Jim Young and Dallas Wells sat down to discuss a recent article by Chris Skinner entitled, Build or Buy or Build and Die?. The premise behind the article is that banks today are still trying to build all of their technology instead of entrusting the help of third parties who are experts in the field.
Young and Wells talk through why banks fear outsourcing their technology and how they can overcome those fears to build a stronger, more efficient bank.
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Build or Buy or Build and Die?
Jim Young: Hi, and welcome to the Purposeful Banker, the podcast brought to you by Precision Lender where we discuss the big topics on the minds of today's best bankers. I'm your host, Jim Young, director of communications at Precision Lender. I'm joined today by my cohost, Dallas Wells, EVP of client development at Precision Lender. Today we're going to talk about an interesting article by banking thought leader/futurist Chris Skinner that ran on his site and on banknxt.com. It caught my attention because, as those of you who have listened to our podcast know, we often talk and write about the question, buy or build, or build or buy, depending on how you want to ask it. Obviously you know as a software vendor the side we're usually going to take on that, but Skinner in his article goes a step further in how he frames things. His article is titled Build or Buy, or Build and Die.
Right away, Dallas, he's got my attention. Yeah, maybe Skinner's being a bit of an alarmist, or just a really good headline writer, but there's a logic to his hyperbole here. Can you sort of summarize for our listeners why Skinner believes banks that want to build all their own tech are frankly on the road to obsolescence?
Dallas Wells: Yeah, and I think first things first, I would like to put in a request to get futurist added to my job title. I like that. That's a good fancy one.
Jim Young: We'll have to talk about that later on. We're still working on the thought leader aspect of this whole thing.
Dallas Wells: Yeah, one thing at a time. You're right. Skinner ... his style is a little confrontational, which frankly I like it and I think it's more interesting to read that way, but that's the heads-up to our banking friends and clients that read this is he challenges bankers. I think a lot of what he says is banks are not doing this the right way. What I would add to that is we all understand why, right? Banks are not run this way because they're bad people or bad managers of businesses, it's just the reality of the business. We'll start with that.
But he talks about really what's kind of an age-old challenge for banks, which is do you build your own thing or do you outsource the things that are not your core competency? Banks have struggled with this. This is not a new thing. We've struggled with this from the time we started adding core vendors, and then we added ATMs, and the question was, should we service our own ATMs? Do we have our own staff keeping those things maintained and filled with cash, and whenever there's a paper jam with the receipts, do our staff go do that or do we hire someone else to do that? Banks, I think, tend to oscillate back and forth on this. What's made it such a loud discussion now, and I think what Skinner is talking about, is that because of the changes in technology, and frankly the way people are used to consuming everything else in their life, the banks that don't start to embrace some of that outside expertise are in real danger of being left behind.
It's not in the article, but I think a way we've thought about it internally as we've talked to banks about this is if you think about even something like your iPhone. When it first came out, it came with the standard whatever it was, 10 or so apps that Apple built-in there natively. Those were great. They worked just fine. But then they opened up the App Store. Now there's all of this outside expertise and so instead of using Apple's goofy mapping app, you can go pick your favorite one. You can use Google Maps or Waze or whatever you want to use, and you can use the best of breed, I think is how bankers a lot of times think of it.
Skinner's point is that the very best banks are starting to figure out how to do that for their customers. The bank has the core relationship and information, but the way that customers interact with that, you can give some choices and you can curate some really interesting, more useful, more valuable options for your customers. You can let a vendor out there do one thing really, really well, instead of the bank trying to do 1,000 things average, and kind of the minimum level of acceptance. That's really what he's talking about is do we try to be all things to all people, or do we just do what we do really, really well, and then let some of these new technology providers do what they do really well, which is usually focus on one thing and do it exceptionally well? He feels like those who try to do it all themselves are just going to be very average, ho-hum banks that get left behind by those that choose the other path.
Jim Young: Perhaps, Dallas, going into your futurist role, you've once again gone straight through to the next question that I had to ask, so impressive there. It's interesting. It feels like what you're saying here, in a way, or what Skinner is saying here, and this is actually sort of a positive turn, which is kind of the good technique you have. You alarm people and then you sort of bring them back from the brink with it. In this case, basically what he's saying is the bank is the iPhone, in the sense that we still think naturally of, "I need to do something financial. I will go to the bank," in the same way of, "I need to make a call. I need to figure out that trivia question. I need to have a map. I'm going to go to my iPhone." That part is built-in already for the banks.
What they need to do in this situation, to go with that parallel, is essentially build out their app library so that people continue to go to them versus going to some other alternate, which I'm guessing in this scenario is probably something that if banks don't do this, it's going to be either a fintech company or an Amazon or an Apple?
Dallas Wells: I think what a lot of the fintech community is talking about, and what they are waving their arms about, and I think the bankers get frustrated and are a little skeptical of that sometimes, but it's really a question about the business model. If banks just put their head in the sand and pretend like these things don't exist, then you'll see what's happening in some other markets. In parts of Asia, very large swaths of the transaction volume happens outside of the banking system now. It happens through P2P apps that have no banking rails to them, so to speak. Really, that's what Skinner's saying is banks can either embrace this and they can be the iPhone ... they can be the platform on which all of this is built.
