Everyone at your bank is on board the innovation train, but is it headed to the right destination?
In this week's podcast, Dallas and Jim discuss the latest PrecisionLender ebook: "Flip the Formula: How Top Banks Innovate to Win."
The central theme: Successful banks are focusing their innovation on customer value, not cost-savings.
Helpful Links
Flip the Formula: How Top Banks Innovate to Win
Bradley Leimer Twitter Account
Podcast Transcription
Jim Young: Hi, and welcome to The Purposeful Banker, the podcast brought to you by PrecisionLender. Where we discuss the big topics in the minds of today's best bankers. I'm your host, Jim Young, Director of Communications PrecisionLender. I'm joined again today by Dallas Wells, our EVP for International Operations.
Today we're going to talk about why your bank is innovating. We're going to be talking about a lot of the topics found in our latest ebook, it's called Flip the Formula: How Top Bank Innovate to Win.
The high level idea here is that banks need to flip from being cost-centric to being customer centric, because that’s where real value can be added.
So I’m going to start by playing devil’s advocate with our own content: when banks innovate wouldn’t we assume they’re doing it to create value?
Dallas Wells: I would hope so, but I think this is one of those things where the word value is one of those that has sort of a fuzzy word. It's really important to define what we mean there by value. The banking industry, we've talked about this many times here, the first instinct is to work on things like cost reduction and efficiency. Banking is cyclical, so what happens is in the good times banks grow and expand, and then there's always a group of people at the bank whose job is to try to rein that in and to be ready for the inevitable change in the cycle when we have to cut back and pull the reins back in. We saw the worst of this ever, one of the worst versions of this ever in 2008, 2009 and 2010. That's fresh enough, even though we're a decade away.
It's fresh enough in a lot of bankers' minds [inaudible 00:01:29], when there is new technology to be put in place, the first question is how much can I save? How much efficiency can I add here? I think this goes back to a trend that's been going on for a long time. A lot of what I worked on early in my career was, "Hey, the transaction volume in all of our branch network is going down. What do we do with that capacity?" Not just the real estate, but the people sitting there. What we started doing was moving back office functions and tasks out to the branch staff.
We had branch staff doing things like balancing, and reconciling general ledger accounts, because they were sitting there, there was no customers in front of them. That was a way we could reduce some of that back office staff at the headquarters, because they could handle those things at the branch. This trends have been going on for literally decades. Now you have technology that you can put in a banker's hands and they see this as a blunt instrument to do that same thing.
Here's another way I can continue what I've already been working on for years and years. So I think it's just the first thing that bankers go to is, so the revenue is going to be what it's going to be, so how do I cut costs out? How do I save money? How do I save head counts? How do I just get more efficient in everything that I do?
Jim Young: Yeah, I think you hit the nail in the head with that last statement, which is if you start with the assumption that the revenue is going to be what it's going to be, we talk about with the numerator and denominator sort of thing, if that's unchangeable, then it's logical you would go to that. But that's, again, sort of what this ebook is getting at, is that the belief that actually that revenue part is changeable. You know, you've talked right there with where you don't ... an area that not necessarily you want to avoid, but that it shouldn't be your first priority when you're looking to innovate at a bank.
Dallas Wells: Yeah, it's not your only option. It's not the only way to go about it. There are multiple pieces to that equation.
Jim Young: Yeah, this leads me into a tweet from Bradley Leimer, and Bradley, if I pronounced your last name wrong, I apologize. He's the guy that's known to us, he was formerly the Head of Innovation for Santander Bank, and is now heading up Fintech Strategy for Explorer Advisory & Capital. This was back a couple of months ago, and he noted that, "American banking sector hit a record high of $56 billion in net income in the first quarter of 2018." Then he said, "Time to double down on projects that build customer value."
So, Dallas, what exactly is he talking about here? Because I'll be honest with you, when I was thinking about value, I was thinking about value for the bank. But he's saying customer value.
Dallas Wells: Yeah, nuance difference, but I think a really important one. By the way, Brad's Twitter is a great follow. He's a really good industry resource. If you're a banker, and you're not following Brad, we'll make sure to put a link to his Twitter profile in the show notes for this.
