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Jim Young and Dallas Wells discuss an Accenture article on the three traits of innovative commercial banks and what those traits look like in banks we work with. They also discuss the hurdles banks face in becoming innovative.
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 your host, Jim Young, Director of Communications at PrecisionLender, and I'm joined again today by Dallas Wells, our EVP for International Operations. Today we're gonna dive into an older study on banking and innovation. It's called The Future of FinTech and Banking, and it was produced by Accenture back in 2015. Now, before you make a joke about "Hey that's really funny you're talking about the future of something by talking about a piece that was written three years ago," we'll explain our reasoning for going back to this piece.
Number one, they identify three traits of innovation-friendly banks and we want to take a look, discuss those traits, and what they look like in banks we work with today or whether those traits can be found in banks today. And two, there are some stats in there around what's holding banks back, and I think it's worth taking a look at those numbers and seeing do these same roadblocks still exist three years later with banks.
Dallas, let's start off with that first trait that Accenture ID'd and it's called openness. And here's what Accenture wrote. Said, "For large organizations. This means engaging with external technology solutions, knowledge capital and resources, and often opening up the organizations own intellectual property, assets, and expertise to outside innovators to help generate new ideas, change organizational culture, ID and attract new skills, and discover new areas for growth." That's a very long, convoluted ... not convoluted. Wordy. Let's just say that fits in a little bit with consultant speak, but there's a lot of meaty stuff in there.
Dallas Wells: Yeah. That's fair.
Jim Young: But based off of that description of how they define openness for banks, do you find that banks are more willing to be open now? And if not, what's holding them back?
Dallas Wells: I think there are pockets of banks here and there, there are individual banks that are figuring this out and being a little more open, by their definition. But I would say the industry, by and large, is still very far away from this. Especially when you go as far as saying opening up the organization's own intellectual property. There's lots of talk about open APIs and how much can we, basically, try to become a platform and let outside partners, innovators, inside the ecosystem. And so there are some banks that are starting to do that. But we feel like what we see in our day-to-day interaction is that it's very slow going. It's very painful. And that even when the bank as an organization says from the top "Hey, we're gonna do these things and we're big believers in this and we want to partner with folks on the outside," like any organization, a big bank is still made up of human beings who all are gonna approach that very differently.
And so from our perspective at PrecisionLender, what we run into a lot is folks seeing us coming in from the outside and it's sort of a deer in the headlights look. It's like "Oh, no. Who are these people and are they here to take my job?" essentially. So people get very protective of their processes, how they do things today. And so I think it's something that vendors, tech firms, partners of any kind ... it's actually an important skill set is figuring out how to navigate that and learning how to work with banks and how to make the individuals that actually own the nuts and bolts of the existing systems ... help them understand that these partnerships can be beneficial and not always just a threat. Right? We're not just here to outsource what you do and send you on your merry way. If done right, these sort of things should be empowering to those folks that own those processes today. And they should look at this as another tool for them to use and another way for them to sort of expand their base within the organization instead of losing it.
So there's very human elements to it that I think are difficult. And just the nature of banking in general, where it's very, I would say, almost secretive and hush-hush and everyone thinks they have a secret sauce, or at least wants to believe they have a secret sauce, that they can't share with anyone for fear of losing it or, in the case of when you get down into the weeds with the human beings, maybe being exposed of "How valuable is what you're doing here really to the organization?" So I think we have a lot of work to do in this one.
Jim Young: Let me play bank defender here for a second here too, though.
Dallas Wells: Okay.
Jim Young: And I don't know if this falls under intellectual property exactly, per se, but to some extent when a bank takes your information or your money or your company's money, there's a bit of a sacred trust there that they're going to protect it. So couldn't you say, to some extent, why bank's aren't open is because this isn't just Bob likes to buy corn chips so let's send him more ads for corn chips that you're sending out there. This is Bob's financial information. You can sort of understand that sort of reasoning for maybe not being quite so open with that.
Dallas Wells: Oh absolutely. Yeah. I think there's way more at stake for a bank then there is for most other types of businesses. So like you say, it's easy to share and to be open when there's not a whole lot of risk in doing so. And so banks are very protective of customer information, as they should be, but I think that's different than trying to find a way to work around that. In other words, let's find trusted partners who can live up to our standards and let our customers opt in to this. But it's the banks job to make that valuable enough for the customers to do that.
