The Future of Open Banking Panel

Category: #WhatsNXT2020
Author: NXTsoft
The Future of Open Banking - Panel

A transcript of the The Future of Open Banking panel featured at What's NXT 2020.

Your panelists today are Ron Shevlin from Cornerstone Advisors, Charles Potts from ICBA and Wade Arnold from Moov Financial. 

Walter Hoffmann: 

Thanks, Amy. Appreciate it. And gentlemen, thanks for joining me today for this panel and discussion. Future of Open Banking is obviously a pretty heavy topic, when you think about all of the evolution of technology we've seen, especially I would say in the last three years, large increase in, obviously, vendor technology, new vendors that are entering the space, and breaking down a lot of the old models, if you will, of offering services to financial institutions to help them find their way when it comes to their digital representation of products and services, how they operate themselves as financial institutions in general, and how they're getting their products and services out to their consumers in a more effective way and strategy means. 

Walter Hoffmann: 

I think we've seen a big shift lately in where maybe three years ago, five years ago, people were going with one stop shop vendors and be able to offer multiple different types of services all at once. And I think we're seeing a shift going back to best of breed where, I think, banks and financial and credit unions, financial institutions are making more of a conscious decision on the products and services they're buying to really solve for their needs. And so, opening up a question so we have a pre-formed discussion is, do you think with all the new emergence of technology, all the new emergence of services, thinking as a service, if you will, are we really still trying to identify yourself, or the major problem which is friction, right? 

 Walter Hoffmann: 

How do we actually get data from point A to point B? How do we actually create that customer journey to be better, if you will, and this integration, really taking the center stage, if you will, now with how we manage technology, the open banking market idea? 

Charles Potts: 

I'll take a first stab at it. The answer is yes. The opportunities for banks of all sizes to have a bespoke set of solutions has never been greater. And companies that that Wade and I both are familiar with, Walter, you guys next offer are part of that equation and ecosystem have come along at a time where we find what historically was this mid tier market of financial institutions who would go out and put together a best of breed. 

Charles Potts: 

Now that technology barrier is truly not there anymore. It's more a matter of the banks identifying what they want to do, how they want to do it and finding the right partners to partner with it. I think it's an amazing time to look at the options and opportunities that make sense. 

Ron Shevlin: 

Yeah, I'll jump in. And I'll agree with you on this, Charles, for sure. But I'd like to add is, well, to your questions, pretty broad around friction. And I would have to say that, yes, I think a lot of financial institutions are still very much going after the reduction of friction. I see that as a major problem not just from a consumer perspective that's absolutely what small businesses, and even on the commercial side of the coin as well. I think what the challenge that many financial institutions just aren't getting to, though, is that, there's as much internal friction as there is external friction. 

Ron Shevlin: 

And I think why you talk about the wavering trend back and forth between the best of breed and integrated solutions, I think that mirrors the wavering back and forth internally from a decentralization decentralized approach. And I think what we're seeing today in terms of going back to the bespoke type approach is that, to a large extent, I think you're seeing a lot of the initiatives being headed up by the lines of business versus IT. 

Ron Shevlin: 

And I think this is reaction to problems with the core issues internally with IT. But the need to just move faster. That's the challenge, is there's the friction. But there's just huge pressure that financial institutions are feeling right now to react in a much quicker, faster timeframe, and that's causing them to say, the hell with IT The hell with standards, the hell with integration. Let's go get this solution done and figure out the back end later. 

Wade Arnold: 

Adding on to what Ron's saying there, I think the macro trend that I'm seeing financial services, do you think of 2010 to 2015 buzzword bingo was omni channel. The phone, mobile app, the internet banking application, the branch experience, the ATM experience, the phone bank experience, probably the fax machine and OFX servers were somewhere in there too. All had to be exactly the same for every single customer. 

Wade Arnold: 

And I think that's a heavy load where everyone gets everything everywhere. And now what we're starting to see is segmentation of different types of users that have different needs, and more of focus around what's my unit economics in order to service that customer, and keep those branches open, keep the deposits flowing in, keep the loans that were originated through there. But let me try something new segmented off of that traditional banking structure. 

Charles Potts: 

You just make my heart skip a beat when you say OFX server, thank you. But you're right- 

Wade Arnold: 

Even though I was making your heart skip a beat just talking about banking

Charles Potts: 

That's like the wayback Machine there. No, but you're you're right. I mean, the same thing that large scale enterprise banks have always faced, you go out and say, "I'm going to make an enterprise decision for some new risk management platform, some compliance solution, and it takes two to three years to get implemented. And somebody down at the other end of the pipeline gets tired of waiting. So they go out and find their own solution. 

