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When the Affluent Become the Unbanked

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Concern about those who have been left behind in receiving financial services (“the unbanked” and “the underbanked” ) have been popular topics of conversation amongst bankers and regulators over the past few years.

An important thread of these conversations has been the fact that in many cases, it is the customers who are leaving the traditional financial service providers behind, not the other way around.

I spend most of my time working with the “overbanked”– affluent families who have no shortage of financial services options, and as I have written previously, they too can find a variety of services to borrow, hold, invest and move money without the need for a traditional bank.

Yesterday’s Wall Street Journal reported on an affluent family who has “…no need, desire or want to go to a regular bank,”

Footnote to Financial Crisi: More People Shun the Bank – WSJ.com

 

 

TechSpeak to English Dictionary

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Word cloud for Web StartupI am excited to spend the next two days peering into the future of FinTech as I watch and hear 60 companies demo their wares at Finovate. This TechSpeak to English Dictionary from Francisco Dao may be helpful for some attendees (and some presenters). Enjoy…

PandoDaily: The TechSpeak to English Dictionary

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Why More Experienced CEOs Will Stay At the Forefront of Tech Innovation

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This is as encouraging to me personally (“the average age of founders of technology companies is a surprisingly high 39 – with twice as many over-50 executives as those under 29 years old.)”, as it is generally (“The United States might be on the cusp of an entrepreneurship boom—not in spite of an aging population but because of it.”).

But I especially like the described “four character traits of a successful CEO – Sensemaking, Relating, Visioning, Inventing.” I couldn’t agree more, and I have seen an abundance of these traits in the CEOs I admire the most (and a dearth in those who leaving me scratching my head).

The Convergence of High Tech and High Touch in Wealth Management

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I wrote a piece for the popular fintech blog netbanker yesterday on how high tech and high touch are converging in wealth management, and what I will be watching for in that convergence zone next week at Finovate Fall 2012 in New York.

In the article, I mentioned that most of the notable traction to date has been in the payments space. One might not think that this “dumb pipe” portion of banks’ business models– moving dollars and data from Point A to Point B– would provide such fertile ground for disruptive innovation, but consider the impact and potential of players such as Finovate alums Dwolla and Simple, as well as Square, PayPal, and others.

I also noted in the article that innovative specialty lenders and crowdsourcing platforms are breaching what had long been banks’ deepest moat–  the ability to monetize their balance sheets. Most simply defined, banks’ primary function is to be a financial intermediary. Besides moving money from one place to the other, they hold excess capital when it is not needed for investment, and lend it out when it is; providing liquidity to all sorts of macro and micro markets along the way.

Oligopolists acting like oligopolists

Even though there are over 7,000 banks (plus a similar number of credit unions) in the U.S. alone, the industry has long operated as an oligopoly. For the most part, it continues to act that way despite disruptive threats from all around. After all, their primary product is the ultimate undifferentiated commodity, money. Bank A’s money isn’t better designed, sturdier or more portable than Bank B’s.

Parenthetically, oligopolists acting like oligopolists has a lot to do with the reason most consumers hold banks in just slightly higher esteem than they do the U.S. Congress. Banks integrated vertically and horizontally, they bought weaker competitors, they raised prices, they made up new fees, they cut costs and maximized profits for shareholders with scant regard to other stakeholders, like, you know, their customers.

Predictably, smart players from outside the industry have visions for better ways of doing business.

As frightening as any of these threats should be to any entrenched bankers who are paying attention, the ongoing march of innovation should be scaring them right out of their moire suspenders. Innovators are moving beyond solving the algorithmic problems of the industry and beginning to tackle more dynamic and heuristic areas, such as wealth management.

I continue to reference a recent American Banker article cited a KPMG survey that said 9 out of 10 banks were considering a major overhaul of their strategy, and that 40% said that wealth management was essential to growing revenue in the future.

Wealth management is an attractive business, and if done right, the business can also be a key differentiator, but it requires the ability to develop, manage and leverage intellectual capital beyond the commodity that is the bulk of many banks’ current business models.

