592 Breaking Banks’ Hot Takes, Live From The Alloy Labs Summit

Welcome to Breaking Banks, the number one global fintech radio show and podcast. I’m Brett King. And I’m Jason Henricks.

Every week since 2013, we explore the personalities, startups, innovators, and industry players driving disruption in financial services. From incumbents to unicorns, and from cutting-edge technology to the people using it to help create a more innovative, inclusive, and healthy financial future. I’m J.P. Nichols, and this is Breaking Banks.

This week is another very special episode. Every year, Alloy Labs hosts its annual member meeting, a three-day closed-door session with our member banks, fintech partners, and a select number of subject matter experts. No pay-to-play content, no vendor haul, no sales pitches, no panels filled with platitudes.

Everyone knows how I hate that. Just the critical conversations that bank executives need to be having. At the C-suite forum, one bank executive said they explained to their CEO that it was critical they had three members of the C-suite, a very expensive meeting, because it was the only place these deep strategy discussions take place.

Another CEO said, this is a club, not a conference. While the meeting follows the Chatham House rule, we did a special episode of Hot Takes that built on the themes of the week and responded to some of the very specific discussions with our own spiciest takes. Returning guests to the fiery table included Kia Haslip from Bank Director, Alex Johnson of Fintech Takes, and Chris Nichols, Director of Capital Markets at South State Bank and my personal go-to guru for the content he puts out daily on the South State blog.

Like what you hear? Leave a comment on LinkedIn about what you like for a chance to get a few of the limited edition hot sauces we had leftover. Best comments get three bottles till they’re gone. Have a listen.

All right. Well, welcome to the spicy. Actually, it’s been pretty spicy this whole time.

So who here has seen Hot Ones? All right. People are familiar with this one. I am obsessed.

I love hot sauce anyway. I was obsessed with that show. So during covid, what started is a little bit of a back and forth between key and Alex and I of all that.

So he and I’ve had this long going debate. This is as nerdy as it becomes. Brokered deposits and what is considered a hot deposit or not.

Right. And we scare people with the level of enthusiasm we’ve had this debate at a conference before, like bankers were fleeing from us at the happy hour as we were debating this. I wish I was joking about that.

So I thought, wouldn’t it be funny during covid if we did hot or not for deposits and we’ll have hot sauce here? What? No, I feel like we have a version of this conversation every year. And but we started with hot or not deposits and then SBB fails. And that really put like an impetus on why this conversation matters.

And then banking as a service, the proposed rule. And now this the 2025 version of this conversation. And so I can’t think of better panelists for this that have strong opinions.

And you start thinking about your questions. I’m going to start with kind of two things related to this. And I want to start with the two things we talked about yesterday around spicy was regulation.

Right. And you can have your own opinions. You have to build on each other.

Start digging into the hot sauce. Let me give us the preamble. We’re in this weird place where, you know, we have acting heads of agencies.

We’ve had the CFPB effectively, you know, kind of turned off. We’re seeing discussions of where it is. OCC and FDIC rewrite rules.

Do we like within the FDIC? We’ve seen it’s like, hey, let’s put small bank and midsize bank. Let’s shuffle all that. Does FDIC go to the Fed? Where does it sit? I at least feel better after Tim talked about the pressure that the White House is putting on the Federal Reserve, that that doesn’t really matter as much.

So, like, that’s my one thing. I feel good about what Tim said. But, you know, Alex, let’s start with you.

And for those, I think, who know, Alex skews towards the fintech side of the house. Chris obviously is a banker and he is skews towards the banking side. So I thought this was a well-rounded panel here.

But Alex, let’s start with, because what is your hot take as it comes to, you know, what does this mean with this new face of regulation? Yeah, I mean, I think for me, the thing that I keep coming back to from a regulatory perspective is just the cost of uncertainty. Right. So we thought we were signing up for deregulation.

That was sort of the idea. But deregulation only works if you actually know that it’s going to stick and you know what the rules are going to be. Right.

Kia, you and I were talking about, Kia likes to use soccer refereeing analogies for thinking about regulations. So that is football. Yeah.

Football, for those who are sophisticated. Yeah. So I think that analogy is interesting because I think where we’ve been the last four years has been this sort of very sort of not prescriptive, like no one’s really refereeing the game, but you don’t really know what the rules are and you can’t really ask.

And so you’re just sort of banging into other bodies and you’re not really sure what’s happening. I think the hope for the next four years was we will get deregulation, which I think for a lot of folks meant like we will get much clearer rules of the road. Right.

For crypto was obviously a big one that a lot of folks were looking for, for banking as a service. There was lots of concerns with the CFPB, like there was hope that we would get less regulation by blog posts, like we would get more prescriptive rules. Hopefully we’d get less of them, but they’d be more clear.

And I think the observation I’ve had about the first like four months has been we haven’t had any clarity at all. Right. Just use one specific example.

The acting director of the CFPB, they published a blog post saying that the provisions that were going into effect for the longstanding payday lending rule were going to be just not enforced and not supervised. OK, that’s deregulation in a sense, but that doesn’t really do you any good. Right.

Because if you have good lawyers, they’re going to tell you, well, that doesn’t mean that the states still can’t come after us. It doesn’t mean that the law itself or the rule hasn’t been repealed. Doesn’t mean that in four years we couldn’t have a totally different CFPB that feels differently.

We can’t take any action on this. Right. So the only actors in the space that are sort of unleashed by this form of deregulation are irresponsible actors.

I was just going to build on that. Who is acting on it? No, it’s not good. Right.

I mean, the people we don’t want innovating really, really fast are benefiting from uncertainty. Everyone else is kind of frozen. So I think from a deregulation standpoint, that’s the number one thing I’ve observed about the last four months.

Chris, I don’t know about you, but didn’t you have a take that it was going to help banks in terms of. You said it was going to be more prescriptive. Yeah, more prescriptive over time.

That was my hope going into this next administration was. And again, I don’t know if people feel similarly in the room. Like that’s sort of what I thought in November.

Right. Like markets were up. Crypto prices were up.

Like there was this idea that deregulation would just unleash a lot of economic activity and there would be more clear rules. I don’t feel that way at all right now. And I don’t think that that’s really likely to change.

