Dallas Wells returns from American Banker's Small Biz: Banking conference and shares his thoughts on the hottest topics of discussion among bankers at the event.
Small Biz: Banking Conference (American Banker)
Innovate or Die: A 7-Step Guide to Bank Transformation (PrecisionLender)
Banks Shift Focus in Small Business as Loan Growth Slows (American Banker)
Build or Buy, or Build and Die? (Chris Skinner)
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 Maria Abbe, Senior Communications Manager here at Precision Lender. Today's show features Dallas Wells, Precision Lender's EVP of Strategic Initiatives, and Jim young, our Director of Content. Dallas recently returned from the American Banker Small Biz Conference
in Los Angeles, where banks from all over the country were talking about their most pressing issues in this line of business. We'll have links in the episode notes to relevant articles and information. Now onto the show. Enjoy.
Jim Young: Dallas, welcome back from La La Land. I want to ask you questions about the Lakers and Clippers and that sort of thing.
Dallas Wells: Of course, yeah.
Jim Young: Yeah. But before we dive into the specific topics that arose at the American Banker Small Business Banking Conference, I wanted to get your sense of ... This is going to sound very Southern California. What was the vibe like at the conference?
Dallas Wells: Yeah.
Jim Young: But I'm curious, though, seriously, though, like was it an air of optimism, pessimism, fatalism, some other ism there just among the bankers that you encountered?
Dallas Wells: Good question. I think generally, it was probably, it was an air of optimism, but I don't know what the right word would be, maybe overwhelmed-ism.
Jim Young: Okay.
Dallas Wells: You get the sense that a lot of the banks know they need to do this, not just fiddle at the margins, but need to do this piece of their business fundamentally in a different way, but they're not quite sure exactly how to go about that. So lots of conversation about kind of exploring lots of different crazy ideas, crazy for bankers anyway, of kind of, "Well, what if we just blew up the way we do this today and just kind of started from scratch? What would that look like?" And I think that's being forced on them. So even though there's a lot of uncomfortable change afoot, I think for the first time some of these banks feel like there's a potential path to where this works again, as a business unit, something that can work at scale, and so there is some optimism but a lot of uncertainty to go with it.
Jim Young: Yeah. And you kind of touched on this a little bit. I mean, how much of this do you think is simply a reflection of banking as a whole, and how much of this is a reflection of sort of the tricky nature of small business banking? How much of what you were talking about there was like, "Hey, I get this, but man, this particular line of business is difficult because of these reasons"?
Dallas Wells: Yeah. So I think this particular area is even more uncertain and there's more changes happening here than in kind of banking in general. I think a lot of bankers feel like the business model still works, so they're trying to improve it and they're thinking about customer experience and sort of this omni-channel way of interacting with their customers.
But it's all from the same kind of core foundation of the economics work, and in small business, for a lot of banks, the economics don't work the way they do it today, especially for when you're talking about a $10,000 business loan, so it's more complicated than doing a $10,000 consumer loan. There's more moving parts. The credit is a little more difficult to evaluate and you just can't charge enough to cover the cost of of evaluating that the way a bank typically does.
So this area in particular I think, you see banks, and I think this is actually why there's some optimism, is they are more willing to sort of burn it to the ground and start over because there's not this legacy business that you feel like you're disrupting yourself. It's more like, "Let's figure out a new path forward and a new way to do this," which I think for some of them is kind of exciting, instead of, "Well, let's make changes but don't make changes that are too big because you don't want to disrupt the gravy train of actual revenues and profits."
Jim Young: I'm going to hold off on diving into fintech sort of thing because I think there's an obvious segue on that, but what we will get to that in a minute, but I wanted to first go to the first bullet, I think, when you sent me your kind of your post-conference thoughts, and again the shout out to whatever airline delayed you so that you would get those to me.
Dallas Wells: Yeah, before I forgot it, right?
Jim Young: It takes a village to get Dallas' pre-podcast stuff to me. But you had a bullet that just said, "All data all the time," but it's pretty broad and I hope they weren't like, "Hey, data, that's important." So what did you mean by that?
Dallas Wells: I think that's part of what is making this now a viable line of business for, and again, we'll get to the fintech question, but it's making it to where there are customers that are bankable by whoever that never were before. And I think the biggest change is that there's actual real data to be evaluated. So a lot of these businesses, even five years ago, but especially 10 years ago and beyond, they were run through paper invoices and scribbles on notepads and things kept in shoe boxes and run in people's heads, right? So now there's just more and more of this stuff that is, just by the other tools they're using that is now starting to live in the digital world.
