2017 Conference

JP Nicols: Wish I had a longer entrance to that, I’d run down with the music. Thanks for sticking around. I saw all those people leaving with their suitcase. I’m like, “Was it me?” I haven’t even said anything yet. Well thanks for having me here with you today. I’ve sat in your seats before. I spent 20 years helping a grow a 6 billion dollar bank into a 400 billion dollar bank. And for the past five years I’ve been really at the intersection between banks and fintechs, and trying to help them make sense out of all these things that are going on, the things that you’ve heard about for the last couple of days, particularly some of those crazy things you heard from that wacky Australian guy, Brett King, yesterday. He threw me some shade and that’s okay, I’ll throw some back, he’s not here to defend himself.

I think, like Dallas said, I’m gonna try to put a bow on that and give you some idea on how all this stuff works together. Let’s start here: this notion of success. And you’re here celebrating the success you’ve had already, planning for your future success, no doubt, and that’s awesome, and congratulations on the success you’ve had. But here’s the thing: success is typically a pretty poor teacher. What got us to this point is not necessarily what gets us to the next level. And throughout my banking career, and probably more of yours, it was marked by, for the most part, rising asset prices, falling interest rates in an era of deregulation.

Now, we hit the brick wall in 2008, and we think about it as the global financial crisis, and it was certainly that. But there’s been a lot more going on, beginning around that time, and certainly since that time. So when the crisis hit, we became very inwardly focused, and for good reason. Our whole industry was rocked, and we had to think about how do we prevent something this drastic from ever happening again? Abut we used a lot of the past to think about what we should do for the future, and meanwhile, right around us new technologies were emerging that were changing the world, and certainly changing the lives of our customers. Things that really weren’t possible in 2008 or years prior have opened up.

And your strategy works until it doesn’t. One of the things that we never really thought about here was the threat of substitution. Michael Porter has five forces; you probably learned about this in business 101. Now we could talk about each one of these things. We could talk about supplier power and, for the most part, means money supply and regulators, and their increasing influence on our business. The threat of new entry, and normally what that means is banks like us, more banks, more credit unions. Well we have fewer; we had about 13,000 banks in the country when I started my banking career. We’re down to just over 5,000 now. Similar number of credit unions, similar kind of reduction. Buyer power, our customer s are smarter and better connected than ever.

But what we never had to deal with was this threat of substitution. We all just competed with each other, and there’s the old joke about the campers, here’s a bear and starts to lace up his shoes. His co-camper says, “Well what are you doing? You can’t outrun a bear.” And he says, “Well I don’t have to outrun the bear, I only have to outrun you.” And that was the way we looked at our own competition. We competed with one another, I’m sure we had big banks, and small banks, and credit unions, and savings banks, and SNLs, but let’s be honest, we pretty do pretty much the same thing, in pretty much the same way, with pretty much the same products and pretty much the same policies and procedures.

And then one of the things that really caught on, circa 2008, this whole notion of fintech, financial technology. And it’s suddenly possible to live my entire financial life without a direct, conscious relationship with a traditional licensed financial institution, a bank or a credit union. Sure, they’re behind the apps on my phone, but that’s something quite a bit different. I could live my whole life through a series of apps. So your strategy works until it doesn’t. Here’s an executive who said in 2010, “We’re strategically positioned better than just about anybody out there. Never in my wildest dreams would I have aimed this high.” Well maybe just a little higher would have been better. This was the head of digital strategy for Blockbuster in 2010. Two years prior, the CEO of Blockbuster said that, “Netflix and Red Box aren’t even on our radar screen, in terms of competition. Not at all.”

It’s easy to use them as a punchline today, but this wasn’t an okay company, this was a great company. They were absolutely dominant in the business. They were opening stores every 24 hours, they had over 8,000 stores, about 30% market share of the whole in-home video market. Let’s run the clock back and look at what was that all like, before Blockbuster even came, for those of you that remember the days of the mom and pop local video store. Remember these days? My wife worked at one of these, it was about 200 square feet. They had a couple of hundred video tapes, at this time, this is even before DVDs. A couple hundred tapes in stock, you went in there Friday afternoon after work, and you’re hoping to get there early enough to get Beverly Hills Cop, and you walk out with Camp Beverly Hills, as close you could get. Your first, second, third, fourth, fifth, sixth, seventh, eighth, and ninth choices were all gone, and so you walk out with what was available because inventory was very expensive at the time, as was retail space.

And Blockbuster really started to think about this differently, thinking about it as a retailer, and they opened stores that were about 10 times larger than the average mom and pop store, carried about 10 times the inventory, backed by regional warehouses. They had bar codes so they could manage supply and demand, they knew what was being rented and on what days and by whom and where, and they could move that round through the regional warehouses. What Blockbuster did was executed the business model better than everybody else. Same business model, and one of the cornerstones was location, location, location, the three most important things in real estate. And they had them all, they had the best locations in all the best parts of town. They had great, well trained staff inside that knew the movies. This was the original recommendation engine. “Oh, if you like this then you might like that.” And this was the business model, they executed the business model better than everybody else.

And I think it’s a fairly interesting, if not scary, proxy to think about the banking industry. Because what worked throughout my whole career and generations before me was executing the same business model as everybody else, and whoever executed it better won. That was certainly true in the 1980s and the 1990s, and even the early parts of the 2000s, the banks had executed more efficiently the same business model as everybody else, were able to acquire those that were not so efficient in their execution. But what happened in 1997 to Blockbuster is a computer engineer named Reed Hastings. Now this is an apocryphal story, he says it didn’t really happen, but he kind of likes that people tell the story anyway, so let’s pretend that it did. Something like it certainly did.

