Announcer:

Financial technology, or fintech, is one of the fastest growing industries in the world today, with New York, London, Tel Aviv, Edinburgh, Singapore, Moscow and other major cities all vying for a piece of the action. Welcome to Breaking Banks, the first dedicated radio show that focuses on how this new boom is changing everything, from the way we bank to the very concept of money itself. Now, here’s your host, Brett King.

JP Nicols:

Welcome to Breaking Banks, the number one global fintech radio show and podcast. I’m JP Nicols. Today, we’re looking at winners and losers so far in this pandemic era, and as we look forward to a post pandemic world, with three of our regular and most prolific contributors. Ron Shevlin, director of research for Cornerstone Advisors and senior contributor to Forbes, Penny Crosman, executive editor Technology at American Banker, and Jim Marous, publisher of the Digital Banking Report and co publisher of the Financial Brand.

JP Nicols:

The impact of the COVID-19 novel coronavirus has been both global and catastrophic, as both a public health crisis and as a worldwide economic crisis, and we’re still in the relatively early stages of it as we record this in early May of 2020. The financial services industry is caught in the squeeze as many workers are at risk on the frontline provided much needed access to relief loans, while others are adapting to social distancing directives.

JP Nicols:

Dealing with the health risk will continue for a while, but what’s likely to last even longer are the economic affects, and those have always had a big impact on the financial services industry. Let’s start with where we are today, roughly two months into dealing with some of these issues. Who are the winners and losers so far? Is it the big banks, the community banks, credit unions, direct to consumer fintech, those fintech, those fintech working with traditional providers? Penny, let’s start with you. What are you seeing so far?

Penny Crosman:

Thanks for having me JP. It’s fun to be here, so in the bigger picture everybody’s losing, because everybody is struggling. Their customers are struggling, their employees are struggling, their balance sheets are struggling. I think in terms of companies that are actually benefiting from this whole crisis, you might put some of the payment companies in that group, like Stripe and Square, and possibly PayPal.

JP Nicols:

Even the card companies, right? Visa, MasterCard, Amex all had pretty decent earnings and mostly increases in revenue.

Penny Crosman:

Yeah, I think Amex had a 75% decrease in revenue. I’m a little fuzzy on that, but I think some of them are doing well, because there’s more online spending, but because there’s no travel I think there’s also a lot of struggle there as well, so I think some of the banks are doing as well as can be expected financially. There are so many different ways to look at winners and losers. Is it financial? Is it reputational? Are they gaining some traction, some new customers through this crisis?

Penny Crosman:

Obviously, the big banks have attracted a lot of new customers, I think partly because of the convenience that they provide over their mobile banking, as most bank branches are either closed, or they’re only available by appointment or through drive-through, so people are forced into digital channels, which the digital movement gives big banks an advantage, because they do have apps that generally are full featured and have really good uptime. In terms of the small business relief program particularly, and we’re probably going to get deep in the weeds on that, but-

JP Nicols:

We are.

Penny Crosman:

Okay, so there are banks that did get a lot of loans through quickly, especially in the first round, and then in the second round some of the fintech lenders were able to squeeze in their, even though they were late to get their approval, so we can go deeper into that, but overall I don’t think anybody’s doing fantastic in these times. Another thing I would say is collections technology companies are doing a little bit better at, like TrueAccord is having a good run, because more people see the need for a better approach to collections.

JP Nicols:

Well, probably more of that coming, so you’ve offered a lot of categories for us to think about and explore today. Jim, what’s your perspective?

Jim Marous:

Well, I think it goes without saying that those companies that are the furthest advanced in their digital transformation had the least pain, be it as far as account opening, post March 1st, let’s pick a date. They were the most well positioned for the SPA loans, because, honestly, if you’re processing with paper in the way that the government dropped this on your desk it was not the best scenario, and I think those organizations that are providing digital services to financial institutions or had projects in process …

Jim Marous:

I had a call with the Verizon sales team for the financial services industry and they all but said, “We’re going nuts right now in business. It’s overwhelmingly good,” but most of it was people that already had said, “Yeah, we buy into your concept. We buy into everything that’s going on. We’re just not ready to pull the trigger,” which is the whole scenario pre March 1st when the doctor said, “You’ve got to lose weight,” and you go, “Okay, I will,” and then you go to the doctor and he says, “By the way, you’re about to die,” and you can’t get on a treadmill fast enough.

Jim Marous:

I think those organizations that had projects in process were in a great position. I think a lot of organizations are still trying to figure out what they’re going to do. Some organizations are quickly transforming themselves almost on a dime. I thought it was extraordinarily surprising to a degree that TD Bank announced I think a couple of weeks ago their entire call center was going to be given the opportunity to stay remote.

Jim Marous:

That shows an organization that was already positioned to do things digitally in the truest sense of the word, because you’re able to monitor, you’re able to measure, you’re able to look at call center. The whole technology behind call centers is being able to distribute calls and monitor how well they go. To be able to do that remotely, it’s kudos to TD for that. Much of the same way that I think Bank of America, with their advancements in digital transformation overall, really benefited.

Jim Marous:

They benefited from accounting openings, they benefited overwhelmingly on new savings accounts opened, which we’re seeing that’s one of those surprising dynamics that’s happened, because of the COVID crisis. That people are opening brand new savings accounts. That’s not because they’re taking money out of the investment services world. It’s because people are saying, “I need those envelopes set aside for these unforeseen circumstances that only as late as mid February I thought we’re so far away from that kind of scenario.”