Not all will be able to make the leap.

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USB CEO Davis Gives Advice to Bankers

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Over the past two weeks I have been a Faculty Fellow at the Pacific Coast Banking School, the premier graduate school of banking, held at the University of Washington. It is energizing and humbling to be surrounded by so many talented students and faculty members.

At  last night’s keynote address, U.S. Bancorp CEO, President and Chairman Richard Davis gave his advice to the assembled crowd of over 500 banking leaders. Davis is known to like sports analogies as metaphors for leadership and strategic concepts, and he described the industry as being at halftime in a basketball game.

Richard Davis at PCBS

First, he described the industry in basketball terms:

The Rules: Changing

With Dodd Frank still only roughly one third finalized and work still being done to finalize global capital and liquidity standards, the rules are changing even as the game is being played. He urged the crowd to get with the decision makers and advocate for changes that might be needed, but not to complain. Complaining only gives permission to others to complain, and unless and until things change, the rules are the rules, and the team who executes the best under the rules in place will win the game.

The Venue: Poor

Davis likened the economic and regulatory pressures on the industry to playing in a poorly lit arena with a tilted floor, warped floorboards and where the air conditioning doesn’t work. What’s important to realize though, is that the competition is playing under the exact same conditions, and the team that figures out how to adapt their game to the conditions will win.

The Fans: Confused

The fans represent the customers, and they are confused because they thought they understood the rules of the game and some of their favorite teams didn’t perform very well. Some are fed up for good reason, but they will support a winner.

The Referees: Aggressive

Davis was clear in explaining that legislators and regulators all over the world are keen to prevent another global finanical meltdown, and thus are right in calling a tight game. It’s exactly what he would do if he were in their shoes, he said. Bankers need to understand this, accept it and step up their play to be successful.

The Owners: Seeking Success

Shareholders want their team to win, that’s why they invested in their franchise. Davis cautioned that the ROEs of the past few years for most banks are not covering their cost of capital, and that is unsustainable. Firms need to focus on growing revenue, lest they become takeover targets.

Halftime

He wrapped up his sports analogy by playing one of my all-time favorite clips, from Hoosiers. The undersized  team from little old Hickory, Indiana steps into Indianapolis’s Hinkle Fieldhouse wide-eyed and intimidated about their impending championship game in such a cavernous venue. Coach Dale (Gene Hackman) hands the boys a tape measure and asks them  to measure the distance from the foul line to the basket and from the basket to the floor. The players become visibly more confident as Coach Dale winds up the tape measure and says “I think you’ll find it’s the exact same measurements as our gym back in Hickory”.

In other words, we are all playing by the same rules on the same court. Don’t over-complicate it. Focus on what you need to do to win the game.

Davis then declared the game as being at halftime, and halftime is great because anything is possible. He urged the bankers to use the halftime break to assess what is working and keep it up, and to make the necessary adjustments, and most importantly to rally the team to a strong finish in the second half.

Not Just Another Lame Sports Analogy

Lest you think this is just another shopworn, hackneyed sports reference from just another executive too stupid or lazy to use his own words to describe what’s happening in his industry, you should realize that U.S. Bancorp is widely considered one of the best managed financial institutions on the planet. Their bond ratings, price to book, ROE, ROA and efficiency ratios are all absolutely at the top of the industry, and Davis has been at the helm since 2006, and has been a key senior leader there since 1993. He has a unique knack for using simple words to convey complex concepts, and the crowd gave him a rousing standing ovation.

Of course, I have my own biases. I worked for the bank for twenty years and saw Davis up close in a wide variety of situations, from one-on-one to very large crowds, from broad strategic issue to very deep operational details. He does it all very well, and he is simply one of the best leaders I have ever seen.

Even if sports analogies are not your thing, and even if you are not a banker, I think the core of the message is universal and enduring: Spend less time complaining about the rules, the refs, the venue, the fans, the owners and the other teams– just focus on what you need to do. And win regardless.

As Jim Rohn said:

“Don’t wish it was easier, wish you were better.”

© JP Nicols – 2012

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