And if we've learned anything about consumers and users of business services in the last decade, it's that they are very okay with giving up some privacy if they get something of value in return. Look at all the social networks. That's what they're trading. They're trading privacy and their own attention to advertisers in exchange for something that they find valuable. People are willing to do that, but you have to give them a reason to do that. And that's where banks I think have just put up a wall and said "No" instead of saying "Maybe there's an opportunity here."
Jim Young: Trait number two is closely tied with trait number one. You really can't have one without the other. Trait number two is collaboration. But Accenture throws a little bit of a curve ball here. They're not just saying it's about partnering with others in your industry. They pointed to banks that work with companies outside their industry to identify new ways to generate value, and I think that one of the examples was a bank working with a Tellcom to work on a new app, that sort of thing. Can you tease out what that means, and really what it means for commercial banks? I think that the retail side of it's maybe a little easier to imagine, but what it means for commercial and where you've seen that sort of thing in action.
Dallas Wells: Yeah. I think that probably the most recent big example on the retail side is all of the talk about Amazon and Amazon partnering with a bank, I think the specific one was J.P. Morgan, and offering a checking account. Basically there's a bundle there of "How can you make a checking account something worth paying for?" Well again, that's something Amazon's really good at. They're Prime membership has all kinds of perks that go with it, and they keep ratcheting up the price of that and the growth rate of new Prime members only increases.
So there are plenty of things, the whole subscription economy, as banks have been struggling with this. As an industry we made this awful decision to go down the free checking route, free checking accounts. In fact, you get a free toaster if you come in and open the account. And all of the rest of the economy is now going to subscription economy. That's how meals are delivered and you can do clothes shopping that way. I'm sometimes overwhelmed by how many $10 a month things that I all of a sudden pay for. And yet we still struggle to get customers to pay $10 a month for a checking account. And it's because of that, maybe some lack of creativity or lack of willingness to not just try to bundle up your own products and services, which I don't know that consumers always care about a bank's products and services. What they want is value and now there are places outside of banking where they can get that. So for commercial banks I think there's maybe even more opportunity than there is on the retail side to really provide deep value.
And if you think of kind of a classic small business, if anyone should know and be able to help them run their business better, it should be their bank. Because your accountant will see your financial information, but it is very much backwards-looking. So even if they're doing interim financial statements, you're gonna bring them the stuff for the last 90 days and they're gonna spend the next 45 to 90 days putting it together. You're always looking in the rear view mirror and squinting to even see what was back there. The bank has current transaction information flowing all the time. So they should be able to see what's flowing through your operating accounts. They should be able to see the available credit that you have. They should be able to look at past history and see seasonal credit needs. And you should be able to, in theory, get a proactive warning from your bank of "Hey, here's a time that looks like a danger zone for you." Right? "Where meeting payroll two months from now could be difficult if you don't think ahead."
So that's inside the bank's ecosystem. You can look at collaborating with outside services that are relevant to the industry. Can you combine that financial information for a farmer with some of their row crop data that they have sitting in another system? Can you do similar things for a law firm? Can you look at typical industry seasonal needs there? Can you pull in all kinds of outside services through these APIs, again, that people would be willing to opt in to, willing to say, "I will give this third party access to my stuff, because I feel like there is valuable information for me there as a business owner and better ways to buy my materials, to manage my own cash flow, to decide when to switch from leasing equipment to buying my own equipment?" And I think that's the future of where banking is heading is being the true central hub for their customers.
And the commercial side is where there's lots of white space, lots of opportunity there that we see some banks starting to tiptoe into. They tend to trip over the tech part of it. They come in and all of a sudden they're trying to jam the stuff into their old legacy systems and that's when they're saying, "Man, this is really hard." So I feel like if you look at when this piece was written in 2015 versus 2018, not a whole lot more action, but there is a lot more discussion and, I think, willingness to consider it. And eventually I think the opportunity will become big enough that the banks will start making the investments necessary to make it happen.