Charles Potts: 

And the reality is banks of all sizes really see the same dynamic and the same opportunity. And, to Wade's point, the segmentation of the marketplace? The uniqueness now of how consumers and small businesses are verticalizing, if you will, their identities in banks, how to respond to that. And I think that's a great opportunity for more targeted solutions in a more bespoke, more crafted fashion. 

Walter Hoffmann: 

It means segmentation, is there a challenge, though, that I think banks here are trying to still fall apart when you think about institutions that have been around for 120 years, and they've had this brand awareness, that they've always been that old, timey FI, and now they're trying to do something different. Is that keynote because of now technology maybe being readily available, is it still a challenge for them to re-identify or rebrand themselves with their consumers and their respective basis? Is that a challenge? Do you think that institutions are not ready to solve for? 

Walter Hoffmann: 

Or is it technologies presented? And they just don't know what to do next? 

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Charles Potts: 

Well, I like what Ron said. I mean, the challenge is really the culture and the people inside a lot of these organizations. So there is a move, regardless of the age of the bank, there is a move on the part of many of them, is to find people inside their organizations or bring people in from the outside who can take on that challenge. 

Ron Shevlin: 

It doesn't matter whether or not you've been in business for 10 years, or 110 years. But the example that I would throw out there is, I think it was River Valley Bank up in Wisconsin, which is has gone through a process of reinventing itself as incredible bank. It's really more about making the strategic commitment of whether that ... Part of that is culture, for sure. But part of that is a strategy. And I think that's what's missing. We've always talked about the need to align business strategy with IT. But today, you can't distinguish the two. 

Ron Shevlin: 

And so, I don't think it's a problem for how long you've been around. This is more of a mentality issue. And this brings up another issue, though, Charles and Wade, as you guys get into this, I'll add some things to say, is that the strategy dejure, seems to be digital transformation. 

Ron Shevlin: 

And, listen, I'm one of the old guys. I've been around for a while. I've seen this trend go from late 80s, early 90s. Back then it was re engineering, and then it was knowledge management, and everybody had to become a.com, and then everybody was going to reinvent themselves by becoming a big data company and now it's digital transformation. So this is just one more management fad that's passing through. 

Ron Shevlin: 

And the reality is, is that, I think there's just too many financial institutions going through the motions pretending what they're doing is digital transformation. Quick data point, Jim Marose, at digital banking report recently published a report asking financial institutions about where they were in their digital transformation journey, and what results they had seen. 

Ron Shevlin: 

And I found it very interesting first, that 17%, I mean, that's not a big number, but it's almost one out of five, said that they've already completed their digital transformation journey. So that was unbelievable in and of itself. But of the 17%, it was split between a 7%, who said they had completed the journey and achieve results as expected, and 10% who said that they had not achieved results as expected. 

Ron Shevlin: 

So really makes you question whether or not we're going through the motions with this digital transformation perspective. And I had written something recently about the delusions of digital transformation, in my belief that until you've reinvented and replaced your core, until you've integrated and integrated AI and a couple other things, you haven't really done any digital transformation. 

Walter Hoffmann: 

Ron, I definitely want to go back to replacing your core content as well as implementing AI. I definitely got some questions there. But I mean, let's talk about digital transformation for just a second, and along this theme of open banking. I think a lot of misnomers and misinformation in the marketplace around as an example, institutions that have, as a result of COVID-19 pandemic, have made these large strides to digitalize their services. 

Walter Hoffmann: 

I think there's a big a misnomer. I think a lot of institutions are still trying to decide how to take that first step. Yes, they may have been able to put their employees at calm, being able to try to maximize the services that they offer, as my initial institution when branches were closed initially. And, obviously, some are opening up now. But I still think that the digital transformation component, or what we're seeing in the marketplace is just starting. 

Walter Hoffmann: 

I don't think people are actually taking the initiatives that they should to really digitalize their services. 

Ron Shevlin: 

Let's get real here. The pandemic, you guys want to get real? Okay, good. The crisis lasted three to four months. We're three to four or five months into this. There's a great video on YouTube that I think captures this. It's a guy who's sitting in an ATM machine, and somebody comes up and sticks their card in, and he takes the card, he looks at it, and he looks up a bunch of papers to see if it's legit number. And then they push the buttons and it goes on $10, so he counts out $10. That's what has happened as a result of the pandemic. We've taken the initial input from the customer digitally, but the rest of what's going on in the organization is nowhere near been digitalized. 

Ron Shevlin: 

And we just can't possibly see that much acceleration in a three to four month time period, because this is a process that was really going to take a couple of years. 

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Charles Potts: 

I'll build on what you said, because, Look, and I know Wade sees this keenly in what he's doing now. And this is not a thing. It's not a project and I start and finish and I'm done. I mean, the reality is the transformation is a continuous improvement process over time. It is a changing of the behavior throughout the whole organization and its culture to some extent, use the old Wayne Gretzky term. Don't skate to where the puck is. Skate to where it's going to be. 