JP Nicols:

Yeah. Well, you’ve also brought a couple of things I think we’re going to drill down on for sure. Ron, I saved you for last, just so you can argue with something that Jim or Penny said.

Ron Shevlin:

I hate to disappoint everybody, but I’m not sure I do disagree, but I do want to preface my comments by saying, I think like what Penny was saying, winners and losers feels a little tough to call here. I would tend to think of what I’m thinking here as more like bumps and dents. Those that got bumped up a little bit and those that got knocked down a little bit. Not necessarily winners and losers.

JP Nicols:

Come on, you’re better at writing clickbait than that.

Ron Shevlin:

Yeah. Well, when there’s page to be had then absolutely I’ll go for it.

JP Nicols:

Let’s go ahead. Let’s go with the bump and dents for now.

Ron Shevlin:

Okay, so both a bump and a dent goes to Bank of America. Bank of America did the $43 billion in PPP loans, which gained them about a billion dollars in fees. You can knock them all you want, but that’s a pretty good amount of money. The dent, however, is that they were in the forefront of being accused of basically front-running their larger loans versus the smaller ones, and I think the longer term implication of that is, because I think one of the larger banks did the same thing.

Ron Shevlin:

I just did a study. Found that more than 50% of small businesses, those between 100,000 in revenue and 50 million in revenue, more than half consider one of the large or regional banks their primary bank, and I know it’s not easy to switch banks, but I think this is the kind of situation that’s going to make a lot of small businesses rethink that. Brett, he was one of the first to publicize the whole issue with Bank of America, so both a bump and a dent goes to Bank of America, and to some of the large banks in particular.

Ron Shevlin:

A bump definitely, a bigger bump to the community banks, who I think, I call this the revenge of the community bank nerds. For a long time, they’ve really been knocked on as being losers in the market. They’ve really ceded the retail market to a large extent to both the large banks and credit unions over the past couple of years, as they’ve doubled down on commercial lending, but here’s the irony of the situation.

Ron Shevlin:

Who’s been the winners in the financial services space and specifically the banking space over the past couple years? Are those firms that have gotten out there with technology that adds to convenience? That have made their customer’s lives more convenient?

Ron Shevlin:

Well, the community banks have trailed and they have not been particularly better at the automation piece with the PPP loans, but because they burn the middle oil and really went to bat for their customer base to get these loans in there, the press is covering that, they’re getting there. It’s a definite bump up for the community banks. A potential dent could go to them, because I’ve got to tell you, nobody wants to tell you this, but they were plenty of smaller banks, smaller community banks who also prioritized the larger loans over the smaller ones, but that just doesn’t get the kind of press that you’re going to get when you’re JPMorgan Chase or Bank of America.

Ron Shevlin:

While I agree with you guys about the benefits to some of the fintech providers, I think there’s a dent that goes to some of the neo-bank, challenger banks who have found that, because they have not evolved into the lending space just yet and have relied very heavily on interchange and the payments, I think they’re going to find themselves struggling in the short-term for this, and especially since they’ve struggled to become the primary providers to a large extent of their customer base.

Ron Shevlin:

Some of them, like Chime in particular, they’d gained some good publicity at the beginning, when it advanced some of their customer base, the stimulus checks that were sent out, but that only went to a relatively small percentage of their customer base, so great PR, but not huge impact, and I think that longer term they’re going to struggle to have to come back, to gain their mojo coming out of this.

JP Nicols:

Yeah. Well, I’ve tried my best to start a fight and I’ve been unsuccessful so far, and I don’t think this one’s going to work either, because, Jim, that sounds like an awful lot of things you’ve been talking about a lot, in terms of certainly personalization and understanding the customer. Do you think Ron’s right? Is this revenge of the community banks? Are they winners in this?

Jim Marous:

That may start a fight. To a degree, yes, I think they’re more connected to the community, but I don’t see their personalization being that much better. I deal with a top six bank, which almost anybody who follows me knows exactly who they are, and my first communication, actually only communication about PPP loans was something that came out and said as a small business customer there are opportunities available for you in this small business association PPP loans. If you currently are online banking customer connect with us through that app, and if you’re not sign up for online banking today.

Jim Marous:

Well, they had me, until they said if you’re not an online bank customer. If they don’t know that already and if they can’t personalize to that level that’s a big, bad mark, and add to that the fact that they have not reached out once about hey, how’re you doing? Yet, for the two months prior to COVID, they’re reaching out monthly about trying to get my retirements funds transferred to the bank.

Jim Marous:

Now, I will say that one of our joint friends, all of our friends in the Community Bank [inaudible 00:12:31] Oklahoma, they’ve reached out to me three times to try to help me, and they’re not my local bank by any means. This is where we may not close our accounts today, but it is as people remember, we remember who’s there when we’re up against the wall, and small businesses aren’t out of the woods at all yet. All PPP loans did was pay for payroll. It doesn’t pay for keeping me in business, and I think we’re all going to have to look and say who’s got my back when things are tough?

Jim Marous:

By the way, you may not be able to give me a loan. You may be like Chase and Wells Fargo who say, “We’re going to be doing home equity lines of credit, we’re not going to be doing small business loans, because of the risk involved right now.” That may even be okay if you at least reach out and show some empathy.

