New company, new focus, new goals – that’s a lot! I sat down with one of Nomis’ newest employees, Dustin Allen, to pick his brain on the status of the financial industry and how he plans to use what he's learned from his past banking roles to help other institutions.
CA: From your past banking roles, what are some of the biggest hurdles banks are facing on the deposits side? From your experience, is there one more dire than the other that banks should really be focused on mastering?
DA: Regulation, regulation, regulation. There was a sigh of relief from the industry in early 2017 that the regulatory agenda had been lightened and many of the objectives that regulators had previously outlined were put on hold. That euphoria has worn off as the landscape has shifted. Though there is little in the way of new policy, the enforcement of existing regulations, especially UDAAP and sales practices, has become a major burden and distraction for banks.
What this means is that business lines, compliance and risk teams, and other support organizations are spending more time and resources either responding to, or preparing for requirements being enforced either by regulatory agencies or by internal control groups in anticipation of regulatory scrutiny.
For banks and bankers, this ever-increasing regulatory pressure means the people leading the banks have less time to work on strategy and winning in the marketplace. With less time to work on being competitive and enhancing the customer experience, banks will increasingly need to partner with technology and service providers who have the bandwidth to think about and perfect specific aspects of the customer experience. It’s not that the banks couldn’t do many of the things being done in the market by third parties, but there just isn’t the time or resources inside the bank to dedicate to these types of initiatives. The banks that get good at vendor management and are nimble in selecting, implementing, and marketing vendor-driven solutions will be perceived as much more innovative and customer-centric, and will ultimately win the marketplace. The fintech vs. traditional is quickly shifting to a symbiotic model that will push out smaller players in the market and accelerate M&A activity for the foreseeable future as smaller banks and credit unions struggle to keep up with the required technology and regulatory spending thresholds.
CA: Customers have changed, that goes for every industry. The retail industry was the first to really go through this evolution or transformation needed to really meet that new kind of demand. What can banking learn from the successes and failures of digital transformation from other industries?
DA: There are some classic examples of companies that have failed to keep up with innovation and customers (Xerox, Kodak, Blockbuster, Sears to name a few), and unfathomable as it seems, there will eventually be a day when Apple, Amazon, Facebook, Netflix, and Google grace the “has been” list…it’s just a question of how long any company can continue to stay ahead of trends and evolve with the customer. The greatest asset in any bank is its deposit base, and the greatest barrier to entry/ exit is the switching cost (real or perceived) from the customer. It wasn’t hard for customers to switch from Blockbuster to Netflix, so the collapse in video rental and other retail industries followed a timeline commensurate to the customer switching costs. Banking has higher barriers to entry and exit for customers, and that will provide some additional runway for the industry to evolve. But we are seeing the deposit base shift materially away from community and local financial institutions and into super-regionals, nationals, and direct banks. I think within one, maybe two generations we will see the end of the community bank and credit union, and online/ direct will rival the major branch-based franchises. For customers, they will be looking for a financial institution that is better at anticipating needs. That’s easy to say, hard to do. Financial institutions, by nature and by design, are very risk-averse. I think we will see the true innovation come from outside banking where the risk tolerance is much higher, then successful models will be ported over to financial services (how many times have we heard the term “Uber-ization” of banking?).
I think there is a strong consensus within the industry that we must innovate or die. I would modify that statement to say “innovate or merge”. The market players that can afford and have an appetite to invest in adopting the latest technology, whether home-grown or vendor provided, will be the survivors, and the institutions that can’t or won’t adopt the technology will be gobbled up. The telecom industry is the most observable parallel. Internet and cellular providers have merged and consolidated to a market oligopoly, and banking is on a similar, albeit slower path.
CA: So are banks truly evolving to meet demand? Are they doing it fast enough?
DA: Yes, the financial industry is evolving, but not to meet all of the customer’s stated demands, per se. If you ask a customer what they want from their bank, they will likely tell you they want more branches/ ATMs and better pricing (a la rates and fees), but those two options are mutually exclusive.
If you look at the data, the growth in deposits is concentrated in the direct/ online players who offer self-serve convenience and aggressive pricing, or within the national and super-regional institutions who are focused on deploying dense branch coverage in affluent and mass affluent urban areas, supported by innovative technology offerings.
There are a number of new permutations of traditional products being introduced by new market entrants, but if you peel back the glossy veneer of a mobile app experience or no fee promise, they still look like very much like a traditional bank offering. The regulatory and case law rulebooks don’t give special exemptions to institutions that are out to disrupt the system (we all remember the Robin Hood checking account fiasco). We will continue to see new entrants that pursue a market niche, but the more these niche players grow and try to serve broader customer groups, the more they will look like traditional financial institutions with the same challenges.
CA: What are some of the things that are working from your perspective?
