In this episode of The Purposeful Banker, we rewind to a 2019 conversation with PrecisionLender CEO Carl Ryden and 11:FS CEO David Brear about the strategies banks should employ to go beyond just weathering the storm to actually prospering during tough times.
[Website] BankOnPurpose Conference 2022
[Book] "Antifragile: Things That Gain From Disorder" by Nassim Nicholas Taleb
[LinkedIn] Carl Ryden
[LinkedIn] David Brear
Hi, and welcome to The Purposeful Banker, the podcast brought to you by Q2 PrecisionLender, where we discuss the big topics on the minds of today's best bankers. I'm Alex Habet, your host for today's show.
Now today we're actually going to look back at an episode from 2019 that I think is perhaps even more valuable and relevant today than it was the day it was recorded. In this interview with Jim Young, the longtime host of this show, The Purposeful Banker, Carl Ryden and David Brear join to talk about banking strategy for the next recession.
Now this episode aired in August 2019 and talked about when things start to go bad is really when they start to separate and you can make up ground on your competition, lower cost origination channels, digitization, etc.
There's an interesting quote from the episode. "The idea is the opposite of fragile is not robust or impervious to change. Antifragile is the opposite where when things get crazy, you actually get better because of the craziness." I think trying to think about how you build that antifragility into the bank is really helpful, and it comes down to two views. There's a motivation to get your house in order, so you're prepared for when the inevitable happens, or look at the recession as an opportunity to move ahead in the market. "Anybody who is merely looking to survive is probably not much an existence in the first place." Ouch.
Here's a look back at the episode.
David, thanks so much for coming on the show.
Yeah, no problem. Thanks for having me.
All right, this is going to be one of those podcasts when Carl and featured guests are on where it's just my job to get out of the way, but I will start things off with the first question. David, is it about being out in front of a recession, being able to predict when it's coming, or is it about, for banks, what you do once a recession hits?
Tough question, right? Rock or a hard place to a certain degree. But I guess from my perspective, I think it's probably most, what do you do? I think the ability to predict precisely when those things are going to happen is when is, and where is, lightning going to strike? So I'd say mainly it's your ability to react to the situation and adapt to the circumstances that it's in. That really feels like it's most important for big organizations to really deal with those situations, I'd say.
Carl, do you have any thoughts on that? I mean, when you're talking to bankers, are you advising them on whether they should try to be the fortune teller here or just be able to react quickly?
Jim, you know I have thoughts on things, all sorts of things. This is the way it goes. But I mean, I think ultimately what we're seeing right now in banks is, particularly in the U.S., and David can talk it's probably different in the U.K. But in the U.S., we've had a long economic run, positive rising tide lifting all boats.
Right now, you're starting to have some banks really get a little bit squeamish. I think for us in the U.S., the inverted yield curve that occurred earlier this year, late last year, spooked some folks because that's typically a precursor to a recession. There's a lot of arguments that things are different this time, right? But also I think there's always this uncomfortableness. I think when we have a long run of good things, bankers, by their nature, are always like, "The other shoes getting ready to drop. Something bad's getting ready to happen."
And even the smallest little thing now calls some folks to retrench. And I think the key thing is not to overreact and, as the old thing goes, "Don't fight the last war again right now." But ultimately, I think it does make sense to be prudent and think about how you position yourself best for the downturn, if there is one, but still get to participate in the upside.
And I think you're seeing folks starting to think, giving that some real good thought. And talk about the rising tide lifting all boats, another quote, I think it was actually Charlie Munger who said, "When the tide goes out, you find out who's swimming naked." When things go bad ... Typically, when things are going well, all the banks are getting better at about the same pace. When things start to go bad, it's really when they start to separate, and you can make up ground on your competition, and the things you do to prepare, to take strategic advantage of that, are really important. Move into lower cost origination channels, digitizing the bank, all these things that are ... You can actually make a positive case for doing them in good times.
But actually, if you look at them, "OK, how do we do this? And how's this going to help us make up ground on our competition, make up the ground on our other banks, better serve our customers?" Through that time, that's where you really build loyalty, where you really build a brand, and really where you take share and lock it in from your competition. So I think we're seeing a lot of folks take a lot of proactive measures toward that.
And one of the things we'll touch on maybe later is one of my favorite books on ... I don't know, David, if you've ever read Nassim Taleb's book "Antifragile," but it's a great book. And the idea is the opposite of fragile is not robust or impervious to change. Antifragile is the opposite where, when things get crazy, you actually get better, right? Because of the craziness. And I think trying to think about how you build that antifragility into the bank is really helpful.