I think that’s maybe one of the differences between the first Trump administration and the second is I don’t really see any like appetite for increasing clarity. Well, let’s pull on this theme for a second, because I think people interpreted deregulation in different ways. Right.

For some we all had our hopes. Right. Yeah.

Yeah. We wanted. Yeah.

I think it’s the interpreted the way they hoped it would be. Chris, like what do you think the banks hoped that meant? Well, actually, like, OK, she has an interesting thing I’m going to fill in. So to extend my painful referee analogy, sometimes I’ve seen where like one team doesn’t have enough players and so we can’t play the game.

But because enough players are there, they’ll do like a pickup game of sorts. And I’ve always been very fascinated by how players would have interacted with me if I was the referee on the field, the yelling, the disputes, the like slide tackles that essentially playing and making the referees manage the behavior. And then when the referee when there is not referees on the field, you don’t see a lot of that behavior.

And I don’t know if that’s like I’m thinking a little bit about how regulators and examiners provide guard rails for behavior, that this is like your bumper that you’re going to run up against and you’re kind of going to use that person as a signal or that role as a signal to dictate your behavior unconsciously or consciously. And I’ve been thinking a little bit about what does it mean for banks to kind of manage their own reputation risk if the regulators explicitly say they’re not going to examine for it now? What does that mean for your innovative products and services if the regulators aren’t going to serve as your barometer? You create your barometer, you decide what risk you take, and people are maybe going to make different choices around the reputation risk. Now, I know this analogy might fall apart upon like light pressure being applied, but I do think that there’s just something really interesting about how are you supposed to behave when the force that was managing some of your behavior is acting differently, not present, looking for different things.

So to get back to your question, we had hoped as a bank that we would have less vagary in our regulation. So the Biden administration, I’m going to lay out a bunch of non-political objective opinions to the extent I can, but the Biden administration was tough, right? So the good news is they gave us some guardrails. The bad news is they were very vague on their guardrails and they were harsh in their execution of those guardrails.

And so we had this real tough time trying to figure out exactly what it meant, not knowing, getting our hands slapped. And so we were scared. So crypto is a great example.

Everyone just backed off of crypto, right, in the industry. And as a result, we haven’t had any innovation, material innovation in, on the banking side in four plus years. Now, now we have this administration that is a black hole.

Like Trump sucks everything towards him and the Marco Rubios of the world just get torn up as they approach the center of that black hole. And it’s the same thing in banking that I’m not worried about the banks. There’ll be fringe banks that are going to get themselves in trouble, but very few, for the most part, it’s going to be business as usual.

The self-policing. The self-policing. Banking always has always been good about that.

But to Alex’s point, what’s going to happen is it’s going to go to the fringes. It’s going to go to the fintechs. It’s going to go to the non-banks that are going to run afoul.

It’s going to come back on us in the next administration or the next set of regulatory pendulum swings on it. And what we’re going to have is this fractured regulatory coherence where we’re not going to know what to do and we’re going to be frozen. So I think we have the worst of all worlds right now.

Actually, can I add here, I was reminded this morning I wrote an article based on a 2020 Federal Reserve research paper looking at a natural experiment in regulation and supervision when in 1983, the FHLB, which used to examine savings and loans, moved from Little Rock to Dallas. All but two examiners left. And so there were two examiners that were responsible for examining 500 institutions across like 55,000 square feet.

And so there was a natural experiment that happens. And for those institutions, most of them did not receive an examination for two years. And then in 1986, the FHLB realizes what’s happening in the Dallas district and does a supervisory blitz where they send 250 examiners in to do these exams that were long overdue.

And the Fed found from that that unsupervised institutions increased risk-taking relative to other savings and loans across the country and other commercial banks in the Dallas area. They specifically entered recently deregulatory spaces, used risky deposits, which were brokered at the time, the broker deposits. And then they also engaged in accounting gimmicks to inflate their earnings.

The lack of supervision resulted in 24 additional failures across that three-year period and cost the DIF $10 billion in 2018 money. And then one of the conclusions that the Fed made was that rules alone were not enough to manage behavior. There is something about the physical presence of an examiner that provides an accountability check.

So I am kind of like immediately tearing apart my own thesis. It’s not all, right? There’s 500 institutions, 24 failed. So maybe that’s an acceptable rate of return there.

They also looked at the fringe institutions, right? This is the fringe behavior that we don’t want to see, but there was some measurable consequences. And I think there’s some really useful parallels between that study and maybe the environment we’re seeing today. Yeah.

I mean, it sounds like fintech today a little bit, right? Sounds bad, right? Well, I guess the thing that might happen that I’d be curious to sort of watch over the next couple of years is, do we think that there will be more fintech companies coming to banks from a banking-as-a-service perspective with just a very different view on what they’re allowed to do, right? And so as a bank, you might still be thinking, well, yeah, I know they kind of have signaled that regulators are more open to this, but we really haven’t seen actual new rulemaking or clarity. So we’re not really totally sure we want to go there. But fintech companies have different incentives, and they’re going to have a different interpretation of what federal regulators are trying to signal to them and what they want to do.

And so I do think we might see a divergence in kind of the risk-taking appetites between banks and fintech companies right after, I think we’ve seen sort of a convergence of those, right? Like the last couple of years, it’s been sort of banks and fintech companies converging on a more common model for how to think about risk and compliance. I think those might diverge again over the next couple of years because of this dynamic. And to that point, I think what you will also see is these fintechs buying banks, because if you’re ever going to buy a bank, now’s the time, right, to get approval.

So you have all these fintechs that are going to be buying banks. So I think as you’ll see the industry develop, you’ll see more banks operate like fintechs because of this, and we’ll see what happens that this divergence. Well, let me actually pull on that for a second.

I think we need to segment big fintechs versus startups playing in fintech, right, because I think we’re likely to see the fintechs buying banks are likely to be the larger. Would you guys agree with that? Yeah, SoFi’s of the world are a great example. SoFi’s of the world, who I don’t think we’re going to see, people push on me, I don’t think we’re going to see Stripe, SoFi, PayPal running as fast and loose as, say, that startup that it’s ride hard or die.

