Episode 18: BankTech & Fintech - What’s Going On?

Greetings, thanks for joining me. This is Eric Cook with WSI, and I am pleased that you have carved out some time in your day to join me for episode 18 of my Banker Education Series webinar show. Today's show, I'm pretty excited that my buddy and fellow recovering former Community banker Sam Kilmer over at Cornerstone Advisors is going to be joining us and chatting about bank tech, fintech. I am known to chase shiny technology objects on occasion, and during our pre-call this morning was going through slides with Sam, and there's awful lot of shiny technology objects. to chase there. So I'm pretty excited, and I know a lot of the bankers that we talk to on a regular basis can be a little bit overwhelmed with the number of, I guess, changes that are going on— acquisitions, new companies, and all the other challenges that I think are kind of hitting things. So if you are joining Banker Education Series for the first time, I don't know how you heard about us. It might have been through social media or maybe a newsletter. But if you are interested in getting updates on future shows, go ahead and click on this sign up for email reminders and get on our list. And while you're here at our Banker Education Series page, why don't you browse through and maybe check out some of the other shows that we've had with some pretty smart folks just like Sam. So we'd love for you to join us on a regular basis and kind of beef up your banking knowledge and And I, I love doing these because I get to spend 60 minutes in a room with some pretty smart folks like Sam from Cornerstone, and we're gonna do that today. So Sam, officially welcome to the show.

Glad to be here, Eric. Always good to work with you.

Yeah, so today's show is going to be recorded, so those of you that are interested in replay or maybe you want to share it within the office, We'll go ahead and we'll send out a note when the replay is available. You can also hop back over to the Banker Education Series, and the button that says register will soon turn into a magical watch the webinar recording. So just keep an eye on that. So I guess to set the stage for today, Sam and I were talking, and I just had the good fortune of being able to spend some time over in the Czech Republic with some dear friends of ours. And during the registration process, there were a number of you that had submitted questions of things that you wanted to make sure we talked about today. And there were a couple of references to Europe. And I think to set the stage, I found it rather interesting that as an American traveling in Europe, even some of the really smaller towns that we were at in the Czech Republic, when I pulled out my credit card from an American bank and went to make a transaction, they were all shocked that I didn't have the contactless payment capabilities built within my card, that I had to stick it into the machine, it had to print out a receipt, I had to scribble on it with a pen. And that seemed to be something kind of different to them just because we like to think here in the States that we're advanced. But there are some areas where we might be behind the ball. But I think others that Sam will talk about today where I think we've got a pretty robust fintech environment here in the States, and I think a lot of the challenges that community bankers have is where does this fall within the organization, who's responsible for it. And so as I, as I get ready to maybe flip the screens here, let me see, let me find Sam and we'll get you to show your presentation. I think as you're listening to this, if you're coming to it from the banker side, Finding the right person that's going to be in charge of bank tech or fintech is going to need to be different for every organization because this is certainly something that might be new. It falls outside of the realm of what you've done traditionally, maybe as a bank. And if it sits in the IT area, you know, you may be subject to old-fashioned IT requirements. If it sits in the marketing area, marketing is still perceived as an expense and not necessarily the possibility of a revenue generator, it's going to have a hard time. So I know that was one of the questions that came through is, you know, who's responsible for this. So, Dan, we see we've got your slides looking good. I don't know if you have any other thoughts about where this ultimately fits in a bank before we jump into the presentation, but that seemed to be one of the ideas that we thought might be a good little nugget to share before we jump in?

Yeah, who's in charge around here, right? That's always the question, no matter where you work at. I mean, it's that— I've worked in tech firms over the years, and I've worked in banks over the years, and it's always interesting. I think that's the right question. A lot of these fintech conversations start with the tech and with digital, and actually what we're finding is the biggest change— one of the questions that came in was about You know, what is digital transformation? And, you know, the big news here is that most of digital transformation, or usually just about any type of transformation, is that it's as much about the people and the process and the culture as it is about the technology. And I suspect that people have heard people say that kind of thing before, but I would say that when we look at some of the models, whether it's branch transformation and, you know, those kinds of things, or it's digital transformation or just transformation in general, it does come down to who's in charge. I would say that we're not seeing a single answer to that question. It's not like there's some magic bullet and all of a sudden you name a Chief Experience Officer and, whoa, you know, man up or man down, it's all fixed, right? So what I tend to find is that what we're seeing happen organizationally though is lining up revenue With the delivery channel. So that's where it's really been. If you look at banks right now, and we'll kind of get into some of the specifics on this, there's still very much a traditional financial P&L reporting. I mean, we're, we're in the finance industry, so we— the numbers are the numbers and we respect the numbers. But one of the things that we'll talk about today is that financial accounting, as we've come to know and love it in this industry, just doesn't cut it anymore.

Yep.

Because what happens in financial accounting is you have things like marketing and IT treated as a cost center, and lending and the branches as a revenue center, and that kind of thinking will get you shut down in the future, where you have to line up digital spending with revenue, and, you know, really kind of line up your marketing spend, and marketing and sales are morphing. So that's actually one of the things that, you know, kind of where we're coming from in our experiences, Eric. And, you know, this is obviously, this is a conversation that's not really a pitch, but I share this only because I just think it's good for people to know where we're getting some of the things that we're sharing. We're not just sort of pulling this out of the— pulling this out of the cloud. We're, you know, we're in and out of hundreds of financial institutions and dozens of fintechs and investors in our fintech advisory work every year. And this is a cut— this is— there is no silver bullet. But every— I will just say this, almost everybody's struggling with it, and that is who's in charge or what group of people are in charge. And then, you know, what does it need to be in the future in terms of who's in charge and how do I get there? So yeah, lots of— it's not just chief experience officers, right? It's chief payments officers. And does the CLO now become the chief revenue officer or the chief banking officer with treasury? You know, and you just—

it—

you, you, depending upon the business model of the bank, it— you can really come at this lots of different ways. But the traditional P&L way, everybody gets that it's broken, if that makes sense.