He rented Apollo 13, forgot to take it back and at the end of weekend, goes back in on Monday, he has a $40 late fee. He was pretty pissed off about that, so he started a little company called Netflix. One thing a lot of people don’t know about Netflix is in 2001. It’s hard to start a business, and it’s hard to scale a business, particularly a B2C business. He actually offered to sell Netflix to Blockbuster for 50 million dollars, they turned him down. You know what happened, you know the rest of this movie, you’ve seen it. The thing about Netflix is, they didn’t beat them at their own game, they changed the game.

We think about this in banked and we should see this coming. In 2014, this survey came out and just like everyone I had ever seen before in my career, they asked customers to define convenience. The number one answer: branches near me. Location, location, location. In 2015, for the first time, it’s no longer the number one answer; it’s not even the number two answer. It’s dropped to number three. Now the number one answer is having a leading online mobile offerings. The game is changing. We should have seen this coming. We’ve known that smartphone penetration has been on the rise since, believe it or not, actually before the iPhone, before 2008. It’s grown now, and I was just in South Korea a few weeks ago and they laugh at these numbers, it’s more like 97% there, Scandinavia and other parts of the world, but we certainly have a majority.

Does anybody here not have a smartphone? Nobody is like my mother-in-law? Okay. One? Alright, we gotta talk, that’s awesome. But clearly, that’s cool, right? But you’re in the minority. We know where the market’s going. We shouldn’t have been so shocked when this other tipping point came up a couple of years ago. We look at the percentage of transactions. Those that took place on mobile kept growing and growing and growing, while those in branches shrunk, and the lines crossed for the first time in 2015. Bank of America, fourth quarter showed some pretty detailed statistics, for the first time, on their mobile banking adoption. They’re adding about half a million to a million plus new monthly active users to their mobile banking every single quarter, and the percentage of mobile deposit transaction goes up every single quarter.

And this statistic is the one that really stuck out for me, that weekly mobile interactions are 12 times more than that of weekly branch interactions. People keep telling me, “We need branches because that’s where the customers are.” Really? Now listen, I’m not one of these people who will tell you, “You don’t need any branches, close them all and the world’s going to completely digital, mobile.” I don’t think so, but directionally I think this is correct, and I think this is going to continue. We’ll still have some branches. We’ll need fewer, what we do in them will be different, it already is, and we’re gonna see more and more and more of it. This device, when you have 80 million dollars worth of devices on your table the other day, a million times more powerful than the computer that landed Apollo 11 lunar escape module on the moon; Brett talked about that yesterday, and we all have them.

How can we not see this? And yet many of us haven’t. So here’s the thing, with apologies to William Gibson, as he said about the future. I say disruption is already here, it’s just not widely distributed yet. It depends where we look. Brett said this yesterday: “By 2025, the largest financial institution won’t be a bank, it’s gonna be a technology company, and they’re not gonna sell bank products as we know them today. They’re gonna access those banking utilities, value store, value transfer, credit through everyday experiences.” I think he’s absolutely right about that, and we’re already on that path.

What we’ve seen so far in this disruption in fintech has been really at the surface of what I call the experience level. Putting an iPad in the hands of your advisors, putting a digital wrap around your existing products and services, or having a mobile app, that’s all great. You need to do that to keep up with your customer. But we’re starting to see things a layer below, we call the tactical level. And this is where things like APIs and straight through processing and re-engineering process, and really building things straight through on a digital platform, not just putting the wrapper around, or really creating not only great cost advantages, but also great advantages around the customer experience, because the whole thing is tied on. It’s not just putting that digital lipstick on the analog pig that we’re used to managing. We were built for the days of brick and mortar and paper, and the rest of the world has moved on from that.

And yet, there’s still another layer, what I call the strategic layer. And we look at things like blockchain and artificial intelligence, and we’re just scratching the surface on what’s possible there and what’s going to happen, fundamentally changing the business model. And I’m not gonna go deep into blockchain here, nor am I a particular blockchain expert, but you think about the very business of this being distributed ledgers, well we’re in the ledger business. I have a ledger and you have a ledger, and you store value on your ledger and if I transfer it off of my ledger onto your ledger, then we have to agree on those amounts. Well what if I’m not the gatekeeper to that anymore? What if that’s all public and permission less, and there’s private and mission too, and I’m not gonna get into all that. But think about where this is heading.

Wayne Gretzky, famously regarded the best hockey player in the world because he didn’t skate to where the puck was, he skated to where the puck was going. This is where the puck is going. Two guys here, Ichram Magdon Ismael on the left, Andrew Kortina. Does anybody know who these guys are. Anybody recognize their names? Well Ichram and Andrew went to University of Pennsylvania together, the graduated in 2009 and decided they didn’t want to go work for somebody, they wanted to start their own company, although they weren’t sure exactly what, so they spent about a week together driving around, talking to people, thinking up ideas, drinking beer, buying pizza. At the end of the week, Ichram owed Andrew, I think it was $120, and he said, “How should I give that to you?” And he said, “Well I don’t know, I’ll talk to my bank.”