Yeah, no, I can definitely see that. I think it's a difficult one, isn't it? Because on one hand, this isn't a zombie apocalypse we're trying to prepare for. It's not building a shelter under our houses and filling it full of cans of food. This is something that we've seen before. The financial services, and the cycles that financial services go in, by nature will go up and down as different factors play out.
So I think it's prudent to definitely plan for an occasion where the economy is not growing at the speed that it would be in a growth environment. But equally I think the things that banks would need to do to most efficiently prepare themselves for it, mostly from my mind, are really about good, prudent business running. Because things that actually are most scarce when it comes to the times of real depth of recession, in the same way as they are in war times with food or water, are really the things that people get really obsessed about.
And if you look at the prudent ways in which banks of all sizes, really these days, should be running, it's only a lack of focus on really restructuring from an OpEx perspective and actually running the operation incredibly efficiently that, potentially, could get in the way of them really surviving a downturn.
So I think it's an interesting one. I think there's almost the luxury of we're, what, 10 years into a seven-year cycle when it comes to the likelihood of a recession. So the idea of really preparing for this imminent doom, if it's used as a good catalyst for people really getting together on delivering the types of things that really add value to consumers, but fundamentally really getting their back office in order for structuring for cost efficiency and repeatability when it comes to processes, then, I mean, whatever excuse people use, that sounds like a pretty good one to me.
I think you're on to something there. Ultimately, a lot of the things that you're going to do to prepare for a downturn versus the things you're going to do to just ... They're good, hygienic things for the bank to do period, right? No matter what situation, they're a lot of the same things.
Ultimately what happens, though, is, in the banking world, I always like to say, is fear schedules their day a little bit. So when you make a loan to somebody, the most you're ever going to get repaid is the loan and interest you are promised, so your upside is capped. So it's all about eliminating the downside, so a lot of that exists within the bank.
And in some ways, putting in place the digital service channels, putting in place the digital, low-cost customer acquisition, putting in place the methodologies around pricing and profitability and those things, and knowing where you're deploying capital, they're all good things to do. What happens is it's actually easier to get them done within the bank, just from a motivation standpoint, to say, "Hey, we're doing this to prepare for the downside." Fear of loss is actually more powerful motivator within the bank than chasing upside in a lot of cases. A lot of times, like you said, I think a lot of things we do are the same.
Yeah, I think definitely the fear of loss definitely in big organizations, because they have all of the customers, don't they? So actually the successes over the past 100 years to get them into the size of a Wells or a Bank of America or a Citi. Actually the loss of that is much more of a driver than creating new capability or moving things forward. So it is interesting what motivates different types of organizations to do that.
Obviously, if you're a startup, you've got little to lose, so your motivation actually is taking advantage of the climate and evolving as the situations develops essentially.
So when you're talking about fear ruling the day and also, David, you mentioned that whole storing up for the zombie apocalypse and that sort of thing, the idea of a recession, Carl, I think you mentioned as an opportunity and not something to be endured and survived. Not storing up everything for winter and just living off of that, but rather actually looking at as, "This is a chance for us to move ahead in the market."
How hard is it to convince bankers to think that way? And for the ones who do, what's the common traits you ... How do you know when you've run across a bank that is looking at it that way, as an opportunity rather than simply something to be endured?
I think to Carl's point, actually convincing people to do anything other than what has got them to the success that they have today is really, really difficult. To the point around using ... do you use the carrot or do you use the stick? Then different people in different levels of the organization need to feel different types of motivation to really face into these things.
I think when it comes to, particularly as a recession, I think big banks, to Carl's point, will see this as the zombie apocalypse moment of actually making sure that they've got enough cans of food to weather the winter, as it were. But really I think it's ... You point to any model that looks in this. Anybody who merely is looking to survive is probably not much of an existence in the first place. I think the often misquoted points around evolution that it isn't really the survival of the fittest, but it's those that are fundamentally most adaptable to change that actually survive.
And really I think that's the thing that when you look at the organizations who are really investing sensibly ahead of what is inevitably going to be a downturn. For me, it's those that are really looking at rationalizing of monolithic architectures. Their rationalizing of the change that we've seen from the analog world to the digital world and, fundamentally, what does that mean in terms of the structure of their organization and actually how they're set up.