Absolutely. So, and we kind of, we kind of skipped over the whole— because I got really excited to jump into this and I take it for granted that I know who you are, but maybe you can give your little 30-second elevator pitch of who the heck is Sam Kilmer and, uh, and what's Cornerstone. Because I'm very familiar with you guys and the Gonzo Banker and And whatnot. But, uh, give, give folks just a quick little, here I am, this is what I do, if you would, and then we'll jump into the meat.

Certainly. Yeah, so the, the short story here is, uh, that I lead our fintech advisory work at Cornerstone Advisors. And, uh, my background— Sam Kelmer, I'm a senior director— and, uh, you know, my, my 25 years of background prior to joining Cornerstone 5 years ago Was I worked for 2 different tech firms, fintech, you know, type of provider firms. One initially in system implementations, and secondly in strategy and partnerships. And in between there, so 2 different tech firms, I worked for 2 different— Eric, like you, I worked for one of the community banks, regional banks, and we did nationwide lending as well. So my responsibilities in those organizations ranged from digital banking to marketing. So experiences both on the banking side and being a consumer of tech, and on the tech side being a servicer of banks and credit unions, and consulting in terms of advising on both sides of that. So that's a little bit about me. Is that good enough? Do we have to tell any wild stories about any of our conferences over the years, or are we going to skip over that?

Next. That might be the, the Oprah after the show. People can stick around and we'll kind of shell some dirt on each other. Maybe we'll give that as a bonus option. But, but I, I'm glad that you joined me. I know when I kind of got some questions from customers, I started getting some, some thoughts about there's, there's really a lack of understanding for a lot of our clients in this area. And I just seen one of the articles that you authored at Cornerstone, and I was just like, yeah, I totally got to get Sam on. And talk about this. So we, we are definitely in good hands, folks, and, and Sam's gonna give us some good, good stuff. So let's, let's roll.

Well, let's look— yeah, let's jump right in. And what I'll try to do is I'll try to answer as many of those questions as I'm going along, because I love the fact that you asked the audience in advance, what do you want to know? And so, yeah, Eric and I put some good time in making sure that you all walk away with that value. You deserve that.

But I think that— I was gonna say, just, just before you jump in, that being said, if there is a question that you've got that maybe you didn't ask or whatnot, use the chat functionality in GoToWebinar and let us know, because we would love to make this interactive. This is a live show, unless you're listening to it on the recording, and then you can't ask a question. But toss those questions in. I'll be monitoring those while we're going through the presentation, and we definitely want to keep this conversational. We'll take some breaks as we roll along just to dive in on some detail if there's necessary. So, good point.

Yeah, I love how you said everyone's live here except for the people that are listening to it recorded. You're kind of blowing my mind there with like a Back to the Future reference. So anyway, for those of you live and also those of you in the future who are not, And let's see here. Looks like—

Well played. Well played.

Yeah, Eric, it looks like the— I don't know if it's over on my end or what, but it looks like the GoToMeeting or a webinar piece is frozen. I don't know if that's something where you can advance.

I cannot. However, Let's do this. This is one of those think on your feet, Eric. Did I mention this is a live webinar?

Yeah, you fintech people, can't you guys figure out PowerPoint?

All right, I am gonna drive. I will be your Vanna White. I don't know if I'll be able to edit that little— I'll be able to edit that little fiasco out in post-editing, but You know, that's what makes these kind of unique, and we show that there's a human behind the scenes.

So, right on.

We are on to your next slide, sir.

Speaking of mind-blowing, and it blows my mind that we're talking about recordings, and then it blows my mind that we're freezing up our techware here. I think the— when I think about what's going on in the fintech world right now, and with banks, most of the developments and most of what's really messing with us right now, is what's going on in terms of transformation, which is one of the questions that came in. And that is that essentially what is happening in the financial services market right now, this is being driven by buying behavior. Customers simply don't care whether you're in lending or sales or a branch, or you're in marketing or you're in service, they just want what they want. They've learned that from their own behaviors, and what's happening is we're going through that transformation right now, whether we want to or not in our banks. So what's happening is this mashup is going straight into a device, and so as we think about the buying experience, as soon as any of the, you know, our financial institution clients, or in fact many of you that are on the phone, as soon as you start taking them through— many of you that are from tech companies start taking them through an account opening process as a good example— as soon as you start going digital with that, what ends up happening is you start having to rethink the rest of the bank. And so that's blowing our minds. And Eric, if you kind of take us to the next visual there, what we're seeing, you know, is— and I saw this in strategic planning sessions with banks over the last 4 or 5 years. 5 years ago, when I went into a bank and said, hey guys, Quicken Loans, what do you think? Typically, the board or the management team would say, you know, never heard of them. Never seen them. Fast forward another year, four years ago, I would ask the same question and they would say, "Well, we've heard of them, but we never see them." And we would say, "Now you do realize that the whole point is not to be seen. It's not like they show up someday and open up an office next to you and they're seen. The whole point is for them to take loans and not be seen. They're a direct shop." About 2 to 3 years ago, we actually started hearing institutions say, hey, wait a second, these guys are taking market share. And then within the last year, what we're starting to see is they're one of the, depending upon your focus on mortgage and whether or not you really care about that, Rocket Mortgage with their relaunch from Quicken Loans into Rocket over a couple years ago, they're in almost every market, they're one of the major players. So they went from literally not unseen and vapor to being very seen. And it's not a perfect organization. We have folks here at Cornerstone who are analysts that work behind the scenes at Rocket. And, you know, while the sausage-making factory may not be pretty, the fact is they do a faster— you know, it's the whole brand, the process is built on fast. I think 3 or 4 years ago, many of our bank clients would say something like, I don't understand why customers go to them. Their prices aren't that great. We have a— but we're a better deal. Well, we might be a better deal, but we're not a better deal to them because customers are valuing fast more than they're valuing price. And the larger point here is that not only are they fast at what they do on the front end, masking the back end, which may not be that pretty, they have shifted their— they have shifted what they do into tech spend and into marketing spend. and away from traditional areas of spending, which is a transformation. And then the other piece of it is that the other rocket effect is that we're just expected to release products to market faster. We're expected to connect interfaces faster. We as— just the expectations upon us to be fast has gone up, and that's really the rocket effect. It's this morphing of sales, marketing, and service, and the fact that we have to do it fast, that is what's driving Undoubtedly, whether you call Rocket a fintech, Eric, or if you call Rocket a big tech, or you call them a bank, I mean, that's the whole point. You may not be able to call them any of those things, or you could call them all of those things. The categories aren't important. The effect is what's important, and how we adapt to that and overcome that. So that's really the Rocket thing. I know, Eric, you've been in digital a long time. You see this stuff.

