Banking's Reality Check: The Real Threat Is You

[Music Playing]

Ron Shevlin (00:11)

Thanks everybody for coming out. Oh my gosh, Jim, look at this. You know what, last year, when we closed out the last year's conference with an edition of Pardon the Finterruption, there had to be what, about 30 to 40 people in the room last year? Look at this! There's got to be at least 70 or 80 this year. So, wow, this is really good. So, really excited about this.

Jim Marous (00:35)

So, it's always great to get together with you. I hope everybody doesn't think this is going to be completely a debate. It's more discussion on topics, but we don't agree on all of them. You'll see that real quickly, probably in the first topic, and you may disagree with me already, but it's really good to be able to kick off the event instead of close the event this year. It's good. We get drinks afterwards.

Ron Shevlin (00:55)

Good. You want to tell people a little bit about the Pardon the Finterruption setup?

Jim Marous (01:00):

So, if you're not familiar with Pardon the Finterruption on ESPN, two gentlemen sit down and talk about the topics of the day. They debate them at times. They bring up new items that are going on, but they're very pertinent.

Jim Marous (01:11):

And we built the script less than a week ago because we didn't know exactly what was going to be hot and what's not going to be hot. We got a couple of things we took off, but we have a time limit, which is kind of interesting.

Jim Marous (01:21):

We have four minutes per topic, and when the four minutes are up, you'll hear this (bell rings), and that kind of tells us we should shut it down and go to the next topic. We will run over at least a few times. So, Ron, you want to start?

Ron Shevlin (01:36):

No, I think you start.

Jim Marous (01:37):

Okay, there we go. So, we already disagreed. So, first topic is agentic momentum. Is it the number one threat that nobody's ready for? Ron?

Ron Shevlin (01:49)

Oh, you're going to throw it over to me right away. Okay, look, Jim, I think we got some problems in the industry here, not just about agentic, but about the whole topic of “AI”. I know my colleagues are sick and tired of hearing this from me, but we have to stop using the term AI so liberally. There are different technologies that make up the AI landscape.

Ron Shevlin (02:10):

There's machine learning, there's conversational AI, there's generative AI, and there's agentic AI. And they all have very different uses and use cases and different development paths. Specifically, to the agentic piece, Jim, I think there's a real issue in the market right now because people are equating agentic AI to getting rid of employees and reducing the staff, and I don’t think that’s the right question.

Ron Shevlin (02:36):

I'm going to put out there that the right question to be asking is this: how fast can we get at what pace, at what cost, and at what operational risk? The biggest benefit from agentic AI is not reducing employees. It's speeding things up to reducing process time to levels that you've never seen before. And I think the questions that need to be answered aren't getting answered, Jim, they're threefold.

Ron Shevlin (03:04):

Number one, what is your appetite for agent autonomy? This is not as simple as putting a human in the loop, it's much more complex than that. Number two, question is, are you going to just bolt on some agents that are coming to market today or wait for your core digital platform, LOS vendors to develop them themselves? That's a big issue because you're going to have to integrate it.

Ron Shevlin (03:29):

And number three, what agents are your customers, both retail and commercial, going to be using? If you're not on top of that, you're not going to really benefit a lot from the agents. That's actually not a true statement. You will benefit a lot from them, but it's going to be a lot more complex unless you're understanding your customer behavior.

Jim Marous (03:48):

So, how many of you have talked about AI since you've been here already? Let me see hands. Everybody. That's the problem. We're talking about it a lot, we're doing less. A lot of the applications right now (and I know Ron and I have both seen this) are in the back office. They're efficiency. They're cutting costs. They're the things that we do as a financial institution day in and day out.

Jim Marous (04:11):

The challenge is, there's not one of us that hasn't talked about the possibility of how we can improve customer experience. The problem is we're risk-averse, and most financial institutions get very queasy when they think they may give the wrong answer.

Jim Marous (04:26):

Well, as consumers, we get wrong answers to agentic solutions almost every day, and you kind of deal with it. I think we have to take a more open-minded stance on looking at how we can make the customer's experience better, how we can make banking better, how we can make our institutions better by applying AI beyond chatbots, which is not an AI solution.

Jim Marous (04:48):

I think it's also important to make sure that the different agents are able to talk to each other, to Ron's point. If you don't fix the back office to supply the outer office or the application, we're going to be in trouble.

Ron Shevlin (05:02):

Well, Jim, I totally agree with everything you said. First of all, I don't think there are agentic systems out there already that consumers are and customers are reacting to. But you're making a good point about the agent-to-agent communication, and there are some good vendors out there (I'm not giving anybody a plug) coming out with MCP, protocols, solutions, that's probably not the right term either.

Ron Shevlin (05:26):

So, that's happening and enabling. But there's a lot of process-oriented decisions and impacts, Jim, that need to be taking place, and I like to think of this as you need to pre-build before you build your agent solutions.

Jim Marous (05:40):

That's great.

Ron Shevlin (05:41):

That was good.

Jim Marous (05:44):

We can go home now. Not yet.

Ron Shevlin (05:48):

You had to know that the question of branches was going to come up. And, Jim, I liked the way you positioned this last week when we talked about this, as a question between are branches a strategic asset or an expensive liability? And I want to give you all today the single definitive answer to that question: are branches a strategic asset or an expensive liability? Yes, they are.

Ron Shevlin (06:15):

Look, here's the challenge that we've got here. The real question isn't are branches dead, dying, any of that stuff, that's not the right thing. The question is really twofold. Number one, it's an individual institution decision.