Charles Potts: 

Don't skate to where the customer is. Skate to where they're going to be. They're going to be in different places at different times. So your transformation activities, I will say, to a large extent, what we've seen over the last five to six months have been a great start. They have been a great start from my vantage point, from a very heroic need to respond and to get payroll loans out to small businesses, and in the hands of the employees to keep them employed. 

Charles Potts: 

I said to some people on March 26, the federal government created almost 5400 brand new SBA lenders. So they had to do something. They had to respond, and they had to do four to five to 600 times as much loan activity in a six to eight week period as they did all of last year. So it was a great start. And there's a great foundation and a great set of lessons learned and some tools that have been put in place to facilitate that. 

Charles Potts: 

But it's got to be part of a continuous process of life-changing, cultural changing view of the word world into a large extent that has caused the imagination of a lot of these banks to change and alter and recognize the possible, and that's really what we're talking about is recognizing the possible. 

Walter Hoffmann: 

Wade, what are your thoughts about it? 

Wade Arnold: 

In general, what Charles is saying about, there's no destination to this. And so, I think banking in the world of technology is the only industry that I continue to be shocked how consistently institutions feel like, Well, once I get here, then I'm done. And then once I get here, then I'm done. And that the same time are waiting in line for the new iPhone, and ready to associate their identity of who they are, and how cool they are, because they have an iPhone 12. 

Wade Arnold: 

So the world of technology continues to rapidly accelerate, and then in a linear way, from an expense model, from a change model, we are trying to keep up in the industry. And I think the things like cloud computing, this shouldn't be a new concept. We're 13 years into this. Think about the fact that cloud computing randomly sends you an email from GCP, or AWS, and says, "Hey, by the way, I'm going to start charging you less for the exact same service you used to get." So your unit economics of service and your customers just went down. 

Wade Arnold: 

When in banking, that the costs actually go down, in order to provide additional features and functionality to our customers. I think that's what we're seeing. I don't know that I'm totally sold on the digital de novo, digital only. But there are some interesting lessons from that, and that's really getting her DDA account, unit economics down into the two to five cents for servicing a month rather than $2 a month. 

Wade Arnold: 

You can buy a lot of Google AdWords, if you're an order of magnitude less. And when I look at digital transformation, or core modernization, or whatever this journey is, smarter people than me like Ron can coin some name and write a book about it. But the goal being, how do I service my customers where they're at, at their point of need faster? That's really what it's about, and do that in a way that I can scale it without proportionally scaling my costs at the same time. 

Charles Potts: 

It's like so many other things in life. You don't know necessarily what it is, but you always want to be there when they're ready to make that decision, and that's to a large extent, what we're seeing is banking, and bankers need to be there when the customer is ready to transact and/or do something. And that's a great direction to head in. 

Walter Hoffmann: 

So I appreciate that, Charles. So going back to one of the things you said, AI, changing our core system with the will. We know there's primarily four large players providing the majority of core banking platform in the industry. They're making moves to try to modernize their services, whether it be through open API strategy, marketplaces that offer integration services back towards their platforms. 

Walter Hoffmann: 

And some of that being obviously like AI solutions that maybe help me look at data analytics, and maybe better, scoring ratios on consumers for lending or propensity to buy models. I think there's a lot of misnomers with the use and applications of that, when an institution wants to go down the path of actually looking at RPA business intelligence products or even, AI. What are some of the biggest misnomers that you're seeing through your research, interviewing institutions, even talking to vendors in the marketplace. 

Walter Hoffmann: 

What are some of the biggest misnomers you think about this in general? 

Ron Shevlin: 

That's a misnomer.

Walter Hoffmann: 

... RPA and business intelligence, and what the court or maybe trying to do to modernize themselves with this new technology. What are misnomers that institutions are facing or don't understand necessarily? 

Ron Shevlin: 

I wouldn't necessarily call it a misnomer, but an overlooked aspect, which is, the technologies, especially anything under the AI umbrella is only as good as the data you have to put through it and run it. And so, for a lot of mid-sized institutions, reality is that, there's just not enough quantity quality of data for things like service chat bots. But in particular, the whole aspect of improving marketing and the delivery of advice. If you think about what machine learning is at a very simplistic level, it has a feedback loop. 

Ron Shevlin: 

You put data in, it puts it through an algorithm, it spits something out. But then there's a feedback mechanism that captures that now. What happens in the world of banking officers, we'll go out there as bankers and say, "Hey, Charles, we noticed that you are in this situation, and you should do this." But there's no feedback on whether or not he actually did it and what the result was. 

