Banking at FinTech Speed

Podcast Transcript

Hi and welcome to Lender Performance, your guide to becoming a better lender. Dallas and Jessie are from Precision Lender and thank you for joining us.

A while back, Dallas wrote a great article for our lender performance blog entitled, The Scientific Method for Banks. It was a great read and seemed like a perfect continuation of our podcast with Joel Rosenberg recently about what banks can learn from the non-bank sector so I asked him to talk through it with us today. Thank you for chatting about this, Dallas.

Sure thing, Jess.

Dallas, let’s start with what led you to write this blog post?

Well, a decade plus in banking. Really it was spurred by a conversation with one banker in particular who was just really frustrated. This is someone who is a current client and were just asking for some simple things as we make adjustments to their pricing system, PrecisionLender stuff. He said, “Man, I just can’t get decisions out of anybody. You know, I can’t get anybody to make these simple decisions that we need to get done.”

This is not an unusual thing. This is business in general but especially banks and how they approach decision making in general. A lot of it comes back to, and what I mentioned in the post was just the nature of banking in general. You know, it’s tons of leverage, it’s really low margin and especially after the financial crisis, it’s really heavy regulation. They treat it almost like a utility in that we don’t really have the luxury of being wrong on things.

Most businesses, if you’re right 95% of the time, you’re a superstar. In banking, if you’re only right 95% of the time, you’re going to be out of business. We just don’t have that much wiggle room.

What that translates to is this really slow, careful decision making process. In many ways, banks should approach their business that way. We should be very thorough in that decision before we put money out there. The issue is that it just bleeds into the rest of our business. As we get into the operational things where we don’t really have to approach it that same way, everything just moves in slow motion.

With the pace of business in general and technology especially moving really fast and our customers and borrowers, they’re used to that kind of a pace and that kind of an innovation from everyone else that they deal with. It means that banks are really being left behind and now our borrowers walk in the bank, things are just the same as they always have been and things still take a really long time. Everything from basic credit decisions to things getting funded, it’s just slow. It’s really starting to stick out like a sore thumb.

That’s why we kind of wanted to talk about are there some different ways that we can approach this without giving up that very slow, methodical, cautious approach to things. We don’t have to give that up, we can just shift the thinking just a little so that we can innovate a little quicker, get quicker responses out there to people.

Dallas, some people listening might say, “You know, but other companies, they do something totally different than us, that’s why they offer it in a different way.” Can you maybe give some examples of companies that maybe operate in the same space as banks but think in that kind of different mindset you talked about?

Yeah, so I think where we see this most of all is in the non-bank companies that are competing directly with banks. Those would be startups that are in the fin-tech world, approaching the same customer base and offering many very similar products. They have the benefit of doing it without all of the legacy technology that banks are saddled with and they’re also doing it, in many cases, outside of that regulatory world the banks have to live in.

They do have some advantages there but the innovations that they’re doing are things that could also be adapted to the banking world. While banks are sitting in their committee meetings and doing the things that banks typically do, filling out all these reports and coming up with this grand master plan from front to back before they try something, these companies are doing it like startups and software companies in general do it, which is you try something and you pivot on that really quickly and you make these small incremental changes on this good idea and you over time, can really make some impressive progress that way that the banks are just not keeping up with.

Can you talk, you mentioned that the scientific method in the name of this article, so break that little bit down into maybe how a bank would use that in practice. How would they use the scientific method in trying to come to a decision?

Basically trying new things and doing it in a very controlled way. This isn’t the toddler approach to trying new things where you touch a stove and figure out it’s hot, right. We can do a little smarter than that so the scientific method would say, hey, let’s sit around and let’s use that experience that we have and that industry knowledge that we come to the table with, that’s our unfair advantage in this is we’ve all been doing it a really long time. We start from there and we form this hypothesis, something we can test. Let’s try this small little thing. We think we know what the answer is but let’s try it in a small way so that we can confirm that. Then you go out and you do this small controlled test of what you think is a good idea and you get immediate feedback.

The way like we do it here at PrecisionLender and the way a lot of software companies do this now is they build what’s called a minimal viable product, an MVP. It’s something that a lot of times, we kind of piece it together with Excel and some really basic code and we just put it out there an we test it with a couple of beta clients. We’ll say, “Hey, try this out and tell us what you think.” Then we get the real-world feedback from that from real clients and they know it’s going to be ugly and they know that it’s not going to be up to our usual standards of software but we can get a feel for, is there value there before we invest a lot of time and energy and effort creating the real thing. Once we even start to put it live into production, it’s little, bitty pieces at a time. The smallest thing that’s viable, put that out there. Let real users use it, find out what breaks, find out what’s valuable and then you can build on the good parts and scrap the parts that don’t work.

Banks can approach it very much the same way where we just try little incremental things that we think are a good idea. We can not only move faster but also in a lot of ways, do it a little safer too.