Ron Shevlin (06:28):

From your institution strategy perspective and from your growth strategy, there are two questions you need to answer. Number one, what are we selling and number two, who are we selling it to? And if you can't answer those questions, you can't answer question number three, which is how do we sell it and support it?

Ron Shevlin (06:45):

So, this is really about your institution strategy and how important is face-to-face interpersonal communication important to what you are selling and who are you selling it to? But there is a challenge here, and the reality is that you simply do not have enough resources to do both, build out a lot of branches and renovate them, and develop digital capabilities.

Ron Shevlin (07:09):

So, you've got a strategic decision to make about resource allocation. I'm not going to say branches are dead, Jim. I'm not even going to say that you shouldn't be putting your money into branches, but I'm going to say you can't put your money into both branches and the new product design and development, the new digital development that you need to be doing.

Jim Marous (07:29):

Great points. I actually agree with every one of those, but I want to expand it. It surprised us when we did surveys. We did it twice because we didn't trust our first numbers, on what percent of institutions are building out or are building brand new branches.

Jim Marous (07:46):

This year, it was 44% of institutions said they're expanding the expenses or expanding the investment in branches, which surprised me because we talked digital enough that you say, “Is it really happening that way?” What is also interesting is the application of that and why they're doing it. Most financial institutions are doing it for deposits growth or customer growth.

Jim Marous (08:09):

To Ron's point, I'm not too sure if that's the easiest way to do that, but I do think it contributes to digital growth. We've seen it in other institutions in some cases where the digital application engagement has actually risen because of a branch being built in an area.

Jim Marous (08:25):

But Ron and I are going to talk about this quite a bit today, about if you don't know your strategic narrative, what you're really out to do, it's very hard to come to a good conclusion as to what you should do. It's not just a remodel, you have to have a plan behind why you're doing it, and then apply it the right way.

Jim Marous (08:43):

I just saw a rebuild in Arizona. It was a huge branch, but they applied it very well because they needed a presence in a neighborhood that was saturated, but they took a different lane and said we need a billboard, we need other things that have to do the same thing and they want the commercial client base. And for that location, that institution and their strategic goals, they built an ROI model which we'll see how that plays out to see how it happened.

Ron Shevlin (09:09):

I actually am surprised that you're finding that a lot of financial institutions are saying that they're growing their branch support budgets, I haven't found that, but I'll give you that. And I can't believe we're actually within the bell on this one. This is pretty good. You’re doing really good here, Jim.

Jim Marous (09:24):

I know. He challenged me in a rehearsal that I couldn't get by one bell, so we'll see what happens here. So, the difference between priority and funding, this is something we also researched recently, and we found that in the strategic planning and in prioritization and trends and traditions and predictions, we found that almost every institution had a real good sense of what was important.

Jim Marous (09:50):

They also had a pretty doggone good sense of how to get to the end point and be able to execute against that importance. However, as we asked the questions further down, we found out they weren't investing priority in the same sense of what they focused on.

Jim Marous (10:05):

I think in fact, for the fourth year in a row, the number one goal was customer experience and enhancement and engagement. However, when we looked at how they're investing in data analytics and execution, that was like five or six. It was quite a bit far down, but it's been that way for a number of years.

Jim Marous (10:22):

So, how are we going to get to what we say we believe in without prioritizing the investment the same way? In addition, between the gap between priority and funding, we find another challenge is that many institutions will talk a good execution game, but the leadership really isn't behind it.

Jim Marous (10:40):

And this is something we're seeing across the industry, that those organizations that have leadership, that are willing to get out of their old mode, able to do things differently, are really going to be able to execute better against the priorities they set. And again, we mentioned before, knowing your north star, knowing where your strategic priorities really are, is the foundation upon growth. Ron?

Ron Shevlin (11:03):

Yeah, this is a really tricky area, Jim, because I think … and I would hope your research supports what I find as well, when you ask a lot of executives, and you know what, not just in banking, but across industries, and ask what are the biggest challenges in terms of execution and they'll come back and go budget. We don't have the budget.

Ron Shevlin (11:21):

And I, Jim, do not think that's the problem here. I do not think it's a budget issue. I don't think there's a problem that don't have sufficient funds from an execution perspective; I think that's more cultural and organizational.

Ron Shevlin (11:34):

Did a study that'll be coming out pretty soon. We looked at the marketing world and asked CMOs, why do priorities and budgets change during the year? And the number one reason was executive changes, challenges, and different priorities. If that's how you're running your marketing department, we've got a big challenge in terms of execution.

Ron Shevlin (11:53):

The other thing that I would put out there is, I don't think that there's enough measurement around execution. Do you really understand what, let's say, your execution velocity is? How fast are you getting from idea to deployment? And I would venture to guess you could guess at that, but don't really have hard measurements to that.

Ron Shevlin (12:13):

And so, the gap here, Jim, between the priority and the funding is, it's an execution challenge, and I think it's a budget challenge. And one of the things that I don't know that I've seen anybody actually do this but would throw out here as an idea, is that you think of this from a ring-fencing the budget.

Ron Shevlin (12:30):

Think about, okay, we're going to put some money into a program and it is untouchable. There is no reallocation of the funds, we are making the commitment to this, and nobody can touch it. And that's what the executive team and board have to come to agreement on.

Jim Marous (12:47):

I think this is a good point, and I think, again, it gets down to putting a line in the sand and you mentioned timing. We go back to the times when any plan was put in place, it takes about two years to get there. Most institutions are doing what we used to take years to implement in a quarter in many cases.

