In this episode of the Purposeful Banker, Alex Habet welcomes back longtime podcast contributor and former host Dallas Wells. We'll get an update on what Dallas has been working on in the past few months and get his take on recent events.
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Transcript
Alex Habet
Hi, and welcome to The Purposeful Banker, the leading commercial banking podcast brought to you by Q2 PrecisionLender, where we discuss the big topics on the minds of today's best bankers. I'm your host, Alex Habet, and we were thinking in the back office recently, right, given that there's just been a lot of variety in the show in the last few months, we said, "Slow down, tiger. It's always great to keep it fresh and do some new things, but it's always great to occasionally go back to the greatest hits, at least sometimes."
I don't mean an episode rerun in this case. You see, one of the interesting things since joining this show, one of the cool things that we get to do behind the scenes is analyze some of the patterns of our listenership. I was shocked to discover that we have really high listener counts on a lot of old episodes, and some are really old. I mean, we're talking years old, and that's just really a testament to all of you out there, the loyal following, but it's also the wonderful work done by those who produced and hosted and were on this podcast in the days of yore.
Ultimately, though, it has to do really with the personalities who are what makes this thing come alive, so when I say "greatest hits" in this context, I mean greatest personalities on the show.
He's only had a few months of "downtime" since last being on the show, but we wanted to really be cognizant of this individual's precious time, especially as ramping up on a new and what is most likely a gargantuan role. But when we asked, "Hey, do you want to hop on the show and say hi today?" all it took was a quick Slack message, so it's great to bring old friends back together. With that, I wanted to dedicate episode number 278 to the person who hosted episode number 1 and has been on many countless episodes since. Dallas Wells, after a grueling, I think, three months or so hiatus, welcome back today.
Dallas Wells
Yeah. Yeah, thanks, Alex. Appreciate it. That might be the kindest intro I've ever gotten, so I'm going to save that one and just listen to it when I'm having a rough day. I appreciate that.
Alex Habet
Before the show, I actually did go and try to find the very first episode around. I was like, "Was it Dallas, really?" Yes, you were, in fact, the very first host. It's a really fun exercise. I'm going to start going back to the old ones. I'm glad they're all still up there.
Dallas Wells
Yeah, production quality was not quite as good, but yeah, they're still out there, and I think most of that stuff's probably still relevant. I hope so.
Alex Habet
I actually absolutely think so, which is great for teeing up some reruns maybe going into the holiday season.
Dallas Wells
There you go, yeah.
Alex Habet
Look, I'm talking to basically the creator of the show here, but just for the benefit of the audience, again, just to set the stage, right, we keep it mostly commercial here, but we've taken a little bit of some other parts of the bank recently. We talked about things like fraud and how small banks work with retail and things like that, so we thought it would be a really interesting perspective given that you're here, since you're basically living and breathing this contortion, right, as someone who's probably spent the lion's share of your background focused on commercial, now you're probably having to stretch some new muscles, so it'd be really interesting to teach us some of the things that you might have learned that were interesting along the way that might be relevant to a commercially focused audience. With that, how's it been going? Tell us about the last few months.
Dallas Wells
Yeah, so I did change roles here at Q2. I've been focused on PrecisionLender since I arrived there in 2014. My background does skew more to the commercial banking side, but also I worked in some community banks where you're all things to all people. I now oversee product for all of Q2, so that has been drinking from a fire hose in that I was dealing with one product and a couple of hundred customers, and now I'm dealing with dozens of products across all kinds of business lines and over 20 million end users that we're responsible for. So it's humbling, to say the least, right, to jump into some of that and to have to try to catch up with people that have been doing this for their entire career and are really good at what they do.
I spend a lot of time learning. I'm trying to learn from our teams here internally and also spending a lot of time in front of our customers talking about some of the issues that they're facing. It's been a whole new world for me over the last year. It's been a lot of fun, and finally just now that we're 12 months into it, I'm starting to feel like maybe I'm making some positive contributions and not having to slow everybody down quite so much, so it has been quite the transition, but it's been a lot of fun.