If you think of that ecosystem, Apple is the one who derives all the value. Just check their market cap and how much cash they have on their balance sheet. Apple's doing just fine allowing other people to build great things to sit on their platform. That's what Skinner's saying is that's what the bank needs to be is the platform. Curate some really phenomenal things for your customers to use. Otherwise, they'll find other places to go use those things, and that's not as good of an experience for the customer. Again, thinking to that same analogy, everybody has way too many apps on their phone, and it's a noisy thing. If you start to try to put your financial life in some of those apps ... I've got five or six different accounts, and credit cards, and Mint to try to track transactions, and all those things that kind of get spread around. The bank has the unique ability to harness all of those together in one spot and make it a better experience for both and they capture some of the value.
The alternative is that you do get left behind and somebody takes that very important platform spot away from the bank. The other side of that, the other alarmist part of it is that I think banks fear becoming the utility, where the bank becomes the plumbing in the background, where all the fintech companies steal the customer relationship, and they're the ones that actually capture the value. All the bank is is just the backend plumbing where information flows back and forth. That's really why this is such a hot topic of discussion and why folks like Skinner and Brett King and JP Nichols and a lot of others that we have talked to and talked about on this podcast, that's why they're saying time is of the essence.
Somebody's going to win that and it's not 20 years down the road. Some of these things are happening now. You see, again in markets outside of the United States, it's in motion. In some cases, the train has left the building. This is important for banks to think about and for them to be proactive about.
Jim Young: One thing ... You mentioned JP and Brett and those guys who, by the way, as you can tell, I'm now on a first-name basis with ...
Dallas Wells: Of course, yeah.
Jim Young: Yeah, absolutely. When I read a lot of the stuff in these thought leadership pieces, I think to myself, "Okay, are we talking purely retail, or does this apply to the commercial side?" So in this case, with what he's talking about with his curator model, is this a retail story or is there an element ... How does commercial fit into this, or is it a separate story altogether?
Dallas Wells: I think banks, a lot of times, think of them as separate but I don't think that's the case. Retail gets all the headline attention and that's just by sheer volume of the transactions. If you look in just about any bank in the world, where's the volume of accounts and volumes of customer interactions? It's on the retail side. But where is the volume of dollars, sometimes, of pure balances and also dollars of profit? A lot of times, that's on the commercial side. There are plenty of this kind of curator ideas that work on the commercial side, too, and banks have been doing a lot of these for a long time. There's community banks that will, either through an upstream provider or some third-party, offer lockbox services so that the dentist's office can have payments run through there. The bank takes a little piece of it, but really they've curated that service from someone else. Remote deposit capture, where you have couriers going out and interacting with your customers.
This isn't a brand-new concept, to have some third-party provide some of that service that the bank offers. Again, some of it's just shifting to the digital world. An example would be our friends at Encino. That is very much a back-office-type loan origination system, but they have this great little portal that interacts with your commercial borrowers where they can upload documents, and they can see the process of the deal actually getting booked. It's sort of like ordering a pizza from Domino's, right? You have the tracker of how long it's taking and when you can expect the pizza to be there. This is the same idea only it's when does the funding show up in my checking account from this loan that we're doing.
That is a way that a bank is curating a service from a third-party vendor that would be difficult to build themselves that really changes the way the customer experiences the bank. The customer, frankly, doesn't give a damn about who built it. They don't care if the bank's engineers built it or if Encino's engineers built it. Who wrote the code is irrelevant. They get a seamless experience from their bank, and that's where I think bankers get a little bit hung up on it sometimes is we have to own that process because it's core to what we do. The real question should be, what gives our customer the best experience?
Jim Young: Right, exactly. Then at this point, Skinner does a pretty elegant pivot here and almost switches to a different story or a different article. In order to do all those sort of things, and the things you're talking about, and to be on the train when it leaves the station, your bank has to make a digital transformation. That is a super-buzzy phrase that gets thrown out a lot, and he takes a step back and says, "Okay, well what does that mean, and are banks really doing that?" He has a particular line here. He says, "The issue is most banks think that by having an app and a cheap digital officer, it's all sorted out." That's certainly a shots-fired by Skinner. Is that fair or is it too harsh?
Dallas Wells: I think this is one of those things where his way of saying it is challenging, and he's, again, getting folks' attention. But I think it's fair, too, and actually just had a conversation with a bank that I think maybe is a good example of this. We're talking ... this is kind of an in-the-weeds discussion about pricing and some of the math. They have an Excel model built that does some of their capital allocations. Their question to us was, "Well can't you just send the inputs from Precision Lender, let us do our calculations in our approved, validated Excel model and send you back the results?" They first just referred to it as a model, and then as we asked and said, "Well, what kind of a model? How'd you build this?" "Oh, it's in Excel."