Jim Marous (13:05):

You're seeing it across the board, and I think it's important to put the speed aspect to what's going on. And we have the ability with the many partners we have in the exhibit hall today that you can actually pick those partners based on the speed of execution because the slowest partner is going to slow down the whole effort to their speed, and you've got to avoid that. So, go to another one.

Ron Shevlin (13:26):

Yeah, I see that you've sort of set this up as the deposit wars as being a battle for the upcoming wealth transfer. And I don't see it that way, Jim. I want to reposition this a little bit.

Ron Shevlin (13:37):

For about the past 10 years or so, I've been using the term deposit displacement, the idea that at the consumer level in particular, they are spreading their deposits out, not just across banks but across non-banks as well. You know how much money Starbucks is holding, how many of you have the … what's in the car for the tolls, what is that, the E-ZPass? You know they have a billion dollars in deposits. Boy, what a threat they are to you, right?

Ron Shevlin (14:05):

No, but that's not it. The deposit war is twofold. Number one, it's the fintechs. SoFi, 20 plus billion dollars in deposits, cash app. Now, you've got NuBank and everybody else coming in. That is one aspect of the war. The other aspect of it is stablecoins and the potential for that being displaced.

Ron Shevlin (14:28):

Jim, I had an opportunity last year to do some research, and we estimated that between 2020 and 2025, $3 trillion were displaced out of bank and credit union deposit accounts into this. And so, I think the challenge here is, I'm always going to come back to product design. Are you designing and deploying products that are competing with what the fintechs are offering, what the non-banks are offering?

Ron Shevlin (14:56):

And I think the other challenge in this war that's going to be really tough, Jim, is that I don’t think that the concept of core deposits no longer holds. There are no core deposits, they're all movable, whatever the right term is, but I'll let you have the last words on this one.

Jim Marous (15:13):

Well, when I look at the wealth transfer issue, I look at Ron and I. We're both OGs, and we have children that at some point, if we planned our financial well enough, they're probably going to get a wealth transfer.

Jim Marous (15:29):

However, I can tell you right now, my son does not have an account with where my institutional, my business and personal accounts are. He has it elsewhere. I would imagine that in many cases, your daughter's the same way. And the challenge there is, are we as financial institutions building a relationship with the children or even the spouses of the people that are holding the wealth at our financial institution?

Jim Marous (15:52):

We keep on talking about the major wealth transfer, but they're not going back to you without you building a relationship with these people up front where they feel like they would do well by keeping their money where their parents did.

Jim Marous (16:04):

My son opened his account with the same financial institution I did, but the fact that he's not there anymore, and he has a number of different financial relationships, that money is at risk, and at some point in the next 10 years, almost all of our major older depositors, which is a big part of most of our institutions, are going to have that money leaving the institution without you even having a vote in the game if you haven't started reaching out and building an engagement tool with the people who are most likely going to get the inheritance. I think it's a major component that we kind of push down the road and hope it goes away. It's not going to.

Ron Shevlin (16:40):

Jim, I think too many times what it comes down to at the individual bank or credit union level, it comes down to is, well, do we offer high yield? Do we compete on rates or not compete on rates? And that's not the only decision. It's about product design.

Ron Shevlin (16:53):

If you look at SoFi and how they're competing in the market, we'll have a report coming out in a couple of weeks on this one. Their loyalty program (I forget what the name of it is) is so interesting and differentiating that they're able to keep a lot of the deposits and move it because of product design, not simply competing on rates. And if you are so integrated into your customers and consumers and members' lives that they don't have the incentive to move, you start winning the deposit war.

Jim Marous (17:24):

Personal file, decades of talk with minimal execution on personalization. Ron, even in the rehearsal, we started going back and forth on this one because I think we could have done the same show 10 years ago. We probably would have had this topic on there again. It's not current, but it continues to be a major problem.

Jim Marous (17:43):

So, personalization, we talk about it all the time. We've got to go beyond simply the name and address. I got a recent mobile offer saying, “We'd like to offer you this, this, and this for your business services.”

Jim Marous (18:00):

One was a credit card that I only have at that financial institution. That crap's still happening. And the other two, one was retirement planning. Not really what I should be looking at right now. I hope I have that one pretty much nailed down, or I at least hope so.

Jim Marous (18:15):

And then the other issue is we keep on talking about building a better personalization tool that's going to make it so people know that we're looking out for them in the future. It's just not happening. We have a lot of gaps here.

Jim Marous (18:28):

And again, if you're coming to this conference to look at solutions that are going to make a difference, these are the things you have to look at and there's a number of institutions that can help you get there. But we've got to stop talking about what we're going to do and start doing it. From your perspective, you've done research on that as well.

Ron Shevlin (18:45):

Yeah, I've never been a big fan of this personalization thing, Jim, you know that as well. And I think it comes back to a definition issue. First of all, a targeted offer or mentioning somebody by name, a push notification, that's not personalization. I will put out there that I think personalization is about conversation.

Ron Shevlin (19:05):

When you can have an ongoing conversation with somebody, then you are personalizing. You are responding to what they are saying, doing. You're using the knowledge you have about them, the data you have about them to have a conversation.

Ron Shevlin (19:20):

And what's different, Jim, today than 10 years ago is the generative AI tools that are out there now really enable a conversation that draws on data, that is an ongoing conversation that can help lead to better recommendations, decisions, actions, and all those kinds of things. The problem is that, yeah, we're getting the technology but there are still two other pieces of the pie here.