That’s right. Yeah, I think that’s definitely true. I mean, I think the one sort of caveat I would add to that is there are some really small banks out there that actually aren’t that expensive.

I mean, I can’t buy them, but the first engineer at Stripe who owns a banking as a service middleware platform, Increase, he just filed a change in control paperwork with the Federal Reserve. He’s buying a bank in Washington. I think it’s $70 million in assets.

It’s pretty small. I imagine he’s going to try to inject a lot of additional capital into it. And, you know, I don’t know that that is an indicator that like he or that sort of wing of fintech are going to fly off the handle or do crazy things.

But like his understanding of risk tolerance and the way he thinks about it might be very different than even someone like a Stripe, which to your point is this massive late-stage company. Well, and we’ve seen some good presence, right? Column is an example of this. Yep.

Yep. Lead Bank is an example. I don’t think they went crazy afterwards in terms of off the rails, but I think they were also people who were mature in their understanding of the importance of compliance and risk management.

Well, and they did that during the Biden administration, right? And so like they were taking those actions and sort of learning the guardrails. And I’ve spoken to the founders of those banks or the owners of those banks. And, you know, they, when they got into it, didn’t necessarily know what running a bank was supposed to be like.

And they sort of got quickly educated on that by prudential bank regulators. But those prudential bank regulators at that time had a different set of incentives from the top about what message to send to fintech companies. You know, if you’re a bank, you have to do these things.

You have to be careful. I don’t know that if you buy a small bank now and you’re a fintech company, you’re going to get that same message from the top. Now, you’re still going to have to deal with examiners who are the same people and they’re still going to be relatively prudent in the way they think about stuff.

But the message from the top is going to be different. So there’s going to be this conflict between the people on the ground and the people they ultimately report to who are trying to send different messages to the market. I mean, these applications even being filed indicates the changing regulatory reception to these.

I think it’s really important to think about the amount of application activity we’ve seen from non-banks, both for DeNovo’s M&A and ILC’s, Industrial Loan Charter, the activity we saw in the last four years relative to the activity we’ve seen in four months. And responsible or not responsible, these I believe are more direct competitors than maybe community banks are used to seeing. I think it’s really important that SmartBiz and Oak North are both small business-focused banks.

Sterling is a small business-focused bank. This is a group of fintechs that are using bank charters and they are potentially coming after a segment of companies that we heard don’t feel well-served by their bank or have to move their bank as they grow. And they will come in with maybe an advantage from the technology side and then have the permissions of a bank charter.

Well, and to your point just real quickly, the OCC is clearly trying to encourage that. They put out a press release saying, like, we are open for business for fintech companies. The signaling is really interesting.

They were very clear about that. Nothing says that like a press release, right? That’s right. Go get the billboard next in Silicon Valley.

They were just about to do that. I mean, they were right there. And when we talk about de novos, you know, like Alex, you and I have talked about the many, many people think one thing when they hear the word de novo, and there is an entire separate industry that thinks of an entirely different example when they hear de novos, right? Like the de novos today are going to likely be tech companies.

They’re not going to be traditional investor groups. So not investor groups that are ex-bankers that work hard. Right.

Actually really hard to run and start a bank and make money. I don’t know if you’ve seen the deal premiums on some of these. Their average is 150 percent of book, 1.5 times book.

Like, are you doing all that work to sell for 1.5 times book? But on the smaller side, these banks are selling for one times book or below book, right? Yeah. We did mention that yesterday. There’s a lot of one time book deals.

If you’re in the middle of 50 million and 250 million, right? You now have an outlet that you’ve never had before to potentially sell. And that may be a competitor or what have you. But I think we’ll see some M&A activity.

And it’s hard when your president has a meme coin that he’s raising for himself to have a North Star of responsible action. Oh, you think that’s bad? And I just think it’s going to have this unintended consequence in banking that, you know, banks in this room don’t have to worry about, but banking in general has to worry about. It’s funny, I think about the cheat code I used when I was launching First Marblehead, the private student lender, and I was supposed to get us into raising deposits.

And they’re like, Jason, we need to be a bank. And I met with all the regulators. The FDIC laughed at me.

The OCC basically threw me out. OTS, thankfully, was still around, was able to buy a $25 million thrift in North Providence, Rhode Island. And they were worried, and this was the OTS, that I was going to put too many loans on the book, even though, like, we had securitization in place, could sell the whole thing.

And I started to think about the level of risk these small institutions can take on now. It really feels like that fringe, it can become the campfire that becomes a forest fire. Yes.

You also bring up another point in that we’ve gone away from regulatory charter shopping. And I think that comes back. I think the divergence between, you know, a charter, a state charter versus a OCC charter, national charter, is going to be different.

And you are going to be more cognizant. If we start talking about charters in this conversation, like, we have truly lost. We’re just warming up.

Yeah. So, Chris, I know you can’t speak for South State, but as you think as a banker and you talk to a lot of other bankers, is this beginning to get into, like, how they’re thinking about the risk profile of the system? Or is it still concentrated on your book? I think it’s still concentrated on the book. I mean, I think on the fringe, you have to say, you know, what is possible? What are the initiatives I may dust off in the past that I couldn’t get traction on that maybe this is the environment to do it? But I think, for the most part, it’s, you know, business as usual and being conservative and the trend towards more innovation and, you know, more responsible expansion is still front and center for most banks.

Well, let’s use that as a shift, as we talk about business as usual, because, you know, today the economic data began to come out. We have jobs on Friday. This will be old news by the time this airs.

But we’re still going to be looking at, you know, what Q2 looks like, as our head economist, Tim Mahaty, said. We’re really not going to know until August, right, when all the data is digested. But we’re in a period of economic uncertainty, right? And, Chris, something you said… Understatement.

Understatement, right? But there’s something that you and Tim said to me, like, within 24 hours of each other, Chris, that really stuck, which is, if you look at the uncertainty, right, it’s like tariffs are on, tariffs are going up. China responds. Tariffs are on hold.

Hey, they’re not on hold. We’re going to renegotiate. We’re going to renegotiate with the penguins.

