until next time, this is Jim Young for Dallas Wells and you've been listening to The Purposeful Banker.
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