Ron Shevlin (19:45):

Number one is the data aspect to it. You simply do not have (you guys, not us) — you guys don't have the data available, well-defined, accessible, that are going to drive a lot of this personalization. And the third piece of the pie is your product. I'm going to come back to this.

Ron Shevlin (20:04):

I believe that personalization can actually be demonstrated through product design that addresses the specific needs, and we see that a lot more with some of the verticalization that's going on, but I would think of that as personalization, Jim.

Jim Marous (20:18):

Well, I'll take something. How many of you have an Oura Ring or something similar? Raise your hand. Okay.

Ron Shevlin (20:26):

Three people. You are a weird one.

Jim Marous (20:28):

No, there's a lot more than that. They're just afraid to raise their hand, I'm going to call on them. But the reality is, why would a $350 ring with a subscription fee have a better idea of how I'm starting my day, besides looking at my sleep score, and have more integration into what I do and giving me recommendations of what I should do next?

Jim Marous (20:47):

We need this capability. We need to use examples like this to say, how do we build a product that's going to keep us engaged and give us value every day? It is possible. There's ways to do it. I just did a video on this, and comparing the Oura Ring to digital banking, personalization, and engagement, we need this level.

Jim Marous (21:06):

We need the ability to say, “How can I improve on what's going on and make that almost an embedded product?” And in invisible bank, we have a number of different projects or subjects we're talking about this. But we got to look at tools like this and say, “How can we make that byproduct more like the kind of experience we have with something that's basically nothing more than a piece of titanium in a great app?”

Ron Shevlin (21:30):

Bing! Oh, we didn't get the bing. So, anyway, before we even get to that, no we deserve the bing on that one. So, I am going to go over time. We're going to do one last comment on the personalization.

Ron Shevlin (21:40):

Jim, to prep for this, I put together a whole bunch of notes. I got my cheat sheet here in front of me. And I loaded up my notes into Claude and said, “Hey, create cue cards for me.” And it did. It came back and it said, “By the way, good luck on stage. Give Jim a hard time.” That's personalization, man. Let me tell you. Claude knows I want to get … that was big.

Jim Marous (22:04):

I use Claude. I don't have my tool here, but it said, “Ignore the notes.”

Ron Shevlin (22:09):

“And ignore Ron.”

Jim Marous (22:10):

Exactly.

Ron Shevlin (22:11):

Alright. Stablecoin, the stable threat, is it the next evolution of payments? Well, the answer is maybe, Jim, but not just yet. And I think the question that we should be addressing here is not whether or not we need to address the question of stablecoin, but to look at this from a broader perspective, it's really about tokenization right now, and what is going to be the impact of tokenization.

Ron Shevlin (22:34):

And I am going to put out the prediction and thought here that we're going to see an evolution over the next, really, five years and maybe a little bit longer, but it's going to be quick, around tokenization, where the first step is tokenized deposits. The second will be stablecoin adoption, and the third is how real-world assets are moving to the chain, and how that will impact both the investment and lending worlds.

Ron Shevlin (22:58):

I think the tokenized deposit is the first step, Jim, because it's the most immediate impact on the financial institutions. It is about cutting the cost and time of reconciliation, immediate benefits, and you don't really need customer buy-in or changing behaviors and things like that.

Ron Shevlin (23:15):

But number two, the stablecoin, over the next couple of years, as the regulatory stuff starts to iron out a little bit, there are some really big benefits and opportunities there, mostly from a commercial payment perspective. But think about it, it's not about you offering stablecoins and doing things like that, it's about you looking at what your customers are doing, especially on the commercial side.

Ron Shevlin (23:37):

If they're doing cross-border payments, if they have complex contractual arrangements with their providers and customers, then there's a lot of opportunity for stablecoin to introduce a lot of efficiencies into that. And you may be saying, “Well, isn't there Fed now, and can't we do that?” Yeah, but stablecoins offer programmability, and that's what the benefit of that is.

Ron Shevlin (23:58):

And so, I think we can't just simply say we're not going to deal with it right now because there are balance sheet issues you've got to deal with, there's plumbing issues you've got to deal with, and technology decisions around who is going to help you build your digital assets stack.

Jim Marous (24:13):

It's interesting, Ron, I asked a bunch of financial institutions, how many of you are starting to work on building a platform for adjusting for stablecoin? And a lot of organizations said they're doing it. I'm not too sure how many that really is in today's world and how far along the path they are, but this is different than instant payments.

Jim Marous (24:31):

Instant payments, we kind of knew what the runway was going to be and when it was going to take effect. I believe stablecoin is going to happen overnight when it's ready to happen. And that may be driven by consumers, it may be driven by commercial clients, but the reality is we have to be prepared.

Jim Marous (24:46):

The challenge is, and this goes back to instant payments, I think about seven or eight years ago, I was at an event, the largest banks in the United States around the table talking about instant payments. And the organizer of the event said, “How many of you are going to be ready to turn it on day one?”

Jim Marous (25:04):

I was amazed, nobody raised their hand. They were going to be ready, but they're not going to turn it on. And the reason was they asked some of the same question we do all the time: “Geez, what are we going to be able to charge for this? What are the fee structure going to be? How many people are going to take it up?”

Jim Marous (25:19):

Making excuses for not doing it right off the bat, this rapid ramp up afterwards. And we still see today on instant payments a lot of organizations don't give both capabilities on the instant payments, and as a result, our consumers are driving that.

Jim Marous (25:34):

I think consumers may drive stablecoin as well, but the challenge is simply putting something in place no matter where you are along the curve right now on implementation, you better be ready because it will happen without a deadline. It's going to just happen overnight when it does happen.

