Nigel Morris, Managing Partner of QED Investors, shared his insights into what a bank in the digital era would like, or should like, at the LendIt USA 2017 conference today. He began his presentation with a list of items that are, on a practical level, what anyone in the business might call “common sense.” His list included:
- Delight the customer in service and product design
- Embrace digital channels and avoid creating technology debt
- Develop culture of discipline and consistency
- Attract and retain top talent
- Don’t get sideways with regulators
- And more
“The problem is, none of these are actionable,” Morris said. “To me, starting a bank is a tightrope exercise between managing resilience and flexibility. Either one of those by itself is a bad thing.”
Morris went on to say that return on equity for banks was very good up through 2007. Since then, it’s been very low.
“Every year,” he said, “banks are making money, but they’re not returning a huge return for their investors.”
In order to be success, a bank has to be good at receiving deposits, or taking people’s money, look after it safely, and provide interest. But they also have to be good at lending it out and letting it make more money. If they’re just good at lending, they won’t have any deposits. If they’re just good at taking deposits, they won’t make a profit.
“The vast majority are leaving money lying around,” Morris said. Many of the large regional banks got out of unsecured lending because they weren’t making any money at it. This created a huge market for technology-based companies to step into and take advantage of the opportunity. In fact, since the Great Recession, many disruptors have tackled that market, he said.
Bank profits have been squeezed by regulator pressure, low interest rates, and evolving technology. The high cost of technology is a burden to banks. Mobile computing has reduced the value of the bank branch. On top of that, consumers are increasingly more willing to unbundle banking services.
When you add these factors together, it means one thing for traditional banking: This is the beginning of the decline of their influence. This is evident in their late trouble attracting and retaining great talent.
One thing financial technology disruptors have going in their favor is that many of the leading company innovators come from a banking background. Mike Cagney of SoFi was a senior vice president at Wells Fargo; Justin Basini of ClearScore was vice president of Capital One UK and global head of marketing and communications in the global banking division of Deutsche Bank; Sasha Orloff of LendUp was senior vice president of Citi Ventures and global technology microfinance analyst at The World Bank. Having an understanding of both banks and technology gives them a competitive advantage.
Morris also said both banks and FinTech companies operate at fragile extremes. Banks are slow to adopt digital channels, married to legacy technology infrastructure, make conservative use of alternative data, operate with organizational inflexibility, have a culture of “no” and little regulatory overhead, struggle to launch new businesses, have a weak talent attraction and retention model, and are poor promoters of credit scores. FinTech companies, by contrast, are more monoline with a narrow product suite, lack built-in physical distribution systems, operate on a scarcity of customer data, are millennially focused, struggle to scale, have a high cost of capital and debt, lack capital reserves, and have minimal compliance requirements.
Morris sees the playing field much more level now than in the past. QED Investors developed a framework to analyze business units and pull all of this data together to create a map of retail financial services.
By dividing the banking industry and FinTech competitors into a 4-quadrant grid, Morris has given food for thought about what a bank should look like in this new millennium. Unfortunately, I didn’t get to see the end of his presentation, but I’d suspect, based on what I did see, if he were to start a bank today, he’d want to incorporate the best of what traditional banks have to offer and the best of what marketplace lending companies like SoFi and LendUp have to offer. It might look something like Cross River Bank. Of course, there’s always a way to build a better bank.