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Jim Young and Dallas Wells chat about the risk of not taking risks in today's financial industry and why you need to be at the forefront of the changing environment.
They discuss what causes change, how these changes affect your team, and how you can drive change that will make your bank stand out among the rest.
Helpful Information
- Leaders, Learners and Laggards
- JP Nicols LinkedIn
- JPNicols.com
- The Best Way to Predict the Future is to Create It (podcast with JP Nicols)
- Innovate on Purpose (JP Nicols talk at BankOnPurpose 2017)
Podcast 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 your host, Jim Young, Director of Communications at PrecisionLender, and I'm joined again today by Dallas Wells, our EVP of Banking Strategies.
Today, we're going to talk about a topic that's near and dear to bankers, risk, but not risk in the risk rating sort of way. Rather, risk in the way that banking thought leader JP Nicols described in his 2016 article, Leaders, Learners, and Laggards. Yes, you did hear me correctly. That article is actually from early 2016. It's almost two years old, but the topics that JP discusses in this really still resonate with us when we think about the conversations that we have with banks that are contemplating the buzzy word that's out there, the digital transformation of their commercial bank. For those banks, and that's a lot of them right now, the smart ones definitely that are thinking about this, this article is still something that definitely rings true. Dallas, can you first start off by giving us a quick synopsis of JP's article?
Dallas Wells: Sure. It's from JPNicols.com, and JP's spoken at Bank on Purpose and I believe done podcasts with us as well, so we'll call him, I guess the terminology we would use for that would be friend of the podcast.
Jim Young: FOP.
Dallas Wells: Yeah, there you go. JP is a former banker, so he's not one of these outsiders who is telling bankers that they don't move fast enough from just a lack of understanding. He's been there and gets it. The article has a few big sections, and what he's talking about is this concept, what he opens with, and I've heard bankers use this. I was taught this as the right way to do banking when I started, which is to be a fast follower. JP thinks that that's bunk basically. There's no such thing as a fast follower. What he says is most of them are definitely followers, but usually there's nothing fast about what they're doing.
Banks in particular, and again they are risk averse out of necessity, but the headline he uses here is the risk of not taking risk. Banks sort of look like as they evaluate new opportunities in the new digital world, it sort of looks like a middle school dance where everybody stands around the edge waiting for someone else to go first. That's where the leaders, learners, and laggards come from. There are a few that are willing to step out there and try things, and it takes a little bit different way of thinking.
That first section actually reminded me of something that Carl Ryden, our CEO, I think rightfully so makes a point of a lot, which is doing nothing is also a decision. That's kind of what JP's saying here is sticking with the status quo is an active decision that you're making. Bankers tend to think, "Well, if I just sit here and keep doing what we're doing, that's not risky, right? I can't be blamed if things go awry." JP's point, Carl's point is that well, yes, you can. You made a decision to not do this.
The next part that JP talks about is, and I think this will resonate with a lot of bankers who are frankly probably tired of reading things like this and feeling a little chastised, is that he talks about the business as a fixed income investment approach, right? This is not a venture capital type business where you invest in 10 companies, the majority of them are big fails, a couple break even, and then there's one home run that actually generates all the returns. That's not how banking works. Instead, it's like a fixed income investment portfolio. I happen to manage one of these for several years. The return of principal is never a question, right? That is always a given. I only buy things where the principal will come back to me, and what I'm managing is these little incremental risk adjusted returns on that principal. We think in terms of basis points, not wins and losses.
When something like a new way of doing business, a new way of having to approach our customers, comes at us, it's hard for us to back out of that fixed income investment mindset and think about it in a typical business cycle, which JP goes back to the S curve where you have the launch where something takes a while to get going. Then you have this kind of hockey stick growth as it takes off, and then it matures and becomes the top of your S as it kind of levels out. Those kinds of things are now coming at banks where there's new opportunities where it's going to take a while, it's going to take some resources to get it launched, but there is that potential hockey stick.
The whole point of this article is there's a few leaders who are stepping out there. They are making that investment at the bottom of the S, and they're actually starting to see some of those returns. There's starting to be some separation between those banks that are doing this well and those that aren't. There are some learners who are coming along and starting to peek their head out and say, "Wait. What are these guys doing that's different? What can we learn from that?" They're tiptoeing into it, JP thinks a little slowly. He's probably right.