Alex Habet
I was actually browsing the internal video channel last week, and I think you had given a digital banking trend to, I think, our marketing team, or something like that. I actually sat and watched that. I went, "This is the first Dallas thing that's not having to do with PrecisionLender I've ever seen," right?
Dallas Wells
Yeah.
Alex Habet
It was fascinating, though. I mean, you seem to be a natural at this stuff. It's a really, really awesome presentation there. Thanks for sharing that with the team internally.
Dallas Wells
Yeah, you bet. I think actually the benefit I get from it is that I have no hope of catching up with all the technical issues, right, so I don't even have to try to tangle myself into those. We have a lot of people much smarter than me who can figure those out, so I can spend a lot of time just focusing on the business aspect of it, and especially for our customers, what are they really trying to solve? Then I can come in and draw the crayon version on a board for somebody, and then they got to do the actual real work of figuring out, "Well, how do we turn that into a real thing and invent it out of thin air?" I don't take for granted the fact that I don't have to personally solve a lot of those, and that's why I've been able to actually make some progress there, so I'm standing on the shoulders of some good folks.
Alex Habet
Are you telling me and the whole audience here that what you do is pretty much all greenfield and you could just focus on the way forward everywhere?
Dallas Wells
Oh, no, no, no, no.
Alex Habet
That's like taking the best parts out of the job, right?
Dallas Wells
Yeah. If only that were the case, to just sit in a room and think big thoughts. The reality of the digital banking business is, as all those folks who work inside a financial institution know, it's the daily grind, right, of moving money on behalf of your customers and interacting with them. It's money, right, so there is zero tolerance for mistakes or issues or outages, or heck, even if I click that button and it goes a little slow, so the operational, keep-the-lights-on stuff, it is a bigger task than I ever imagined it could be. That's what a big chunk of the business is here at Q2 is making all that complexity and all that stuff that's pretty difficult just work. That's a good portion of what the team works on.
Yeah, the fun and exciting stuff is the "what's next," but a lot of it's just problem-solving hairy things and to step back from things sometimes and say, "Look, I get the 70 hours of meetings we've had on whatever this thing is we're trying to solve, but let's back up a little bit. What are we really trying to do and who we really trying to do it for?" It's amazing how we as human beings can sometimes lose track of that as we go.
Alex Habet
Is there anything that comes to mind that you'd be willing to share? It's OK if you want to keep it a secret, but anything that's been a total surprise as you're getting your feet wet in that space and you're like, wow, a totally left-field idea or a conversation or concept that we're thinking about that could change the future of banking? Anything come to mind around that?
Dallas Wells
Yeah, there's a couple of areas where there's lots of attention and I think there's lots of ideas. What we're starting to see that's exciting to me is some bankers really pushing through some of the boundaries and maybe the constraints that they've had before, so I'll give a couple of hand-waving kind of examples. In one area is just management of identity, right? Identity is ... in the tech world, it's table stakes, right? A user has to be able to log in and you authenticate them and you need to be able to grant them the appropriate rights and access that they're supposed to have.
We have to do that across a wide swath of types of users, so grandma logging in to see what her CD interest rate is when it is going to renew, to the treasurer of a large corporation that's doing ACH origination and multiple international wires per day, to employees who are administering all of those systems on the back end, and so user management is a critical piece of our infrastructure.
But we are also trying to make progress down two tricky roads in that regard, and all of our customers are struggling with the same sort of thing. On one side, we've got a whole bunch of applications that sit on top of digital banking or sit beside digital banking, and the users don't care that those are separate tech stacks. Maybe one is a company that we bought in 2018 and is built entirely differently and functions differently. They're both Q2 products and they sort of operate in a similar workflow. They don't want to have to re-log in, they don't want a jarring experience as they move from one thing to another, and so we've got to be able to hand off across integrations within our own technology from one product to another.
Same thing happens inside a bank, right? You've got to be able to hand things off across channels and across systems that maybe are different vendors, even. The challenge around that has gotten bigger just because user expectations have gone up, right? Amazon doesn't SSO you to a weird place where you have a separate username and password usually, and they're trying to connect the dots there, right, so it's a technical problem, but with real user experience implications, so integrations is one.