Jim Marous:

Now, that said, smaller organizations, smaller banks tend to do that better than the biggest banks, even though on a number of customers per calling officer it comes out probably about even. I think we’re really going to see who’s in the position to make me a consumer or me a small business owner feel like you’re on my side? I mentioned PayPal quite often. They’ve come out to me more than once and said, “If you need a line of credit to get over this hump let us know.”

Jim Marous:

They’re not talking about the SBA loans. They’re talking about just knowing my business and knowing that the risk is not that great. My traditional bank doesn’t do that, so the whole personalization, the importance of data overall is going to prove to be much more important than the ability to handle digital transactions. I think at the end of the day, if you’re not applying data and advanced analytics, to know me, look out for me and reward me, you will fail in the environment, in the economy going forward, and we’re nowhere near out of the woods, as we’ve said in previous conversations together.

Jim Marous:

The health crisis is only the tip of the iceberg. The economic issues are going to be longer lasting and how organizations, who are going to be in financial stress as well, how they react to that is going to make a big difference.

JP Nicols:

For sure, and a lot more to unpack there. Penny, you’ve been reporting a lot on this too, and the banks are always lightning rods for litigation. You’ve hinted at this. This is no exception. We’re already seeing lawsuits as we already talked about how banks prioritize, accepting and processing the applications. This only gets worse from here, right?

Penny Crosman:

I’m sure. I’m sure there will be more. The second round is not quite over yet, and the second round of the PPP relief loan lending looks a lot better than the first one. The first round there were about 1.7 million loans made and the average loan size was 206,000. That’s pretty big. You’re not really reaching the smallest. There were some small businesses that did get loans, but for the most part it was those very large loans that Ron mentioned before. The largest businesses seem to be prioritized by most of the banks, because the fees were, they can get higher fees.

Penny Crosman:

Also, some of those larger customers were existing lending customers, so they’d already been through, ran through the gamut of credit underwriting, and so they were a known quantity, easier to make a loan to than some kind of new business that the bank hadn’t ever done due diligence on before, but the loans are smaller in this round. So it is looking a little bit better, but I also think you have to look to the government for some of the things that went wrong, because the rules around the size of business were not there.

Penny Crosman:

There wasn’t a requirement that you had to lend to, make a certain amount of loans to companies below a certain size, so without that directive there was no real reason for the banks to prioritize their smaller businesses over the large ones. And large businesses do have people that they employ that they want to keep paying, so it’s not like they’re not legitimate recipients. It’s just that the small businesses were pretty overlooked in the first round, and I think I’ve lost track of what you actually were asking. Sorry.

JP Nicols:

Well, there’s so much, we could probably do the whole show just on the PPP program, and I do want to stick with it just a little while longer, because I want to talk about forgiveness process. We were talking about the lawsuits that have already been generated. I suspect that we’ll continue to have a lot more. Economists at the federal reserve in New York looked at some of the SBA data and they saw that the PPP loans weren’t correlated with prevalence of infections or even unemployment claims, as they looked at it on a state by state basis.

JP Nicols:

The strongest correlation was with states with more community banks and those in the areas with preexisting banking relationships, which is what you were just talking about, and so far through this the smaller institutions have done most of the lending. Only about 26% of the market share was from the 15 largest banks, and that’s not the trend we’ve been tracking for the last several decades, so we’ll talk a little bit later as we think about which of these new trends are really new and will stick around versus the ones that are maybe a little more ephemeral, but Ron, you’ve written about this too. What do you think about how the loans have been distributed?

Ron Shevlin:

I want to go back to your point though, about the correlation to the states and to the businesses. This is where people just love to throw out statistics without really defining what they are.

JP Nicols:

And correlation is causation. I don’t care what you say.

Ron Shevlin:

Absolutely. If it suits my needs then absolutely, but they love to throw numbers out like there’s 30 million small businesses out there, but reality is that 80% of them don’t have employees. This was the paycheck protection program. If you did not have a paycheck. Now, they still included 1099 and gave workers to a certain extent in this, and they could apply for those things, but here’s where you get back to who’s going to do this and act faster?

Ron Shevlin:

It’s probably the $50 million small business with at least small, but competent accounting team, who’s going to jump on this much quicker than the three person small business who’s trying to plug in numbers in QuickBooks every night or something like that, or waiting for their payroll provider, if they even have one, to provide them information. To your point Penny, and I don’t ever want to seem to be in a position of defending the government. Never find myself in that position, but to a certain extent, two things.

Ron Shevlin:

Number one; we should never expect the government to get it right, I don’t care what the situation is, whether it’s this or anything. There’s always unintended consequences that the government never manages to take into account when it enacts regulations, but second and more importantly I think here is they were a bit under the gun. If they had waited even another 24, 48 hours to review these things, and get the T’s crossed and the I’s dotted, they would have taken even more heat for not getting the program in place, so they were in a bit of a rock and a hard place on this one.

JP Nicols:

Thank you Ron [Swanson 00:19:54] Shevlin. I think though, playing into that, is just the banks are always going to be the scapegoats. The banks have not been shy about claiming victory, that all this money went through banks and particularly small banks. We talked about some of the structural reasons why that was true, and the government also not shy about claiming victory, about how many dollars have been out, how many loans, how many people have been impacted, but at the end of the day anything that goes wrong in the public perception is going to be it was the banks’ fault.