Anyone’s going to, you know, renegotiate all of it. But the point you and Tim both made, unlike 2008 and COVID, where it was an external event where you could point to and say, this started the contagion, and worldwide we’re united around how do we, you know, tamper the mess, this isn’t a black swan event. This is like a whole flock of black swans that are flying in from different directions and, frankly, are self-inflicted.

How do you begin to digest that? Because the standard, like, I like to harp on, like, what is the bank response to uncertainty or the face of recession, which is flight to quality on your loans, tighten the loan book, cut expenses, work out early and often. Is that going to potentially, like, it feels like that’s the worst thing you can do in another three and a half years of uncertainty. Yeah, no idea what’s going to happen.

But put this in perspective. Liz Truss, Prime Minister, UK, September 24, cuts the budget 50 billion, proposes to cut the budget 50 billion. British pound drops off 5%, uproar, she gets thrown out of office in 45 days, right? This administration decides to, you know, start a trade war globally with every country, including ourselves and Marshall Islands and penguins across the board while trying to extract a trillion dollars out of our budget in cost cutting through doge while having an immigration policy.

So complete chaos. I don’t know how to forecast it. And, you know, we talk a lot about economic models and trying to forecast where bank earnings are going.

It’s really out the window. What you really need is a psychologist to try to figure out what one man is trying to do, rational or irrational, and then work backwards from there. But I don’t know how to forecast it.

And right now we’re looking at NAICS codes and industry level information to try to figure out, is this business helped or hurt? And it’s very, very business specific. So it’s hard to figure out a probability default and a loss given default on your credit, let alone earnings and let alone, you know, where to put resources. Yeah, I’m very curious.

I realize you can’t tell all of the editorial room at Bank Director. It has to be really interesting right now. Like, I’m wondering, like, what is Emily thinking about writing about as she thinks about her director series and what they’re thinking? Yeah, I mean, I do.

I can understand that flight to quality feels like a wholly insufficient response to this much external uncertainty. But I do think that there’s got to be a focus on really, really high fundamentals. You mentioned the pandemic as something that kind of wasn’t anticipated in a way that we actually do have.

We’ve had, I know it doesn’t help, but we’ve had four months of kind of some of this information. I know that that time doesn’t seem like it’s helping us make decisions. But I do think about, you know, where were we five years ago? Like, you know, late April 2020, where were we five years ago? What do you wish you had then to help you manage your pandemic response that you now have now, that’s in your control now, that you survived the pandemic now? What do you wish you had when interest rates went from zero to 5% in 18 months that would have helped you then that you can incorporate now? What do you wish you had in, again, April 2023, when SVB fails and First Republic is two weeks away from failure, that you have now? And again, it just doesn’t seem like enough, but you have these things.

The other thing to pay attention to is the series of dates I just said. I started reporting in 2011, and interest rates were 0% then and did not increase until 2018. I didn’t realize that at the time, those might have been the halcyon days of banking, the last calm period of time, the times where we were worried the most about the Greek austerity crisis, and it was enough to derail quantitative tightening and easing.

We don’t live in that world anymore. We can’t long for those days. We live in a world where about every 18 months, there’s probably just something new coming.

It’s going to be really difficult to predict. What do you wish you had now that you think will be useful in the future? And if that’s, you know, strength, you know, if that’s data, then do data. If it’s, you know, sorry, drink.

If it’s your CECL allowance and your Q factors and your models, then do that. And at Bank Director, we’re really focused on governance. We are really focused on education.

These are the only things you can really control right now. And that, you know, the credit quality, giving yourself all the flexibility, all the liquidity, everything you might need to be on offense. Do you need to be retaining capital right now? Like, you just don’t really know what the future holds.

So what would you want to have given what you’ve had in the past? One answer to your question that you alluded to is technology. With the unheralded part of technology is it gives you options. So if you’re March or April of 2020, and you’re facing the pandemic, to be able to spin up a online PPP platform or a deposit taking platform was huge.

And if you’re having data and we can better figure out in real time what’s happening with your customers now, you know, if you have embedded finance and you have a connection to your customer’s ERP system where you can see in real time, that’s a huge game changer that you have an advantage you have over other banks. Because right now I think it’s a race between when you get the stated, the audited financials of your customers and when they go bankrupt, should this continue? And I think it’s a race against time, because I think many customers are just going to give us the keys to the business of the project before we get the financials. And that’s going to be a crime.

The answer to that question is getting embedded information from your customers directly to your credit folks. So they can see what’s happening with revenue, what’s happening with inventory, what’s happening with, you know, AR and AP. I think that’s so important when we think specifically with the pandemic, the drilling down between borrowers and understanding the like really important differences, even in your commercial real estate book.

And I and, you know, we, I’m not sure we’re going to get the PPP of tariffs, right? I’m not sure we’re going to get this TDR suspension of tariffs. Who would give that to us? It’s a coin. But I thought what was really important back in the pandemic was that borrower identification, very clear workouts.

And so, you know, I’ve been thinking about today with tariffs, like, where do your customers get their money from? I was at Acquire or Be Acquired when the grant fundings announcements came out. So that was in late January. Have you identified your borrowers who received grants that might be eliminated? Are you starting to work out with them what that might mean for their financials and how fast they’ll be running out of money? You know, Vanderbilt has been announcing like millions in cuts because of the funding.

And so who is, you know, is hopefully they’re working out with their borrower, what that’s going to look like from, you know, the Vanderbilt as a borrower perspective and then what the bank can kind of expect from that financial relationship. One of the points that was made yesterday that I thought was really good is the closer your business customer is to the consumer, the quicker they’re going to feel it. But then it slowly marches back.

And, Chris, I want to highlight one point I was just thinking of. Remember when we did the PPP debrief as an alliance? It was like circa July 2021, which I’m like, it seems forever ago. I’m like, that was only four years ago, not even four years ago.

It’s lifetimes ago. But you had made the point that like I keep like harping on and writing on is our ROI analysis underestimates the value of flexibility. And I think that’s the point Yeah, exactly.

To be able to pivot and try to figure out like how can you use existing technology for other purposes was a game changer in PPP. And it’s a game changer right now to, to again, get the data that we need and the intel we need on our particular industries, because it’s warehousing, it’s transportation, it’s retailing, it’s restaurants that are all now struggling. And I don’t think we have a full understanding of what that actually means.