Ron Shevlin (25:51):

It can't happen that way, Jim, unless they're making the investment in the infrastructure to turn that on. You've got some of the big cores who are moving down that path already, but they have to make decisions about when are they going to be ready? What are the things?

Ron Shevlin (26:06):

I keep coming back to this notion of you've got to pre-build before you build, and you've got to be making decisions about who's going to support the digital asset stack that you're building.

Jim Marous (26:15):

That was not fair.

Ron Shevlin (26:18):

That wasn't fair.

Ron Shevlin (26:20):

They were ready this time. X Money, the SpaceX of banking. This is interesting. This was one of the ones we picked up a couple of months ago, and we actually thought in April that X bank was going to be a real thing.

Jim Marous (26:32):

So, we're going to broaden this a little bit and talk about innovation and the SpaceX of banking. Ron, from Elon Musk, you had some commentary around the likelihood of an X bank happening bigger than that, a super app. What are the chances?

Ron Shevlin (26:48):

For my book, zero, or pretty damn close to zero. A couple of reasons why. Number one, we do not need a super app here in the United States. We as Americans really value our choice. We get it from a whole bunch of different places. There may be segments of the population that would tend towards using super apps and they tend to be maybe lower to middle income consumers, but even still, I don't think that we need the super app in this country.

Ron Shevlin (27:14):

Number two, if we did need a super app, it sure as hell isn’t coming from Elon Musk. And that's not because I have anything against the man, but public perception, he's a polarizing figure, and I think that hurts.

Ron Shevlin (27:30):

And what has happened is, if you look at X as a social media platform, it's been on a bit of a decline over the past couple of years, and so, at best for me, X Money basically has the opportunity to maybe become a niche payment platform for creators on the platform, but not a super app, no way.

Jim Marous (27:49):

So, let's take this a little bit further in the whole broad concept of innovation. We just last week saw Artemis II take off and land. Unfortunately, I was in Minneapolis airport at the time and I thought, “Well, at least I can pick it up on the TV.” And surprisingly, not one TV had the space launch on it, which means are we getting that comfortable with innovation that we say we just expect it to happen?

Jim Marous (28:12):

And that's kind of the answer I have for banking too. Where is innovation in your banking's model besides a talking point or a person's title or an innovation lab, worst case scenario there? And where are you going to be going? Where are you going with your innovation opportunities as well as challenges? And is management really behind it besides putting it at the front two pages of their shareholder report?

Ron Shevlin (28:38):

Yeah, I think I agree. And I seriously agree with Jim this time. And we really do have a challenge and issue with a lot of organizations around this idea around innovation. And a part of it comes from it being five years ago fad.

Ron Shevlin (28:51):

Are you guys familiar with that meme of the three spidermen pointing at each other? Well, I posted that on LinkedIn a few weeks ago with the caption, one of the spiderman was the Chief Digital Officer, the other spiderman was the Chief Innovation Officer, and the third spiderman was the Chief AI Officer.

Ron Shevlin (29:08):

And I basically said, “If you've got one of each of these in your organization, you've got a major problem.” And it's an org problem because who's got the budgets? Who's got the authorization to make changes? But the org or the industry keeps reacting to these themes and to these trends and fads, management fads, forget innovation.

Ron Shevlin (29:29):

And I'm not saying you shouldn't have Chief Innovation Officers, but they should be well-defined roles around what change they're trying to do in the organization. Is it about bringing technology in? Is it about making process changes, some combination of it? How does it fix with the data? It's just getting really messy, Jim.

Jim Marous (29:46):

Well, and you talk about, we have the technology, we have the tools, we have the things we have to apply assets to, the challenge is leadership has got to change; not just top leadership, all of you out there.

Jim Marous (29:59):

You’ve got to get in the discomfort zone in order to move forward. If you don’t get out of your old shoes, you'll never move into the end. It's not just dipping your toe in the water, you got to jump. You got to go balls out. And bottom line is, it's so important now, more than ever, to get out of the status quo, to do things differently.

Jim Marous (30:16):

If you're stuck in a meeting where everybody in the room is saying, “No, we tried that before,” keep fighting. Don't let it go. And I'm going to hit the bell, but that's okay. But I think that's something we have to do … I was going to say, they're going to let me off the hook.

Jim Marous (30:29):

But again, it's a leadership issue. And it's all the way down as a culture issue, that unless we change that mantra, unless we change out of what we're comfortable with, unless we embrace change, we're not going to get there.

Jim Marous (30:43):

It's a behavioral aspect. And it's very difficult now with all the noise in the marketplace, you can easily put all these risk elements in place that say, “I don't know if I want to go there because this, this, or this may happen.”

Jim Marous (30:54):

Compliance, budget, whatever it is, we've got to move beyond stuck because our customers are demanding it now. And they're making their choices based on how innovative and how progressive your organization is.

Ron Shevlin (31:07):

Jim, easier said than done though, and I think that's the bigger challenge. There's too many executives in financial institutions now kind of coming up on retirement age, and they don't want to make any changes until they're gone. So, there are some issues there, but we got to leave that one alone.

Jim Marous (31:22):

Let's take a short break here and recognize the sponsors of this podcast.

[Music Playing]

Ron Shevlin (31:30):

Next topic.

Jim Marous (31:31):

Yeah, the impact of embedded payments. Again, it's interesting, second payment structure we've had, but that's where all the innovation is happening right now, at least, a lot of it.