JP Nicols:

Yes, the rules were confusing and last minute and conflicting in many cases, and there’s a whole other can of worms yet that we haven’t even begun to open, and that’s the forgiveness process. There was a pretty good article in New York Times recently, and they talked about so many of these borrowers from their perspective they focused on the forgivable part, and this idea that they will very easily turn it alone into a forgivable grant, but, of course, there’s some criteria around that, which were also fuzzy and being clarified as we go along.

JP Nicols:

That was, Penny, my original point when I said this is just the beginning, because we can complain about how we originated the loans and we’re going to have a lot more to complain about when we talk about which loans are forgiven.

Penny Crosman:

Well, yeah. I think the burden will be on the small businesses to prove that a very high percentage of the money that they got was actually put into payroll, and a lot of businesses are struggling with that. I think a lot of them have furloughed people. A lot of them are simply not operating, so they just can’t afford to keep paying people who aren’t really working, so it does seem like it’s going to be very challenging for a lot of these businesses to get that forgiveness, even though that was the goal, and that’s what will make …

Penny Crosman:

This seemed, this felt like a dream for the banks, that they made these loans that are backed by the government and they get to reap the fees with what felt like little risk, but I think if a lot of these forgiveness goals are not met, if the requirements are not met these will become regular loans is my understanding. And then the banks will have to actually service them and deal with delinquencies, defaults the way they normally would.

Jim Marous:

Question Penny. I’m not familiar with the loans completely, but does the small business then have to prove it through the bank or directly to the government? Where’s the flow of communication going?

Ron Shevlin:

JP, can I address? It’s to the bank guys. They report back to the banks, and it’s funny, JP, that you mention an article in the New York Times when you could have mentioned my article in Forbes.

Jim Marous:

Ron, how many views, how many people have seen that article? I’m just wondering. Three, four?

Ron Shevlin:

As of today, that article has generated over 320,000 page views and that is orders of magnitude better than anything I’ve ever seen, so-

JP Nicols:

Well, flog it away Ron.

Ron Shevlin:

Absolutely, so here’s the thing, and I titled the article the Coming PPP Forgiveness Nightmare, because on the face of it you would think that calculating the forgiveness amount would be very straightforward. The AICPA actually came out with a very nice PDF, simply five step thing, but when you start looking at the details it’s not that simple, and it’s funny. Thanks to this article, I’m getting a lot of messages through LinkedIn from people, small business owners who’ve read this, and they’re really worried that this is going to turn out to be a whole lot more complicated.

Ron Shevlin:

Part of what I was writing about is that the banks really need to get on the stick here, proactively communicating here’s what you have to do to track this stuff, here’s what you’re going to have to do to report it. They are going to have to report it back to the banks, so there are a number of fintech companies that are stepping up to the plate and creating some quick and dirty PPP forgiveness solutions and systems that the banks can put in place to help the small businesses track stuff, because it’s more than just the payroll.

Ron Shevlin:

There are other allowable expenses, and in the end here’s the other complicating factor. Is after you submit all this information back to the bank, the bank communicates, calculates all this stuff. You might have taken out a $25,000 loan. Reality is that you may get 20,000 of it as forgiveness and 5,000 stays on the books with the banks, and as you mentioned it does convert into a 1% two year loan. And so what’s funny is I’ve heard from a lot of small business owners who’ve said, “To be honest with you, we’re doing fine, but I saw this as a way to get money that I was going to be borrowing anyway, so 1% over two years, I don’t care if I get the forgiveness or not.”

Ron Shevlin:

And so this is going to be nightmare in terms of those who are really using it for payroll and paycheck protection. It’s going to be a nightmare in terms of calculating it. There’s also going to be tax implications, where congress had specified that this money would not be considered income, but there are tax experts who say, “No, sorry. Not so clear.” There are other tax codes in the IRS sections that say this stuff will be taxed, so we’re looking at a nightmare guys.

Jim Marous:

Well, and that, again, those organizations that are digital and did most of this digitally are going to be in a better position to be able to process the followup on this. If you’re doing it the way you used to do small business loans and that’s a lot of the community banks, because that’s where their strong suit was, was doing a whole lot of small business loans. If they’re doing it the way they’re doing old small business loans you may have looked okay on the front end. You’re going to look terrible on the backend. Just it’s going to be messy, it’s going to make everybody angry, and what happens when the bank kicks it back to the bank and says, by the way, not enough?

Ron Shevlin:

Not just digital Jim, but those that captured a lot of the information and captured the right documentation. They looked at this as quick and easy, just get the minimum amount of data that they needed to get from the small businesses, and that’s going to turn out to be insufficient and it’s going to be tough. And then you’ve got the case that historically the SBA has always tried to nickel and dime, and get out of paying back their portion of what needs to be covered. Now, I think the political pressures will be on them to be a lot different this time around, but too many question marks in this forgiveness process.

JP Nicols:

Well, Ron, I’m happy to report that I’m probably responsible for at least 20 of your 300-and-some-thousand hits, because we’ve been sharing that article with the banks that we work with and we think it’s absolutely something the banks ought to be paying very close attention to. We do quite a bit of work with Crowe and they’ve been looking into this, and exactly as you said, you cited some of the other experts in your article.

JP Nicols:

There’s still a lot of fuzziness around this, there’s still probably new rules that are going to come out after the fact that looking for data that the banks didn’t capture, and the other thing we didn’t talk about early on was that there were so many of the smaller banks that just threw bodies at solving this. And to their credit, I love the can do attitude and the commitment to their customers, but they didn’t have a real process with gathering all of the documentation and process.