There was a really interesting presentation from Square Capital, and so you can imagine the sort of data that gets created just by those little card readers that plug into a tablet or a smartphone for swiping credit cards, right? So it turns these, what used to be small cash businesses into now a digital business where you can kind of monitor in real-time actual cash flows and actual seasonality of a business and you can see what's coming in and out, and it now sits somewhere where you can do something with that information. And so all that data, now there's ways to actually underwrite these businesses. And there's ways to actually plug in lots of additional services on top of that digital data flow. These things sort of operated in the dark forever and now there's actually some light coming to them to where banks have something on which to make a decision, which is brand new, and that at least it's a starting point.
Jim Young: Okay. I feel like Square, that gives us a good segue then into, let's talk about the fintech aspect of this conference. I've got a couple of aspects to that. One is what was the general attitude towards them? I think we've seen this sort of oscillate sometimes between fear, they're the enemy and then now these guys are our partners and then sometimes, "Man, I'm glad these guys are going to handle this because then we don't have to deal with it anymore." What was that general attitude towards fintech at the conference?
Dallas Wells: I think the general attitude is still wary, just a little nervous. And that comes from a couple of different directions. So number one, there are fintechs out there that are legitimate real competition, right? So Square Capital is one of them, and Square kind of sees themselves as, they're like the starter kit for making your way into the financial system proper, so to speak. They almost view it as graduation, right? They'll fund these really tiny micro businesses with a $6,000 loan and then they get repaid by taking a portion of swipes for the next four to eight months. And eventually, when that business now needs $50,000 or $100,000, they'll go to a bank and they've sort of graduated now into the financial system. That's how they view their place in the world.
That line is not as clean always between the fintechs and the banks. And so they are directly competing for some of those that overlap. And there's lots of other players out there that function the same way. And I think banks are feeling sort of the pressure from them, from the Kabbages and other kind of online lenders who are doing real legit small business loans, and the process is really smooth and easy, so the customer experience is fantastic. It's expensive, but it's seamless. It's quick. And a lot of times, speed and efficiency is more important to those size of businesses than whether the rate is 6% or 8% or beyond.
So there's direct competition, but there's another aspect to it too, which I thought was interesting, and this one felt a little new to me, which is there was a whole bunch of fill in the blank as a service, right? So underwriting as a service, loan origination as a service, so basically vendors saying, "Hey, if you want to do $20,000 small business loans, we'll build this thing that is basically a little widget on your website and then that takes them to us and our platform does all the underwriting and everything and basically all we're doing using your balance sheet and your name."
And so you can see banks looking at that, and on one hand they're like, "Well, hey, I plug it in and go and now I can offer this thing that might take me two or three years and a whole bunch of capital to build myself, but also they're basically stealing our customers and stealing some of the value from that." So there's, "Are we losing some of the upside to this? Are we losing the touch points with our customer?" And also, "Do we really trust them to underwrite these properly, to service them properly, to handle the data safely and securely?" There's just lots of uneasiness there, but also tons of potential.
And so I think that we've been talking a long time about SaaS and just the ability to, even for back office systems, just plug and go, right? Banks, you do you and let somebody else do the software building process and you end up with better value for lower cost and more flexibility. So now that is not just software but actual full pieces of the business just being plugged in as a service. And I think that's really, really interesting.
Yeah. I don't want to get too far off in this, but it reminds me, actually, I think Chris Skinner has written some stuff about that, about the idea of almost your bank operating as a marketplace
almost. He's argued for the stop trying to do everything for your customers and start trying to actually be the place they go to find out where they can do stuff, give them that sort of, "Come into our digital door, and if you need, in this case, small business loan, we'll connect you with this particular service that is really good at doing this." But what I'm curious about is in that model, you're not really losing the customer. It's simply you're having someone else handle that and obviously they're getting a cut of it and that sort of thing and maybe you even white label it so they're not even aware that that's it's leaving the bank. But you mentioned about losing customers. So is this something different?