But those that are in real danger are the laggards, the one's that are kind of head in the sand and saying, "We're just going to keep doing what we're doing. It's always worked. It will continue to work, so we're just going to ignore these new opportunities." JP thinks that the time has come where it's a moment of truth, and those laggards, the clock is ticking and that eventually they're just going to have to put a for sale sign out in the yard in front of the bank and let someone else take over. That's a not so brief synopsis, but there's a lot of good stuff in there that I think is worth talking about.
Jim Young: I'm kind of curious, because I get that concept. I would worry that, let's face it, it's not ... Right now, I mean looking at a lot of the metrics, things have been on the upswing for banks. I feel like you might have be able to make this sort of thing and say, "Hey, you've got to get on board with this or you're going to be extinct," four or five years ago. I recognize of course that a lot of banks are getting swallowed up, but still in terms of the overall metrics if you're that person that reads that thing from JP or looks at this stuff in digital transformation and giving a commercial customer the experience that they get on the retail side or anywhere else, and you say, "Okay. This is definitely where we need to go," how do you counteract someone else at the bank who says, "Dude, we're doing fine right now. Why would you mess with this?"
Dallas Wells: Yeah. I think that's why he talks about that S curve is this is not something where if you all of a sudden see that it works you can just say, "Oh, well we're going to do that too." You can't be a fast follower in these kind of things, because there is a foundation that has to be built and it does take some time, and that if you lag too far your competition will run away from you. Those that are starting to reap the rewards of this started making these types of investments a couple years ago.
Let's maybe be explicit about what types of investments we're talking about, because as we've talked about before on this podcast, fintech is this kind of fuzzy thing that gets thrown at bankers, and a lot of times it almost always comes back to the retail and usually payments spaces.
Jim Young: Yes.
Dallas Wells: We technically are a fintech company, but we have nothing to do with either of those areas. What we're talking about is digital transformation, taking processes in even the commercial loan world and saying, "Are you doing things by email? Are you actually still handling pieces of paper? Are you entering things into separate systems multiple times and kind of moving things slowly through these different buckets or silos of people and processes?" Connecting those things, making the data flow, making the data actually useful to you, that's the digital transformation that we're talking about.
JP's point is it takes a long time, multiple quarters, for that stuff to actually come to fruition, to connect all those complex things together. Once they come together, then your customers start getting a little better experience, and that's what starts to spread, and that's what is then very hard to catch up with. It's that you can't be a fast follower with these types of things. The technology moves too fast and once you're far enough behind, you literally cannot catch up.
Jim Young: I think you sort of mentioned a little bit, because of that S curve and that sort of thing, that it's a little bit of a double whammy. Again, A, you've got to convince people that when times are good that actually there is this potential problem down the road, and then B, you've also got to tell them, "Hey, I might take us from good to not so good in the short term, but you've got to trust me that it's going to be great later." That's not an easy argument to make.
Dallas Wells: Yeah, it's not. The good news is that bankers are really good at being scared of what's around the corner. It's what they're paid to do.
Jim Young: Right.
Dallas Wells: The way we see work is you have to make sure that everybody understands the boogeyman who's lurking around the corner, which in this case is if you're too late to the party and every other bank that you compete with starts to leave you behind, you're in bad shape then. The conversation we're having with a lot of banks is like, "Look. If you don't do it now, this is kind of a once in a career opportunity to make these sort of transformations," because banking is coming out of this now decade old crisis that really consumed the industry for so long and where we stopped investing in so many things for such a long time that now there's this chance where there's lots of white space, there's lots of opportunity in front of us to kind of pick, "Okay. Now that we're back to investing, where do we really make a difference?"
There's also budget dollars now. Earning are good, right? The banking industry is as healthy as it's been in a very, very long time. You have some sort of pent up need. You have dollars available. The people who can move within these large organizations and get things done, it's a career defining moment. It's an opportunity to really make these things happen.
Jim Young: One other thing I would think of to sort of argue against myself, which I'm pretty good at doing, is that to some extent even though it might not be showing in your returns, I think it's some of the commercial bankers a lot of times, the impetus is in some cases not, "We need to do this for customers," but rather, "It's driving me crazy. Like I need this," this sort of thing.
Dallas Wells: Yeah.
Jim Young: "This is insane that I have to do this on paper," or, "This is crazy that I have to have all of these inputs to this Excel model. Even if we're doing well, I can't see myself continuing to do it this way in the next couple years." A lot of times I feel like that tends to be the impetus for change sometimes.