Ron Shevlin: 

So there's no mechanism to really make AI work in a lot of these situations. And I think there's this hope, and I think to some extent what we're seeing a lot is, innovation theater, I'm not the first one to use that term for sure, but certainly comes to mind, where the management team wants to be able to go back to the board and say, "Oh, no, no. We're doing things. We're keeping up." 

Ron Shevlin: 

Look, we've got this pilot project to run a chat bot or to do some AI. I think it's a lot more mature from a fraud and risk management perspective, because the data is there. And it's been collected for a long time, and there's a lot more collaboration around that. But I think for a lot of other areas, in particular, marketing and advice, a lot of these efforts are for show, and I don't think aren't anywhere close to delivering the results that the pundits like to promise. 

Wade Arnold: 

Well, and look, you can't let the technology drive the strategy. That's the real challenge or misnomer with AI machine learning. All modern buzzwords, all of the technology and all the data in the world isn't going to do a bank any good if it doesn't have a good clear strategy and a clear direction on what's it's going to do. I mean, there was a legendary story of a nation's bank, but Barnett and Barnett was a massive data collecting organization, had a warehouse full of Tara data stack and this commercial database that was storing every single transaction. 

Wade Arnold: 

And after the acquisition, they basically shut the thing off, because they couldn't possibly imagine what they were going to do data. In the end, if you don't know what you're going to do, or don't know where you're going to go, the technology isn't necessarily going to fix that. So form has to follow function, not the other way around. 

Wade Arnold: 

I think there's some great strives, especially in marketing, great intention. But something Ron said that is really important is, you know what a memo post is, the length of a memo post is designed for an IBM 1400 printer, which you should Google. You wheel that around, and it has little tape things on the side. And we take all of this actual great data. We actually know exactly what card swiper you swipe at Target, because if there was fraud on it, we can go figure out whether or not an individual was doing something wrong to that card swiper. Yet we take all this beautiful data, even in ACH there's a vendor records, why keep those? 

Wade Arnold: 

Might as well throw those away because it doesn't fit on an 89 piece of paper. Card swipes, wire transfers, all this beautiful metadata that you could actually do something with AI on top of, gets thrown away in that memo and post. 

Charles Potts: 

Skew level data, Right? 

Wade Arnold: 

... Are worth I guess billions of dollars. Because rather than going back to the source of the data, we take a string of data, do regular expressions and pattern matching and all kinds of stuff, even though we threw away the data at the core, because data wasn't important in order to do AI and ML and stuff like that. And so, when we see AI and machine learning doing well, it's when there is a lot of data, which is normally in things like fraud because it's before it gets to the core. But it's not on the other side of it, which is servicing the consumer and helping the Small Business make better decisions. 

Charles Potts: 

Absolutely, absolutely. And I chuckled near the Holy Grail is skew level data. You want to know what somebody bought. Granted, cancer it and don't trash it and throw it away because it leaves the POS and merchant acquiring platform couldn't care less about it. 

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Ron Shevlin: 

But it goes so far beyond just purchasing. It's really about understanding, having a better insight into the customer, whether that's a consumer, or a small business, or a corporation. What are all the inputs to their financial life, their financial health, their financial performance? And the problem is, it's not all simply account level stuff. It's not even stuff you're going to just get through aggregation and account integration. 

Ron Shevlin: 

I've said this a number of times to the number of financial institutions I've worked with, and I just get the sense it falls on deaf ears that I think these better spending the next two to three years building out their data infrastructure versus trying to build applications. That's a long period of time to do that and not see those results. But going ahead with AI type pilots, it just isn't having the bottom line impact. 

Ron Shevlin: 

And I think that's why in gyms versus survey, that's why you see the institution saying, we're not having the results we did, because they didn't build the data infrastructure and the business infrastructure it takes to do these things correctly. 

Walter Hoffmann: 

So Ron, but challenging that a little bit. So data infrastructure, and a concise data strategy is a financial institution. If some institutions, let's just say if they're $5 to $10 billion in asset size, they might have, outside of their core system itself, they may have somewhere between around about 20 and 50 different types of third party vendors providing different types of services. I mean, is the data readily available? Do you think generally speaking, do you think data is readily available, whether it be through the core provider, whether it be through the ancillary platforms historically, and how we're looking at things today as we go forward. Is that data available so that the institutions can actually make that strategy? To control their data for the consumer? 

Ron Shevlin: 

The simple answer to the question is actually, no, it's not there. But it actually leads to a couple advantages. Number one, it's not there for any five to $10 billion institutions, also not there for any 50 to a trillion dollar institution. So there's some parity there. Second of all, you don't have to have it all. One of the things, going back 10, 15 years, I was always amazed that, especially the large institutions, we all have these 360 degree view of the customer efforts going on. It was re centralize everything so we have a 360 degree view of the customer. 