Absolutely, and I think one of the questions that begs to be asked, and I know it came in, one of the pre-registration questions is, you know, how can an institution— and I guess it's twofold— one, how can they be on board with this if they're in an environment where they still have traditional board senior management? So let's talk about that first. Is this just— if board senior management doesn't get it, then maybe you're in IT or you're in marketing and you see this And you're screaming the sky is falling, if nobody's listening to you, you know, what can change that culture? Or can't it? Yeah, I—

it can change. I would say a couple warnings. I've heard some people say, well, we just need to get somebody that's super, you know, that's kind of the super tech board member to kind of get on the board and that'll change everything. And I've generally found that not to work. Meaning, of course, it's better to get a diverse and a representative board of directors. Don't get me wrong there. But just the idea that we're going to have, you know, we're going to have the designated tech disruptor sit on the board and that's going to change things, that hasn't worked very well. What I think is really challenging, whether it's the board or the management teams, is candidly, it's the accountability. And, you know, I think it's no mistake that accounting and accountability, 2 very sexy topics in FinTech, not really, but I will tell you that as not sexy, as unsexy as those topics are, they're really important because I don't think there's any getting away from the fact that a community banker management team and board will continue to be about the numbers. It's in our blood. And you sort of can't— you have to lean into this. You can't lean away from the numbers and say, well, we can't— this can't— this is not about the numbers anymore. We have to take some risks and go away from the numbers. Well, my argument to that would be, you need to take risks and you need to use numbers in your favor. And what that really means is, is we have to rethink our organizations. And what we found is really helpful. is to develop a set of numbers or management accounting that takes into account digital transformation. So again, rethinking how you count revenue, you know, and align costs around a channel and around investments with the revenue that comes from that, which is really not happening in the majority of community banks. So that's one aspect, is kind of rethinking how we do the numbers. And then the other piece is, and we found this to be very healthy, is as you you're doing the numbers and looking at things like costs and revenue and risks around certain aspects, that you then start to say, okay, let's get a consensus in the boardroom and among the management team and talk about where we think these things are going to change. I mean, just one provocative question, like, what percentage of accounts are we opening digitally right now, and what do we think that will be in 3 years? And what I found is that even for very traditional boards and management teams, just having that conversation and assume that there's going to be a wide degree of different opinions on that in the room. The argument is what's important. The argument is what is important.

Yeah, exactly.

Lean into the numbers, lean into the argument. I hope that helps.

Yeah, it does. And the other side of the question that's going to be addressed, because again, I've seen the slides, I got a sneak peek, is what do we do Because a lot of banks that you and I know and work with are community banks, and they're subject to the handcuffs, if you want to call it that, of the data centers. And so, you know, what's Fiserv, Jack Henry, and I think that's one of the other, you know, CSI, FIS, what are the Big 4 doing in the area of fintech? Because as much as a bank wants to do this, if their core processor is not going to play nice, that's going to significantly limit the capabilities. of getting access to customer data and transactional activity and all the other things that I think you really need to be able to have to deploy this successfully. So I don't know if we need to answer that question now, but I just wanted to plant that, that that's going to be one of the things we'll talk about, because I've seen some stuff related to the core processors, and they're starting to wake up and smell the coffee a little bit and getting invested in other platforms.

Yeah.

And if we need to dive into that into more detail after we get through all of this, we certainly can. But proactively, I just wanted to address that item because I know that's on the minds of a lot of the community bankers.

I think it's a legitimate point, and I, I, it's a, it really does deserve to be on the minds of community bankers. I think what's happened, the short version, then we'll kind of jump into some of the deals in a little bit that'll, I think, start to tell the story around, you know, what's Jack Henry, what's FIS, Fiserv doing. 'Cause you'll start to see it. I always like to say, it's kinda like in banking, when you're investigating something, you follow the money. When you're investigating whether you're transforming or not, you follow the money.

If you're—

when you're looking at core providers, or you're looking at the fintech world, follow the money, follow the deals. They tell a story. And whether it's the value of the deal, how much forward revenue are they valuing that deal at, Or it's where are they making announcements or not making announcements. And so I guess the short version, until we get into the deals, is I would say one direct answer would be we're seeing a fair number of the core providers announce their kind of open APIs approach. In some cases, it's more of an announcement than a reality at this point.

Right.