And they went in and talked to the bank, and guess what they found? About an inch thick of paperwork on a wire transfer agreement and an indemnity, and all this kind of stuff, and $35 fees on each side of the transaction. Yes, there’s something called ACH that will send it a little bit slower, but fairly cheaper, but you’re not qualified to be an ACH, is it push-pull transaction? What they found was there’s no really easy way to transfer money, what we would now call P2P or peer-to-peer. That term didn’t really exist, we certainly didn’t think about it inside our industry prior to this. There wasn’t a good example, and you heard from Bob and Chris yesterday on jobs to be done. They had a job to be done. I need to get my money to my friend in another city, in another bank, pretty cheaply, pretty easily, pretty quickly, how do we do that? It doesn’t exist? I don’t know, let’s create something.

They created a little company called Venmo. 2012 they sold it to BrainTree for 26 million, the next year PayPal bought the whole thing for 800 million, and now PayPal’s having the last two quarters ever were record quarters, and they’re pointing to Venmo transactions as being a cornerstone of that. And now, PayPal’s talking about Venmo coming more and more to the merchants who will accept Venmo as a payment, not just a peer-to-peer transfer, but as a payment mechanism.

A survey done just a couple years ago now, this was also in 2015, it was done in the UK, but I assure you, this will hold in the US, said that actually 78% of senior financial services executives polled has no idea who Venmo was, never heard of them. Again, maybe your peer-to-peer, this whole thing, this is like a new category that we didn’t compete in because we didn’t even think about the job to be done. But how about lending? I’m gonna go out on a limb and say, “If you’re here, especially, there’s a pretty good chance that you gather deposits, market up and lend it back out, hopefully with the help of PrecisionLender, but you’re probably in the lending business. And I’m just floored that 35% of people, as recently as two years ago, bank executives said, “Never heard of LendingClub. Who are those guys?” I’ve been talking about them since about 2012. And people said, “Well, but that’s a really small thing. We don’t take them very seriously.”

Well we’re about 25 billion dollars of loans originated now. Are we gonna take them serious now or or are we gonna wait until they get to 50 billion? At what stage do we think this really make sense? Disruption’s already happening, it’s just not widely distributed yet. You’ve probably seen this slide 100 times. I think it’s a little known [inaudible 00:17:15] in the bank consultants agreement that we have to show this slide, but it’s a pretty good one. CB Insights put this together; they took the Wells Fargo website and showed how every single line of business they’re in, every line on their income statement, every line on their balance sheet has one more more non-bank competitors, and we could do this with any of your bank websites.

And the same thing is true on the commercial side. Mostly, this disruption so far has been happening in consumer banking, but if you take a prototypical commercial balance sheet here, look at short term liabilities, long term liabilities, equity and other, again, we’ve got multiple providers that will do the things that we say we do to customers, but very focused on very specific needs, very specific jobs to be done. So McKinsey says that this is a 35% threat, on the left hand side, to the average retail bank’s margins, more than offset by 45% opportunity on the other side. And whether you think it’s a threat of an opportunity it sort of doesn’t matter, because the penalty for missing it is the same.

Well here’s the good news: the industry is going to survive. Like I said, I’m not a person telling you we’re going out of the branch business. We’re certainly not going out of the banking business; we’re gonna have banks, we’re gonna have banking. But don’t take too much solace in this notion, because that’s not the question. Yes we’ll have banks, but will we have your bank? That’s really the question, and what we have to figure out how to answer, or do we face our own Kodak moment. Kodak, a leader manufacturer of celluloid film in the world, until nobody cared about celluloid film anymore. The game changed.

Here’s the thing a lot of people don’t realize about Kodak, though. It’s not that they were surprised by digital photography, “Oh, what is this?” They actually were a pioneer in digital photography. What was difficult for them was changing the course of the company. While they were looking at digital photography and paying attention to that, they still focused it through their own lens of prints. “Well, then people are gonna take all those digital photographies and print.” My wife and daughter and I like to watch The Amazing Race. We’ve been off of it for a few years. We were watching the latest season, and we happened to notice that we had an unopened DVD for season there from 2003, I think it was. So we were watching that one, and actually they ended up in Seattle, where I live, which was kind of interesting. Unfortunately. I learned that, by text, as my wife and daughter told me, “We went ahead and watched the last episode while you were in Austin.” Great, thanks.

But they had a couple of stops along the way. One of the prizes that they won was a Kodak EasyShare camera. Okay, cool enough, that was their mode to try to get back into it. “Hey, our game is changing, we’ve got to get into digital photography now.” But one of the pit stops that they had to do in Kuala Lumpur was take their Kodak EasyShare camera, and go into a photo shop and print out their pictures that they had taken in front of the Petronas Towers. And I thought, “Man, this exactly exemplifies what I’ve talking about, is that we have this existing business model, how do we take this new technology and cram it through our existing business model, instead of thinking about what do our customer really want and need.”

And again, I love that you had Bob and Chris here yesterday. What are the jobs they needed to have done? I have another friend who sold a wireless company to AT&T, what became the original AT&T Wireless. And he talks about going into the boardroom in New York City with AT&T, and only about half the board even carried a cell phone, which was a flip phone, StarTac phone at that time. But everything he would talk about, and he was talking about data and all these digital things that were gonna be possible as the industry was coalescing around the CDMA standard. And he said they kept asking him, “Yeah, yeah, that’s great, but how do we sell more talk minutes out of that?” Does anybody pay attention to talk minutes anymore on your phone? We all have these smartphones, and phone is almost a misnomer anymore, that’s probably the thing we do the least on it.