Ron Shevlin: 

But reality is, is that, so those projects took three to five years and hundreds of millions of dollars to do and didn't produce the kind of results they thought because the reality is, if there are a million data points about somebody, you don't need a million. You need 1000. I don't know what those 1000 are. That's the problem. The problem is figuring out which data points really matter that you really need and go back to Charles point about strategy and direction. Unless who you're going after, what you're trying to build for them and deliver for them and differentiate, then you can't know what data points you need to go get aggregate or to proxy. 

Ron Shevlin: 

I mean, you're not always going to get the data. But other data points predict other data points. So that's what I mean when I say build out the data infrastructure. It doesn't mean go collect the million data points that are available. It means figuring out what data points are important, what data you can get, how much it's going to cost you to get it, because some of it's just not going to be worth the purchase. And from a banking perspective, I think this is going to require a lot more collaboration between financial institutions. 

Ron Shevlin: 

And, look, I'd for love for you to address this, Charles, because you're on the bank side. I see a lot more collaboration among credit unions than I do among the community banks. But I think that's something that's going to have to really change in the next couple of years. 

Charles Potts: 

Well, to a large extent, I think where that's leading us. This is the age-old problem in banking in general. I have all the data in the world, but if I don't have the products and services to meet the needs of the customers, have I shown you my free checking account? What about my free checking account? Would you like my free checking account? I mean, I used my CRM and a mountain of data to churn through every month a new campaign. 

Charles Potts: 

But if I don't Have the products and services that the customer needs, then I'm just burning up cycle time. So the collaboration, the expansion of relationships across financial institutions, financial service companies is the evolution that I think is still in its infancy so that my customer in my market in my delineated geography, who may have, let's just say, a wealth management need, but I don't have a wealth management solution. And I got to provision it and find it and deliver it to them in the right way. 

Charles Potts: 

I think that's the real potential is moving beyond my siloed products and services on an individual institution level, and being more holistic in acquiring and provisioning capabilities to meet the needs of my customers. 

Walter Hoffmann: 

The other thing I've just jumped into add before you jump in, Wade, is that, we're 30 minutes into this and the title is The Future of Open Banking, we haven't even talked open banking yet. But I think that's part of the delusion that many bankers have is that somehow, we're going to have this great open banking environment in which all the data flows freely, and we'll just tap into it. And I still struggle to see how that's really going to evolve and come about. 

Charles Potts: 

I'm not a big fan of the term in the US market, because we don't have the same compelling business reasons nor regulatory reasons, nor cultural reasons that started PSD1 and PSD2 and what was happening with faster payments in the UK. I mean, we had check 21, which allowed guys like rich Oliver at the Atlanta fed to shut down all these massive cheque clearing systems, and they didn't have the same thing. 

Charles Potts: 

So they had massive costs they needed to take out of their clearing operation. And that began a cross border portability issue to remove friction from payments settlement and clearing. So open banking has become something. 

Ron Shevlin: 

Quick comment on the side there from Jared Riley basically saying the same thing about how open banking just become the new omni channel, I think he's spot on. 

Walter Hoffmann: 

I don't disagree. I think if you're looking at it, and there's still a standard, whether it be through a regulatory requirement or not, we're trying to maybe utilize different formats of services and create an author, our own byproduct of what we think is ultimately is going to be but there is still nothing that's definitive here in the United States to find what that's going to be for us, and for how financial institutions or vendors alike operating the space are going to move forward. Wade, I know you want to jump in, buddy. 

Wade Arnold: 

Man, I must be chomping at the bit through the video on this one, huh? To Charles point, it's an ambiguous term right now. So open banking, or big data, AI or mobile first, or Cloud- 

Charles Potts: 

Digitally native. 

Wade Arnold: 

What I am hopeful for in the United States is that, we have a reliable, secure way of consumers and businesses accessing their data. I think that the United States government should actually get involved and allow consumers to have access to their data. I do not think any government in any country should mandate a technical spec or implementation standard for how that should happen. But if I think about open banking. One area is my bank data, But boy, I sure would like to get my utility bill in the mouth do for it well before I have to pay it integrated into there. 

Wade Arnold: 

Without web scrapers, without cat and mouse games between financial institutions and PFM providers trying to make consumers lives better. So I do think that that's my data as a consumer. A lot of financial institutions are paying for that data. They are paying for the infrastructure. And I think they have a valid argument that it's their data. 

Wade Arnold: 

So that's, to me, a great spot where government can actually point direction. The United States is very innovative. And we're very different than the rest of the world. So if you take all the banks and credit unions, and say, "Hey, here is the standard, because you guys are all just dumb pipes that do exactly the same thing." It can't be true, or there wouldn't be that many financial institutions. It can't be true or there wouldn't be that many core systems. 

