Bank Director recently posted an article with a recap of their Bank Board Training Forum. The piece addressed some interesting questions, several of which were similar to the kinds of questions we've been hearing from the banks we work with.
The issues included: justifying tech investment; how banks can deliver value; competition among community banks; and alternative growth strategies
We brought on Andy Heusel, our SVP of Community and Regional Client Success who previously spent two decades working in commercial banking, to get his take on these questions, and to offer some answers.
The "But" in the Conversation Among Bank Boards, CEOs - Bank Director
Innovation in Banking: Frequently Asked Questions
Jim Young: Hi, and welcome to the Purposeful Banker. The podcast brought to you by Precision Lender. 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, and I'm joined today by Andy Heusel. Andy's our SVP of Community and Regional Client Success here at Precision Lender. And he's got a long track record of working in banks as well, so looking forward to getting his thoughts on today's topic, which is actually coming from an interesting bank director article. And that article is really actually a recap of their recent bank board training forum conference. The piece is called "The 'But' in the Conversation Among Bank Boards and CEOs." And we're gonna use the topics from that as the starting point for our conversation today. Andy, first off, welcome to the podcast.
Andy Heusel: Thanks Jim, glad to be here.
Jim Young: Alright, so the first topic they address in this article was banks' willingness to embrace tech advancements. The "but" here was that banks remain wary of the cost and risk associated with adding new tech. Do you think that's a valid concern or are they being overcautious at this point?
Andy Heusel: No, Jim. I think the risk associated with technology is definitely well-founded, however I think there's ways to mitigate that. Obviously when banks look at adding technology, it's typically they're looking at ways for the client to interact with the bank. Also for the back office to engage with the client.
One of the biggest risks that we see from a cost standpoint are technology projects that aren't what we call closed loop. And what I mean by that is when a bank brings in a piece of technology and then they have to hire a third party to come implement it. From my experience, I've typically seen a lot of cost overruns with those kinds of projects, both from spending money and time.
Obviously there's risks associated with security fintech projects that are in the cloud. However, I think in today's day and age, those are fairly well mitigated. Banks have developed a very robust security protocol when they put these things in, as well as the vendors. They know that that's gonna be a top concern with the banks, so they typically have their ducks in a row as far as the documentation and other things that would make the bank feel secure with going with their technology.
Jim Young: The first part you talked about is something that's definitely been I know a conversation point, which is there's the actual tech, which is one thing, and then there's the implementation of the tech, which sometimes can be a whole other thing and a lot of times as you mentioned, that's a lot of times where the risk can be associated kind of the project creep that comes in with that.
They then go on and next went to address bank reservations about tech from a different angle. They have a quote here from Dave Mansfield at Provident Bank, and I'm gonna paraphrase this a little bit. He basically said, "Tech isn't gonna be the one answer for how banks will deliver value." Do you agree or disagree with that statement?
Andy Heusel: I completely agree with that. I mean obviously technology is really meant to be an enabling feature or an enabling technology, to allow bankers to be more efficient. Really it's all about efficiency here, and a lot of times, banks go into projects looking for cost-savings. But what I'm hearing with our clients is that they're also really looking for those types of projects that focus on revenue generation.
We've all done business cases and we've all had to justify return on investment, so forth and so on. But what I've found throughout my career is that it's very difficult to really go back and understand, did I get the cost savings that I thought I was gonna get to support this investment? I think it's a lot easier to look on the revenue side and find out, did I really get that lift in revenue? And I think banks should always look for that revenue supporting initiative to actually pay for that efficiency initiative that really is there for cost saves.
As far as delivering value, obviously there's a lot of different ways to look at that. I think on the retail side of banking, absolutely. I think that will become more and more digitalized as we move forward, less human touch. I think on the commercial side, there's still gonna be that one-on-one kind of conversation between the banker and the client. I think it's really about giving that banker the tools to be more efficient in their job and to get out of spending 40 percent of their time on those routine administrative tasks.
So what we really hear banks saying is that we want sales enablement tools that will allow our bankers to spend more time doing things, having those conversations with those clients, that deliver revenue for the company.
Jim Young: Yeah, I interpreted Mansfield's comment sort of along those lines of, particularly on the commercial side you're still gonna have a human generating value through that conversation. If you're looking for tech to be your end-to-end solution on that, to deliver value, then you're probably looking at it the wrong way, in that aspect.
Andy Heusel: Yeah, I agree.
Jim Young: Next one here was a very hot topic of conversation at that conference, was about competition in the community bank sector. And it was an interesting sort of twist on this. Obviously competition's an issue, but where is that main competition coming from? And the conclusion from the conference was that it's not the big banks, but rather it's their fellow community banks. Andy, does that mesh with what you've been hearing from community bank clients that you work with?