The other path that we have to make progress on is we're trying to make all of our systems, but in particular the digital banking platform, extensible. We want to be able to extend the experience into the other applications from fintech partners or other tools that your customers are using, so we allow our FI customers to add a chat integration for a chatbot that we don't build, that a partner builds, or for their customers to be able to get credit scores, or to be able to apply for credit cards, or to be able to integrate their stuff with QuickBooks, Autobooks, right? There's lots of use cases for that. Well, now, it's not just an integration inside our own walls, but we've got to be able to authenticate and provision users and give them the right entitlements into brand new systems. Again, the whole goal is to make that a smooth path.
I give all that as context just to say that there's some really interesting solutions out there and some really, I think, actual practical uses of things like blockchain that is not like the latest coin that may blow up and expose your customers and you were associated with it somehow, but there's actual real reasons to be able to, in a secure and encrypted way, pass along credentials and information about that user that is needed to optimize that experience, and so we've got some customers that are really pushing the envelope there. We've got some partners that are helping us build some pretty exciting things.
I think it's one of those things that if you build it properly, you don't actually notice it, but there's a ton of work that goes into it, and if you don't build it properly, you absolutely do notice it, and right now, financial services is so scattered. The average customer has 40-plus relationships across insurance and banking and all your various retirement accounts and all those things. It's a really scattered and jarring experience. The long-term goal is to try to smooth the rough edges of that and have a central home for it, and more importantly, allow our bank and credit union customers to remain a core part of that, and to remain a central hub where that stuff can flow through.
Things like that, the data aspects that go along with it. Payments is something that is just really difficult to keep up with. There's interesting things happening, but it's like how many can a $500 million community bank actually implement on behalf of their customers and keep up with, and, heck, how many can a $50 billion regional bank keep up with? The pace is really overwhelming, and I think the job is to just make sure that the infrastructure and the options stay there for the customers so that they can serve their markets the way they need to and do that in a unique way to be able to answer that, "How are we different?" question using digital tools where you interact now with like 90-plus percent of your customers the vast majority of the time. You got to get that stuff right. I think a lot of financial institutions are just, "There's some interesting ideas out there," and then there's a lot of folks that are just like, "This is hard, this is a little daunting," so it's an interesting place in the cycle to be having those conversations.
Alex Habet
Yeah, it's kind of like the inverse in terms of the user activity that you were probably used to working with where a change could impact only thousands of bankers. Now, you're like a small change can impact millions of people. That's pretty intimidating.
Dallas Wells
Yeah, and it's a thing like, well, now, the rent didn't get paid in time if you mess that up, so that's the other side of innovating, either inside of a bank or on their behalf, right, is of course, we all want to move fast, but that move-fast-and-break-things mentality that people get excited about in the tech world, these are things that we can't break, right? So there is some care and attention that has to be put in. We like to try to build them fast and then test the heck out of them. But doing that inside of a bank or a credit union, and again, the tolerance is almost zero for mistakes. It's a challenge that we all just have to make our peace with every day that that's just how it is and try to balance those two things as best we can.
Alex Habet
Are these examples that you shared, are those just representative of what, sorry, bank executives are, I guess, pushing us the most on, or is it part of our own internal drive to make some progress across these fronts?
Dallas Wells
Yeah, it's some of both. What I consider the healthy tension there is Q2 is a platform company for across all our products, more than a thousand financial institutions, well north of a thousand. Well, that is a thousand different combinations of a core and a digital banking provider and how they do their debit and credit cards and where they send wires through and how they do their ACH clearing and a hundred other systems, right? Those thousand customers will bring us, "Hey, there's this one part of this tangled web that doesn't quite work right. Help us smooth out that edge." We get that times a thousand and every one of those is a different problem, so it's a really interesting challenge, and it's a puzzle that our product and engineering teams get to try to untangle every day.
But again, we try to do that in a fast and responsive way, and without breaking something as we go. Sure, we make that connection, but that stuff has to spider web through all those various integrations, some of which are on old versions, and some of which are with vendors who don't like to play nice. It's a complicated thing to keep this whole web of services that we've built and created aligned and going in the same direction.
Alex Habet
I would assume growing as well, right?