Jim Young: Once again, I've got to stop feeding you the questions ahead of time here, because once again you've almost jumped ahead to our previous question [inaudible 00:12:29], but I'll back you up for just a second here and go to trait number three here, which is investment. Now Accenture looked at this from the angle of venture investment, and I'm curious whether it is a lens to use. I'm curious whether it's the only lens or the right lens. They're talking about basically investing in a FinTech. I'm just wondering if investment could also simply mean buying the services of a FinTech. Do you know what I'm asking on this one?
Dallas Wells: I think so and I think what this comes back to, the reason they view it through that lens is the vendor management restrictions, maybe I guess would be the way to word it, that the banks have to deal with. In that if you're going to do something meaningful with a vendor and you're gonna turn over an important chunk of your business or of your future endeavors, if you have a key vendor whose gonna be an important part of that, you have to trust that they're gonna be around. Right? And that they're gonna be able to keep up their end of the bargain. And there's pretty well defined expectations from regulators around that.
And I think the struggle here is that a lot of the very cutting edge stuff comes from newish vendors, tech startups, and when you look at their financial statements, especially on like a traditional gap basis, they lose money. Right? They're in the early growth stages, investing heavily in the technology and growing the teams and they have exciting momentum, but they maybe only have 12 to 18 months of runway in front of them of cash. And so banks view that as "Well, if we find the right team, the right product, the right vendor, let's just become an investor." Right? "Let's help shore up that end of it so that that doesn't have to be a concern." So that's probably partially why it's viewed that way is if you ignore that part of it, if you don't open that as an avenue, then what you're left with is kind of the established big name players, which everybody's got relationships with, Accenture being one of those, the IBMs of the world, in the U.S. the big core vendor companies. It's a pretty small selection and everybody's shopping off the same menu.
So if you really want to innovate, if you really want to look at interesting new ideas that are unique to you and you want to customize them to what you're doing, a lot of times that means looking outside of the usual suspects. And it may require you having a mechanism for, "propping them up" is the wrong way of putting it, but of helping secure their stability so that that doesn't have to be a concern.
So it's probably too narrow, but I understand why they're coming at it that way and creates lots of actually interesting conversations for vendors like PrecisionLender. As we talk to large banks that's one of their questions. They're like, "Hey, you guys are small. You've got 100 and something employees. We've got 100,000, so are we sure that you're gonna hang around? And why don't you just let us invest?" So those are decision points that I think come from both sides of the table and it's something that banks at least need to have a thought out way of dealing with that. They need to have plans for how they handle it. And sometimes it can help get a deal done if the vendors are willing to do that. So it can't be something that is off the cuff. You have to have a plan in place for those.
Jim Young: Gotcha. Okay. I guess my thought on that too is there's a line, a tipping point, where at some point if whatever it is becomes popular enough, you can't have 25 different banks all investing in it. At some point someone just needs to actually use the services. Right?
Dallas Wells: Yeah. And I think that's where there's a corner turned. And where you say, "Okay. We'll sell you this, but you can't buy a slice of the company." And there are lots of vendors that take that stance early on anyway. It is "Hey, we'll show you the financial information. We'll give you a chance to get comfortable with it. We'll explain to you why we think it's okay, but we're not gonna take a check from you" because of that exact issue. Once you take one from one, then you have to be willing to consider that for every future client. And so some vendors are okay with that and others are definitely not.
But I think as a bank, if you want to have a full set of options in front of you, you do have to have the ability to do that. And again, at a large bank, you have to have a clearly defined path for making that happen and you have to know what those criteria are so that the lines of business that are shopping for things know that that's an option. If they find a young, new vendor that they're excited about, that they think solves the problem, that they don't just immediately write it off and say, "They're too small. We'll never get it approved."
Jim Young: Gotcha. Okay. So they go through those traits and some nice charts and that sort of thing, and they also highlight a few things holding back banks from innovation. And a couple of these I wanna mention. One, 72% of the respondents said their bank had only a fragmented or sort of an ad hoc strategy for innovation. Two, 40% said the time taken to deploy new tech was either negatively impacting its value or just negating it entirely. And sort of an overarching one, number three, 80% said they were minimally to somewhat equipped. Nobody basically said "We are definitely equipped" or, I'm sorry, about 20% said that, said "We're equipped" basically. The other ones, 80% said they're either minimally or somewhat equipped to handle the challenges of the next wave of digital innovation. So, yeah, what I wanted to ask you was, those were the numbers in 2015, do they reflect today's realities? And if not, how have things changed?