Ron Shevlin (31:41):

So, I'm going to expand this beyond embedded payments to embedded finance. And it's been put out there as sort of this term that's meant to kind of scare you that you become invisible, and there's no longer that direct connection between you and your customers and members and so forth.

Ron Shevlin (31:56):

And I don't know, I don't see it that way, Jim. I see it as a major, major opportunity for financial institutions. This is about not getting disintermediated, this is about finding new distribution channels, meeting customers and prospects where they already are today, whether it's on the consumer or business side.

Ron Shevlin (32:13):

The business side is actually the easier one. Where are they today? They're in their vertical industry apps, they're in their ERP apps, they're in their accounting apps. And being able to integrate into that becomes a new distribution channel, a new way of finding customers at customer acquisition costs that are far lower than what you have today.

Ron Shevlin (32:33):

But the challenge is twofold. Number one, it takes a bit of a different organizational approach to doing that, and number two, it's a technology issue. But you don't need to be developing all these new marketing opportunities and developing that as much as you need to be developing the interconnections, the APIs, and the contracts to do it.

Jim Marous (32:53):

Again, we're all inundated with embedded payments right now that many of us take for granted. We talked about the E-ZPass going through the toll booth. You talk about a gas station that allows you to pay without having to go in or put a card in, that's all embedded in things. And it's happening outside the industry.

Jim Marous (33:11):

I think that we talk about big threats, some things that are coming down the road. Organizations outside of banking are building integrated apps that are making it so they have embedded payments. You mentioned Starbucks in the past, and it's still one of the biggest deposit gatherers that's not a bank.

Jim Marous (s33:27):

And I think when we look at the innovation in banking, we've really got to look and say, “How do we provide embedded payments without becoming invisible?” Because I think one thing we have to be aware of is we still want to have a brand, have a reason for people to come to us that's part of that whole equation.

Ron Shevlin (33:46):

Look, what do you want? Do you want to be wildly profitable and make a lot of money and be invisible, or do you want to not make a lot of money and not be profitable, but be visible? Come on, where's the choice here?

Ron Shevlin (33:58):

Being invisible is not that bad thing. It's not about being invisible, it is about disintermediating, disconnecting from having to force people to come to your website, to your mobile app to do that. You're not disconnecting.

Ron Shevlin (34:14):

If you've got a satisfied customer who isn't leaving because you've embedded your products and services into their other providers from a distribution, ERP perspective, accounting perspective, payments perspective, how can that possibly be bad, Jim?

Jim Marous (34:30):

Yeah, I have to agree with you.

Ron Shevlin (34:32):

There we go. Oh, last point, because we do have 58 seconds here. I know they changed that. Okay, look, we're going to use the 58 seconds here. I want to make sure people here, Jim, are clear that when we're talking about the embedded payments, embedded finance, we're not talking about banking as a service to fintechs, this is completely different.

Ron Shevlin (34:51):

And I think you've got to make sure your boards are clear with this, because sometimes I had one board experience where I talked about embedded finance. One director raises his hand and goes, “We've already discussed that. We're not doing banking as a service, move on.” I was like, “Okay, we're not talking about the same thing, bud.” So, we had it. So, there's that definitional problem again.

Jim Marous (35:13):

How do we serve the underserved? I'll start with something here that we have a lot of customers and consumers out there that we're not addressing what they need. Over 30% of humans, consumers today can't make the next payment on a mortgage if their job was taken off the market immediately.

Jim Marous (35:36):

We don't have money in savings, we don't have, in many cases, credit scores up to 700, where there's about, I think it's 35 or 40% of the consumers are at 640 or below. Most of your institutions would turn those down immediately. You wouldn't even ask them questions to see if you could make that happen.

Jim Marous (35:55):

There are organizations out there, but I was lucky enough to speak at an event in Atlanta at the end of last year, and we talked about the need to meet the masses who are not being served well. And that's not just from a credit standpoint or from an income standpoint or a wealth standpoint, but the reality is we're not addressing these massive number of people because they don't fit our mold.

Jim Marous (36:19):

We've got to go from risk avoidance to risk management. We've got to realize that I was in China in 2020. I can't even talk to you about that trip because it was very much at the beginning of COVID, but the reality is I went to WeBank.

Jim Marous (36:34):

WeBank is the biggest digital bank in China. They make their money mostly on financing the phones. They finance the purchase of phones. But with those phones, they get data that tells them if this person is going to be a decent customer or they're going to immediately go bad.

Jim Marous (36:51):

They're just trying to get rid of the worst customers. They're not making judgments between the lines. They may only make $10 to $30 a year on that customer, but when you talk about tens and hundreds of millions of customers, it's not a bad business decision.

Jim Marous (37:04):

We've got to expand our realm beyond what was normal 50 years ago. I haven't seen credit scores and the handling of credit scores change in the last 50 years of my banking career yet. That's kind of scary, but it's not just credit score based.

Ron Shevlin (37:17):

Well, that piece, things are changing. A lot more cash flow-based approaches coming to market. But Jim, let's go back to the underlying question here, how do we serve the underserved? And we've got a room of marketing people and they should know the answer to this. And the answer is by taking a marketing segmentation approach because the underserved is not a single block of customers or consumers, there are different segments of the population.

Ron Shevlin (37:41):

There are those who are underserved because of geography, because they don't have access to banking. There are those that are underserved because of income volatility. There are those that are underserved because let's call it documentation issues. They may be immigrants. They might not have social security numbers. There are those who are underserved because they have a miss or distrust of the financial system.