JP Nicols:

And we’re going to head to break here in just one minute, but I’ll also just add one can of worms that we purposely did not open today is the whole notion, ideas about protecting income of workers. Why was the process your boss ought to go to the bank and apply for a loan, and then we may be able to forgive some of that for you? We’ll be back with more Breaking Banks right after this.

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When it comes to business, you’ll find the experts here, VoiceAmerica Business Network.

Announcer:

You’re listening to Breaking Banks featuring your host, Brett King. To reach the show today please call 1-866-472-5790. That’s 1-866-472-5790, or join the conversation on Twitter by using the hashtag Breaking Banks. Now, back to the program.

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JP Nicols:

Welcome back to Breaking Banks, the number one global fintech podcast and radio show. I’m JP Nicols and we’re talking about winners and losers in this pandemic era and the post pandemic world, and I’d like to turn our focus a little bit further out now. Once the virus is under control and businesses are fully open, what does the new normal look like? Want to talk about that from a perspective of both the banks and the broader financial services industry and fintech.

Jim Marous:

JP, before we go on, I want to get back to what happened before the break. We were talking about the banks, what they’re going to be doing in this post PPP loan, when you have to declare whether or not it can be forgiven. We have to remember as financial institutions these organizations that all came in, in a three day period to get these loans, are all going to be coming in, in a three day period to get forgiveness, and that process is a lot more lengthy than the process of taking loans.

Jim Marous:

I think we have to think as financial institutions can I collect the data now that I’ll need later to be able to help our customers get these loans forgiven? There’s no reason why we have to wait. The organizations that we gave these loans to already are collecting that data on how they’re doing it, and it’s good for the financial institutions to be able to tell the small business, “By the way, if you haven’t done so you better make sure you have some payroll receipts for what you said you’re going to do, because I’m going to need those to make it, so I can process for the government as quickly as possible.”

Jim Marous:

Just a word of warning. This gap between the period of taking the loan and forgiving loan is time we need to take to collect the data we need, to be able to process that on the backend just as sufficiently as we did on the front end.

JP Nicols:

I couldn’t agree more and I think this is a time, we talk about winners and losers. Maybe consultants and accountants are the big winners in all of this, because there’s so much complexity and uncertainty. I really think this is a time for most institutions to not go it alone and to really understand how do we get the best thinking around this? Be able to build a system and one that’s adaptable, because the rules are changing as we go along.

JP Nicols:

Well, Penny, you’ve reported for a long time on the ongoing consolidation in the industry. This certainly doesn’t help, right? This is going to be more fuel to fire, so as we look out beyond just getting through the crisis on the other side of it, what do banks need to do to be able to survive?

Penny Crosman:

That’s a really interesting question. I think Jim was talking before about the need to really have strong digital properties and a strong digital presence, and I think that is for sure a big part of what they are going to need to do. I think the pandemic has only made mobile banking more important than the ability to make loans quickly online important, as we’ve been talking about. They probably need to continue some of their homework from efforts, that they all had to quickly enable all their employees to work from home, like Jim was saying.

Penny Crosman:

Call center people as well as traders and lenders. People working in branches and offices. They’re going to have to go through that whole what does social distancing look like in the future? The way all companies do, and I think as we can say that the digital capabilities for me to continue to be strong and I think they’re going to have some interesting technology decisions to make both about what they offer on their apps and online, to be appealing especially to a younger generation, because banks aren’t really attracting gen-z. Especially the midsize banks, are not attracting the youngest customers at the same rate that the very largest banks are.

Penny Crosman:

All banks have work to do in that area, but also with things like cloud computing they’re going to have to think hard about what they put on the cloud and how they secure that information, so also issues around cybersecurity and data privacy continue to escalate. So while they need to modernize, there’s something that we’ve talked about a lot here and elsewhere, that so many banks have outdated technology. They really do need to modernize, in order to offer cutting edge capabilities. That it is very tricky to go to a modern cloud based core and as recent data breaches have shown there are risks to it, so there are just some interesting dilemmas that a lot of banks face on the technology side.

Penny Crosman:

On the business side, they’re going to have to really make touch decisions as the whole economy continues to struggle. I actually was impressed at a few of the banks, like Bank of America, that said, “We will have no layoffs in 2020.” There weren’t too many that committed to that, but the ones that did I thought was good, because that certainly gives their employees a level of comfort and it reduces their stress a little bit, and also it set a tone for the industry and I think it was a remarkable commitment, because they have hundreds of thousands of employees and very, very large payroll costs, so they’re going to have to figure out as loans continue to not perform the way that they would like to and margins continue to be small. They’re going to have to figure out where they do make cost cuts and where they do that without putting themselves at risk,

JP Nicols:

You bring up a couple of interesting points. I want to start by going back just a little bit, and you talked about the dilemma that banks have to balance on. There’s risk to moving to new technology and there’s costs involved, and for the past decade the industry has been able to pretty easily justify that those risks didn’t offset the upside that they were getting, because they were already doing well enough. The industry was at record profits, and Jim, you talked about the doctor visit scare. Jason Henrichs has been talking about that a lot. He calls it that heart attack moment.