But I think what Brad is talking about is something similar to what [inaudible 00:04:12] has been shouting from the rooftops for well over a year now, which is, "If not now, then when?" What he means by that is similar to what Brad is saying here. If you're going to remake the customer experience, and we think that's really important, I think a lot of, I guess you'd call what the Fintech universe think that's really important, that customers have higher expectations of those they do business with.
They're dragging the banking industry along with them saying, "We expect this of you too." If we can all agree that it is important that your customers have a good experience, and I don't know of a banker who would disagree with that, then when are you going to do it if you're not doing it now? As an industry, we have record earnings, the technology is there, it's available, it's proven, it's accepted by the regulators, it gets, if anything, a little cheaper and it becomes a little more commoditized. The checking account is full, the thing is there available to purchase, and we have a proven track record, we sort of know what to do. I think that's what he's saying, is all the pieces are aligned, if you have a chance in your career to remake how you interact with your customers, this is it, it's not going to get any better than it is today.
Jim Young: So, when you say we're already making it then where does the tech fit into this? What are we talking about in terms of innovating to ... obviously you want to improve in that area, but how does the tech fit into this equation?
Dallas Wells: The summary is, and there's a whole bunch of tactical ways that you can actually make it happen. But I think the summary version is, you can find out how to better and on a more personal level service your customers meaning you can give them exactly what they want, what they need, based on who they are as an individual. What drives all of that is data and context, and turning those things into insights. So insights about that customer, about their potential future needs. Since we are bankers, even about the potential risk around that. There are all sorts of insights that can be gleaned. What we have the ability to do now, what the tech unlocks for us is what small banks could do on a much smaller scale all along the way, which is sort of, "I know my customer, I know what they're after, and I can sort of handcraft the solution for them." That was their differentiating factor.
That's hard to do at scale, even for a community bank. You can do that for a few dozen customers reliably, and you can do it well. But when you start getting even into the thousands, and for the larger banks into the millions of customers and of interactions, that's going to take tech to do that at scale. It's being able to take all the pools of data that you have floating around, and use the technology to stitch those together, and then use some banker judgment, some domain knowledge about your own products, about how customers behave, and pair it with that data, then you have some real insights. You can offer something that's different than the competition is offering, you can offer something at exactly the right time for the right customer.
What the customers end up with is they don't feel like they're waiting into this sort of scary, unknown universe of financial services and they just have to figure out on their own with a unhelpful branch staff, or an unhelpful 800 number. They get something that is relevant to them, and timely, and it just makes it much easier for them to use your products and services to do the job they needed to do. That jobs-to-be-done framework that we always come back to.
Jim Young: Yeah. This also sounds a lot like the sort of thing that Jack Hubbard spoke in the BankOnPurpose, somebody we've had on this podcast. He's talked about in terms of [inaudible 00:08:25] yourself into a resource, [inaudible 00:08:27] relationship manager, resource manager, or sometimes we talk about as being a trusted advisor, going away from order taker to somebody that can really provide that insight that you want. I can hear already some bankers saying, "We know we have all this data, and that sounds great, but there's a big jump from having all this data and putting this data into form that is usable." I mean, is that sort of the magic potion here, that block that needs to be filled in?
Dallas Wells: I think so. Good news and bad news there. If I know bankers, they want the bad news first. The bad news is, it is going to take some effort and it is going to take some money. There are some resources that you're going to need in place. Specifically, you have to get this data into a usable place, for lack of a better way to put it. In plain language, you have to get the data where it's accessible and usable in a format where it's relevant to you. It can't sit in your core system. It can't sit there. That means banks have to get a lot better and a lot more disciplined about where this data resides, who has access to it, who can use it. You're actually going to have to use that CRM system that you're spending a fortune on. You have to use it in a consistent, disciplined way.
You have to have the right technology in place, you have to have the right people to manage that technology. This is where we're seeing banks struggle, is they've used sort of the IT function of their bank forever as basically, it's a help desk, it's a support function, fix the things that break and keep me functioning, help me reset my password. You need a lot more than that to make this sort of stuff work. What you need is someone who actually understands databases. How to get relevant information out of all the different places that it's sitting from all the different stakeholders involved. Get it into a central spot where it can actually be used, analyzed, sorted, measured, labeled, all the things that you're going to need to actually make that data relevant from, I'll say data science, I don't want to scare anyone with that. Data science can be an intimidating concept or word. To be able to analyze it, right? And to be able to then deliver insights that come out of that to someone in a relevant way.