But as I go into retailers, whether it’s Target, Walmart, you know, or the mom and pop on the corner, their shelves are getting more bare by the day that affects sales, that affects cash flow, that affects the ability to pay back loans that affects deposits. And, you know, we, the more, the more integrated we are, the better we are. Alex, you love to write about cashflow underwriting.

Yeah, passion. I’m just gonna, you know, tee you up here, wind you up, give you. So how do you think about cashflow underwriting is really good when it’s stable cash flow? And how do we think about cashflow underwriting where I was talking to a bank last week, was lamenting, they were talking to one of their borrowers.

She has a series of high-end boutiques, had just placed orders for Christmas. So it was cash poor tariffs hit. Her inventory is stuck in a port.

Can’t she’s like, how do I pay to get the inventory that I’m not sure I can sell at the price? I’ll need to sell it to recoup the tariff. But now I’m like, I’m between the rock and the hard place. And the bank’s thinking through that, even a fintech, like, how do you think through a world where your cashflow is now, you know, like a curve? Yeah.

No, I mean, I think kind of building on what Chris and Keya were saying, the challenge is you can do a lot of work to be prepared, right? But you’re not playing tennis against a wall. You’re playing against someone else on the other side. And the someone else is the small business or the consumer who’s facing these same exact challenges and uncertainty, and you don’t know how they’re going to react to uncertainty.

And so you have to game out all of the scenarios. Right. And so to build on your point about cash flow, I think one of the benefits kind of to Chris’s point about technology and some of the tools that we have access today is we now have much more kind of granular real-time access to data on what’s actually happening on the ground.

Right. And so it’s less reliant on models. It’s less reliant on historical assumptions.

And, you know, Keya and Chris and I were talking about this, I think, yesterday, but it’s like, you know, your training as a banker used to be, oh, maybe you run into one crisis over the course of your career. That would sort of shape how you think about it. Right.

And then that would be sort of not great training for the next set of bankers that would follow you because then they’d have to face a different crisis. Now we face a crisis every 18 months. Right.

And so having access to 18 months now, it’s going to be like every, what, three weeks? Just setting expectations. Three days. Yeah.

I mean, just get ready. It’s going to change a lot. So like that constant increasing pace of sort of change, I think, is going to have a necessary sort of investment that you have to make in having access to on-the-ground truth and having that data flow into systems that you use to make decisions.

Because if you’re basing things on, we were talking earlier today about like banking based on vibes or feel, like that’s just not going to work. It used to because we had these historical models that were pretty stable. I don’t think we have that anymore.

There’s the other side of the coin that it’s never been a better time to be a banker, right? Like, if your customers don’t need you now, they’re never going to need you. So they’re going to their accountants, they’re going to the lawyers, they should be going to their banker. And that’s the question that if they’re not, or if you want to increase that, what do we need to do to be that trusted advisor that we always say, we’re all about service, we’re all about the relationship.

Well, this is the time to prove it and giving thought leadership in terms of how to deal with tariffs, how to get them into the Canadian-Mexican trade agreement certified. Things like that are really, really helpful, whether increase their lines of credit. These are all good conversations to have to think about banking more than your small business or your middle-sized business customers thinking about banking.

Chris, you already gave a great answer to it. Where’s the opportunity, Kia and Alex, that you see? And Chris, if you see other opportunities, it’s not all bad, where are the opportunities here? So I think it’s really interesting what Lindsay was saying yesterday. She actually does want her personal banker to be a little bit more of a financial advisor.

Can I give a quick context? We did a from the stage interview yesterday of a small business owner, actually. She owns multiple small businesses, Madeleine and our team. Did a great customer review of like, what are you looking for from your bank? Back to you.

Yeah, so that is an opportunity. I actually also asked her like, so do tariffs, like tariffs plus steel, right? And she was explaining the cyclicality of her industry and that she may have opportunities, you know, it sounds like to acquire and grow right now. And so I do think to just not, you know, to be very, very curious about different, how different industries and different borrowers are going to be impacting tariffs.

Another opportunity I see, in addition to Dara, who yesterday advised that if you do want to pursue innovative products and services, the permission structure is more permissive now, obviously, as we’ve seen from the 2020 study, you will have to figure out the guardrails. And, you know, you want to make sure you’re not a fringe institution. But the third is that I do think that community bankers are a very beloved interest group in this country.

And if you are not in having conversations with your elected representatives at all levels of government, and with your regulators, I think now is the time to really share with them how the, what’s happening in the macroeconomic environment is impacting your communities. You know, this is something we’ve seen from the appointment of Governor Bowman, there was some attribution that the community bank groups were very instrumental in appointing her to that role. And this is something we’ve also seen in our surveys at bank director that bankers are just wondering what is their role in their economy, in their community, and in their society, and that might involve maybe greater participation in political spheres as well.

Or you could just buy more meme coin. Oh, you could buy, yeah, top ten holder of the meme coin. Right to the top.

Yeah, exactly. No, I mean, I think just to add to that, and this, I mean, Chris already mentioned, but I think you have to step outside of your existing products and services, right, and think more holistically about how you can most help customers because a lot of their problems are going to be financial services-adjacent problems, but they won’t necessarily be financial problems that are directly addressed by your product. And so you’ll have to get a little creative about how do you help them with those financial-adjacent problems that are going to affect their cash flow, but aren’t directly relating to the product that you offer them.

And that could be service, that could be… Supply chain help. Yeah, supply chain. Like, I was just looking at a fintech company that’s looking at basically modernizing the process for getting rebates if you import goods that you then export or destroy, right, because you actually get rebates for that based on tariffs.

And the process to go through doing that is really cumbersome. You have to fill out all this paperwork, you have to provide all this evidence. You can make that dramatically more efficient, and there’s a fintech company out there that’s working on that.

Those are the types of, like, point solutions that you can bring to the table for your customers that can, on the margins, make a big difference when there’s lots of uncertainty. Well, I think one of the biggest opportunities is uncertainty causes us to change, right? Like, stasis, it’s easy to be lazy, to sit on the couch, eat the, you know, wings with sauce and stay there. Things have to change right now, both for the institutions and for the customers.