JP Nicols:

We all know we need to eat more and move less, but sometimes it takes a really serious health scare to get us to actually do something dramatic about it, and so I do wonder if that’s going to continue, but then you also bring up some interesting thoughts just in the more macro basis around do we just, do the banks need to go on a diet? Do they need to change what they’re eating and consume a diet of healthy technology, but also just reduce some of that overhead? Ron, what are you thinking the banks need to do from an operating expense perspective?

Ron Shevlin:

I think Penny listed a lot of things that would be very helpful to that, and one of the things that Penny brought up was making difficult decisions. I think one of the things that fits under that category is really rationalizing the cost structure of the banks, and Brett, of course, talks all the time about the death of branches and everybody likes to argue no, they still have a role, blah-blah-blah.

Ron Shevlin:

Maybe they do, but the reality is maybe we just can’t afford it anymore, and especially now with the change in a lot of consumers’ behaviors. See a spike in mobile adoption of course, and I’m sure that there’s plenty of customers who can’t wait to get back into the branch, because they hate doing this stuff, but do you know what? I hate pumping my own gas too, but 40 years ago they forced us to do it and it has never come back, except for a few gas stations-

JP Nicols:

You could move to New Jersey or Oregon, right?

Ron Shevlin:

Yeah, two states, the holdouts, but in banking let’s get real, especially now that the banks’ profits have been hit so incredibly hard in Q1 is not going to, we’re not going to probably see that V shaped recovery, and so where is that diet going to come from? It’s going to have to come from, like it or not, it’s probably going to have to come from staffing somewhat, because that’s an immediate expense that they can-

Jim Marous:

Well, and overhead. The branches. I talked to Richard Hunt on a podcast interview for Banking Transformed and he said for the first time he really thinks there’s going to be movement on CRA. He said the Community Reinvestment Act is being looked at and saying what was the concept to begin with? It was making sure you kept investing in the lower income neighborhoods. Well, the branches is not the way to keep that investment going, he says, but the problem has been we’ve never had a tangible way of saying what’s going to qualify as being able to close a branch and reinvest money someplace else?

Jim Marous:

He says we’re very close to bringing a tangible answer to that, so number one; close those branches that are completely ineffective and are only there because the government regulations say, “We’ll make it very difficult on you if you close them,” when there’s really a better alternative, which is reinvesting in that area outside of a branch, and next, as you said, human resources.

Jim Marous:

We now are in an era where the digital transformation is simply being held up by legacy thinking, and so we have to say … Somebody wrote to me this week and said, “What do you think the outcome’s going to be on the universal banker concept?” I said if you as a banker are thinking about anything with regard to how to make a better experience in the branch, I’m telling you right now for the rest of this year deploy all those dollars and resources, mind, thought into what can I do digitally better?

Jim Marous:

If you’re putting any money into the branch network right now, that is poor allocation of funds in my opinion, as opposed to putting it towards a better digital experience, because you know one’s not going to go away. The other one may not, but how good is it to get a better rating on some of kind survey if one half of the people that were prior to COVID going to the branch, which was already six times lower than it was 10 years ago, what difference does it make?

Jim Marous:

At the end of the day, what difference does it make if you have a great reader in the front of the branch if nobody’s showing up there? I’d say anything you had put towards, except for closing branches, towards the budget of branch right now for the rest of the year, put toward some aspect of digital engagement, because that money’s going to pay off and the other one may not.

Ron Shevlin:

Yeah, I totally agree Jim, and I’m glad you made the distinction between the branch experience and the branch itself, because reality is they’re not going to break leases. They may own the real estate. It’s not as easy as just shutting the doors and walking away, but you’ve got to be crazy to be putting money into ITM, new ITMs. Sorry for all the vendors who are going to kill me on this one. Inside the branches themselves. It’s who’s going to want to be in those little rooms after somebody’s been in there? Even the question of post crisis, well, when is post crisis? How long does this really last that we’re going to be comfortable going into these things, so-

Jim Marous:

Invest in the Zoom platform, so you can bring multiple calling officers on a screen to talk to a business customer, instead of putting a teller on a screen that’s going to be on a screen in a branch, which doesn’t take care of the problem.

Ron Shevlin:

Jim, here’s what drives me nuts. It’s going to be a whole lot simpler than that. How about just giving your customers a list of the employees that they should call if they have this particular question about this particular thing? Forced them to call the contact center, which is getting overloaded today, and as you mentioned earlier is going to get way overloaded when the PPP loans start coming up for forgiveness. You have to authenticate yourself before you get in, and so it makes it impossible to actually talk to somebody, and then when you do they don’t know anything.

Ron Shevlin:

The reason we have branches in the first place is so that people can meet people, but we are doing it right now through Zoom, so why can’t banks be doing it? They’re learning that they can do this. There are some simple steps that they can take to help redirect that traffic out of the branches, and I think one thing they’re going to have really do to look at the cost. JP?

JP Nicols:

One of the things that we’ve been looking at is what kinds of technologies will banks be likely to invest in or should they invest in? One of the things is scheduling, so maybe when you do have that need for the branch you actually have a schedule and you get to the right person, so maybe that’s just slightly more sophisticated than what you suggested Ron, which is here’s a list of who to call, and I was really happy to hear one of our bank’s CIOs say we were looking at that and we started to think about what’s the reason behind the reason?

JP Nicols:

Rather than just give everybody a better way to make an appointment in the branch, we want to understand what are you coming in for? If we can solve that in something that doesn’t involve a branch visit, then that’s probably a better solution. Initially, that was short-term, because we’re trying to limit person to person contact, but they’re really becoming believers in that and thinking about that’s probably a longer term solution too, right? If we can solve the problem, and we can do so in a way that’s cheap and efficient, and everybody’s happy, why should we force it to something that’s manual and face to face?