Because we haven't said fintech yet, but really what fintech has shown big organizations is that the reality of their world has changed so dramatically, and what can now be done with 15 used to take 1,500. So for me, the ones that you see who are fundamentally changing, how they do change, and actually changing the level of value that they believe that they need to actually offer to the customer. Because in a changing world, those who add the most value to consumers, I think, are ones that most likelihood of survival and thriving, if that makes sense.
Well, when I think about what David mentioned earlier about this seven-year cycle and we're 10 years into it, but it's interesting. Where does the seven-year cycle come from? And there's a lot of anthropological studies around this, around why is it seven years, and those things. Why is that a thing?
I think it turns out that one of the jokes, but I think there's a truth in it, is that seven years is about how long it takes an organization to forget where it was. And that maybe that there's two things that the depth of the downturn in 2008 and 2009, it's harder to forget, so we've been able to go longer because people are worried about it. I remember in 2006 when banks were ... There's a lot of crazy things I would see going on in banks, and you go, "This can't last." Right now, at least, there is some worry, and I think that's good.
I think the other thing is allowed it to extend a little bit longer is the fintech threat, because I think the fintech threat has at least caused some large banks and other banks to invest in these things. As opposed to when times are good, you strip out as much as you can, boost your dividend, jack up your stock price, but don't invest in the fundamental technologies and fundamental capabilities that better position your bank. I think the fintech guys have actually forced some level of investments in core operative issues of the bank and the core value propositions of the bank, which has probably set them up well.
But I also think that, again, doing more of that, taking the time and the money that you're earning right now and using it to invest and position yourself better, where you can more efficiently create better customer experiences in the downturn, provides you a strategic advantage that is really going to allow you to gain share. And I think folks who ... I see a lot of banks and bankers, not a lot, a good number of folks even within large banks who think of it that way, and I think helping them realize that and communicate that is really pretty powerful.
I think that's a really interesting point around the ... Since 2008, the changes that we've seen haven't just been in those large organizations that were effected by it. We've seen such whole scale regulatory reform since 2008, and actually fundamentally the environment, the ecosystem that is financial services now, is a very, very different place.
I think we've gone from people measuring once a year to the regulator paying such a close attention to big organizations and new organizations in the whole landscape. It's forcing a different cycle this time. Definitely if you look from a U.K. lens perspective, the regulatory change here and the competition mandate that's actually been brought through is really brought about a very different level of stability, I'd say, within the ecosystem in its broadest sense.
And really that's, if I'm honest, I feel like that's just being felt in other geographies. A lot of the things that have happened now within HKMA over in Hong Kong, or with MAS over in Singapore, and actually with places like the Fed in the U.S. now, the changes, even the Department of Treasury for the U.S. ... An event that I was at with the FCA last week were talking about actually the cycle now just being so dramatically different because of the amount of scrutiny that the entirety of the system was in.
So in a way, if you've ever been pulled over for speeding, you drive at the speed limit for the next six months exactly at that limit type thing, then it feels like the whole industry is probably acting in a very different way than they were pre-2008.
Capital levels right now for banks are have never been higher. The characteristics, if there is a downturn of this next downturn, have to be different than the last one, just because structurally, not just from the regulatory oversight that's been put in place, the psychological piece of the speed limit, but there's now more cops actually, more police actually policing the road. And they probably set the speed limit down to 45, down a little bit lower, so you see banks incredibly well capitalized right now. And so again, I do think you're going to see a lot of less just complete failures, but I think you're going to see there still is a lot of room to gained.
So we've talked a lot about this from a tech perspective. I wanted to shift a little bit to the front lines, and an article that really spurred a lot of this conversation was from Bain called "Is Your Sales Organization Ready for the Next Recession?" And it cites some stats that argue for really preparing your sales team for that.
And it seems to me like I can see that logic computer thinking digital transformation and planning ahead, but what if my sales team is just ... It's keeping its head above water right now? It's not, for all we've talked about, a great economy. We know about margin compression, etc., and every banker we know tells us it's super competitive. So if they're focused on the here and now and just trying to hit this quarter's numbers, how do you get them to focus on their sales approach? What it should look like for a future environment that may be around the corner or may not?