And I think this is a warning sign. I mean, I have very 2007 vibes when we first started to get the first cracking in the financial crisis, and it wasn’t until, you know, mid-2008 where we really had it. You know, we had the dislocations in the treasury market and a lot of the markets right after April 2nd on that Tuesday, and it feels similar.

And we’re not on the verge. We don’t have the bubbles that we did back then, but these are the warning signs. And whether everything’s going to turn out okay, I don’t know, but at least we have to play a little more defense to Kia’s point.

Exactly, Kia’s point. What would you wish you had done differently, looking back then? And when you look at bank failures, you know, it’s always the loans originated in the last two years, in the previous two years before the financial crisis that really go bad first. And it’s your construction lending and it’s your riskier, you know, land development deals, speculative deals.

And that’s, you know, maybe the time to cut back on that a little bit and be a little more careful and work on your pricing. So one of the things we talked about extensively, two things that came up thematically a lot that were not things I expected. Number one, like way more than I expected, incentives, right? And it feels like incentives are backwards looking in terms of our analysis of the behavior.

Are you talking about compensation or are you talking about something else? Compensation. Okay. Well, and I think- Banker compensation.

Banker compensation. Yeah. Right.

And I think it extends though to incentives and alignment of incentives with fintech partners and others, but incentives tend to be backwards looking on the, here’s what the behaviors that in the past, how do I actually repeat those behaviors? And Chris, back to your point about flexibility is, do we have misaligned incentives right now? Let’s start with the bankers. Completely. So, you know, a lot of banks out there compensate for loan growth or new loans on their books or net interest margin of that, all of which net interest margin is classic in that it’s not only not correlated with earnings, it’s actually negative correlated with earnings.

If you go after a large net interest margin, you normally take on more credit risks. So not having the data and incenting for the wrong metrics presents more risk on your balance sheet than you know. And the lender is high-fiving everyone because they put on a nice $10 million deal.

They got the compensation for it. Meanwhile, your bank is stuck with that for five, 10 years, and now you have to live with it. And now’s the time when you do not want that higher risk loan on your books.

And yet your incentive structure is really archaic. And so moving to a risk-adjusted return metric, taking into account your cost, your risk, et cetera, really makes a difference in environments like this. The more volatility, the more it matters.

Alex, you love to harp on this. The easy part is giving out the money. The hard part’s the getting repaid portion of this.

How are the incentives misaligned right now if we think about the fintech ecosystem? Yeah, I mean, on the fintech side, part of the challenge is that there’s a whole infrastructure that exists to remove risk from fintech companies, right? And so you guys probably have all looked a lot at private credit and the growth of private credit. It’s exploded over the last 10 years. It’s actually been surprisingly durable even as rates have gone up, which is kind of strange and unusual.

And it just sort of tells you how much extra capital is out there looking for return. The thing that used to be challenging about dealing with private credit was there was no infrastructure to connect private credit firms to small fintech companies, right? And so if you were a fintech lender and you wanted to start making loans, you know, fintech lenders, they always are like, oh, we have a better way of underwriting this. It’s like, okay, I don’t think you actually do, but they all think that they do.

So they come up with this brilliant plan. But the problem was, historically, you had to show performance over a long period of time to get access to capital markets that were even close to the levels that you can get for bank funding, right? So you would first lend off of your equity. And then once you showed that you were getting a good return, then you could get a small warehouse line at a terrible price.

And then you had to show performance on that. And then you could get a slightly better price. And over time, you could grow into good funding, which is, if you look at someone like a firm who’s been around for a while, they have sort of gotten to the end state there, right? Now, the infrastructure exists to allow these big private credit firms to do asset-based financing for very, very small fintech companies.

So now as a fintech lender, you don’t have to loan off of your equity. You just say, hey, we have this great model. We can, you know, we’re so much smarter than banks.

We can outperform them from a lending perspective. And they have access to capital that they’ve never had access to before. This is a very new development.

And we don’t really know what the long tail implications of that will be. But to your point about incentives, I’m sure everyone in the room can relate to this. It’s really hard to see someone else winning the deal that you’re losing and go, yeah, but we have great risk management and then walk away all sad.

Like, that doesn’t work very well. It doesn’t make anyone feel very good. So it’s really hard to resist that temptation.

But I would just encourage folks to always remember, like, there are irrational actors in the space that are being enabled by infrastructure that doesn’t really make sense and probably isn’t durable. But in the moment, it’s not going to feel like that when you’re losing deals, right? So the balance there is tricky. On the positive side, one other aspect that Alex touched on is we now have an opportunity as bankers to look at all these private credit lines that are out there and see how they perform under a stressed environment.

So buy now, pay later is the classic example. We’re going to get some real data. We’re going to finally get some real data.

And you’re finally going to know, like, is it risky or was it not risky? Here, are you guys looking into that data? Not on buy now, pay later. I, you know, just going back to thinking about, like, earnings, credit risk, we focus so much on credit risk. And then, you know, me as the balance sheet nerd, now writing about technology, I just like to think that, one, you know, it is really hard to watch other people win deals and you to say, like, very clearly, like, that wasn’t in our risk appetite.

That’s not how we’re going to win. And, you know, I think there’s, like, some sort of, like, pep talking of, like, let them, right? Like, do not, like, right now, you can’t really control almost anything else. Really, really focus on your risk appetite, how you’ll win your strategy and how you’ll get there.

From the balance sheet side, we’ve kind of joked about it. I have, you know, especially around the interest rate risk. I often heard banks say, well, we don’t, we’re, like, a very conservative bank.

And what that has actually looked like at some institutions is they did not take credit risk, but they were sure taking a lot of interest rate risk. We’re seeing that coming up in the banks right now who are sellers, because they cannot earn anymore because of their balance sheet is just so hamstrung by interest rate losses and fair value losses. So just make sure you’re managing all of the risk.