So how do we avoid our own Kodak moment? It really is about change, and people fear change, I think, more than they fear failure, but if you don’t like change, you’re gonna like irrelevance even less. Here’s the good news: you don’t have to be out on the cutting edge. I have bankers tell me that all the time. “We’re not gonna be out on the edge, we’re gonna be a fast follower.” And I usually say you’re half right. You’re not fast, you are a follower. You oughta be reasonably fast, because you do have to close the gap, and it’s the customer experience gap between what your customers are expecting and what we’re providing.

So why do customers like fintech? There was a survey done last year, Capgemini, 14,000 consumers worldwide, I think it was about 1,500 bankers, and bankers in blue and customers in gray. And some of the differences were really pretty stark. Thew banks really misunderstand how much consumers like things being faster, and actually having good experience. Bankers still tell me that good experience means, “We have awesome tellers and we have shiny marble in our lobby.” Well those things may be important, but look at what they’re doing, and are you providing the same kind of customer experience digitally, and in many cases, unfortunately, the answers is no.

Technology has been a part of the largest companies in the world for about the last 15 years. In 2011, Marc Andreessen, the founder of Netscape, creator of Netscape, now one of the world’s most successful venture capitalists, he wrote an op ed piece I the Wall Street Journal called, “Software is eating the world.” And in 2011 people took it with a grain of salt and said, “Well, sorta, kinda, but look, we have all these other companies.” It didn’t take but five years now, all five of the five most valuable companies in the world are technology companies. And increasingly, we’ve got to think of ourselves, at least somewhat, as technology companies.

There’s 40 billion dollars invested in fintech over the last four years is really just the tip of the iceberg. How many Ichrams and Andrews are there out there? Not that many, and certainly not that many as a percentage of all the startups that are out there, but that’s also not the point. Think about the Facebook and the Googles and the Amazons, and Brett talked about this quite well yesterday, so I won’t repeat that, about how they’re encroaching into what traditionally was financial services. And I also think about the digital arms race. The largest and best funded of our competitors are acquiring, they’re investing, they’re incubating, they’re partnering, they’re building their own, and we can’t ignore this. Four keys, what I call innovating on purpose, and then I’ll tie that into why you’re here, bank on purpose. I think it’s a great notion, and I think we’ve gotta innovate on purpose.

The first thing we have to do is we’ve gotta look beyond the next few quarters. I love this Bill Gates quote: “We always overestimate the change that will occur in the next year, but underestimate what will happen in the next 10. The key is to not let yourself get lulled into inaction.” I like the Gartner hype curve, I think it’s a useful tool to think about how these ideas come and go. There’s a technology trigger, and then immediately some of these ideas catch fire and I reach, what Gartner calls, the peak of inflated expectations. Frankly, we’re probably there on blockchain right now. Blockchain won’t wash your socks and send your kids to college, but it will do a lot of cool things. We were here a few years ago with big data. Big data, big data, big data … We don’t say that buzzword quite so much anymore, but yet some of those ideas fall off through the trough of disillusionment.

Sometimes it’s not the right time, sometimes the ecosystem isn’t ready, sometimes the market isn’t ready. But if the idea is really a good one and the right pieces come together, we begin to climb the slope of enlightenment, and then ultimately the plateau of productivity, and it goes on and on. A new idea comes and this is how things happen, and it takes time. It doesn’t all happen in two years, but if we look back over 10 we can see a lot has happened. And part of the reason for that is ideas don’t just occur in a vacuum. They’re adopted, or not, by human beings. As early as 1957, Everett Rogers actually looked at this, the diffusion of innovation. It’s a standard Bell Curve, it’s a very small out the second standard deviation or innovators, early adopters. Most of us are in the middle … The early majority, late majority … For whatever reason, he didn’t carry the second standard deviation out on the right, but I assure you it exists. It’s my mother-in-law.

This is a true story. She once told me, “I don’t like going to the ATM because it takes too long.” I said, “Well what do you mean?” She said, “Well, I can only take it out in $10 increments.” You know what she was doing, right? Putting her card in, punching in the code, taking out a $10 bill, getting her receipt, getting her card back, putting it back in, and she did that 10 times in a row if she wanted $100. “It takes too long.” I don’t think that works the way you think it works. Now it’s not just an age thing. There’s all this talk about Millennials and digital natives and all that stuff, and I take a lot of that with a grain of salt. I think the digital native part is important, but digital immigrants are just as important as digital natives. But there’s not something magical about being born in this timeframe or that timeframe.

My mom is a little bit younger than my mother-in-law, but this is another true story. My favorite text from her iPhone 6 is, “Do you know if Skype takes PayPal? I need a new headset.” So mom’s a little bit more of an early adopter than my mother-in-law for sure. If you put these two together it makes sense. Those ideas that fall down through the trough of disillusionment, fall through what Jeffery Morrow called in 1993 The Chasm. He wrote a great cook called Crossing The Chasm. It’s a Bible to Silicon Valley companies, but it’s something that I think a financial services company should pay attention to too, because we’re really heavily weighted to the right side of that. This is us. We call them trailblazers or traditionalists, and most of us look a lot more like the guy on the right than the guy on the left.