Well, I think you also have to ... The sales team, particularly on the commercial side, that's where you really have a sales team. A lot of times, David's offering digital, thank you, those things, but it's also true there, I think. But the sales team generally has a great deal of momentum, and so they're out winning deals and winning the deals they can win. And a lot of times those deals, the sales team at a bank is, to a commercial sales team, is compensated solely on volume, right? And so they win as much as they can win, and they grow.
It's interesting because in the street, I think Wall Street in the U.S. in particular amplifies this, but I think it's true also around the world. What they care about is long growth in them until they don't care about long growth in them and all they care about long loss reserves in capital, right?
And that's the shift of focus every seven or 10 years or something. And I think what you need to think about is when your sales team builds that momentum of winning, winning, winning, and loan growth and them is easy to do longer term deals for riskier credits and you get more them, but what do you do? How do you set them up to make sure that they're saying no to the right deals? How do you make sure you're not piling on the particular types of deals that would be sensitive to a recession and cause the capital and loan loss reserves? Because what happens is what freezes out a bank is asset quality issues, right? And when the loan loss reserves and the capital stuff start taking over, all investment falls zero, and the banks that continue to invest and continue to grow and better serve their customers are the ones that take share.
Coach your RMs and your sales folks and align them around, "Let's make sure we're winning the right deals, make sure we're saying no to the right deals." And then when you do that, I think you start building some amount of discipline in there. And maybe even start thinking about things more than just volume, think about the risk you're putting on the balance sheet and how you're positioning the balance sheet for what might be a potential downturn.
And that doesn't mean shut down things, or raise credit standards across the board, or any of the blunt force instruments. But it really means tilting the table toward the ones where you can have really responsible and profitable growth that's going to allow you to continue to invest. And I think that's the key thing is continuing to invest on behalf of your customers to make their experience better becomes the thing you have to protect.
No, I completely agree with that. I think it's one of those ones where, to your point really, salespeople will pretty much do whatever they're incentivized to do. I think the last recession probably showed us that if people are incentivized badly, then bad things happen quite quickly. So I think the other trait of good salespeople are they will understand what it is the needs of the people of that they're actually dealing with. So in order to continue those cycles, then the people who understand their clients best, and whether that's through data or whether it's through the relationship that they can create with them, have a much greater potential of navigating any downturn.
I'd say maybe something that organizations could look to do of to try and mitigate those changes. Because I think any time there's a stutter step from an economy perspective, the sales force and the mentality of the people within that organization are usually the slowest thing to react to the new world. But when it comes to the types of things that people are making decisions on, then ... I mean, this plays so beautifully into the digital world for me because the more things become automated, standardized, and actually even things like risk modeling, being unable to be managed and controlled centrally, then actually your ability to dial up and dial down risk from an acceptance criteria perspective, or even down to the types of business that you really want to underwrite, become a lot simpler that it's not down to just frontline sales people, making decisions about sales.
That actually what we're doing is we're supporting people with technology to make the most informed, most accurate decisions. And at that point, really, the delivery mechanism for them could be a human, could be an apple, or could be anything you want it to be. But ultimately that means consistency in the decision making for organizations, which arguably is another weapon for removing any of that uncertainty or a disproportionate level of appetite for risk in some people as opposed to others.
So definitely that's what we've seen with some players over in Europe is really how that standardized modeling, even if it's delivered by a human, can really lead to a much more consistent and much better sense of change when those gears start shifting.
One last thing to add on that, I think you're much more likely to be working on behalf of your customer and their success as opposed to against it. If, as a bank, you think there's some chance you're heading to a downturn, there's actually a really good chance that what a lot of your small business customers, and even medium-sized business customers, might not need right now is increased leverage and more loans, right?
What they might need is other things, and you actually think on their behalf a little bit and actually start solving their problems. And I think if I was ... In the dream world for me, is where we had the intelligence and the tools within the bank to then arm our relationship managers, to have those conversations and our salespeople to have those conversations with their customers and actually set their customers up for the downturn.
If you set your customers up to survive and do well in the downturn, you set the bank up to succeed in the downturn, as well. And sometimes the momentum of the sales team of more loans, more loans, loan growth's important actually encourages your sales team to do things that are not necessarily to the benefit of their customers and the bank customers. And ultimately that's not a good recipe for success for anyone.
Final question here. David, I'll turn it to you on this one. The last part of the Bain article, when it's going through its listing of how to get your organization ready for the recession, it says, has the title "Start Small, Fail Fast." From a tech perspective, you nod your head. Of course, that's the way these things work, and that's all well and good, but does that really apply to a bank, and particularly a large global bank? We're talking about the whole turning a luxury liner, or turning an aircraft. Is it possible for them when it comes to this stuff to start small and fail fast?