Ron Shevlin (38:03):

Jim, these are all different problems, all different segments of the population and yet, all I keep reading about from us fintech influencers is, oh, we have to be nicer to the underserved. That's not the answer. The answer is designing products and services that meet these various niches of the underserved population.

Ron Shevlin (38:22):

And if you treat it as a marketing problem and a marketing segmentation and product development, you start making progress. If you deal with it just simply from it's a policy issue or it's an education issue, you're not going to get real far in terms of solving the challenge.

Jim Marous (38:38):

You go a step further, how are we serving the digital-first consumer? I'm going to argue not very well on the whole. If a customer is digital-first and wants to open an account at your financial institution, the reality is you probably don't have an answer that's geared to the way they want to open an account and the way they actually want to manage the account.

Jim Marous (39:00):

We talk about making it easier. If I asked how many of you are looking for a growth model, trying to grow deposits, you're probably all going to raise your hand. And as Ron said, there are target markets out there that can help you in that. But there's also the way we open the door.

Jim Marous (39:14):

I get frustrated as anybody who's seen me in the last three years by the fact that we continue to say we want new customers. We have a 14, 15, 19-minute new account opening experience. There are applications out there that get you to a three to five-minute account opening experience, and that will make it so you actually will double your deposits and double account growth almost overnight because so many institutions don't do that.

Jim Marous (39:37):

But that's not the only gap out there. I think you've researched enough things to know that there's other forgotten masses in categories that we're missing all the time.

Ron Shevlin (39:47):

Alright. Move on to the next. I think it's our last 10th topic. The sleeping giant, who poses the greatest future threat? And Jim, this topic just drives me nuts sometimes. I've got to be honest. So, NuBank announces they're moving into the United States, and oh, they are the biggest threat.

Ron Shevlin (40:04):

Oh, they've got 100 million customers out in other parts of the world. They're going to come and take over, and then Revolut comes. They've got 50 million customers in the rest of the world. They're coming to the US, they're the biggest threat. Coinbase starts offering competitive products, and then with the specter of yield on stablecoin, they're the biggest threat. SoFi, they're a big threat, by the way, and they're doing really well. So, all of this-

Jim Marous (40:28):

And Chime. I mean, you've done a lot of research on that one.

Ron Shevlin (40:31):

Yes. And we keep throwing these individual names, and I don't think the biggest threat come from any individual fintech or any individual company. So, I've got three, and I'm going to only give you two.

Ron Shevlin (40:44):

There are two biggest threats that I think that are out there and they obviously can't have two biggest, but two big threats. And number one, the accounting system ecosystem. And what I mean by that is you look at QuickBooks, you look at Xero, you look at even Brex and the fintechs coming in.

Ron Shevlin (41:04):

The ability for the accounting and ERP systems to understand the needs of your commercial customers are already displacing you from their borrowing needs and more so from their banking needs. This comes back to why the embedded finance piece, Jim, is so important, but I actually think that accounting ecosystem is a bigger threat than any individual fintech.

Ron Shevlin (41:30):

Second biggest threat that's out there is the US government, and this is not a political statement one way or another. But with crypto, stablecoin yield, new charters, and the Treasury Department contracting with Robinhood to support their Trump account things, I think that fundamentally, and this is not just a political statement about the existing administration, but about the previous ones as well, and especially the previous one that we have in Washington regulators who simply do not understand the difference between a Wall Street bank and a Main Street bank. And I think that's the biggest threat to the community banking ecosystem, Jim. There was a third.

Jim Marous (42:22):

I'm going to take one, and that is closer than you think. I think the biggest opportunity and the biggest threat in banking you see every morning when you look in the mirror. And I mean that honestly, that I think we have as individuals and as organizations, the opportunity of a lifetime.

Jim Marous (42:40):

This is the most exciting (and Ron and I do agree on this) this industry has ever been in my history, in that there's more things that can happen fast, quick. We have partners out there just dying to service no matter how big of asset size you are.

Jim Marous (42:54):

On the threat side, we have to do something. We have to move out of our comfort zone. I said this before, move out of our comfort zone. As people know my term, embrace change, take risks, and disrupt yourself and your organization.

Jim Marous (43:06):

If you don't get behaviorally scared, you're not doing enough. If you're not working with your team to say, we need everybody to pull the same way but also be willing to pull against if something's not right, and don't get stuck in what's been comfortable for years, Ron mentioned it.

Jim Marous (43:22):

We have leadership, certainly mid-majors and mid-asset size organizations that have the same leadership team in charge that moved up as management trainees 30 years ago, and they're the same people, and they've done very well. Profitability every year, all these kind of things.

Jim Marous (43:37):

However, that's not good enough. We've got to get out of our comfort zones. The next three days, spend time in the exhibit floor, meet the people that are dying to serve you and help you, pick the ones you have to do from your strategic narrative, your North Star, and move forward and do something about it.

Jim Marous (43:53):

Don't go back Monday and say, “I got great notes, I'm not doing anything about it.” Take those great notes and actually do something because that's the biggest threat if you don't do that. So, mail time.

Ron Shevlin (44:04):

Alright, last piece.

Jim Marous (44:05):

Normally, on Pardon the Interruption, they get together and they have a little extra time, so they go, so mail time, let's come up with … I got one for you, Ron. You're known for your writing, your snark tank and your Forbes writing, everything is quite good.

Jim Marous (44:16):

However, something happened last week that I didn't expect. Ron wrote an article that was quite, quite convincing as all of his are, wrote for Forbes. But then the next day or day or two later, I see you all of a sudden doing a rebuttal on your own article saying, “I was wrong.” I thought up here that never happened, but what happened, Ron?