Like, a lot of banks were like, we have a lot of core deposits, and they’re very sticky. And then SBB happened, and we found exactly how many of your deposits were core and sticky. And thinking about how these, like, stories you’re telling yourself about, and are you testing your narratives to make sure that’s correct? Or are you kind of just coasting on what was true 18 months ago and not really keeping up with what’s happening today? But yeah, if you don’t do buy now, pay later, don’t worry about buy now, pay later, and let them do buy now, pay later, and then, you know, gather the data.

Yeah. So interest rate risk is a great point in that most banks have a single scenario along with the Fed or the dot plots or, you know, the CNBC Next Economist that was on a couple minutes ago. And it’s, you know, two rate cuts, three rate cuts, whatever it is.

But the reality is that we’re a lot more volatile. So along with credit volatility, we have interest rate volatility. And we’ve already seen, as Kia alluded to, that that really matters to your bank performance really matters to the value of your franchise.

And so if you’re making a lot of, you know, fixed rate loans out there, for example, and you have a chance of, you know, 20%, 30% probability that you’re going to have rates 200, 300 basis points higher because of inflation, well, you have to take that into account and say, you know, is this really where I really want to be? And can I change now to affect the future? Unrealized losses increased at the end of last year, right? So the don’t, I mean, I assume everyone’s really smart here. Don’t fool yourself about the short term cuts and miss the long term movements, right? This is after SVB. So we’ve learned a lesson and then seemingly forgot about it, you know, six months later, and now we’re looking at the same mistake.

And when we think about, you know, what’s going to happen with not only credit risk, interest rate risk, but now liquidity risk, you know, that we’re just one credit event away from a public company having another run in the bank, all SVB, SVB was a crisis of liquidity. It could also be a crisis of credit, which is much more common. And so as a bank, you know, you got to kind of prepare yourself.

And I’m not sure that we have a solution to what happened to first Republican, first Silicon Valley bank in that we just don’t have that liquidity. And that’s the kind of the, the burning question about how do you manage that? Right. All right.

Not on script, but you have hit my hot button on the SVB. Did we say the magic word? The magic words to unleash Jason going to need more hot sauce. So we talk about SVB and it certainly was interest rate risk.

Like that was wait, interest rates can go up back to the amnesia point. Chris is like, we’re all, except for Kia old enough to remember interest rates that are high enough. Right.

Like I remember my first mortgage, right. And I got a deal and it was like 8.6, right. Like interest rates go up the management of SVB new interest rates could go up just because they hadn’t since like Kia, when you got in, you said interest rates were 2011, 2011 is zero.

But like when you got in the business, what were interest rates, Chris? Like, Oh, they’re high actually. So, you know, I was in the business when they were, you know, 20%. Right.

Like we know they can change. So yes, that was a mistake, but I think what we gloss over and to me, this is the self-inflicted wound that we don’t talk about. Cause we go to the fundamentals and the data, they drop their PowerPoint that they’re about to take this massive write down on the unrealized losses with a plan to go raise capital with no plan, actual capital in place.

I think there were 50% committed. Yeah. Yeah.

That’s right. 50% committed. None of it closed.

None of it closed. Right. None of it closed.

They drop this. And they’re trying to do a right thing to disclose it. Disclose it, but they drop it at five o’clock Pacific.

And then all of their social media goes quiet. There’s no response. And if you think about who their target customer is, right? Like I was in Slack and WhatsApp channels with other VCs and entrepreneurs, right.

Tightly connected that are communicating this thing. Like to me, if anything, the lesson of SVB is, well, don’t do stupid things with your balance sheet and duration risk. But the other thing is you need a decent PR and fundraising strategy.

Like we gloss over management. Don’t raise capital when you need it, raise it when you don’t need it. Yes.

Right. Alex, what were you hearing chatter in some of your groups? Yeah. This was like February, I think.

And I was just getting messages from people and they’re like, so do you know what’s up with SVB? And I was like, ah, no, not really. And they’re like, okay, cool. Ask somebody else.

But you could totally tell that there was this sort of background conversation that was happening. And you have to imagine the executives at SVB knew that was happening too. And so that’s what makes this like lack of communication strategy so surprising is, oh, we can just go tell the market this and nothing bad will happen.

They know who their customers are. They know how well networked they are. They all talk in the same groups.

That was not like new information for SVB. So it made the lack of a communication strategy or crisis management strategy that much more confusing. Well, thinking about connecting, not to like relitigate SVB, but thinking about the role that trust and reputation played in the changing SVB story.

SVB’s customers loved them. Loved them. So I mean, I think that that was like a true thing until it was a useful lie.

But it was a lie that maybe obscured what was likely to happen to that company that the trust, they loved the bank. They trusted the bank until they absolutely were like, no, I have to leave. And like even yesterday, Lindsay says multiple times she really wants Chase to keep her business, but she didn’t close her account.

She has a backup account at Chase. Well, the flip side is the first banker that took a chance on her. She left that.

She left that, right? This trust only goes so far, right? Right. And all of your customers are like rational actors, right? And maybe VCs are like hyper rational or irrational actors. But like in general, like they’re going to do what’s in their own best interest.

And, you know, the lack of sort of awareness or planning for that is where you get into trouble. So I would argue VCs are first and foremost, self-interested actors. Absolutely.

That masquerade as. Absolutely. Rational actors, right? They will work that back.

But I think this is part of the wrong lesson. This is what gets me fired up is the lesson we take from SVB is, oh, these value added services and the things they do in the specialization, bad, bad. You shouldn’t do those things, right? That was.

You don’t want to be like essentially a monoline lender who has no viable, like lending to them. So then you just call everything. They were.

Wine loans. Yeah. Having been a customer since 1998, right.

Where I raised my first round of ventures when we started, right. I did not want to leave SVB when it was clear it was going to fail. Right.

We had our venture funds there. That was the story I was hearing with everyone in our VC and this was mainly an entrepreneur. I want to tie that back to the self-interest of the VCs.

No one wanted to leave. There was an absence of any leadership from SVB to Chris, your point, the crisis management to give us a reason to stay and say it was going to be okay. Right.

So the first they shot themselves in the left foot, then they shot themselves in the right foot. The customers are trying to figure out what the heck is up and people didn’t want to leave. And then what sparked a lot of it is the first time of that is like, I was like, yep, going to fail.