Now that’s not a horrible thing. That’s exactly the person I want running the loan book and running the audit committee. I don’t want to throw the keys to the guy with the Mohawk on that here. That looks like a good credit risk, why don’t you go make it? But I’m not so sure I want him on the right running strategy and thinking about our customer experience either. I teach a class on innovation in fintech ed at the Pacific Coast Banking School University of Washington, well in fact, this year I’m gonna teach at University of Colorado and Wisconsin as well, in their graduate schools of banking.

But at PCBS, we actually put everybody through the Myers-Briggs personality test, and it confirms this exactly, that we’re very, very heavily over weighted on people that are sensors, they need to see it, feel it, taste it, touch it, hear it. It’s not so much the intuitives who are driving the innovation and the early adopters. Nothing wrong with that, but we’re over weighted. We just have to recognize that we’ve got a bias one way, and we need to balance it out a little bit more. If we get too far on this edge, it becomes the business prevention department. “Don’t worry, somebody came in here with an idea but I got rid of them.” We’ve all worked with that guy, right?

If we go too far the other way, it’s all innovation theater. “Oh, we’re gonna have a block chain in the cloud doing straight through processing,” blah, blah, blah. Well that’s great for buzzword bingo, and you have a bunch of kids in hoodies running around your cool brick office downtown, that’s great. But what we really want to have is a balance of this. The Japanese call their samurai sword, the steel is called tamahagane, and it’s a balance between high carbon steel that’s very, very strong, and a low carbon steel that’s very flexible, and we call this the alloy organization, that we need to have a little bit of both. We need to be strong, we need to be strong in risk management and a lot of things, but we also have to have some flexibility to try some new things, and we’re gonna talk a little bit more about this right now.

The second thing we have to keep in mind if we want to avoid our own Kodak moment and really be able to innovate on purpose, is we’ve gotta know that innovation is about creation, it’s not about theater. It’s about value creation, and this notion of plan your work and work your plan, it just doesn’t work anymore. We’re so used to thinking if we can get all our smartest people around a big, brown conference table in the tower, and we think long enough and hard enough, and we can make up even better numbers into our spreadsheets than the competitors make up the numbers in their spreadsheets. We’ll get it all planned out, and then we’ll be done with planning, and then we’ll step over here and we’ll jump into execution. We’re really good at planning, we plan our work, and then we’re gonna work our plan.

Doesn’t really work that way, particularly in this dynamic environment that we’re in. The great Prussian military strategist, Helmuth von Moltke, it’s a famous phrase, it says that no battle plan survives contact with the enemy. I think that The Great , Mike Tyson says it even more succinctly. “Everybody has a plan until they get punched in the face.” You would never sit down at a poker table or blackjack table, push all your chips to the middle and go, “Deal me some cards, I sure hope they’re good.” But that’s exactly what we do when we do through that planning process I just described with all of our smartest people around the table making up numbers in spreadsheets. And when we think we have it perfected then we’ll launch, and we’ll see what happens. And we don’t hit the projections, so marketing blames sales and sales blames product and product blames finance for making them sign up for all those numbers.

We need to shift from “Plan your work, work your plan,” to, “Test and learn.” I have a company called Fintech Forge, and we actually created an acronym around this we call FIRE. It stands for fast, iterative, responsive experiments, and it really is the best of lean six sigma and lean startup and Scrum and Agile, some of you may be using some of these things in your organization. Already, but it’s really putting them into work, and the six sigma is awesome when you’re perfecting things, perfecting the known knowns, perfecting best practices. But part of innovation is exploring the unknown and establishing next practices. We’ve got to also be able to embrace the power of one sigma. Don’t know if this will work, but based on preponderance of the evidence, looks like it’s worth testing. Let’s get it in the hands of a couple customers and see what happened.

Again, tying into what you heard yesterday from Bob and Chris, jobs to be done. Get it in hands earlier. I love the story of the apartment building and testing, and this whole idea of a pain point around moving and having storage space and all that. Brilliant. He didn’t think about that as an apartment landlord, he thought about that as a business person with customers who had jobs to be done, and we have to do better than that.

The third thing we have to do is be willing to partner. If the chairman of one of the largest and most successful banks on the planet says that, “We’re comfortable partnering where it makes sense.” Well maybe we should too. Jamie Dimon knows they don’t have to think at all inside their four walls. They’re doing a number of fintech partnerships already. Yes, they’re building their own, but they’re also more than open to partnering with others. Consumers do trust banks, and we have this advantage, that despite all the things that we do in our industry to cause customers to not trust us, for some reason they still do. 96% of customer surveys said they trust their bank somewhat or completely. Does anybody want to venture a guess how they answered the same question for fintechs? How do consumers trust fintechs? Anybody want to venture a number?

Male 1: It’s probably low, but I don’t think they [inaudible 00:34:31].

JP Nicols: Probably low, yeah. Usually the general through, including mine before I saw the data, was low, lower, at least. It is lower, but not a lot lower. 90% said they trust their fintech company that they work with somewhat or completely. This margin of trust that we have is probably not as big as we think it is, and it’s evaporating quickly. All the more reason for us to partner. Same survey asked your willingness to refer; would you refer a friend or family member to your bank? 50%, thereabouts said yes, pushing almost to two thirds now said, “Yeah, we’d refer our fintech, because we like the experience, we like what we get from this, we like how fast it is.”