Okay, what are a couple of examples how that might translate to banking? What are things people might try?

Banks have the benefit of, they think there’s nothing we can test and in reality, banks are the perfect testing ground because we have thousands of accounts and all of those accounts are doing hundreds of transactions. We’ve got deposit accounts and loan accounts and hundreds of pricing decisions every month. All of those are places where we can do testing.

Banks a lot of times will spend a ton of money coming up with a marketing campaign and then they run it and it’s a giant flop and nothing happens. They don’t move the needle. Why not try that on a smaller scale in one of your markets? That’s what the big banks do it. They’ve figured out that do a test market, see what works, see where you get real results, and then you scale it up. Community banks can do the same thing in a small scale.

You can do it with account offering. You can very much do it with pricing where if you’re wondering what’s going to happen to deposit rates once the Fed moves rates, there’s lots of chances to test that. Run a CD special in one of your markets. Even if you’re a small bank, for one of your branches. Do it real, hyper-local.

See what the effect is on the rest of your accounts. When you increase rates there, do you get… do you cannibalize some of your existing deposit base and how much new growth do you actually get? Try that, a couple different versions of it in a couple different spots and you’ll get a feel for what’s the behavior going to look like and what kind of results are we going to get so that when those rates do move and the competition does start to react, you have some real experience to move from instead of making this wild guess that has huge implications for how we’re all going to perform, how the banks are going to perform over the next few years.

You can do that with loan pricing, deposit pricing, marketing strategies, you can even do it with some of the new customer-facing technology. Mobile stuff, there’s lots of ways to test that where you don’t have to do the full thing. Test it in a small way and get the real feedback so that when you roll out the big thing and you spend big dollars on it, it’s already been tested and vetted a little bit and you know where you stand.

That’s great. Dallas, this idea might be a shift in how bankers think and the thought of acting like a startup might be kind of daunting so what advice do you have for a bank that wanted to start using this approach?

Well I think if you want to really stick to the methodology, you test the approach just like you were going to test your new ideas. Just carve out one small area where you can do this testing. Wherever you feel like you have… really it’s less about the function and more about the right person… so find someone who has a little bit of that entrepreneurial spirit and has the wherewithal to try those things and they know that they have the backing that it’s okay if you get it wrong, because I think that’s the biggest bridge to cross is that all the employees have to learn that it’s okay to make a mistake and that was the biggest culture shock for me coming from banking to a software company was you don’t have to wait until you know you’re going to be right. You just act. You just move. You do it and everyone knows that when we’re all moving that fast, some of the decisions are going to be wrong.

Carl, our CEO, has a great way of putting it that kind of helps put that in context for everyone and the way he says it is, “if you don’t feel a little bit dirty, you’re probably moving too slow.”
Basically what he’s saying is it’s going to be a little sloppy, right? It’s not going to have all the i’s dotted and t’s crossed exactly how you’d want it to if you had more time to spend on it. Banks get stuck in doing things in a way that they know is not ideal. They know there’s a better way but they let perfect get in the way of improving it. You know, this well, we want to keep it in committee until it’s exactly the way we want it and you never get there because by the time you’re ready to roll it out the whole world has changed around you and it’s once again not quite ready.

We see it in a lot of ways with banks being slow to move on, yes, pricing decisions, that’s where we see it in our data from our application but also just in dealing with banks as client. The cycle is really slow and so even when early on they say, “This is a great idea. We have to do this. It’s very important for our business.” Then it’s a year or 18 months before we actually sign a contract and move forward. It’s because it gets sucked into that committee vortex where you’ve got all of the things that the regulators tell them they need to do and those are all valid things, but we’ve also had banks that get through that process in 30 days. It can be done. You just have to be very intentional and purposeful about it. Everyone’s busy so you have to be very good at prioritizing, letting people know that it’s okay to make mistakes and finding ways to test those things.

Most vendors are going to be willing to, in a similar way, let you do a little test drive of things so pull together a small group, try things out. Rather than sitting through 6 different meetings where you try to convince everyone that this is the right decision, try it out. Test it and do that quickly and then come back with real results and say, “See? This is the right thing. Let’s move it up on the priority list. Let’s make everybody get this in motion and then we’ll move on to the next thing,” Instead of having 15 things sitting in committee and everybody’s in meetings all day not really moving forward.

Thank you Dallas, that was I think an excellent kind of discussion and expansion of your blog so I think that will do it for us today. Thank you all for listening. You can find more information about today’s episode and we’ll make sure to link back to Dallas’ blog post at precisionlender.com/podcast. If you like what you’ve been hearing, make sure to subscribe to our feed in iTunes, SoundCloud or Stitcher. We also love to get ratings and feedback there so thanks for listening. Until next time, I’m Jessica Stone.

And I’m Dallas Wells and this is Lender Performance.