Dallas Wells: Well, I think you see multiple different models for it and sometimes that loan will sit on your balance sheet. Sometimes it sits on someone else's. And sometimes you even have some discretion deal by deal. Do you want this one or do you not? But I think what all that's turning into is that all of this technical innovation is really starting to surface what value is the bank providing. So is the value in how you actually process the nuts and bolts of putting that loan from an application to on your books, or is the value the fact that you have customer relationships, you have trust, they know to come to you and that they can trust how this stuff operates and they can trust their data with you and you have cheap balance sheet capacity, relatively cheap. It's cheaper than these fintechs going out and trying to raise cash and then loan it out. You can get it much cheaper.
I think what banks are starting to see is that where they can extract value is basically, "We'll rent you a spot on our balance sheet and we will in effect let you rent some of our trust and goodwill and many decades worth of customer interactions, and then you do the nuts and bolts processing because you don't have sort of the legacy stuff to carry around." But the question then becomes, "Okay, well, who owns the compliance issues and who owns the customer service aspect of it and who owns the mistakes that inevitably get made?" Those sorts of things are what's being worked out, right, and that's where the uneasiness comes from. But I think we're heading in the right direction. So it's never a super clean path to get there, but banks are figuring out where they can actually provide value and let someone else handle the things that maybe they can do better.
Jim Young: Yeah, that's fascinating. And you mentioned that part of the customer service. I know I've had that with deliveries of things from companies and you go, "Hey, you guys were supposed to deliver this," and they go, "Well, actually we subcontract out to these guys," so yeah, and that's never-
Dallas Wells: Yeah, "It wasn't me." Right.
Jim Young: That's never an answer you want to get. Another interesting aspect to this conference. You mentioned significant credit union presence there. I'll be honest with you. My first thought was, "Why?"
Dallas Wells: Yeah, so I think it's a natural fit with most customer bases at credit unions, so small businesses, and you get a lot of relationships where the lines are really blurred, right? So you've got the owner of an auto repair shop and he's got four or five accounts and some of them are personal and some of them are business and some of them you can't tell which they are, and so credit unions have been servicing those kinds of accounts forever. But I think they're also now looking for on top of just servicing those better, they're also looking for growth.
So if you think about kind of the traditional things that credit unions have always done, they've done deposit accounts, what they call share accounts, they've done auto lending, they've done mortgages. A big part of their business has been truly disrupted. The mortgage business is now typically handled by mortgage companies, and good luck competing with Ford credit on auto loans because their job is to move metal and they will do it at whatever cost. So I think credit unions are looking for where else that they can grow and actually offer real value added and differentiated service. So I think they feel like small business is a place they can do that, and the regulations have kind of over time gotten more friendly towards them actually doing that.
The interesting thing about it is that several credit union execs, they're just like sort of going through the trade show area, the exhibit hall and basically just like, "What do you do? Take a brochure. What do you do? Take a brochure." It's a little scary, but they kind of had no infrastructure, and in some cases, not a lot of existing experience inside the walls in doing this stuff and they're just in to figure it out on the fly. There of course will be some crash and burns from that, but you also have some that are willing to jump in and really do it from the customer perspective, like, "We want to do this right because that's our motive, not profit." So that'll be interesting. But there was quite a few of them there and they were active, asking lots of questions and willing to invest time and money and it's a real thing.
Jim Young: Yeah. Okay. So you've done a good job of sprinkling in some optimism among the confused-ism or whatever it was you mentioned before. I was wondering, was there something there, either some company you talked to or heard about or someone you saw present that just really impressed you? And you don't have to name a name unless you think they will sponsor the podcast. But was there any company that made you say, "Man, these guys, they're getting it"? It's a company and by company, I mean, that could be fintech, could be credit union, could be bank, but just somebody that kind of turned your head and said, "These guys, they seem to know where they're headed"?
Dallas Wells: Yeah. So I think there's a couple of the big banks, I mean the very big banks, the biggest ones, that they have a presence there, but they're not there to shop for the next new thing. They're there because they're building stuff. And a lot of times they're there as speakers to talk about some of their projects that they have. So there's a few of those that have made a lot of really good progress over the last several years. We're not that far removed from people really strongly disliking those bigger financial institutions.
So first of all, you had all the consolidation and all the pain that goes along with that, and then you had the financial crisis and the bailouts where a lot of the big dollars landed with the big names. We're not that far removed from that. They've spent gobs of money obviously to get here, but they're creating some distance between themselves and the rest of the industry. And I think that stood out as pretty clear. And so that's what a lot of these vendors now are trying to fill that gap of like, "Hey, if you want to be able to compete with Bank of America and JP Morgan, these are the sorts of things you have to do."