There's infrastructure to be put in place, that's the bad news, is you can't just use what you have. You're going to have to invest in it. The good news is, we touched on it already, there is proven technology out there, and I think the really exciting part for banks is that the off the shelf stuff is now viable for banks, meaning there is proven use cases where banks have used it, the world didn't end. Their data stayed safe and secure, and it met all the expectations. Regulators have seen it, viewed it, signed off on it. There's a track record here for this. The really early adopters of this, the banks had to build their own. Things like API integrations between a lot of the different systems and sources of data.
They couldn't go to a third party and say, "Hey, can we just use your stuff?" They had to build their own way of plugging all these systems together. Now there's off the shelf systems out there that are viable, useful, relevant to banks, and they have bank customers that they can put you in touch with. There is investments to be made, but there is a proven path that you can take and there's people who have done it before. Go find those people, hire them, invest in the resources. What comes out will be an ROI unlike anything else you're used to seeing in the banking universe and in bank technology. It unlocks things in a really measurable way where you can see the impact, you can measure it over time, and you can make sure that you're getting a return on your money that should make the finance types in the bank happier than they typically are to spend these sort of dollars.
Jim Young: Yeah. There's [inaudible 00:12:04] kind of describing too I think about every time a company I've been at has struggled with CRM adoption in terms of just, because you're still, was at that time, a manual component entering in this information. It's great once it's in there, but getting it in there and that is changing, becoming a much more of an automated thing where you put it in one spot, and it goes to every other place you need it to go. I think so, it's not just the data you have, but the way you collect it going forward is changing and becoming so much easier for banks.
There was another stat in the ebook that said, "66% of commercial bank execs," this goes to kind of what you're talking about. "66% of them believe that customer experience is a potential competitive advantage." Given that stat, shouldn't we be seeing a race to get in line to start these projects? Shoving aside every other IT project you've gotten, and winning the battle for funding at banks?
Dallas Wells: I think there is a race going on for that. I think you see it in a couple places. I think you see it in the race for talent. Again, the right sort of talent to make these things happen, a lot of banks say, "Either we just can't find them, or when we find them, we just can't hire them. We can't recruit them to come here and work in the banking world when they have so many other options out in the tech universe." In addition to the talent, I think you hit the nail in the head, banks know that they have to do this, what they're struggling with is, "Where do I start? There are so many things that I want to do, and there are so many projects, and there's only so many people who can sort of carry the bucket up the hill, and can actually make this thing happen."
"They've got multiple buckets in their hand already. So can I realistically hand them this? If so, what do they set down?" I think what banks are learning is what technology companies have gotten pretty good at, which is prioritization. There's always more things to build than you have the time and resources to do. The banks that are differentiating themselves are the ones that are figuring out what is the right thing to set down? What is the right order to go about delivering this stuff? It's sort of the true agile approach to building and delivering things for customers, which is an evolving process, it's a constant feedback loop. It's a different way of thinking about the work and about delivering the stuff that banks are used to.
As Carl Ryden likes to say, "Agile doesn't mean that you do waterfall really, really fast." It's a totally different approach and it means that you have to learn from what you're doing, you have to be willing to set things down, and [inaudible 00:14:26] midstream and pick up something that looks better, more valuable, more important. Do that and then come back to the other stuff. Some are figuring it out, it's a race, it's sort of a messy, chaotic race, but we're seeing signs of that happening.
Jim Young: All right. That'll do it for this week's show. So again, the title of the ebook we’ve been referencing is “Flip the Formula: How Top Banks Innovate to Win.” We’ll include a link to it in this week’s show notes, but you can also find it by going to our resource page at Precisionlender.com It’s right there on the featured resources page.
Speaking of that part of the site, that’s also where you can go to listen to more podcasts, or check out more of our content. You can also just head over to our homepage to learn more about the company behind this content. Finally, if you live 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, Dallas Wells. And you've been listening to The Purposeful Banker.
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