But they're making announcements around their openness, and I don't just mean claimed openness. I mean both technical openness, which has been around for a long time, but also political and economic openness, which is what's really been lacking over the years. And so they're making some announcements around that, but what I typically find is that the thing to watch out for is it tends to revolve around one or two of their key systems. So I would say one warning sign to community bankers is Take a look at what system you're on and what provider you have, and is it really the system that's getting the attention? And is it quote unquote the flagship system? Because you tend to find a lot of these open API efforts, the initial focus and time to market is around kind of the system that's getting all the attention. So that would just be one thing to take away.

Yeah.

As we kind of jump into this, Eric, I was just going to say, when you look at when you look at what bankers are reporting right now, and this gets back to the idea of fueling of fintech, you can see here that really just about half of them say that their digital banking is ready. And the thing about that is, is we believe that's pretty optimistic. There's a fair number of folks that will just tell you candidly that what they're doing in digital banking is nowhere. But I think that's the point, which is, That's as good as it gets. Look at some of these other areas.

Yeah.

You know, only a third of them report that their marketing is anywhere near where they want it to be. Branch delivery, in many cases, banks are thinking maybe I've over-branched, or I don't really have a strategy on branch, so while they may have branch networks built out, in many cases they may view that as a liability. And then 2 of the enablers of digital transformation in dealing with customers remotely, the contact center, you know, where do they— where do customers call when they actually have a problem with their mobile app? They call the contact center.

Yep.

You know, what do we need to backstop our digital work? We need cybersecurity and we need better offers when somebody's using a mobile app or a digital app. Those are analytics, and analytics right now is at the bottom of the barrel in terms of the industry's view of readiness. So we have all these conversations about AI and machine learning, and it's like, Yeah, that's good, but what about like just basic blocking and tackling analytics, like making a decent second or third offer to a customer? People are still kind of playing in the 1990s on this. I don't know what you've been seeing, but that's— this is consistent with what we've been seeing.

Yeah, and I— and when I saw this slide, I thought digital banking was a little optimistic, but I think the devil's in the details as to what somebody constitutes digital banking, because somebody could read this and go, well, we offer online banking and bill payment, Yeah, we're doing digital banking, we're good. Whereas I see digital banking as, you know, and I hate to use the omnichannel buzzword of yesteryear, but, you know, what can I do digitally with my bank? Can I pay bills and transfer money? Ho-hum, been there, done that. Can I deposit checks? Can I get PFM stuff? Can I get predictive recommendations? Can I get— You know, intelligent alerts, can I control my debit card on/off? Those are things, I think digital banking is a really wide swath that people might not really understand.

Yeah.

Unless you go back and you talk to the customer, and that's always sometimes a challenge because you may have a customer base that is content with the status quo, and you're not talking to customers that have jumped ship and gone someplace else because you're not offering what truly is a digital banking experience from more of a bank tech, fintech perspective with Rhino. Yeah, so, but if nothing else, this does show there's opportunities.

Yep, yeah, and you're absolutely right, and actually if you kind of take a look at the next view, which is where banks are actually replacing their systems at, you start to get a sense for exactly what you're saying. Most people in the banking industry right now define digital banking as what I would call transactional. Digital banking, which would be transferring money, maybe paying a bill using your phone, right, or, you know, using your desktop. Where the real challenge is, is interacting with customers and the customer experience from a sales perspective. I said earlier, what's happening is this big mashup, and so what used to be considered service being separate from marketing and sales, that's all blown up. And so what's being replaced right now?

Customer experience.

Well, I always think of core and payment systems. Everybody says there's a lot of change going on in payments. Well, yeah, there is some, but not nearly as much as some of these other areas. So we're talking about digital account opening, customer relationship management, and origination systems. Those are the, those are the movers right now at a 2 to 3x replacement rate versus, you know, core payments. That doesn't mean it's not happening, but these other things are happening at a much higher rate.

Yep.

And that's really what's happened. So that's really what's driving a lot of this fintech is this interaction with customers or end consumers and businesses to drive revenue. And so as you start to take a look at what's out there, and normally at this point people are like, okay, let's go partner. It's like, okay, well, let's— what we always say is take a look at the relationships out there. The kind of the first cut that people start to take a look at, if you take a look at the next visual there, Eric, is kind of the, okay, let's take a look at the infographic that, that shows us all the different places that we could partner out there. So many conversations that we have around, well, we need to go partner, we need to go partner. And we'll talk about that in a little bit, but I think that we just kind of find it interesting to say, how many of these logos did any of us even hear of 4 or 5 years ago? That's how much change we're talking about here. Is consumers and businesses that have some pain. The pain has been identified by entrepreneurs. The entrepreneurs are creating solutions with a logo that they're getting funding from Silicon Valley or wherever, and they're putting some things out there to get some traction, to try to get some traction with consumers and businesses directly. In many cases, as we saw with On Deck and Avant, And some of these other types of solution providers, they kind of started with consumers and they end up dealing with banks because they realize, well, you know, it's just better to start to get traction. It's better to start dealing with banks. So in the case of OnDeck, for example, they start becoming the small business lending fintech quote unquote vendor of Chase, and Chase is an investor. So you kind of end up with this. It started with disruption. But it's kind of like it started with, I'm going to take out the man, and then it was, I'm going to join the man, and then it was, I'm the man. Okay, so what's happening with a lot of these categories and startups is some of them are staying independent, some of them aren't. And as you kind of— as you start to kind of come into looking at this from the bank perspective, which is what I think is kind of interesting, if you go to the next slide. visual here to kind of help shape the story. What I think is helpful is look at it from the customer's perspective. Again, let's go back to the point about entrepreneurs looking at pain. When a banker looks at their process just for taking a customer through how they consider working with us all the way through onboarding and retention and advocacy and all the way through to how do I get awareness for the next deal, For all the talk about vendor consolidation, and there has been a lot of vendor consolidation over the— and fintech consolidation and roll-ups over the last several years, but if you take a look at this, since some of these have actually been mashups and acquisitions within even the last month, it can— there's 2 or 3 announced every month, new ones as well, so it's proliferating. I think it's always kind of interesting to look at it from the perspective of How do we have to tie all these different systems together and what are the integration points to get there? And some of these names might seem relatively new to many folks. I think it's kind of interesting to look at them, how they're categorized, because some of them start to play together in kind of new interesting ways that you may not have thought of before. So you've got a Jack Henry down there that we may have in the kind of the retention area of the historically known for as a servicing provider from a core systems perspective or FIS. And then you come over to the kind of the purchase side of things or onboarding, you start seeing people like Grow Solutions or Zenmonix, Grow recently being acquired by Q2. You have Volts being acquired by Jack Henry. You have Zenmonix getting a major investment infusion from FIS. So you have You have people throughout this chain kind of saying, how can we tie some of these things together at the same time that the banks are trying to tie these things together? So that's kind of just, you know, kind of one of the interesting ways to look at it is kind of look at it through the delivery cycle.

