What They (mostly) Don't Teach You at Banking School

By JP Nicols

Summer is officially over, and with it another season of teaching at some of the leading graduate schools of banking, which Jason Henrichs and I have enjoyed doing since 2015.

In 2012 when I proposed the first ever fintech and innovation curriculum for these programs, fintech seemed like a fringe topic to most bankers and many didn’t see the need for it.

I persisted for the next three years, punctuating my pitch by saying these programs were doing a great job of teaching industry best practices; but that was akin to teaching local video stores how to operate more like Blockbuster. Essentially how to play the same game a little more efficiently. Netflix didn’t beat Blockbuster at their own game, they changed the game; and that’s what fintech was already starting to do to traditional banking.

Who was going to teach the bankers how to create new products, services, and business models to survive and thrive in this era of digital disruption?

Still a lot of work to do

A decade later, most of the industry still has a lot of work to do. Alloy Labs members should feel ahead of the curve, and there is still plenty of opportunity to be makers, not takers of someone else's strategy.

A few weeks ago Bank Director released its 2022 Technology Survey results. Along with some unsurprising results (81% or respondents said their bank increased its technology budget, and 89% identified cybersecurity as a key area for investment), there were some findings that felt like we set the Wayback Machine to the 20th century.

• 56% said “Local banks and/or credit unions” were considered their greatest competitive threat, the number one answer. Just 29% said “Digital payment providers such as Square and Paypal”, and merely 6% identified “Digital, nonbank consumer lenders”.
• 43% said that their bank had not changed staffing within its branches or how service is delivered through its branches

Read the whole report and draw your own conclusions, but something else that stuck out were the answers to two questions on whether respondents believed their bank had the right tools in place to service various customer segments.

Respondents felt very confident that they had the tools in place to serve consumers ages 41+ and small and mid-sized businesses, but not at all confident for customers aged 16-25 (Gen Z). Yes, I know I’m on the wrong side of that generational divide, and yes, digital natives, Tik Tok, Snapchat, blah, blah, blah... but I don’t understand the vast difference in confidence levels.

It’s not that I think they’re wrong about Gen Z, it’s that I think they’re wrong about everyone else. There seems to be an awful lot of selection bias (and survivorship bias) leading bankers to feel like they are serving what’s left of their existing customer base well (which is often, surprise! older consumers and small businesses), despite plenty of evidence to the contrary. Where will growth come from?

Focusing on the Wrong Targets

Meanwhile, as of 2Q20, megabanks (51%) and digital banks (18%) accounted for 69% of all new accounts opened, as opposed to just 15% for regional banks and 2% for community banks, according to research by Ron Shevlin at Cornerstone Advisors. Which seems to confirm the suspicion that many bankers are benchmarking against the wrong competitors.

Just two days after Bank Director released the results of their survey, American Banker published an article asking “Are Banks Technology Bets Finally Paying Off?” The conclusion by the analysts and consultants quoted was mostly yes, but the only reasons cited were expense savings and efficiency gains. Sounds a lot like playing the same game just a little more efficiently, or as we like to put it, merely extending the line of existing results rather than bending or transcending the line.

This general anchoring to the status quo across the industry leaves a lot of white space for fearless leaders to bend and transcend the line as they differentiate themselves and find new competitive advantages.

This quarter alone, Alloy Labs members have collaborated to do just that in multiple ways:

• Launched Social Money? as a part of the member-built CHUCK? open payments network, which allows users to send digital gift cards through their banking apps and gives banks opportunities to add local merchants and demonstrated the new capabilities live on stage at Finovate in New York.
• Began exploring new use cases for embedded lending solutions for small business customers in our Concept Lab.
• Invested in three game-changing fintech companies: Totem, a neobank for indigenous people by indigenous people; Sardine, an AI-driven fraud digital fraud protection platform; and Themis, a compliance platform for Banking as a Service (BaaS).
• Speaking of the latter, members of the Alloy Labs BaaS Center of Excellence will be releasing this month their industry guidance on roles and responsibilities for banks and fintechs engaged in Banking as a Service as a follow up to the BaaS Nomenclature guide they released last quarter.
• The Third Party Diligence workgroup will also release The Practical Guide to Risk-Based Bank-Fintech Partnerships

Which brings us back to:

What They (Mostly) Don’t Teach You at Banking School

1. Dare to Differentiate. Know where to play offense (where you can win) and where to play defense (to stay in the game)
2. Benchmark to the Best, not Just the Familiar. Think beyond peer groups, legacy geography, and similar competitors to retain and win new customers
3. Get out of the Bank. The answers aren’t in spreadsheets and forecast models, they’re outside your four walls
4. Partner to Win. Relevant scale is achievable with the right partners.

While most of the industry keeps focused on just extending the line, we’ll keep pushing boundaries with a vengeance to bend and transcend to drive exponential growth.

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JP Nicols leads the industry-leading?FinTech Forge corporate and executive programs at Alloy Labs, working directly with bank leadership teams and boards to help them build and leverage their internal innovation capacity to "unbreak the bank", unleash new growth potential, and quickly forge ideas into results.