Ron Shevlin (44:38):

Yeah, thanks a lot for bringing up the mistake there, Jim. I really like telling people about how I was wrong about something, but yeah, I was wrong. So, I published an article last week about how … and the title of the article was something like How the Treasury Department is Handing Over a Customer Acquisition Program to Robinhood.

Ron Shevlin (45:00):

And it wasn't too long after the article got published that I started getting phone calls and emails from a senior advisor at the Treasury Department of the United States of America. And she was saying, “We need to talk immediately because your article is “wildly inaccurate”.

Ron Shevlin (45:22):

Now, I wasn't able to talk with her immediately, so what I did was I contacted my editor at Forbes and said, “Do me a favor, please, please pull down the article, and I will deal with this the next day.” So, we scheduled a call for the next day and I'm telling my wife about this at home. And she's like, “Well, what was the problem?” I go, “I don't know. All I know is they're telling me that my article was “wildly inaccurate”.

Ron Shevlin (45:44):

And my wife says, “Well, if they think your article was wildly inaccurate, just wait until they see your tax return next week.” “Thank you, hon. Appreciate the support.” And so, I get on the call the next day — oh, by the way, my wife says to me, she goes, “Let me tell you how the phone call is going to work. You're going to be on speakerphone and there will be two other people in the room who are unannounced.” And I go, “Okay, conspiracy theorist.”

Ron Shevlin (46:15):

So, I get on the call and the first thing the woman says is, “Ron, I want you to know you're on speakerphone, and I have two of my colleagues here with me.” But she introduces them and they were lawyers, by the way.

Ron Shevlin (46:28):

And basically, what she said was that the premise of my article was wrong and here's why she was right that I was wrong. The Treasury owns the customers, not Robinhood or BNY, Bank of New York. They are simply contractors to the government on this, they do not own the customer.

Ron Shevlin (46:50):

Now, it is still more murky in my eyes about whether or not Robinhood has access to communicate with the account holders, but they certainly cannot interact with the children who are the beneficiaries of the account until they turn 18.

Ron Shevlin (47:07):

There was also some issues about whether or not this went out to public bid, and it did not, but they seem to indicate that there was other providers that were taken into consideration. Led me to actually believe that it was BNY who selected Robinhood, but when I asked for confirmation on that, they said, no, that's not the way it worked, the Treasury was involved in that, and it was an iterative decision process.

Ron Shevlin (47:32):

But here's the thing that I left them with and I said, “I'm not going to publish the report. It's dead. Let's just move on.” Is that it still was kind of a slap in the face to the community banking and credit union world that did not enable you to get into it. They brought up the topic that, hey, in a year or so, they can do rollovers, but that's not going to happen. But yeah, I let that go.

Ron Shevlin (47:55):

Alright, Jim, mail time. We did some promotion around this event on LinkedIn, and I asked people, “Hey, is there other topics you'd want to hear about?” And I had somebody, Jim, reach out to me and say (and I really, I have to say, I didn't understand what he was talking about), “Ask Jim why his podcast is foggy sometimes.”

Jim Marous (48:19):

Oh, right. I thought I was okay with just having you cover this, but we're supposed to be professionals. Ron, how many articles have you written for Forbes? They’re hundreds?

Ron Shevlin (48:27):

300.

Jim Marous (48:28):

I've done 500 podcasts, but I figured I got to make it better so I'm looking at the camera, the zoom lens. So, I said, “I'm going to get this new device 4k thing,” drop down thinking and look right at it, I'm thinking, “This is great.”

Jim Marous (48:41):

I've used it for about a year and a half. I've done 500 podcasts (not in that time period) and I did notice that, geez, I got to change the lighting or different room or something's wrong. And one day, just maybe two weeks ago, I'm looking at the lens, I'm going, “God, I got to clean it off.”

Jim Marous (48:57):

I take my lens cleaner. It's a really small lens. I look at, I said, “God, there's something like red ink or something like that.” I'm looking, oh my God, I take the cell thing off the camera. Oh, applause. Thank you very much. That's probably my podcast team going, “Finally, Jim, you got ahead.”

Jim Marous (49:17):

But I thought I had the worst story until I told the story to a person I was interviewing. He goes, “I can beat you.” I go, “How can you beat me? The longer period of time?” He goes, “No, I just turned my car in to the dealer and they said, sir, did you realize that you never took the cell thing off your backup camera?”

Jim Marous (49:33):

And that he goes, “I thought it was always dirty.” I go, “Okay, you kind of beat me, but you're not making money hopefully on the car.” But yeah, so we try our best, we still make errors. Thank you so much.

[Music Playing]

Jim Marous (49:46):

Again, go to the exhibit hall, enjoy the beverages, but more importantly, figure out what you're going to do on Monday morning. Who are you going to partner with that you're going to come away with something, an action item that you can move forward on. Thank you very much. Appreciate it.

Ron Shevlin (50:01):

Good job, buddy.

Jim Marous (50:05):

Thanks for listening to Banking Transformed, the winner of three international awards for podcast excellence. If you enjoy what we're doing, we would really enjoy a positive review. Also check out my recent articles in The Financial Brand, the research we're doing for the Digital Banking Report.

Jim Marous (50:21):

This has been a production of Evergreen Podcasts. A special thank you to our senior producer, Leah Haslage; audio engineer, Chris Fafalios, and video producer, Will Pritts.