Okay, well Excel doesn't play very nice with digital data moving back and forth. It can be done, but you're talking about several steps removed in writing scripts and having to be uploaded through an API. There's some technical hoops to jump through that are way beyond me and way beyond most banks. Even if you build it, they break very easily and there's all little pieces that can go awry there. That's a bank who ... they probably have a very nice app. They probably have a very nice internet banking portal. I'm sure their website is beautiful. So they think, "We're digital. We are meeting people where they want to be. They have great digital access to us." But things like back-office functionality are still living in this, in many ways, analog world where everything lives in these siloed, behind-the-firewall systems.
Even if it's not Excel, even if you've bought a software program to do this, is it truly an open-type system where you can, through APIs, connect that to everything else and have clean data flows across the system? It may seem back office, but these are things that impact your customers. This takes, in our case, a pricing conversation from you can negotiate live on-the-fly with a customer, to it turns into, "Well, let us go see what we can do," and you take a week and you crank things through an Excel model and then you come back with an answer. That's a worse customer experience because they don't have a way of cleanly connecting things in a digital way.
That's an example, and may be self-serving one ... That's us helping them solve that problem by saying, "Let's get rid of the Excel thing. We can solve that problem for you, and now it is digital. And now you can connect that to Salesforce so that you see how that negotiation was made and what the results were, and you can connect it to Encino or whatever your loan origination system is. The data's there and it's live-updated and everything is clean, and there's not any of this messy translation in between."
There are millions of examples of those inside every bank, and his point is it's all happening in silos where there's little products, where parts of it are being turned to digital, but this overarching framework of the bank, of do we have data in a way that it's easily consumable? Can it move between all of the different pieces of the bank as it needs to? We haven't run across a bank yet that has that figured out very well. Again, that's not a criticism of the bankers. That's the nature of the business and it's a problem they're going to have to solve so that somebody else doesn't solve it for them.
Jim Young: Yeah. It sounds like basically what you just described there was this next thing that he gets into in the article, which is this digital 1.0 versus 2.0, with 1.0 being this accessorization of the bank with digital. In other words, taking some stuff, putting an app on it, a chat bot, that sort of stuff. 2.0 I think is basically what you just described, which is this overall transformation ... I just used the buzzword again ... but which fundamentally changes how a bank operates and fundamentally changes the customer experience it can deliver. Skinner thinks that this sorting out, then, of the banks that can go from 1.0 to 2.0 and then those banks of course, in his view, will be the ones that rise to the top. He thinks it's going to take place in the next 5 to 10 years. What do you think of that timeframe?
Dallas Wells: I think he's right. The 1.0, 2.0, and what the definitions of those are is really fuzzy, but banks have had internet banking for decades now. All it has been ... His point is it's a digital front-end to still a very antiquated back-end system. All it can do is pull up that ledger of transactions and display it on the screen over the web. You don't have the ability to let any machine-learning algorithms or third-parties easily access and share and do anything with that data. It's just sort of static, lives on the screen. It's basically your bank statement on your computer screen. That change to having much deeper analytics around that, this is where he kind of brings this article full-circle.
Back at the beginning when he's saying, "You're on the road to obsolescence," Amazon knows how to do this. Apple knows how to do this. It's not just the big ones, either. There are tons of little niche fintech players and banks that are figuring out how to do this, to make that data truly open and accessible. Once someone figures it out, it'll feel like a little bit of a quantum leap from where we are today, but that's how these technological advances happen is there's a leap and then everybody has to rush to catch up.
I think what he's saying is we're starting to see some parts of the industry make that leap, and so those that get it and make the leap with them will move ahead, and a lot of the others will be left behind, and they'll be what we used to still run across five years ago, which was some rural community banks that didn't have internet banking. They just said, "Well, you can call this number and we'll essentially read back your transactions to you." They got left behind. Those banks don't exist anymore in that form. A similar thing is starting to happen here, and banks aren't just going to go out of business. The reality of what happens is they consolidate, and so the banks that just say, "Ugh, this is beyond us, or it's too expensive, or we just can't keep up or make a difference," or whatever, they throw up their hands and they put a for-sale sign out in front of the bank. That's the reality of what is happening. The banks that are aggressive and are growing, and they're the acquirers, they're the ones that are figuring this out and really pushing the envelope.
Jim Young: All right. Well, that'll do it for us today. Again, that was a Chris Skinner article. If you are interested in this sort of thing, and if you are okay with being challenged and maybe being made to feel a little bit uncomfortable, I highly recommend that you check out some of his articles on his site, and he writes also for, again, I said banknxt.com. That's banknxt.com. Thanks for listening. If you'd like to learn more, visit our resource page at precisionlender.com. If you like what you've been hearing, make sure to subscribe to the feed in iTunes, SoundCloud, Google Play or Stitcher. We love to get ratings and feedback on any of those platforms. Thanks for listening. Until next time, this has been Jim Young with Dallas Wells, and you've been listening to the Purposeful Banker.
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