Yep. One question that I think is relevant here as we look at all these different entities, and some of them are newer entrants into the marketplace, is compliance risk and vendor management has been given rise since the recession, but that may have stifled innovation and fast delivery. So how do you deal with, we want to do all this new and cool stuff, but now we've built an even more robust vendor management process, and the typical fintech may not fit that mold and check all the boxes, and procedurally or policy-wise, you may not even be able to take advantage of some of these technologies?

What's a bank to do with it? Yeah, it's a great point. I mean, I think there's 2 ways that you have to deal with it. One of them is, and we find this happening all the time, where you have kind of a mid-level manager or a fairly senior executive of a bank who wants to do a partnership with a, you know, a fintech. And talk a little bit about these things as we go along, but it's like they start out the conversation wanting to be a partner, Where being a partner implies shared risk, meaning you're either investing in that company or you're taking— you're making a big bet on that company in terms of your own resources that you're applying towards it.

Yeah.

You might not normally with a, let's call it a historical vendor. The problem with that is, is if the risk appetite of the bank at the board level hasn't been restated or articulated clearly, which is more often the case, Then what ends up happening is you end up taking a startup provider that you would never even think about giving a loan to as a bank and running them through your, you know, procurement and vendor management process, and it's like a meat grinder, and it doesn't work. I mean, ultimately you end up not doing it. So I think that the thing to do upfront is to clarify that risk appetite with the board so that you're going into your strategic planning process knowing that you're going to be making some of these risks, are taking some of these calculated bets, and you actually start to, again, account for those risks. You know how much money that you're putting on the line every year, just in the same way that you might as a bank know how much money you're willing to put at risk in your loan portfolio, right?

Yeah.

Or in fraud, or any other— in any other aspect of risk. The other thing that I— that, that comes up all the time is if you're just looking at vendor risk management, it's only one of 3 elements of the vendor management or fintech or partner management puzzle of performance. The other 2 people, the other 2 aspects of that that have to be looked at are, what are you going to— what are you proposing that you're going to be getting out of it? What we would call the performance, the vendor performance management or the fintech or, you know, performance management. Even if you're building a solution yourself for some of the larger folks, banks, or we even see some midsize banks and credit unions that are getting into the occasional build of some solutions. You have to look at the performance, the cost, and the risk, all 3 levers. And if you're only looking at the risk lever and treating that basically like, well, if the number is anything greater than some small number, we're never going to do it, that's a recipe for disaster in this environment where you have all these startups and people really getting out there with some neat features for customers, like whether it's a rocket on the loan side, Or on OnDeck, or even somebody on the payment side like PayPal and Venmo, or, you know, anybody, somebody like that. So you really, you really need to articulate that risk well.

Yep, cool. I'm gonna be a hallway monitor here and just take a look. We've got about 20 minutes remaining, and I know we've got several more slides, so I will try to keep my commentary to a minimum, but I want to make sure we get through the rest of your good info.

So I'm clicking. Oh, you bet.

You're talking.