Jim Marous:

We cannot assume that the consumer knows what’s available. I think what we saw and I’ve heard this from more than a couple of people that work in the auto teller lines of branches, they said, “Our auto teller lines are an hour long, and then we put somebody out there to greet the consumer and say, by the way, this transaction, let me show you how this can be done without you having to stand in line,” and then an auto deposit, a remote deposit cashier.

Jim Marous:

Or they found a way to do it another way and the consumer’s so used to coming to the branch, so they transferred an in branch visit to an out of branch visit when there’s only a single teller line outside, and all of a sudden they had a greeter, and we’ve seen this a couple of places, that said, “By the way, we have a better alternative,” and sometimes it may just be engaging by phone or some other way.

Jim Marous:

We need to think about the fact that don’t resolve the problem by saying, “See, people still want to come to the branch,” when you really haven’t dug to the next layer to say, “What for? Are they better served in another way?” Again, it’s a scheduling. It’s an allocation of resources and determining what’s a consumer really looking for as opposed to what are they doing? They’re vastly different.

Penny Crosman:

I’m seeing a little mini trend towards these apps that let you choose a banker, your own personal banker like [inaudible 00:46:30] was the first one. They had this go to banker and it was this little directory of their customer facing employees, and whether or not they liked cats and their hobbies and where they live, and all that kind. You get these little bios and little human interest vignettes on each one-

JP Nicols:

It’s like freshman orientation.

Penny Crosman:

Well, yeah, and I’ve actually talked with them a couple of times about does this become a personality, popularity contest? That actually is something that they’ve worried about, and what they do is they shuffle the deck each time, so that people are seeing different people first. So they have ways of getting around that, but the point is, to what Jim was saying, it gives people a way to, and Ron was saying this to, connect to one person that they get to know, that they can text or call with whatever they need.

Penny Crosman:

Also, we are seeing an uptick in use of video contact, like Jim was talking about Zoom, but there are companies that specifically do that for banks, and I actually see the ITM or the video teller machine as having some potential. The banks that have that are seeing increased use of those in this day and age, because that way they can go to a kiosk that might be right outside a branch, or it might be outside a store or somewhere else, and they can not only do basic transactions, but ask more complicated questions and even submit loan documents while someone’s watching, or the video.

Penny Crosman:

So I feel like there’s some potential for that to do better, and then, of course, I think we’ve all written about the virtual assistants and that could also be something that becomes more popular as that becomes more digital.

JP Nicols:

We finally found a job for Pepper the Robot.

Penny Crosman:

That’s right.

JP Nicols:

The Pepper does not have to socially distance, so he can come up and give you your paper deposit slip, and the signature card and the pen to sign it with. Well, speaking of that, let’s talk a little bit about deposits. The classic race, as we talk about disruption and innovation in financial services, is can the incumbents innovate faster than the new entrants can scale up?

JP Nicols:

And so before we close I want to talk about deposits in general. I want to talk about who’s been the winners and losers there, and what’s that look like going forward? Because about $8 trillion has flowed into the financial services industry. Where’d it come from? Where’d it go? And then before we close let’s pause on fintech and talk about that, so who wants to weigh in on that one?

Jim Marous:

I’ll be quick. I promise you I’ll be quick. I think we have to look at deposits in a new light. I’ve been an advocate of Robinhood and Acorns, the ones that use AI to determine when I have funds available for deposit and for savings. That is the way we have to move forward. Not by waiting for a customer to come in and deposit funds, or not by setting a specific amount and having that go in monthly. We’ve got to combine data AI and deposit type service or investment type services into a single product that flows in and out of checking accounts as needed, into online banking or overdraft protection as needed. Ron?

Ron Shevlin:

It’s an interesting thing, JP. It really works both sides, and Jim, by the way, you were quick. Thank you. I wasn’t ready, because I thought you were going to take an awfully lot longer time, so I wasn’t ready to jump in-

JP Nicols:

You’ve been on the show with Jim before.

Ron Shevlin:

Yeah, I have been, and it’s a good thing we’re actually not doing video here, for reasons that the four of us now know. Here’s the thing. First of all, a lot of the money that flowed in to deposits in the past six to eight weeks did so, because a lot of people were cashing out of the stock market and out of their investment holdings, and not surprisingly a lot of that went to the big banks where they’re doing business, so the big banks saw a lot of that.

Ron Shevlin:

A lot of the fight with the deposits, the debate has been around can you do it online or do you need the branches? Interestingly, there’s cases to be made on both sides of the coin. In the five or so quarters from the beginning of 2019 through Q1 of 2020 JPMorgan Chase had opened up a bunch of branches in the northeast, up the east coast, and according to their filings six branches brought in about half a billion dollars. Across those six branches, so it proved to some portion of the market that there’s life in branches from around deposit gathering.

Ron Shevlin:

On the other hand, you look at markets grow through deposits and they’ve now cleared $70 billion in deposits without ever having opened a single branch, so the argument about you have to do digital, you have to do branches, both are good at doing that, but I think we’re getting to the point now where, because of the shift in the economy the focus is going to be a lot more on what do we do with those deposits not gathering them, because a lot of those opportunities are up in the air. The credit worthiness of a lot of the business bar ours is hurting, so I think we’re going to start to see the perennial shift in the deposit gathering focus.