Andy Heusel: It definitely is. I think there's always gonna be the competition from big banks, particularly on deposit gathering. They have the machinery in place to bring in those low-cost deposits. But what I think this really is talking about is, particularly on commercial business, is probably pricing. A lot of community banks out there do have low-cost sources of deposits, very loyal customers. And they are able to price loans very competitively. The problem is sometimes they don't exactly know what the real economics behind that deal is. What I'm hearing from our clients is that when we bring in our solution, they're actually able to really kind of understand some of those economics and actually price a little better. They might not leave as much money on the table because they're still gonna win the business, but they're gonna win it at a little bit better price. Maybe better than what they were doing the year before.
Definitely though from a competitive standpoint, I think community banks are gonna continue to be successful. They have much less regulatory burden, and I think they're poised with this interest rate environment to continue to grow their portfolios and continue to grow their profitability.
Jim Young: Is is a case, Andy, where if you're in a market with a big bank, that there's essentially enough to go around? That there's business which, quite frankly the big banks are just not as interested in? Is that where community banks can find their niche?
Andy Heusel: Yeah, I definitely think the size of the bank dictates kind of what their sweet spot is for a deal. So for some of the mom-and-pop type deals, they're definitely gonna be better suited for community banks. I even hear of community banks coming into large markets where there's been a lot of acquisition, where there's not a lot of community banks and doing out-of-market deals with smaller businesses in a large market. So I think there's definitely a play for community banks, both in their community where there's competition, and looking for deals where there's a market with not as much support for the small clients.
Jim Young: Good segue into our final topic here, which is M&A, which seems to be always on the minds of the people at the bank director conferences. The market for that is hot, but they talked about a couple of interesting developments here. One was scarcity of potential M&A targets. And also the second one was about banks pursuing some alternative growth strategies, such as IPOs. So, let me split this into two questions here. First ones, do you agree? Is it getting harder to find merger partners or acquisition targets in certain markets?
Andy Heusel: I think there was a wave of community banks kind of waving the white flag with some of the regulatory burden from the previous administration that we had put in place. I think that's starting to ease a little bit with some of the new legislation that's eased that burden somewhat. I also think that banks have kind of scaled up their infrastructure to support the regulatory issues that are thrown at them. And so there's kind of a leveling off of that increased spend that we've seen over all the years. So really what I'm saying is that the targets that were kind of waving that white flag have been picked up. And so I think there's just fewer of those types of deals to go around. And so I think that the ones that have survived are really looking for ways to grow quickly.
I think that really kind of leads into the second part of your question is how do I grow quickly? In recent months there's been a lot of senior executives from larger banks that have gone on and done other things, that are actually starting banks or kind of recapitalizing banks. They're going out to the secondary markets for investment dollars to capitalize those banks, so that they can grow that loan portfolio because they see that need. They see that they can come in as a small community bank and do those types of deals that the large super regionals just don't really want to spend their time on.
Jim Young: Yeah, so that's actually ... I wanted to get a little specifics into that, which is kind of puts you in those shoes, which is if you're at a community or regional bank, what is that thought process you would go through in this specific case, in whether to do an IPO?
Andy Heusel: I think it's about how much capital you need. I mean, obviously IPOs are typically broad-based type of offerings. You do run into external reporting requirements and things like that that you have to be prepared to deal with. A lot of these smaller startups are kind of more private placement equity offerings. Sometimes, though, banks are looking for kind of to reposition their capital stack so to speak, and they're looking at paying off subordinated debt with some of this equity or retiring preferred stock. There's obviously a cash flow savings and a cost savings there, depending on how you set that up. So I think those are all different ways that banks are looking at, how do I get more dry powder, as we call it, to grow the bank, remain well-capitalized, and do it in the most efficient manner possible?
Jim Young: And I think, and this is coming from a banking outsider, it'd be interesting to get your take on it, these are to me, for the industry, seem like good things that they are considering. You're talking about people trying to ... like you mentioned getting dry powder, getting capital because they see opportunity here. It feels to me like this is a continuation of a confidence, I guess, from within the industry. Is that fair to say?
Andy Heusel: Yeah, I definitely agree with that. These are not retrenchment strategies. These are growth strategies. I think if you look at our broader economy, it's doing very well at the large top end, the big boys so to speak.
Jim Young: Mm-hmm (affirmative).
Andy Heusel: I think Main Street is really starting to wake up, and see some good things happen. And so I think again, that kind of goes back to my comment about where community banks fit in. I think there's gonna continue to be opportunities for community banks to come in and support both individuals and businesses as they grow and expand and actually get started as well.
Jim Young: Alright, well it's great stuff, Andy. Thanks for coming on the podcast and I'm looking forward to having you on as a future guest.
Andy Heusel: Alright, I enjoyed it. Love to do it again sometime.
Jim Young: Great, well that'll do it for this week's show. Thanks for listening. If you want to listen to more podcasts or check out more of our content, you can visit our resource page at PrecisionLender.com, or you can just head over to our homepage to learn more about the company behind the content.
Finally, if you like what you've been hearing, make sure to subscribe to the feed in iTunes, SoundCloud, Google Play, or Stitcher. We love to get ratings and feedback on any of those platforms. Until next time, this has been Jim Young for Andy Heusel. And you've been listening to The Purposeful Banker.
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