DA: The new offerings in AI and voice response are impressive. At first the use cases were very limited, but now that customers can use a voice assistant to look up old transactions, check balances, and do things that used to take a lot of research I think the opportunities are promising, both from a cost savings (less calls to contact center) and user standpoint, and from a brand halo perspective.
The other area that has been talked about for years is data mining and customer-centric relationship pricing/ rewards schemas. The expansion of AWS and Azure are making calculations that were impossible only a few years ago into a mainstream possibility. We are finally able to harness the power of cloud computing to complete trillions of calculations on a nightly basis in determining customer-level price points and relationship rewards without relying on a product type as a key.
This customer-centered approach is enormously powerful as you can now reward and message customers individually about their relationship with the bank. This means that we can be less dependent on the front-line banker or the customer “selecting” the most appropriate product, and instead, let the machines determine the value of the customer and apply the right business rules at an individual level. Think of it this way, mainstream banks today have 10-15 different flavors of checking accounts to accommodate everything from private banking to student status. What if you could service just two checking account types: interest bearing and non-interest bearing, then let the computers apply rewards on a daily basis using the customer’s loyalty and behavior scoring to determine their eligibility? There are banks with this capability now, and Nomis is on the leading edge of providing the tools. From here it’s just a race to see who can effectively go to market with the right schemas and messaging.
CA: What is still not being done?
DA: Pricing and delivery are still stuck in the 20th century for most financial institutions. The old method of secret shopping your competitors’ rate sheets (or hoarding newspaper clippings and direct mail), purchasing a third-party report of competitor rates, and then relying on heuristics to select price points for products needs to end. We now have the power to understand customer behavior and preferences, and to price according to portfolio and customer elasticity using proven algorithms. To put it another way, when it comes to pricing and delivery methodologies, some institutions are using Google while others are still using the phone book. Guess which group is winning the deposit share of wallet.
CA: There are obstacles to overcome for successful price optimization in deposits. What are you the big ones and your tips for overcoming them?
DA: There are two primary hurdles I have seen, if we exclude typical annual budget constraints. The first is the misconception that price optimization is only necessary during a rising rate environment, and that pricing optimization investments can be turned off and on depending on the rate trend, thus major investment has a short payback horizon and a limited shelf life. Deposits are a bank’s most valuable asset, yet receive only limited time and attention from many institutions. The biggest banks have overcome this misperception and are adding serious discipline to the deposit pricing and delivery practice, and they are reaping the rewards.
The second obstacle is the perception that next-gen deposits pricing is based on a tool, database, or algorithm that can be built with minimal effort. While the mechanical infrastructure is the heart of any deposits management function, and it requires years of experience to execute properly, the real success is viewed through the much wider lens of deposit administration. The process of capturing, analyzing, and executing on the insights provided by tools is a transformational requirement for banks.
Imagine the following scenario: A customer walks into your branch or visits your website to inquire about today’s deposit rates, in response the banker or website returns a static rate sheet and the customer is left to make a decision to deposit or bounce. Contrast that with the capabilities now being implemented at some leading banks- a customer walks into a branch or visits a website, asks about rates, and is given the opportunity to identify themselves (either to the banker or via digital authentication) to ensure the best rates. The customer’s entire relationship, balances, geography, loans, credit cards, and length of relationship are all immediately fed as inputs in the background, and the output is a simple, personalized rate sheet that is unique to that customer, including promotional pricing and a price-match offer for that customer. It’s not science fiction- it’s being done today, and the possibilities are myriad. The banks that succeed in protecting and growing their deposits base will realize that next-generation deposits management will need to be done by a team of cross-functional experts who manage the data, product, delivery, measurement, and leadership of the franchise.
Whether the obstacles at a particular institution are related to Type I (deposits management is on/off valve), or Type II (deposits management can be done by a tool), or both, the keys to success sit at the top of the house. From the CEO downward, there must be a commitment to making deposits management a part of the culture. Rate calculation, rate presentment, relationship pricing, and a continuous feedback loop requires everyone from C-Suite to technology to tellers rowing in the same direction.
CA: From a bank to a Fintech, what made you take that jump?
DA: I have spent my entire career at banks and credit unions, so my identity was very much wrapped up in “being a banker”. My primary motivation for making the leap was my admiration for Nomis and what they are doing for the industry. I’m pretty passionate about deposits and I believe there is nothing that gives a bank a more defensible competitive position than the strength of its deposits portfolio. I made the jump from bank to Fintech because I see how desperately the industry needs an update in the deposits discipline, and while I could have helped facilitate that evolution in my previous role, I now have an international stage working with the biggest and best financial institutions in the world to help make next-gen deposits happen.
Questions or comments? Connect with Dustin on LinkedIn.