Wade Arnold: 

Every single core provider would love to consolidate down to one core, but unfortunately, they all do a little bit different thing and do it in a different way. So there's to me an access to data in a secure way that have some third party that has now the right to your credentials to move money out of your account or close your account. So making that data read only. 

Wade Arnold: 

And then there will be no shortage of companies that can aggregate that into different standards or different abstraction layers to come in and help consolidate that space into a single API. 

Charles Potts: 

And different solutions, different services, and again, the fragmented consumer and the small business marketplace, to your point Wade, all have different needs and trying to peg one is actually going to kill innovation not spoiling innovation. 

Wade Arnold: 

Yeah, if you try and build something on top of PSD too. 

Charles Potts: 

Exactly. 

Walter Hoffmann: 

So switching gears a little bit and try maybe like the topic, banking as a service, Wade, you had some the announcements and success of move, and what you're doing there. I know this is something close and dear to your heart, especially, as we look at new providers, like Moov Financial that are providing, let's say honest solutions to disparate processes within a financial institution and/or the process of getting funds as example, back to [inaudible 00:36:49] financial institutions and recognizing those in normal fashion. What are some new things that you're thinking about when you think about banking as a service and as an organization, yourself? And for how that affects open banking here in the next two, three years? 

Wade Arnold: 

I think it's good to maybe put my opinion out there real quickly. I think open banking is access to data in a secure way, in a non mutable way. You can't post a transaction, it's read only, safe and secure and audited. I think banking as service is quite the opposite. You're authenticated. Some people like to call banking as a service, like headless core, all kinds of interesting buzzwords around that terminology. But to me, that is very transactional, very payment related and the ability to not be in control of the entire user interface, but still provide those embedded banking features. 

Wade Arnold: 

And really, the area I'm most excited about in banking as a service, is simply the small businesses, consumers, vertical SAS providers. We call this all FinTech in 2020. My assumption is in 2030, we're going to call this treasury management, and it's something that every business that has needs automated transaction and embedded financials and needs to do that at scale, will use the banking as a service API. And Angeles Strange at Andreessen Horowitz says, all companies will become FinTech companies, which is an interesting quote, because you've got ... Marc Andreessen, the founder of the firm saying, all companies will be software companies. 

Wade Arnold: 

And so, what we're seeing is that this is a better consumer experience to stay inside of your Uber app, to stay in side of your Instacart app. The classic banking term it makes them sticky, is why there's this demand to have those services in these vertical SaaS companies. And I'm super excited about that. I do think it's a better experience. Did you think 10 years ago, remember we all went crazy, because Starbucks is going to become a bank? They really sped the, I think avalanche of consumer demand for banking services being inside a platform and marketplace company. 

Walter Hoffmann: 

Charles, you're going to go first? 

Charles Potts: 

Yeah. Look, I agree. The consumer dictate or the small business dictate is somewhat the same. Let me continue to surround my operational needs with more capabilities, more functionality. Let me create a more efficient relationship with my customer, and the ease by which I can bolt on, Connect in other services is really going to dictate the effective, efficient delivery of my service. 

Charles Potts: 

So like Starbucks, let me just keep making a cup of coffee. Let me keep selling my coffee product, but let me make the experience easier for my customer. And I think every business every bank, everybody is looking towards that same mindset. 

Ron Shevlin: 

Yeah, if I can jump in here. Sorry, go ahead, Wade. 

Wade Arnold: 

Banking, we like to put new words on old things. So this trend, this isn't new. Right? 

Walter Hoffmann: 

No. 

Wade Arnold: 

If you're a fortune 100 company, since computers were invented, a top tier bank would absolutely build out to anything you wanted in order to do your cash management and allow you invoicing and EDI. I mean, city is probably the best in the business at building out fortune 1000 companies specifically to their needs. I think the trend is really this standardization so that there is more access rather than one-to-one access per commercial customer. And that's proliferating the use cases and the total market that's addressable as you come down market out of the largest businesses in the world. 

Ron Shevlin: 

There are a couple of points. Wade, I want to address from what you had said originally. First of all, I think you're right about the opposite of open banking. Although I wouldn't have said banking as a service is the opposite of open banking. But embedded finance is the opposite of open banking, meaning that what embedded finance is really about, it's Amazon or an Uber basically saying, "Well, we are going to be the data universe. And so, let's embed as much as it didn't open." It is open only to our network or universe, or what's our platform. But there's obviously huge benefits to both the consumer and the providers for being part of that platform. 

Ron Shevlin: 

Why not if you're a bank, outsource your KYC and account opening function to let Amazon open that free and hand you an account. Let them deal with all the complexity of that. Banking as a service, to me is the input to the embedded finance. It's what allows the platform to provide a banking service. So I think there's some limitations to that, because how many platforms are really going to succeed providing a wide range of financial services? 