I hear a lot from banks who say, “Oh, we already partner. Yeah, yeah, yeah, we do that. We’ve been doing that for years,” to which I say, just because you have a couple of tech vendors and a procurement department doesn’t mean you’re partnering. This notion of you’re a multi billion dollar bank asking two kids in a garage to indemnify you and sign an inch worth of disclosure statements and asking for three years of audit of financials. They don’t have three years of financial statements, think of Ichram and Andrew starting this company. That doesn’t mean vendor risk management isn’t important, it is, but we’ve got to think about this a little bit differently.

It’s different from hiring a vendor if we want to take advantage of some of the new things that’s happening in fintech, because bankers are from Mars and fintechs are from Venus. They speak very different languages, and most of partnerships today is focused on the technology, the technology has to work, and yes it does, that’s necessary, but it’s insufficient. Not only does the technology have to work, tab A has to fit into slot B, but we’ve gotta be able to solve for the culture, the cost, and the compliance. These fintech companies go by this Silicon Valley notion made popular by Mark Zuckerberg: “Move fast and break things,” and that doesn’t work in a highly regulated environment.

We’ve got to move fast and take advantage of the fast moving culture and the technology, but at the same time, make it work for our customers and for our shareholders, for our regulators, for our depositors. Last thing, we need to understand that innovation really is an act of leadership. I told you a few minutes ago about Kodak. In my mind, there’s no higher calling to any of you in leadership than the allocation of resources, financial resources, human resources, managerial time and attention. It’s hard, but innovation doesn’t just happen. Hey, there’s some cool idea out there, that’s great. I hear a lot from bankers too. “Well that’s all great, well we could just acquire those. We have this mode around our business, and then if anything cool comes along we’ll just acquire them.” There are a handful of banks, which that is absolutely true, JP Morgan being one of them, and Jamie Dimon has been very clear about that. But I think for most organizations, the reality is just because that sounds good on paper, that’s probably not the way you’re going to operate it. It’s really hard to change.

I just read a thing from Seth Godin. I get his daily emails, some of you may too, and it was something about change is hard because it forces you to disagree with a person you used to be. I think that’s a good way to think about it. But innovation is an act of leadership, it doesn’t just happen. Here’s a business cycle. You’ve all seen this in textbooks and talked about it in business class. We have a period of growth and then we have a period of maturity, and then eventually things decline. And I don’t think we think about this very much in our industry, because this isn’t really our reality. We haven’t had a growth category since home equity lending in the late 1980s, and we haven’t killed anything off since PastBook accounts, and some of you still offer those.

I’m working with a bank right now that still has a PastBook account. They bought another bank, and they’ve determined they need to keep that. We’re not very good at killing off products, that’s a whole other conversation. But the reality is, this middle isn’t a nice rounded hump. It’s what Geoffrey Moore calls, “The infinitely elastic middle.” And this is more what our business cycle looks like, or what it feels like inside financial institution, this low, single digit growth, year-in, year-out. So when we think about this, and we think about how we’re gonna get growth … I mentioned Michael Porter earlier, and some of this work was followed up in 1993 by Michael Tracy and Fred Wiersema, and they talked about value discipline.

And in 1999 John Hagel and Marc Singher at Harvard Business School followed up on this work, and they used slightly different language but they came up with a pretty similar conclusion, which was these are three strategy domains. You have to do a little bit of all of them. But market leaders really make a bigger bet in one of those. Now banks usually tell me they’re in the customer relationship management business when we have this conversation, but if I look at how they spend their money, what their CEO writes about in their annual report, what’s in the board minutes, follow the money, what are the actually spending on? It’s usually more around infrastructure management, and that’s about scale and repeatability and reliability, and all those things are really important.

But that’s also part of the game that’s already been played. That was a part of that scale up cycle that we talked about in 1980s, 1990s, early 2000s. I do think customer relationship management is very important. You have the ability to be very … This is the same language, this is what Michael Porter calls customer intimacy. You have the ability to be really intimate with your customer, and one of cool things, I think, about PrecisionLender is the ability to not only manage this from an infrastructure management point of view, but to actually customize to your individual relationships, so you can play both of these. I think very, very few banks are gonna be very true product innovation leaders, very few globally, and most don’t have an aspiration for that, and that’s okay. You don’t have to invent it in your own four walls, you can partner, as we talked about.

But I think we have to think about where these things fit in, because if we just do a little bit better for our customers, and we take a little bit of cost out along the way, that just extends out our infinitely elastic middle. Where the growth happens is in product leadership, and really coming up with something new that solves a problem that your customers care about. And whether you invented it or not, you have a choice in whether you want to deploy it and whether you want to pay attention and listen to your customers. I think there’s no better example of this than Apple.

In 1997, with Steve Jobs’ return to what was then known as Apple Computer Company, because that’s what they were, and they weren’t really a very good one. They had about 3% market share and Dell was eating the world. The business model, the primary business model or value priority there was infrastructure management. How do we take the cost out of this? You go to Dell.com and you put in the components that you want and we’ll send it to your house, and that worked for all of us. We probably all had a Dell computer; I had more than one. And when Steve Jobs returned to the company in ’97, he focused on a hunker down strategy. We do too many things and we don’t do them well enough, so let’s get out of peripherals, let’s get out of printers and let’s just focus on a couple of desktops, a couple of laptops, and bankers intuitively get that strategy.