Yeah, the majority of what we have to cover in the remaining content that we put together for you is really a series of deals, and these are selective deals that we've seen, okay? So I would say look at the relationships between these providers and look at the deals that are happening. Again, these aren't all of them, so please don't send me any hate mail or phone calls that I missed a deal or I didn't talk about a certain provider or fintech or whatever. These are just sort of a state of the state, but if you kind of go to this visual here, Eric, what we've basically got to look at is the overlaps between the big banks, which I have that in red around big fin, because that's really what's happening here is between the quicken or the rocket effect and the investments in sort of digital capabilities that the Chases and Capital Ones have brought to the market, That's what's really forced this issue, when we have these fintech players and big tech players out there, and then we start seeing some interesting overlaps. So you have Insino, who is also the tip of the spear for Salesforce in the market, and then you also have, you know, some of these people like Azelle, which has really been kind of an agent for the larger banks. So that's a little bit kind of big fin. You have the Visa and the MasterCard, you know, elements out there, they're playing a role in this. And so you start to see some of these things kind of overlap. So you have Temenos out in the market, maybe with Microsoft doing some discussions around cloud. You have Encino with Salesforce, and then you have some of these other people. And so looking at those relationships is helpful, especially when you start to look at following the money, which is the next visual, because in many cases, some of these folks, it's all the same money. Okay, so you've got Chase who's invested in On Deck, and you also have Chase using On Deck. You have Salesforce investing in— Salesforce Ventures investing in some companies, and then also leading. So in many ways, while one of the questions that came in was about APIs and using the Salesforce business model, I think APIs are very interesting. and obviously important from a technological perspective, but I would also say that even Salesforce, who has, you know, some of these types of things out there, they're still investing in some of these things, including go-to-market strategies. So I would also say, as much as I like APIs, keep an eye out for who's buying who and why and how they're rolling those up together. And that really kind of gets into the deals that we have. So one of the things I'd just like to take you through very quickly is a deal watch of what's been happening in the market around a few categories: digital payments, lending, and then kind of enablement, which I've just kind of lumped together, kind of back office analytics, things of that nature. Look at these deals that have happened. This is just this year. This is just this year, Eric. I don't know, you're kind of looking back, you mentioned the article that we had on one of these, but you just kind of look at this and say, this is just in the digital category. All of the major core providers or 3 of the major, 3 of the 4 core providers did digital-related acquisitions this year, or in the case of FIS, an investment in Zenmonics. Last year, Fiserv did Architect and OBS, which are 2 digital-related deals. So they were kind of already there in some ways. Temenos just, what, 2 days ago announced the acquisition of Avoca, which is a digital Onboarding provider like Grow, a digital onboarding provider with Q2, and you had an interesting one with Kony acquiring Pivotus Ventures from Umqua Bank. And I thought the reason why this one really jumped out at me wasn't just that it involved digital engagement. That's true, but it really speaks volumes about the whole build, buy, and partner situation. You have Umqua who decided. Remember many years ago, I was talking about how you know it was always it was about the store, it was about the branch or the store. Then it became about digital. Then it was we have to control our own destiny. We're going to create our own and build our own. Now they've essentially sold that out off to Kony, who now will be their provider. So it's kind of a I think I view it as a vote of confidence for the fintech vendor community that Umqua looks at it and says, "I can work with folks like." Coney and Q2 and Fiserv and other folks like that in the market, and FIS, and I don't necessarily have to build all these things myself.

So that's what— Do you— yeah, I don't know if you got a crystal ball that has this answer, but do you think an element of the decision to unload Pivotus to Coney is getting it outside of— and I'm not going to say bank culture because I think tries to go beyond what the traditional conservative bank culture is. But, you know, even realizing in an environment like Umpqua, for this to really thrive and grow, it's better off in a different home that isn't under a bank banner, and Kony can do even more than what we could do in a bank culture. Does that— yeah, I—

well, I think maybe it may be an endorsement of Coney's culture or industry providers' cultures generally. I don't necessarily think it was about Compass culture because remember they created a separate organization that was headquartered separately, geographically separate. They created it as a separate business that wasn't inside the bank. It was a separate group of people separately located. But I just, I think it has more to do with valuation, energy, And, you know, what you can get by collaborating with lots of other people.

Yeah.

So it's very interesting to me because we saw a lot of the world heading towards builds. You probably saw that we're creating a lab. Everybody was creating a lab. Everybody has an incubator. Everybody has, you know, a group of people that are, you know, kind of crowdsourcing and hackathons, and those are all good things. But just, I thought that was an interesting, pretty good-sized bank Yep. And what they did there. So I think the other thing, as you look at the lending area, which a lot of that was digitally oriented, if you look at some of the rollups that happened in the lending side of things, you had CRIF Lending and MeridianLink mashed up. That's, you know, 2 of the digital lending heavies in the market. MeridianLink also on deposit origination, both in, In the branch as well as digitally. You had Q2, not just with Grow, but earlier than that, 6 weeks or so ago, announcing cloud lending. So the key here is you have these digital banking providers that are saying, I have to be able to show the money to the bank by showing that the— it's not just about experience and a better user experience, but it's about driving revenue and opening accounts. I have to be able to show that throughput. Moody's, very similarly, with that acquisition of REIS there, they basically brought in a capability to say, where are all the loans coming due at in CRE, so that we can basically show our lending origination clients and analysis clients exactly where the next deals are. It's kind of like it's engineering the revenue. For years, we as banks have engineered the back office and the cost. We've engineered costs, we haven't engineered our revenue. And so same with the Sageworks acquisitions by Accel KKR, we're talking about lending and the mashup of lending and analytics. Fiserv's spin-out of their lending solutions and infusion with Warburg Pincus to create a separate entity, again, to create energy around lending. And then even more recently, this mashup with CUNA Mutual Group acquiring both Mirador and Compliance Systems. So you have both the front end of loan origination and loan sales into fintech combined with one of the historic barriers of lending, which was compliance, and tying those things together, you factor in the fact that they already had advantage Edge Analytics. They're basically tying the lending analytics and compliance and fulfillment all together into a string of acquisitions. Just very interesting to kind of watch all that come together in a series of— Yeah. —that happened very quickly.

Can you just talk real briefly about what the potential future of commercial banking might look like in terms of loan origination as it relates to the growing popularity or the growing capability of artificial intelligence and automated decisioning and underwriting and, um, you know, what that's going to do, because that could, that could be perceived as an income generator, a cost saver, or both, or maybe neither. Um, that was one of the pre-registration questions.