Dallas Wells: Yeah. So we touched on this a little bit earlier, and I think there's willingness to do these things, but I think the same problems still exist, which is that there's not a well-thought-out, from-the-top plan for how do we do innovation. And so in a lot of banks they feel like "Well we have to do something. So let's create a Chief Innovation Officer, and let's create a little FinTech lab, and maybe let's even invest in a few things." But it's very much a sideline to the real business. And when, those three traits that they laid out, when you actually get down to trying to rework an existing, functioning part of the business, innovation has to be a part of that thought process for the actual, real day-to-day lines of the business, not the sideline thing that you put out in press releases.
So what I mean by that is it's a conversation we have with banks all the time where we show them what we do and they say, "That's great. It's fantastic. It looks cutting edge. It's exciting, but here's our existing current process. Can you match this? Can you accommodate these things?" Which a lot of times are 20 years of workarounds that have now been baked into the process. And so they want to know, can we customize what we do to meet their process?
And our question back is always, "While you're doing this, why don't you come to a better answer?" Right? "Why don't you get rid of all those ugly workarounds that you've put in place?" And that's the gap where there's no overarching strategy for how to do this and the actual day-to-day business is not equipped to really innovate with new digital solutions. They're wanting to kind of pour concrete around the way they already do things with new technology instead of using that as an opportunity to "Let's really rethink this. Let's come up with a much better solution for our customers, for our employees that is front to back a better answer because now the technology allows it instead of just solidifying some of the cumbersome and difficult ways that the business runs today." So lots of work still to be done.
Jim Young: Yeah. And a big part of that is that there's a lot of talk, like you said, a lot of conversations around breaking down silos and that sort of thing. And I know I'm struck by it sometimes when we have a conversation with a bank and I'll ask one person on sales, "So who are we talking to?" And they'll say, "Well, we're talking to this particular line of business." But that line of business isn't interested. And it's like, well but the product doesn't make se ... or these guys have this CRM, but the other line of business has that CRM. And you're like, "That's insane." But basically it has a multiplying effect of difficulty if you continue to treat essentially four or five lines of business in your bank as essentially four or five different businesses. Now you're trying to innovate four to five times, which would be difficult for even the most FinTechy of people out there.
Dallas Wells: Yeah. It becomes where there are small experiments being run, and I guess you're asking about what kind of progress have we made since these numbers came out. There are small experiments. So there are things happening, but these struggles, the 72% said that it's a fragmented or an ad hoc strategy and 80% said they're minimally equipped to handle these challenges, I think from the top of the organization, they think of digital innovation as something that one person can own with a lab and we can spin interesting new ideas out of it. Maybe the corollary is back to the Blockbuster versus Netflix discussion, right, where it's not that Blockbuster thought that what Netflix was doing was dumb. They saw the value in it. They in fact had beat Netflix to a couple of those things. The problem was if they really wanted to invest in it wholeheartedly, it was going to do damage to some of that existing business and it didn't work well with all that existing framework and all their existing stores.
Banks are struggling with a lot of that, where the existing processes and the organizational structure, all of that becomes in many ways an anchor around their neck where it becomes hard to innovate even when they see a good idea because the existing business is still working today. It's still making money. It gets harder every day and I think they become a little more vulnerable every day. And that's what the leadership of these banks have to be really careful of is that they don't go the way of Blockbuster, because they just couldn't put at risk some of those existing people, processes, lines of business to invest in what's coming tomorrow, what is inevitable, coming around the corner. And they've got to find a way to do these small, little experiments on bigger scales.
Jim Young: All right. Well that'll do it for this week's show. A reminder: if you want to listen to more podcasts or check out more of our content, you can visit our resource page at 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, SoundCloud, Google Play, or Stitcher. We'd love to get ratings and feedback on any of those platforms. Until next time, this has been Jim Young, Dallas Wells, and you've been listening to The Purposeful Banker.
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