I'm not sure banks really understand what small or fast really is, and think that's the problem really in that statement.
So when people say fail fast, in most big bank organizations, then big programs are $300, $400 million and they're three, four years long. So the idea of failing anything that they do is potentially hundreds of millions of dollars down the toilet when it comes to failure. I think the other thing to point to there is that if you go and talk to the FCA or the Fed about what failure is, then actually it's a very different connotation than actually what the banks or the financial services institutions themselves consider failure.
So for me, if this really gets to the crux of the problem and the change that we're really seeing in the environment right now is in a digitized world where everything is a proxy of what was gone before it, where you're seeing paper-based capability just being digitized into websites and mobile apps. Then with that, it has been brought the cadence of everything costing a lot of money and taking a lot of time.
In the new world of a truly agile organization where your ability to decide to do something, do it, and have it in the market is weeks not years, then actually your ability to do something and be wrong and change it is a fully expected and tolerance that you come to live with. So I honestly think the difficulty is really getting the banks into the mindset where, actually, they don't place big bets. It's a move away from we're going to put all of our money into some machine learning AI thing that solves everything and fights off the inevitable zombie apocalypse or whatever, and actually moving to a point where they get that real sense, I think, of emotional intelligence to know that they're not always going to be right and that with that ability to do smaller things and continually test and learn that.
I think the biggest proving point for me on this is the amount of organizations that start a program and then midway through the program realize that actually the world has changed and the thing that they're doing is no longer relevant. I've seen this so many times with so many organizations spending billions of dollars to get there, and it's a real weird thing.
We say the biggest risk to your project is getting to the end and nobody caring. And the more people can isolate things and do them a very cost-effective manner in a very quick way to actually put them in the hands of people and actually understand whether they care or not. That really encapsulates the digital worlds that we're moving to. Test and learn in a startup sense is just a natural habit that you do. In a big organization, it's just an alien concept.
So the start small fail fast, the thing I hate is the fail fast. All these kind of memes or mantras that get out there about embrace failure and all, that's stupid. Failure's a mean, not an end. It should be start small, learn fast.
You tolerate failure to optimize the rate of learning. And I think David touched on this and his things about, he didn't say test and fail. He said, test and learn, right? The goal isn't failure. The goal is learning and maximizing your rate of learning to minimize the chance that you get to the end and nobody cares, right?
And so you tolerate failure. You want to manage it so that you can ... If you need to have small failures to optimize the rate of learning, you do. But I see a lot of folks go, "Well, we need to embrace failure." Well, that's just a dumb strategy. Why would you embrace failure? Failure sucks. Failure is tolerated because it's necessary for learning. And my goal is to learn as fast as possible and learn as much as possible about the needs of the customer and how do I best serve them. And if you say, "I'm going to optimize ..." Failure's a means, not an end, and one of the things that gets confused here is people embrace the means and forget the ends, and the end is learning.
Yeah, I completely agree with that. I think if you look in other walks of life ... Actually in a sports context, you don't make every shot you take. But if you don't learn from that in terms of the technique that you do for these things, or where on the court you take a shot, or when it's better to pass than it is to shoot, then all of these things are learning opportunities to move forward. But at the end of the game, you're still looking to win. And actually if the failure is so catastrophic that actually it risks the chance of the organization to actually succeed or not, it is neither small and it is neither fast at that stage.
OK. Well, I think that's a good point, and I know you two could continue going on talking about these topics for a long time, but I think this is probably a good spot for us to wrap up this show. David, thanks so much for coming on.
No problem at all. Thanks for having me on.
Thanks for joining me on this rewind to 2019 with Carl and David, names you hear quite frequently at the BankOnPurpose conference, and I hope to see you in Austin November 15th through the 17th, when we're back for the in-person BankOnPurpose 2022. Visit bankonpurpose.com for more information, and you can save $100 off your registration if you use the code "podcast."
If you want to listen to more shows, you can go to the podcast page at explore.precisionlender.com, or head over to q2.com to learn more about the company behind the content. And if you like what you've been hearing, be sure to subscribe to the feed in Apple Podcast, Stitcher, Spotify, or iHeartRadio. We love to get ratings and feedback on any of those platforms.
Until next time, this is Alex Habet, and you've been listening to The Purposeful Banker.