Oh yeah. I think this is a good point to ask that. You bet. Yeah, commercial lending is Has, you know, process-wise and cost-wise been one of the areas that when we go into a bank is predictably the messiest. Now, the good news is that the revenues have typically been pretty strong, and banks that do it well may have messy operations and messy processes, but they typically have pretty strong revenues. What we're seeing in commercial lending-related engagements, and what I'm seeing in fintech-related advisor engagements, is the engineering of commercial from a revenue standpoint. You've seen that with the growth of the loan origination system providers in the marketplace. So you've got a lot of the big names that are out there, but you know, really what you're seeing, I think, going forward in the future, a lot of focus on AI and analytics to try to move things through the pipe, a lot of focus on marketing and sales, sort of the mashup between CRM and loan origination systems, It's really happening in decisions across the country. It's been one of the reasons why Salesforce has been such a horse in terms of deals, and Encino as well, kind of affiliated organizations, but not just them. It's been a string of deals with different providers. I would say when you think about the future of that, think, how do I tie together campaign management? How do I tie together other aspects of the, of the, of the business development side. The typical commercial lender in a bank right now is spending about a third of their time actually developing business. Two-thirds of their time is spent with administrative things, compliance things, other types of things that in other aspects of our business, like mortgage or consumer lending or other retail or banking, it just hasn't happened. So bringing together commercial lending and commercial treasury management, we're seeing organizations kind of bring those together so that the funding and the lending are really kind of relationship management selling, and then automating and using analytics to bring as much of that together as possible so that you, you, you kind of end up with way more revenue engineering and way more of the lender or relationship manager's time being used on actual relationship development. Yep, cool. So that's, that's kind of how we see there. If you look at the payments piece and kind of the, kind of the 2 last pieces here on the deal side, if you look at the payments deals, the thing I would draw everyone's attention to is the fact that some of these are roll-up deals like Fiserv, Elan, and Deluxe. Deluxe, first date of remittance. But if you look at a couple of these deals at the bottom, like NCR JetPay, NCR going into payments fulfillment, Capital One with Wikibuy, kind of enabling your ability to, you know, get a better deal on Amazon if you're using a Capital One card, or Square and Weebly, where essentially what Square is saying is we want our clients to not only be able to move money, but we wanna help them with their commerce. We want to help them build their websites, okay, or, you know, kind of create baselines to do that. When you look at those deals, what it basically says is that payments is headed towards full-blown commerce in the way that you or I might use a Target app or a Walmart app or an Amazon app. People are trying to mash up payments with commerce, and probably the future of fintech-related deals with banks, if you look at City National Bank's acquisition of Exactual, This is a bank that has stated in their strategic plan that they want to be the bank of the stars. They are, you know, in Hollywood and Nashville and New York City helping out entertainers. They acquire a tech firm that does payments analytics to actually figure out where residual— where royalty revenues get paid. Okay, so you've got— it lines up perfectly to their strategy. I want to do entertainment banking. I acquire a tech firm that does entertainment-related analytics and payments.

Wow.

That is absolutely the future of what we're gonna be seeing more of in tech-type deals. And on the enablement side of this, Eric, I think the one thing I would point to is the single most valuable deal that was reported in terms of revenue multiples for the year was Salesforce's acquisition of MuleSoft, Beyond Salesforce having, you know, money to spend, obviously. But the thing here is that that's just the power of integration. What MuleSoft does in terms of integration and APIs, that tells the integration story future. And I would say the other one I would point to there is IBM Red Hat, largest, one of the largest deals ever done that speaks to cloud and and open source and just sort of giving control back to people to build the types of things that they want to build. And then lastly, I would point to, you know, just kind of backstopping our increasingly digital world. Look at Thoma Bravo. They did a string of acquisitions this year, all of them related to security, cybersecurity, et cetera. So I just, you know, you're seeing an increasing interest there as well. So with that, let me just say, you know, we've got a few minutes left here. I would just say a couple of closing thoughts and then I'll just open it up, open it back up, Eric. I would just say, when you look at the whole point that we oftentimes hear around partnerships, you know, it's like Jack Nicholson, you say you want a partner, you can't handle partnerships. Be careful what you're looking for. Make sure those risk profiles that we said are our risk appetites are sorted out. If you take a look at the next visual, this one really gets down to how does a community bank leverage some of these things? I think the number one thing that you can look to do is if you look at that graphic there on the right of helping to structure technology-related, FinTech-related justifications in an analytical way, because guess what? Our CEOs of banks, our CFOs of banks, our boards of banks are analytical. They want to know that we've thought through these things. And so what I would say is let's make sure that we're not overspending on our plumbing there in the bottom left. Let's make sure that we have solid business cases there to the right. And most importantly, if you took this exercise and sort of mapped out all your tech fintech-related initiatives at your banks, and you don't have anything at all in the upper left-hand quadrant, you have to ask yourself, if you were your daughter or son, would you want to work for your bank? Would you want to work for your tech firm if you don't have anything at all in the R&D category that you're really actually taking some risk on? You know, carve out 2%, 3%, 4%, or 5% or more of certain budgets and make sure that you're actually taking some risk that you're And I think this is how commercial banks or community banks get there.

As you're—

as you, Eric, as you think about being a fintech, because I know we have— what, when we looked at the registration list before the call, right, Eric, we had probably, what, a third of the attendees were from fintech and tech-related firms.

Yep, non-bankers.

Yeah, non-bankers. You take a look at that group, I would just say, In our advisory work, we just say, just make sure that you're keeping an ongoing pulse on the market, not just what you're hearing from a few of your early investors or a few folks, but, you know, a broader view of what's happening with the industry, customer, and competitive, and what the so what is for you. And it may seem pretty straightforward, but we oftentimes find these kind of rigorous, brutal truth exercises lacking—

Yeah.

In fintech organizations, And, you know, as you sort of think about that, we've given you a couple tools to take away. We've got a couple articles, we've got a couple frameworks that you can take and kind of put into place. But at this point, why don't I just stop there and just open it back up and, you know, let's continue the conversation.

Absolutely. So we've got— let me just pre-read it here. So a comment just got posted. the initial comment of trying to figure out who's in charge, which is super critical in my humble opinion. Marketing/customer CX is the best place to start, yet these are positions that tend not to have senior seats at the table. Any thoughts on that?