Dallas Wells: You know, interesting aside, we had a client who our person that we worked with most at that client, he was the administrator for PrecisionLender at his bank, young, smart, kind of up and coming star at that bank. He ended up actually leaving banking and going into an entirely different industry sort of out of the blue, and we were a little surprised by it, a little disappointed to see him go. I reached out to him on LinkedIn and I'm like, "Hey, congrats on the move." You know, kind of, "What spurred the decision?," basically. His response really kind of struck me. He said, "It just wasn't fun anymore. I just couldn't see myself doing this for the rest of my career."
When you have young, bright, talented people leaving the industry because it's a pain in the butt to come and do all the things you've got to do, you're right, that's a long term drain that we have to be conscious of. It's easy to ignore when you sit around the table with the management team that's all been there forever, has always done it that way, can't imagine doing it a different way, and just doesn't really see the problem with it. It's hard to start putting dollars to invest to save the young talent like those that are either leaving or never show up in the industry in the first place because it's a difficult place to get things done.
Jim Young: Yeah. On the flip side of that though, I think it was just yesterday that you and I were watching someone give a presentation about this sort of transformation at their bank and marveling about how unbelievably well he was doing it, but also marveling in the way that people who were older than the person in the video, marvel at how unbelievably young he seemed.
Dallas Wells: Yeah.
Jim Young: Those banks are out there. They recognized, "Hey, this guy may not be 30 years in the business, but we need to listen to this guy." Enough of those banks are doing that, getting back to JP's point, that there are banks that are doing this, that have made this investment, that get it, and that get that we need to start listening to some of those voices. If your bank isn't, they need to make that adjustment right away.
Dallas Wells: Yeah. Basically move aside and let some of those youngsters take some of these things and own them and do well with them, because the rest of that conversation that I feel like is relevant here that we said is, "My God, I wish we could hire that guy."
Jim Young: Exactly.
Dallas Wells: There's a tech company trying to pick off the young talent again, and it happens, right? It happens over and over and over again, and that's a pretty compelling thing to someone young like that for a growing software company or whoever to come and say, "Hey, you seem really good. You seem to really get this. Why don't you come do it from the outside where it's easier to get things done?" That's what banks are competing with long term. It's a tricky spot to be in, but I think the time has come to take some of these little incremental risks, even if it's giving the youngsters a chance, if it's taking the leap even when things seem to be fine, seeing what's around the corner and what investments do we need to make to make sure we at a minimum keep up, and if we want to be one of the leaders take some early steps here. Go out to the dance floor before everyone else and get things in motion so that you can see the return down the road.
Jim Young: One thing you said was take these incremental risks. One thing JP mentioned is he sort of compared the fixed income person versus like the VC investor. I think I got his point, but I also think that's a little bit of a scary one, because as he mentioned, as a VC person you can be wrong 9 times out of 10 as long as you hit big on the 10. I don't think a lot of bankers can be wrong 9 times out of 10 on the new systems that they put in at their bank, but I also don't think that it's like that. You can be smart and thoughtful enough, there's enough information out there now that it's sort of an in between this fixed income and VC thing where, yes, it's not that guaranteed sort of thing, but it's also the probabilities if you do it right are for much bigger returns.
Dallas Wells: Yeah. It's some of the other concepts we've talked about in kind of rolling these things out of you can take these risk, but be smart about it to where the way technology has evolved you don't have to make a multi year eight figure investment in something and hope that it works. You can step into something that, as you said, there's tons of information out there. It can be well validated as you step into it, and you can step into it in a way where you can almost try it on for size, right, and say, "Let's verify that this actually works like we expect it to in our environment. Once we prove that, then we can do the rip out and replace."
Technology now is a little easier to plug and play and verify things, then actually put it into production. Kind of think of it the way we think of our software environment. There's all these test and staging environments where things sit and get poked, and prodded, and kicked to make sure they work right, then they go live out into the wild. Banks need to be, I think, better at figuring out how to create test environments for their own processes and the way they approach things. Test it, prove it, and then roll it out. You can do that faster than you ever could before, and people need to take advantage of that.
Jim Young: All right. Well, that'll do it for this podcast discussion. Thanks again for listening. If you'd like to learn more, visit our resource page at explore.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 rating and feedback on any and all of those platforms. Until next time, this has been Jim Young with Dallas Wells and you've been listening to The Purposeful Banker.
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