So a couple of things that I thought were interesting is there was more vendors that were focused on how you interact with your customers now instead of just back office efficiency, which is all we used to see at these things. There's a little bit of a transition there. And it was things like kind of content marketing in a box, like, your website should be helpful to small businesses if you're really going to bank them. So here's a bunch of ... Basically they're available in Word documents, but blog posts. Take them. Make your own adjustments and changes to them. Put them on your site. Here's payment calculators and cashflow analysis and just little widgets and calculators and articles and stuff you can plug into your website to start really content marketing to small businesses, which I think is really interesting and something that a lot of banks and especially community banks are just like, "Hey, we just don't have the capacity or the skill set in house to do this stuff, but we feel like it's important."
There was a company called Seismic
that I thought did a really great demo, and they basically help relationship managers create presentations and send them out to customers, so compiling industry data and information on their own internal products. They can kind of mix and match those into a deck. They send it out and then there's sort of Google analytics style feedback on did they open the email, did they read it, what did they look at, what did they spend more time on, and then that really drives, what do you follow up on and when do you follow up? So helping bankers truly better serve customers I think is a slight change in direction that I thought was really interesting.
Jim Young: Well, then, so let's go to the final question here. You saw some, it was a fair amount of stuff about payments and LOS, and again, that's sort of [inaudible 00:18:55] data. That's broad and it could tell you pretty much every single banking conference has something about LOS and payments. So what exactly was the conversation around those two areas?
Dallas Wells: Yeah, so I think both of those are sort of the wild west right now, meaning there's a rush in both of those. There's tons of vendors that are either already competitive there or building new products. So origination systems, I think we've traditionally seen specialists in that area. You'd have a mortgage origination system and an auto origination system and commercial, and you're seeing quite a few of the vendors now start to consolidate those into one platform and there's just a ton of money being spent in the industry on these things.
And you're also seeing that that's one of those, putting in a new LOS, especially if you're going to consolidate different platforms, it's kind of like doing a heart transplant. You got to unhook everything and then real fast get the new one in there and hook it back up. And so there's lots of discussion about that. There's lots of pain going on in the industry around that because there's some kind of projects midway through, and so lots of hallway discussion about that of like, "Hey, are you guys doing a new LOS? Who do you use? How's it going? How far over budget are you?" Those sorts of things. It's one of those things that's like, it's the necessary foundation for a lot of the other cool things you want to do. And so that's why there's that much attention being paid to it, but a little bit of project fatigue around that.
And then payments. My goodness, payments is ... I think when a lot of people think of fintech, if you ask them, "What is fintech?", they would list 10 or 15 payments companies and that's what they think it means. So it's probably been fintech for the longest, I guess, if you want to describe it that way. And what we saw at this conference in particular is that a lot of the consumer payments stuff is now moving into the commercial space, and so banks and credit unions have a lot of choices there, consumers and in business [inaudible 00:21:00] has a lot of choices there.
I think that the optionality there in the marketplace is really pushing a lot of innovation, a lot of new features because for those vendors, it's a race to try to beat everyone else to the one platform that ends up ruling them all. I don't know that we ever get there in the payment space, but there will be some winners and losers. And so again, a lot of uncertainty for the banks and kind of figuring out, "Okay, that's a lot of choices. What do I actually do with that?" Lots of discussion about those two areas, and I think there will be for some time to come.
Jim Young: All right. Well, thanks Dallas. Thanks for coming on the show. I was glad that your time in southern California didn't turn you into a diva and you didn't big time me on coming back.
Dallas Wells: Well, yeah, we'll see. That's yet to be determined.
Jim Young: I'll talk to your agent on that one.
Dallas Wells: Yeah, thanks.
Jim Young: All right. Thanks.
Maria Abbe: And that'll do it for this week's show. Now, for a few friendly reminders. 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 this content. Finally, if you like what you've been hearing, make sure to subscribe to the feed in iTunes, Google Play or Stitcher, and we would love to get ratings and feedback on any of those platforms. Until next time, this is Maria Abbe for Jim Young and Dallas Wells, and you've been listening to The Purposeful Banker.
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