Dallas Wells
Yeah, absolutely. Yeah, absolutely growing. That's what I think bank executives are really challenged with, and we have real empathy for that job, which is you've got customers who have a pet issue, right, and sometimes it's a really critical one for some of your largest customers. "Hey, I've got to be able to validate wires like this before I send them out for my escrow customers." It's just like, "I got to be able to do that because this is such an important part of my business."
Then also, you have to think this multiyear thing, you're in the middle of this massive digital transformation journey that everybody's on. Well, I also need to be able to originate complex commercial loans online, and I also need to be able to remove some of the paper processes for how I onboard new treasury management customers, so I've got those big, high-level initiatives where I've probably got some internal change management and what we call "process debt" to deal with. At the same time, I got to get to where my escrow customers can validate their wire, so I've got this in the weeds, tactical annoyance to deal with, and then I've got multi-year strategy that I've got to try to deal with, and I've got to do all that with limited resources, and in particular, real constraints around the talent and the skill that goes and gets those things done inside the bank, and also, frankly, at most of your vendor partners. There's just more ideas and more things to be done than we can jam through the sausage factory.
Alex Habet
Man, I don't even want to think about how you all prioritize this stuff. I mean, it's got to be insane.
Dallas Wells
Yeah, it's a daily thing of trying to do it the right way, and that's a cliche, but in a fair and transparent way, make what are inevitably trade-off decisions, right? There is across our product portfolio, every product has hundreds of ideas, all of which have some value and some merit to them. Many of those are a really important thing for one particular customer and we want to do as many of those as we possibly can.
Then we also have to be aware of, "Alright, what's the big picture direction where the technology and where the markets are heading?" Things like that sort of user management thing, the way I described it, I think, is a fair way. If you execute it perfectly, that makes it so that it's smooth and nobody notices, and so we're saying, "Well, we can't do this one-off thing for you because we're in the middle of building this." "OK, well what do I get out of that?" It's smoother and nobody will notice, right? That's the hard sell that we got to make sure that we make progress in both without getting too scattered in how we spend our time and attention.
Alex Habet
Yeah. Well, look, I appreciate some of these kind of things that are just lurking in the mind of Dallas Wells, just to understand. But I can't let this episode end before asking you a little bit about your perspective. We're at the end of the year now and we're entering a new year and there's some headwinds everywhere. Given that, I've always viewed you as "A Beautiful Mind" John Nash-type that could understand all the different indicators out there in the economy and what that means for banks, especially on the commercial side. But I imagine you're still keeping up with the news, so what do you think 2023 is going to look like? Disclaimer, this is not a prediction, this is just what Dallas is keeping as the backdrop and how he's thinking about next year.
Dallas Wells
Yeah, I think as much as I would love to be an optimist, I think we have to look at some realities around next year. I won't go down the full list of bullet points, but if I just look at, again, where we sit today as we're starting to see economic numbers that look like they're turning over a little bit and the growth that we had is slowing, so the Fed is having to raise rates aggressively to combat the inflation, and they're having a hard time making a dent in it.
But the interest rates increases are doing what they're designed to do. Let's not forget, they are designed to slow down the economy. The cure for high prices is to slow down the velocity of that money turn cranking through the economy, and there's some pain associated with that. There is no free way out of this place that we're in with inflation. You're seeing that where retailers are starting to talk about a holiday season that's going to be rough. Even the mighty Amazon is saying like, "Hey, our growth slowed down and the fourth quarter looks ugly." And so it's not just about individual execution, but it's about broad swaths of the economy, starting to feel the impact of things slowing down.
Now, the flip side has been that bank earnings look fantastic, but I think we also have to remember the lag effect that we see from banks, right? Banks are extremely cyclical, but they're also balance-sheet-driven, right, so it takes time for those shifts in the economy to filter their way through a balance sheet, and so there's two places where that really shows up.