It is going to fail. Was a company had raised a series C $119 million put into the Slack channel. They were taking their deposits.

Their VCs told them to take the money out, right. That became public. And I’m like, there is no way with that domino tipping.

This whole thing does not just fall down. That was the back channel. Like everyone was talking about.

I’m not believing my money in there. I’m taking it out. And, you know, I’ll, I’ll back Silicon Valley bank up in a lot of, in a lot of ways.

I mean, what happened to them in first public to two banks with probably the most relevance of any bank we’ve ever seen in the history of banking, right. Their customers, we all said, love them yet. What happened to them could happen to anyone, any, at least any public bank and the short sellers, the role that they played wasn’t really known at the time or before that.

I mean, we knew it, but not to the extent that we’ve seen with Silicon Valley bank and first Republic. And it’s, it’s a problem going forward, but I think like we’re smarter. And I think there’s a lot of lessons that we probably haven’t fully internalized yet.

A lot of banks told themselves, I feel like a lot of banks told themselves, I’m not SVB in first Republic. And therefore it can’t happen to me without saying like, you know, you guys are talking about this and it wouldn’t solve all the problems, but I’m just like, put the reciprocal coverage on. Like that one was crazy.

Like the ratio of going back to hot deposits. You’re like, yeah. So, but again, it’s, it’s that look, it’s like to, to not manage your liquidity risk because your customers love you.

It’s kind of wild. But if back to incentives, if you look at the CEO and CFO incentives, the reciprocals go ahead, Chris. No, you’re right.

We had no incentive to go to a reciprocal program. It cost us more disincentive, but now we face a potential crisis of liquidity coming up, you know, whenever it may occur, if it does occur, but it’s the same thing. Like we should be battening down the hatches and playing more defense and going to more, at least preparing for more reciprocal deposits because the fallback, even though it didn’t Silicon Valley didn’t affect you and you didn’t have any deposit runoff.

I’m here to tell you that at least more money went to the large, you know, globally insignificant banks. And as a result, their cost of funds is lower. Our cost of funds are up as community banks.

And now I got to combat that at the next crisis. All right. So last question, because Chris, you’ve talked, you know, over the last couple of days about playing offense.

You just talked about defense. I think we miss, you don’t play all offense. Kia, I’m going to steal your football analogy, right? Like, unless you’re the Chicago bears, you don’t just play defense as Lindsay made the point.

You don’t win games that way. You need offense. You have to score points in show.

Alex, to start with you, how do you think about in this environment? Where do you think need to think defensively? Where do you need to think offensively to play a well-balanced game? Yeah. I mean, I think going off of Kia’s point about other areas of your balance sheet, like there are just areas where you would just want to be really strong defensively, right? Because it just gives you more optionality. And so I think, you know, interest rate risk, liquidity risk, all the things that you sort of wished you’d pressure tested before these previous crises.

Those are all areas where you can really shore up your defenses and be strong. Going to the point, though, about credit risk, I think it was Kurt this morning who said that, like, one of the benefits of taking risk is that you are showing customers that you trust them. And so I would say going on offense is about understanding which customers you want to win with and how much risk you’re willing to take on to win with them, right? Because you have to give them a reason to want to work with you or to choose you.

And that doesn’t just require, oh, yeah, you know, we found this amazing customer who doesn’t have any risk. Those customers are gone. Chase has those customers, right? Like you want customers that have some type of risk, but a risk you can get comfortable with and where you can build trust by showing the customer you trust them.

To me, that’s the part where you’re playing offense. And it requires a really, really precise understanding of the customers that you want to focus on and the risks that you want to take and the fact that you understand those risks very well. Now, they still are risks.

We’re operating in a very uncertain environment. That absolutely means that it could go bad, but that’s the business we’re in, right? And so as it relates to offense, like, know very specifically who you want to take risks for. And defense.

And if you have to fall back and tighten things up, who do you, you know, take a chance with of your existing customer base and who do you jettison? I mean, that’s going to be some uncomfortable decisions. Hopefully, we don’t have to make. But I think having a pre-plan, having intent, to Alex’s point, really makes a difference.

And what we’ve learned is, you know, if you don’t think about it ahead of time and we bank everybody in the community, we’re going to get the performance of that community. And if we just allocate capital and marketing resources, sales resources, et cetera, a little differently, credit resources a little differently, we can have a higher performing bank. All right, Kia, bring us home.

I agree with everything that they said. And I think right now, there’s going to be a lot of emphasis and focus on execution and tactics and operations. And I guess what I am thinking a lot about is how do you, bankers in this room, give yourself mental curiosity, flexibility, creativity? How do you make a decision? How do you get comfortable with getting uncomfortable, right? This is almost like about a mindset shift that we all need to be getting better as the operating environment becomes more difficult.

The best teams will win, and they’ll win in all sorts of environments and games and against teams because they’re a great team and they’re constantly focusing on getting better themselves. And so I’m here to not sugarcoat the challenges in front of us, but to say, I actually believe everyone can do it, but you have to do it. And if you can get yourself there and be prepared to make these choices and lead versus being kicking and screaming because you didn’t prepare for this crisis, I think that’s going to be a world of difference of maybe who sits in this room next year or the deals that we see and the type and reasons we see when we see these partnerships.

So I’m going to leave with, I was fortunate, one of our LPs when I was a VC in the first dot bomb was the youngest partner in Susquehanna history. If you follow when sales and trading was opening up in Asia, it was that guy. Interesting character.

I’ll leave it at that. We can talk to you over lunch about it. But when the dot bomb hit and right as young VC and trying to figure out, he said the best time to be a player and to make your trades is in an upside down market.

All it takes is courage and capital. Yeah. And I think that’s the situation we’re in, right? Like, yes, we’re upside down in a lot of factors and a lot of uncertainty, but with courage and capital, we can make those things work.

All right. Thank you all for sitting through and tolerating us eating and slobbering in front of you. Good hot.

There’s that. My hot take was that beer battered fries are the best fries. Thank you so much for serving that.

Pure fries. It’s only been pure fries and I don’t know what that means. That’s it for another week of the world’s number one fintech podcast and radio show Breaking Banks.

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