Ron Shevlin: 

There's always going to be competition for that. So there's only so many banking as a service providers that will succeed. But from the financial institution perspective, it's both an opportunity. It's not just embedding banking, it's embedding lending. It's embedding payments. And so, there's opportunities from the financial institution perspective, to yeah, they're all worried about being Kodaked and, whatever ... What's the word I'm thinking about? 

Charles Potts: 

Disintermediated. 

Ron Shevlin: 

Disintermediated, thank you, out of the equation. But reality is that it creates as much opportunity for them to create from a new distribution channel perspective. To Angela's quote about every farm becoming a financial services company, I mean, quite frankly ... And I don't mean to insult anybody here, but that's just nonsense. That's like saying that today's fortune 100 companies is in cleaning business because it cleans its offices. No, they outsource that. 

Ron Shevlin: 

The platforms are not the financial services providers. They're simply the platform upon which it happens. They are no more a financial services company than they are a manufacturer of shoes just because they sell shoes on their platform. So, the Mark's quote is a hell of a lot more closer to reality than Angela's quote is, not every everybody's going to be a financial services provider or FinTech. 

Wade Arnold: 

Oh, maybe I'll take the bait on that one, I guess. You just laid it out there and then, I came in after it. Agree but disagree. So I think what Cross Rivers Bank has done, what Goldman Sachs has done, are super interesting ways of doing banking a service and using distribution channels, whether that's a firm across rivers, if that's Amazon and apple at Goldman Sachs, I don't know that those institutions would have ever been able to capture that much market, without in essence, having a channel partner there. 

Wade Arnold: 

And so, I think it's really interesting opportunity in banking as a service. When I go into institutions, meet with the CEO and CFO, they say, "Well, what do you do?" And I say, "Well, I give you cheap deposits and non-interest income." And they go, "What's the catch?" Well, this whole risk underwriting BSA AML, that piece of the puzzle is on you. 

Charles Potts: 

That's on you. 

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Ron Shevlin: 

But Wade, I don't think we're on different sides of the coin here. I agree that there's that opportunity and cross rivers and so forth, would never have done that. But we've got 5000 banks, 5000 credit unions in the US, and they're not all going to transition to a banking as a cert become banking service provider. And, in fact, what we'll see is just more and more acquisition and consolidation in that space so that they'll be a few big providers of it, and the few will succeed at doing that, but it's going to consolidate pretty damn quick. 

Charles Potts: 

Well, what both you point out is, there's also room the banks to create partnerships on one side and partnerships on another side and be that intermediate. I look at Eric and the guys at the coastal community, and they're a bass on one side, and then they're working with Google handle, to your point, Ron, will handle the onboarding in KYC and authentication of customers that they bring into the bank. So it can be both things, or banks can pick and choose how, when and where they want to take advantage of these capabilities and stick to what they're really good at in their markets. And that's, again, the strategy has got to drive that the vision for the bank has got to drive that in the open mindset, the desire to take advantage of these tools to improve what they do for their existing customers and potentially extend that reach into their market for those customers who want these new digitally native type capabilities as an example. 

Ron Shevlin: 

But can we unpack that a little bit, Charles? Especially like coastal and the number of other new partners like Google announced, it's still not clear to me that there's this path, as you mentioned, bringing customers in. The banks have this affiliation with the Google checking account, but it seems to me that they're kind of disintermediating the banks to a certain extent and just using the bank as the platform and have the license to it. 

Ron Shevlin: 

It's apparently going to run through Google Pay. And so, where's the payback to the bank? And why does Google even need more than one partner to do this? 

Charles Potts: 

Well, Google has different desire. We can talk years and years worth of Google going out and seeding the landscape with new programs that that just bring them new data sources to monetize. And then shutting down those programs. You can find that landscape. I think the above the fold story, though, is still the one to play out, and that is, can partnering with Google bring me new customers and do some of the heavy lifting up front that I don't have to do? 

Charles Potts: 

That's one side of the equation. But, again, the devil's in the details, and we have yet to see the details on how that whole program will- 

Walter Hoffmann: 

[inaudible 00:49:19] We can definitely have a conversation all day long. [inaudible 00:49:28]. But we need to start wrapping up to allow people to answer some questions that are asked, if you will. Wade, go ahead and respond to them. If anything, we can try to maybe do a touch point on just some nuggets for everyone, or what you feel to have a new area to look at when it comes to banking and the future of banking as you're looking at today. 

Wade Arnold: 

I think my only response around every software company becoming a FinTech is really around every software company 20 years ago and truly needed a website, and 10 years ago, truly needed a mobile app. And I do think we're in a moment, they didn't need to make their own phone. But they didn't need to have that part of the digital experience. They didn't need to build their own web server, or have their own servers. They didn't need to have that experience. 