One is a slowing economy, of course, which means that you're going to face some credit losses. We're starting to see provisions increase a little bit, but we're coming off of just a really strong credit environment for banks of all sizes that a multiyear run with really low losses, and because of the COVID scare at the beginning of '20, capital levels and provision levels got really boosted, right, so those loan loss reserve accounts, some of that got wound back out. But we're still in a pretty good place there, so it feels like banks have some capacity to withstand some of the losses before they need to start refilling the kitty there to make up for that. The way the accounting rules work now, you got to see evidence of it before you start making those provisions. Used to, you could prepare for a rainy day of, "Eh, things look a little ... For caution's sake, we're going to go ahead and pad those reserve accounts." You can't really do that the same way anymore. You got to wait until real losses start showing up in real indicators, start showing that your models have adjusted, and you need to do that. That's one side of it.
The other is the increase in interest rates from a zero level and from banks being just really flush, and I wouldn't even say "flush," I would say "drowning in cheap deposits," so they've been able to, on the asset side of their balance sheet, that entire book is pricing up quickly. Loan rates are going up, mortgage rates are going up for those mortgages that stay on the books, the securities portfolio is pricing up, and they haven't had to pass on very much of that to the deposit customers yet because every bank was in the same position of, "We could stand to let 10-to-10-plus percent of this deposit book run off. That would actually be probably healthy for us if that happened."
When most financial institutions are sitting in that same position, there's a real lag before the funding side of the business starts feeling the rate increases, so we get revenue jumps up, the cost will eventually catch up. There will be some deposit pricing wars coming. You can already see hints of it starting, but it hasn't come yet. If we stay on this trajectory, which I don't see any reason why wouldn't, at least the coming months and couple quarters, the headwinds are going to be there of margins will not keep expanding like this, provisions will show up and wage costs and the inflation side sits there on the expense side for banks just like it does for everyone else, so there's going to be real earnings pressure.
You can see that just in how bankers are starting to talk about decisions that they're making, the caution is back. Not that it ever really leaves a banker's mentality, but all of the conversations used to be about, "How do we grow more? How do we expand more? How do we build the business?" A lot more of the focus is back to risk management, "How do we reduce the fraud levels? How do we get efficient? How do we use the technology to do more without having to add a lot more people?" It's that controlling the dollars out the door as much as trying to maximize the dollars that come in is the real shift.
That's my gut feel, anyway. What it feels like is that this will be a tough year for everybody. You see it in the layoffs coming in, especially the fintech space. I think some bankers are probably happy about that in some regards, and I get it, right? We've been unfair competition for a good long while, but that will also just have some follow-on implications that I think will affect everybody, including some of your vendors and partners are not going to be able to deliver some of the things that they promised, and heck, some of the less stable ones may not even survive this in their current state. That's all part of the risk management equation that I think has to be dealt with right now.
Alex Habet
Yeah. I mentioned the John Nash thing in the beginning, and there you go, you laid it out beautifully.
Dallas Wells
All the threads across my crazy board, huh?
Alex Habet
Well, we're going to have to leave it at that. I know that every listener is probably saying, "No, we need more Dallas, another two hours," but the man is busy. He's got a huge spectrum of products and problems to solve, so we ought to respect his time again and let him off the hook. Thank you again for joining, Dallas, anything you want to plug today? Any sports team? Are we Phillies fans going into the World Series?
Dallas Wells
No, not a Phillies fan. My beloved St. Louis Cardinals lost to the Phillies. I don't know if that means I'm team Philly now, or they're mortal enemies at this point. I frankly can't muster any caring at all about it at this point, so nothing to plug there. We are at Q2 back to doing some in-person events and we got some teams out traveling around, so I guess what I would plug is we'll see some of y'all out and about in the marketplace. We got customers coming on-site, we're going to see customers, and so some normalcy, I think, is welcome, and hopefully, we can cross paths with some of you out there.
Alex Habet
Excellent. Well, thanks again, Dallas, and I hope you'll agree to come back again real soon, right?
Dallas Wells
Yeah, absolutely. Thanks.
Alex Habet
Well, that's it for this week's episode of The Purposeful Banker. If you want to catch more episodes of the show, please subscribe wherever you like to listen to your podcast, including Apple, Spotify, Stitcher, and iHeartRadio. If you have a minute to spare, let us know what you think in the comments. You can also head over to q2.com to learn more about the company behind the content. Until next time, this is Alex Habet, and you've been listening to The Purposeful Banker.