That’s right, we have to stick to our knitting and stick to our core competencies and do all those things, and that makes a lot of sense for a lot of reasons. But that is not the strategy that made Apple the most valuable company in the world, or Steve Jobs a legend. Apple was able to catch not one, not two, but three massive secular growth curves, first with digital music, secondly with the smartphone and third with the tablet. Those were all product innovations, and those were all solving problems that were there, if not exactly obvious for people, seeing this trend of yes, music is doing digital, blah, blah, blah, blah.

They didn’t invent the mp3 player. I used to have an iRiver mp3 player that held up approximately 25 songs, and on cross country flights I knew them all very, very well, because I would hear them over and over. And I loved I had this tiny little thing. I didn’t have to carry a CD player and extra batteries and a thing full of CDs. The capacity wasn’t quite there yet, and oh, by the way, how did I get those songs? I stole them off of Napster. Not too proud of that, but I still have a few of those. But it was really iTunes that changed that game, to make it easy and legal to acquire, for 99 cents, that’s pretty cheap relative to free, and it just is a lot easier and it feels pretty good, and they really powered that wave. The key is to be able to ride those secular waves, not have them crash down on top of you.

Doing a little better for our existing customers, with our existing products isn’t really enough if we want to have growth. And most of you don’t have chief innovation officers, you have what we called And, I’s, not to be confused with the Andi product from PrecisionLender, I love that. I was just out there looking at that in the break. That looks really cool, which I had that when I was chief private banking officer with a 7 billion dollar loan portfolio. But And, I’s are people that I call … They have, “And innovation,” tacked onto their job title. They’re head of digital banking, they’re head of marketing, they’re head of something else and somebody said, “Oh, I guess we’re supposed to innovate now, so congratulations Mark, your head of digital banking and innovation.” Better than not having it, right?

But these people are in a tough role, because they don’t know, really, what they’re doing about innovation. They know their product and their business inside and out, but managing innovation is different than managing business as usual. So again, we’re back to the trailblazers and traditionalists. It’s not just about existing products, existing customers, existing markets, again, not just about best practices, but next practices, and how do we discover those? We got to continue to encourage those people inside your organization, and give them all the help that we can.

And ultimately, maybe Peter Drucker just had it right, that management is doing things right, but leadership is doing the right things. So four things: innovate on purpose, avoid our own Kodak moment, look beyond the next few quarters, think about value creation, be willing to partner and innovate as an act of leadership. And let me leave you with just a couple of closing thoughts, and I’ve kept a little time for Q & A, if you’d like. You have a choice to make here. This is the modern fintech version of Pascal’s dilemma. You have to decide, first of all, if you buy this whole thing, and I just told you about this new landscape. Or will the old world  prevail after all? Or motes are just too deep, and our industry is just too strong. It’ll be a lot more like the past, and I tell you that it is.

And then you have to decide, either way, are you gonna do something about it or not? You can double down on your existing strategies, you can just hope this is all a temporary fad, maybe it’ll go away. You can give up and just give way to the fintech innovators. “Oh, we’re just gonna do this,” and I’ve talked to banks that have already given up consumer lending, and now they’re talking about giving up commercial lending. And, “Well we think we can do more in real estate.” Well not only is that a concentration issue, but it’s also just whittling your way down to nothing. It’s painting yourself into a corner. But you have another choice to really embrace and engage and partner with these new players, that really has never been better. We’ve never had the ability to get such amazing technology so cheaply, to be able to deploy things, that we don’t have to write code and [inaudible 00:47:47] in our back office and hope to launch is 24 months from now.

We’ve got great partners out there in the cloud providing new things, but we’ve got to reframe the way we look at this, because I believe the future looks a lot different than the past. I’m often asked about, well what does that look like? And Brett gave you, certainly, some of his views for that. But I think maybe even more important, that the best way to predict the future is to create it. Thank you very much. Thank you. I have these slides on my website here at JPNicols.com/BOP, that takes for Bank On Purpose, in case you didn’t figure that one out. Happy to share those with you, and I’m happy to take questions or comments that you might have now. They’re like, “Dude, I got a flight an in hour, man.” Yes?

Male 2: In the slide that you showed earlier that represented trust fintech relative to banks, was there an age break on that when you dig deeper?

JP Nicols: Yeah, that’s a great question. I don’t recall if they broke that down. That is available if you just look up … That was the [inaudible 00:49:15] Capgemini survey, and they published those results, so they’re out there. I think there might be a breakdown, and clearly there will be some correlation with age. Like I said, I don’t buy into this whole notion that 77 million people in a so called generation we’ve hung a label on will all act exactly like the monolith. I don’t believe that at all, but I do think that over time, what you grow up with and what is normal to you, versus what is new and foreign certainly does matter. And I’ve talked to some banks that tell me, “Well, yeah that’s all great, but we just know we can’t keep up so we’re conceding the point on all of that. We’re just gonna go hire Touch,” and all that stuff.

And I go, “Well that’s great, but I’ve already looked at your demographics. Your average customer is somewhere between age 67 and dead, and how’s this play out for you over the long run?” But I suspect that there’s definitely some age skew to that. Thank you. What else?

Male 3: So JP, one of the interesting things that I think we covered on the podcast that you did with us is there’s lots of banks out there that have, and I think it goes into your Innovation Theater concept, where they create this, almost like an aquarium in the lobby. Let’s put some kids in hoodies in there and that’s our lab. Does that work? Or is there a better way that folks can go back and actually start to put some innovation.