Wade Arnold: 

And so, what I do think is happening with embedded financial services? Is it the user experience is simply better? The payout experience of an Uber driver is actually allows Uber to pay their drivers less than other independent contractor companies that only pay every other week. And that's an incredible user experience where they can go drive in the morning and go buy beer in the afternoon off the money that they just made. And so, that flow, an access to capital, regardless if it's powered by cross rivers, or Goldman Sachs or preferably move. 

Wade Arnold: 

To me, that's the change that we're seeing in software development is that it's becoming a [inaudible 00:51:08] feature that they need to have it as part of their product to keep people inside of the channel. 

Charles Potts: 

Yeah, I mean, there's definitely still a ground game to be played out here with lots of players trying to acquire market share, acquire presence, and then there's some 9000 identifiable "Fintechs" in the United States. That's, a big pile of stuff to filter. 

Walter Hoffmann: 

Charles, any nuggets from you as far as things that you're looking at, super excited about as the Future of Open Banking, the general topic you're looking at? 

Charles Potts: 

Look, Wade's point, I think is a direction that we see banks paying attention to more closely and, again, the activity around the Cares Act and PPP has highlighted this. And that is extending and deepening the relationship they have with their small business customers, being able to provide more capabilities to their small business customers, to be able to provide that daily payroll, that daily provisioning of services to those small businesses. 

Charles Potts: 

I think this has created an awakening, an opening of the eyes to the possibilities that are out there and what we're seeing going forward, and what now and going forward is far more attention to, I like Wade's analogy is the city approach and having the the wealth of tools and capabilities that a business can take advantage of and provision and plugin to their own unique environment that fits their needs. 

Charles Potts: 

And the banking partner is the provider of that as the intermediary to provision a lot of those, and from Company A to Company B, having a business banking, Treasury cash management platform, that has all the bells and whistles that they need to be efficient and effective, I think is going to be a major leap forward for a lot of us in this industry. 

Walter Hoffmann: 

Ron, what about you? Next things that with your research and performs and Cornerstone were things that are keeping your eye on? 

Ron Shevlin: 

There's a lot keeping the eye on for sure. But here's the kind of comment I want to leave people with is, at the individual financial institution level, I think this comes down to making a pretty big strategic choice between whether or not you're going to take a passive approach to open banking or an active approach to open banking. Meaning, are you going sit back and wait to see what kind of evolves at the industry and even government regulatory level? Or are you going to go out and create it and not wait for it to happen? I think that the banks in Europe that waited for the regulations to come down the pike at a scramble to get in place. 

Ron Shevlin: 

I think if you're sitting back now and waiting for fed now to take gains and some traction on the payment side, good luck. Where you've got the clearing house doing a lot more work. You can't be passive and wait for this. You can't say, "Well, there's going to be regulations that will come down the pike that will regulate and enforce and open banking." You got to make a strategic choice and say, "Look, what can we do to help create this at a small level and start building it up from the ground up?" 

Ron Shevlin: 

I don't think you can sit back and wait to do that. But most midsize institutions don't have the billions of dollars that the big guys do to throw around. So you got to pick your spots. But my fear is that there's just too many mid sized institutions sitting back and waiting for something to come down the pike. And I don't think that's going to be ... I see this and some of the research I've done asking specifically around API development. I hate to tell you guys on the bank side, the last survey I did, about half of the credit union said that they've already been developing API's. 

Ron Shevlin: 

It's about half as many on the bank side. So I think the banks have some catching up to do from an API development and utilization perspective. But it's about being passive versus active. And I think active is going to be the better path for a lot of institutions to start going down 

Wade Arnold: 

To add to what Ron's saying there, even if you can't allow your own banking as a service platform, logical option of open banking, or banking as a service, or any of these tools, is to have a service provider. But what's not okay is piles of bank saying, "Well, I'm just going to sit here and wait until my service provider delivers something." At least get on the phone with that service provider and say, "This is part of your strategy." 

Wade Arnold: 

and maybe get other people that are on the same platform to do the same thing, because that's really the only way change actually occurs. 

Charles Potts: 

Or come get involved with the ICBA accelerator program and dip your toe into the water. It's exactly, Wade, you can't sit back and wait. And there are ample opportunities out there for bankers to get engaged and see what's going on. And thankfully, Walter, you and the team that next off toasting these kinds of obsessions are a big part of continuing to educate the marketplace and enlighten them to the possibilities, and that's really a large extent Wade's point. You can't wait. It's experienced the possibilities go out and look, it's there. 

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Walter Hoffmann: 

Again, thanking Ron, Charles and Wade for joining today. Our big thing is we want to be able to try to provide that level of education for institutions. And if we're doing a small part, at least we're making those steps forward. I appreciate everyone joining us today. Thank you so much. 

September 24, 2020
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