JP Nicols:

Well, and let’s think about deposits from the other side of it. We think about it so much from the customer’s perspective, which is a great place to start, but for the banks it’s a lifeblood, right? Having a low cost source of funds that you can mark up and lend out is exactly what the banking business is at its core. The Robinhoods and the Chimes of the world, it’s something a little different.

JP Nicols:

They’re typically in most cases not holding those deposits, which are a liability by the way. It screws up everybody. [Gusto Accounting 101 00:52:16]. It’s not an asset. That’s a deposit from a financial institution’s perspective, and so then the question for the fintech, and this I think will lead us into our fintech discussion before we close today, is then the trick was how do we monetize that?

JP Nicols:

And so is that better access? Is it adding benefits or bells and whistles on top of that, or the financial planning and so on? We’ll do a lightning round here before we close, and Ron, you had the floor last, I’ll give it to you next. What’s your prediction for, what does fintech look like 12 months from now?

Ron Shevlin:

Okay. I’ll try to be really quick here, to appease Jim, so I don’t get any more trouble with him. Look, we’ve got to really look at fintech not from this single umbrella term, but at the least split it between the B2C focused and the B2B focused. Those fintech that see the financial institutions as their customers and partners, and those that go directly to consumers.

Ron Shevlin:

On the B2C, I may be wrong, but I’m going to tell you I’m bearish. I’m not that bullish on their prospects in the next 12 months. You’ve got Betterment looking to get into banking, you had Robinhood trying to get into banking, and you have to do that over a certain period of time, because you hit limits in your growth. This is a bad time to try to be growing on the retail side.

Ron Shevlin:

On the other side though, I think those that are focused more on a B2B strategy have a lot more legs and I think are going to really emerge as vendors, and not just the fintech, but the big tech. I think you’re going to see Amazon and Google emerge as real fintech vendors, not as bank or competitors to banks, but as vendors.

JP Nicols:

Penny, what do you think?

Penny Crosman:

Well, I’m a little more bullish on the challenger banks. I think they have seen, like Chime and Varo Money especially, got up to seven million for users and they’re growing very quickly. They’re accelerating in their growth, and I think they are getting a reputational boost from, as you mentioned before, some of the efforts that they’re making to get stimulus advances to people, and they do have I think a better overall perception from consumers. I think that the challengers, it takes them a while to gain awareness and to get traction, but once they do, they do really well.

Penny Crosman:

I think JP brought up a really good point about profitability, because they do make a lot of their money off of interchange fees and that’s not the most profitable model. I think a lot of them do want to get into lending. We’re going to see more of them offer lines of credit and small loans. I think the alternative online lenders have been struggling, and I think it’ll be interesting to watch how they do. LendingClub had a really difficult quarter and it’s going to be challenging for some of the online lenders that do have the customers on the lower end of the spectrum, that don’t have the highest of credit scores.

Penny Crosman:

I think that’s going to be a challenge for them, but in fintech that serve businesses, again, they’re going to be affected by the economy like everybody else. Those that are small business focused I think we’ll probably see a thinning out, as small businesses continue to struggle, but then obviously we’ll see some that do make it and do well. We saw Kabbage have a tough time for a while, but they’ve now picked up again. Overall, I’m pretty bullish on the fintech market, although there will be said loss.

JP Nicols:

All right, and Jim, against Ron’s better judgment, you have the final word today.

Jim Marous:

Okay. I’ll make it quick. I think we’re going to see a mirror image between what’s happening to the banking industry, what’s happening to the fintech industry. What I mean by that is the bigger organizations are going to do well, recognition. They have a business model that’s not going to completely depend on VC funding. They small organizations that are the most focused and have the most segmentation on who they’re trying to meet both in the banking world and fintech world are going to do okay.

Jim Marous:

These midsize organizations in the banking world and in the fintech world that really are jockeying between do they have a real differentiation? Do they have a real customer base and are they relying on the right sources of income or funding? Are going to fail or they’re going to be absorbed, or they’re going to need investors. I believe the middle market in both entities shrinks tremendously, as long as there’s buyers out there, which is how much money is anybody going to have to fund anything?

Jim Marous:

I think overall we’re going to see a scaling back and a sending out in both entities, both the banking industry and the fintech industry, where we’re already seeing it. The bigger ones are still getting funding, but you don’t hear anyone else getting … The funding overall in fintech is going way down. I think the same is going to happen in the banking industry. The smallest community banks that are really responding to the communities are going to do well. The regionals and the midsize banks are going to struggle tremendously, because they’re caught in the cross-hairs. They don’t have enough money to fund digital investments. On the other hand, they don’t have a real differentiation.

JP Nicols:

It’s hard to win. It’s hard to win from the middle.

Jim Marous:

Yeah.

JP Nicols:

Well, that’s it for this week. As always, if you like the show give us a five star rating on your favorite podcast platform, and don’t forget you can listen to all of our more than 300 shows plus episodes from all of our other shows, including Breaking Banks Europe, Tech on Reg, the Finovate Podcast and more all on provoke.fm. That’s it for this week. We’ll see you again next week for more Breaking Banks.

Announcer:

You’ve been listening to Breaking Banks with host Brett King. Please be sure to join us again next Thursday at noon pacific time, 3:00 PM eastern time for more of the latest in fintech news.