I have some thoughts, but I'll let you go first. Yeah, yeah, I'll give you my quick take on it is I'm actually seeing this happen to a reorganization. So you're right, the typical CMO, typical marketing director at a bank, right, wrong, or indifferent, doesn't really have a seat at the table. What we're seeing in many of the organizations is they handle that through reorganization, meaning the former functions of sales, marketing, and service all roll up to a senior exec, and that person has a seat at the table, specifically if they have a revenue target on their back. This is important.

Yep.

If the CMO, when they sit down with her or his boss and they have a budget, if it's only, if they're a cost center, that's the red flag. The red flag is cost center versus revenue center. This person has to be chasing revenue, and candidly, what we're finding is that means that what historically used to be a CMO, that job's probably gonna change. Yeah, I would agree.

Yeah, I think having the appreciation and understanding at the top level that this digital initiative is just as, if not even more important than somebody that's in charge of your branch network, your traditional branch network. And we started beating that drum as it relates to just general web development, digital marketing, not even at the fintech spaces. You know, more people are interacting with you just on your website than they are in your physical branch offices, but yet you don't have a digital branch manager controlling the web, the message, the client service, the interaction, the analytics, the content. All of those are components that are necessary. And now you roll in this fintech experience where you're now augmenting that traditional digital web social interaction with actual transactional behavioral functionality. I think you need to get to the point where you understand and respect the digital channel first, and this is just one of the elements that needs to get rolled into that responsibility as the digital champion, whether, you know, you can call it whatever position you want, but you've got traditional and digital. I think the digital side is going to be— And I came up through the bank on the digital I did a little bit of lending, but my passion was really on the technology side, figuring out— but very few bank CEOs come up through the tech op marketing. It's mostly the lenders, and that I think is gonna have to be a little bit of a shift, or it's gonna be hard to break out of that.

Yeah, I would— and this was related to one of the questions that came in around future projects for fintech companies. I think you nailed it. I just think anything that is revenue-creating uses analytics, where the fintech provider or the, whatever you want, industry provider, whoever's supporting the bank, comes with shovel-ready, ready-made solutions and helps them implement that.

Yeah.

Only because for as much as we've thought over the years that banks might need support, many of the providers provide around helping them with their operations or their technology, they actually are further along in that than they are in things like marketing analytics or translating their strengths in detecting fraud and credit analytics over to things like building, developing out revenue. And I would say, especially on the commercial side, so many solutions, seems like everybody's coming up with a new fintech around consumer stuff, But what about commercial business and small business? That more and more of that is really needed.

Yep, absolutely. So as we come to a close, I've got a couple of sites here. Gonzo Banker, just a quick little side note, I am actually the proud owner, although it's been retired due to overuse. Many, many moons ago, I was one of the lucky recipients to receive a Gonzo Banker t-shirt because I was a community banker that liked heavy metal and mountain biking. Wiking and wakeboarding, and that was unusual. So, I have an affinity towards the Gonzo Banker name, and I got the skull and crossbones on my shirt. But talk a little bit about this, and then I'll go back to the first slide with your info so people know how they can get a copy of this presentation if they're interested.

Yeah. So, I would just say a couple different venues here. We have— we're constantly watching the new deals that are happening and developments in the landscape. We cover those at Gonzo Banker. I think we've written 4 or 5 on recent deals, but also even some situations where there are not any deals around some of the core providers. You know, 30 or 40 of our colleagues here are writing articles regularly on that. So please check, that's a free resource. Another free resource, my colleague Ron Shevlin, who some of you may be aware of, our research director, curates the Insight Vault. The News Not Noise section there is always free. We have some other subscription areas of that as well. And then just one quick, you know, we've been talking about building, buying, and partnering, who's in charge, vendor management. There's an article that my colleague Joe Ganzelli, he's a former commercial banker, a couple different banks, and I wrote for Banking Exchange just a few months back on fintech partner, build, or buy, and the link is there. Those are all available to you. I would also say If you'd like any of the information that we covered today, if you want a PDF of the whatever, feel free to email me. Eric, I know you said you'd put it up there, but it's skelmer@crnrstone.com. And of course, as you might expect, like Eric, I'm on Twitter and LinkedIn fairly regularly too, so you can ping me there as well and message me. But I— cool. Listen, Before you— let me just say this. It's always been a treat to work with you, and I'm not just saying that. This goes back years before I was at Cornerstone, and it's always great to trade notes with another Midwestern banker that, you know, kind of out there having some fun and documenting the journey.

Absolutely. Well, back at you. This delivered, and I know one of the things that you and I talked about is, How are we going to fit all this in, into 60 minutes? This could go on for a couple of hours, and I think we could very easily do that. But the cool part is that leaves us open for a potential round 2, and maybe we bring you back to the Banker Education Series in 2019 and we chat about some more stuff, because you're doing a lot of cool stuff for the banking space and helping bankers be better prepared for the future. And I think that is very important and much needed. So kudos to you and the crew over at Cornerstone.

Yeah, and I think, Eric, I think we got through all the questions that I saw, but if there are any other questions from the group that we've been coming afterwards, guys, please feel free to shoot us notes or send in more questions. We're always here to help.

Yep, sounds great. Well, that wraps the show. Thank you everybody for joining. We had an awesome group of live folks. We appreciate the questions and the interaction through the chat. Um, encourage you to hop over to poweredbywsi.com/BES for the Banker Education Series and catch a future one down the road. But again, this has been Eric Cook with WSI Digital with Sam Kilmer over at Cornerstone, and we appreciate you taking time to spend an hour of of your day with us. So have a wonderful holiday season, and here's to a really great 2019 and beyond for all of you. So take care, and we'll see you on a future show.

Bye-bye.

Thank you.