JP Nicols: Yeah. Well it certainly can work. Probably the most famous is the Lockheed Skunkworks, and that’s where the SR71 Blackbird, first supersonic spy plane was developed, and many, many other amazing aeronautic innovations. That started by taking a bunch of rebels, and they literally hung a jolly roger outside on an off site building and they developed things. Incubating a new business is very different, and if you just throw it to your existing business it’ll get eaten alive, no one will pay attention to it. We’re working with a Silicon Valley tech company, name you’d recognize right away, very, very huge technology leader, not a fintech company, a massive tech leader, one of the winners of our generation. And they’ve got an idea around a cloud based API system that really would level the playing field for banks, because some of the big banks are developing their own ecosystems there.

They know this, at least the people we’re working with know this, but it’s still a fledgling business. There aren’t ready made buyers for it right now knocking on the door and asking for it, and to throw that to their commission sales reps, who already have a full account load and they’re trying to figure out, “How do I hit quota this quarter?” And all that stuff that doesn’t work. So there is something to be said for, particularly if an idea is still in the early stages and you’re trying to find product market fit, this is the whole idea around lean startup, around having the kids in the hoodie in the brick office downtown, or the aquarium, as Dallas puts it, that makes sense.

Most of that stuff, we didn’t talk about the horizons, but that’s kind of horizon three, that stuff you’re gonna commercialize maybe three or more years from now. That’s different than the incremental stuff, which is gonna be probably more resonant with your existing product managers and so on, and they’re just fundamentally different types of innovation. The real no man’s land is in between, then you try and take an incubating, incubated business and make it mainstream, because now what you’re saying is that somebody that runs a full time business, and this is exactly why we’re struggling with branches. If you look at the incentive arrange are setup, and we say, “Well all of our account are still open in the branch.” Well yeah, because you don’t allow them to be open digitally, and oh, by the way, you domicile every account in a branch as a cost center, and they get credit for that and they don’t want it to go somewhere …

There’s all of these structural issues that reinforce the status quo, and to say, “Well hey, now we have this whole digital thing,” it gets relegated as this alternative channel or something like that. It was a super long answer to your question, but you ask a really good, complex question. And it’s not either, or, or one or the other, or which is best, they’re just more or less appropriate depending on where you are. And the most innovative organizations are really doing all of the above and really trying to tie them together. What else?

Speaker 5: JP, you’ve noted the roles that have, “Do this,” and innovation. Does your counsel to your clients differ based upon the size? And do you find many organizations that have, literally, and innovation officer?

JP Nicols: Sure. If you look at the top 25 financial institutions in this country, about a third have a chief innovation officer. I tend to work less with them. There are some things we do and help with them. Usually it’s more about efficiency for them, whereas the other organizations with the And, I’s, a lot of it is really about effectiveness, how do we actually make this happen? Regardless of size, although somewhat correlated to size, we really see three groups of financial institutions. We call it leaders, learners and laggards, and the leaders were already doing all the stuff. The laggards don’t get it, maybe never will and they’ll just be passing statistics in our ongoing consolidation.

I tend to spend most of my time with the group in the middle, the learners. So the organization says, “Yeah, I get this, I know things are changing, I know we need to do more, but I’m not exactly sure how to get started, and I’m not sure how to reconcile this with the other things.” I mean, we cited Clayton Christiansen a couple of times yesterday. His seminal book, The Innovator’s Dilemma, was published 20 years ago now. And I don’t have time to give you the whole story, but the dilemma is you have real life customers buying real life products, generating real life revenue, today. Why would you divert any of that toward something that’s risky and unproven and might pay off in the future?

Yet the flip side of that is, if you don’t, everybody knows the Blockbuster story and Kodak, and on, and on, and on. Nokia, and Sony should have developed the mp3 player and they didn’t, on and on. It’s really, how do you help them reconcile that, and it kind of plays into Dallas’ question of there are incremental innovations of improving your existing products for existing customers. IT’s very important, that keeps you in the same, but that’s different than somebody who’s trying to look around the corner a little bit, and thinking about where you’re gonna catch that next wave of growth. Thank you. What else?

Speaker 6: Thank you. I would be curious, a decade from now, if we’re down to 5,300 banks from 14,000 or whatever, how many do you think will be there?

JP Nicols: I don’t know. Less than we have today. I’ll stand by my closing remark: the best way to predict the future is to create it. I know that, for institutions, what really matters is are they one of that number, whatever that number is. It’s certainly going to be a smaller number. Right now, the economy has been in recovery and stabilization, and a next big financial or economic shock will certainly accelerate the pace of that. One of the things that’s a little bit confusing about this part is there is no tomb stone and cause of death listed for banks. Banks don’t really die, they just hang up a new sign. You get a new business card. How many people have a business card that’s a different logo from the bank that you started with? Almost all of us have. Mine changed four times without ever leaving the save office where I was, so that masks a lot of …

We don’t have these punchline stories like Kodak or whoever and say, “Oh yeah, XYZ bank failed to innovate so they’re not here anymore.” It’s really this subtle thing, but we’re gonna continue to see consolidation. I guess if we want to just ask rhetorical questions, I’d flip it around and say, “Please tell me something, anything that you see that would make it the other way, or even stop,” and I have not found anything yet. What else? Alright. Dallas, anything else from you?

Dallas: I think we’re good JP, thank you.

JP Nicols: Great, thank you very much.