(Digital) Banking on the New Generation

Mitch Woods: Welcome to the latest episode of Lending Made Easy. Today, I'm joined once again by David Catalano and Bryan Peckinpaugh, and we're going to be diving into a topic that's been the center of many recent conversations, the impact of Gen Z and millennials on banking trends. A lot of this is coming from BAI recently published research indicates that 70 percent of the millennial and Gen Z population would switch financial service providers for a better digital offering.

So I'd like to start off today's episode with a question. I guess, Bryan, David, whoever wants to take a shot at this first, what exactly are better digital offerings?

David Catalano: Go ahead, Bryan.

Bryan Peckinpaugh: The million dollar question, Mitch,and potentially literal million dollar question, depending on what you might be investing in. And, I think that's part of the challenge. We've seen very similar reports and metrics out of firms like BAI. I mean, probably for 10 years or better, there's been a lot of talk about the, the reduction in switching costs for, consumers of financial products, there's been a, obviously a growth in the, non bank financial institution space or MBFIs that has been the, behind the scenes, the ringing of the gong, of the death of the bank, the death of the credit union that just hasn't come to fruition. And I think there's a lot of things that play there. You know, from the, the protection of deposits that exists for banks and credit unions from, the long term impact of those types of switching, because those millennials, those Gen Zers are, are not yet the highly profitable, Financial relationships in most instances, they're also not, potentially bringing the, the corporate or business relationships yet.

So, so the impact of them switching is just seen in, low profit or even sometimes desirable attrition because some of those Gen Zers might actually cost me money to serve, especially if I've got to consider, spending significant amount of money to bring in these quote unquote digital assets.

So it creates a conundrum for the financial institution because they certainly see what those MBF eyes are bringing to the table. Somebody like a SoFi, that that's bringing very, very slick lending products to the market that they have invested heavily in, over the last five to 10 years when funding was incredibly cheap, that are building wow experiences for those folks to try to attract, you know, the deposits try to attract the, the low dollar loans. So, you know, the, the quick cash type ideas that I can auto decision to those platforms, get money in hands of, you know, maybe not always a desirable bank. clients quickly. but trying to replicate that whole cloth is not the right approach, right?

You really need to be selective and you got to start figuring out what does that digital experience mean to you? What does it mean to the different, you know, tranches of segmentation within your portfolio? You know, what am I going to offer a consumer versus what am I going to offer a corporate client is going to be wildly different from a, from an online digital perspective.

There's gonna be some table stakes. There's no doubt. Yeah, you know, the, you don't want to be caught lagging with deposit account opening. You don't want to be caught lagging with simple, online applications for existing customers. you know, but it is really doing, the market study, doing the analysis of your clientele, your desired clientele.

As well as the ones you don't want that are in your markets. cause the last thing I want to do is put tools out there that only brings me clients I don't want.

David Catalano: Well said, Bryan.

Mitch Woods: Bryan, I guess a question for you. I think you said, said this pretty early on there, right? That. Oftentimes, it's the Gen Z and the Millennials that aren't the profitable customers for a financial institution yet. And I think something I think of there is the key word in that is yet, right? So what, what are your thoughts on this, this idea of providing this great digital experience for today's consumer?

That's tomorrow's business owner and how, how can that help create kind of a longer term digital strategy for a bank or a credit union and really creating stickier customers?

Bryan Peckinpaugh: So, so Mitch, I'm gonna, I'm gonna do exactly what you hate when I do and I'm gonna flip it completely on its head. And go in a, in a slightly different direction here. because I do think that's critical. It is the yet. And it, it is again, you want to make sure you have those table stakes. We don't want to alienate folks that, that want to engage in a digital manner.

However, I think there needs to be a focus, back on traditional banking, back on relationship banking. How do I start to build, meaningful interpersonal relationships with these new borrowers, or new potential borrowers, because what you really need to kind of have an eye on as they evolve in their financial journey as a person, you know, when I want to pick them up as a small business client or, you know, maybe a corporate relationship, if they move into like a controller or, you know, CFO type role, I need to have that relationship.

Those types of individuals bank on people they bank with their RM. They don't bank with the brand. They don't bank with the digital tools necessarily, so I think there's a part of this that we lose sight of the value of the people in the process. We have too much focus on the digital, you know, SoFi is awesome. I can go on there and I can get money fast, but there's not a person there, right? There's no physical, you know, what do I do if I've got a legitimate question? how do I go beyond me? Maybe even a screen share type idea, because I've got to try to. Walk my way through multiple options.

I've got to understand the difference between lending products and, what that means to a repayment and a pricing perspective, what other types of services might I need based on the questions that I'm asking? you know, how do I get there? How do I bring Gen Z? How millennials into a face to face interaction that they may not be comfortable with, they may not be used to.

Knowing that that's what's going to bring the value to me in the future, probably more so than having a better online application, right? and that's hard. That's a difficult bridge to cross of a pure digital experience and a human interaction. so it's, again, getting very, very purposeful. with what you're offering in those channels, you know, we see it all the time in engagement with our clients.

They'll put in an RFP or they will reach out and say, what are you doing for a deposit account opening combined with online, you know, small business loan applications. And my immediate kind of pushback to them is, well, what's your strategy around those areas? How are you going to go and attract? Because that is. That's a new domain for most of, the financial institutions we work with. So it's sitting down and really developing your strategy, across products, across client segmentation, to, to find out what matters and start to, roll technology out in a way that makes sense because otherwise you, like I was saying before, are going to attract clients that you don't want.

So the more you can tie into your your client journeys where they are, and serving the products that matter at that point in the channels that they are most likely to engage with, with a view on how you want them to act in the future is the work that the financial institutions really need to do.

And it's not typically you you know, strategic work that we see happening, especially in a lot of the community banks that we work with. it's, it's a shifting dynamic as we've talked about on, on prior podcasts, even though everybody's saying we're in a historical change environment, we're actually just going back to historical norms.

And a lot of these ideas wouldn't have been foreign to bankers 25 years ago. you know, the, the last 20 years of, of effectively free money. Whether that's for banks to get and lend out, whether that's for, startup financial or sorry, startup, startup fintechs to, to get funding, to build new and crazy and fun, solutions for, for people, is going to change, we are going to have a huge focus on, what these solutions really mean from a dollars and cents perspective, what.

Are you bringing in profitable relationships, you know, all of those things will be key to the decisions that the banks and credit unions have to make how they have to evaluate software. And again, if you don't do it with a long term lens, that's where you're going to get bit because a lot of these decisions you make now.

Probably don't pay real hard ROI type dollars for 10 years, for 15 years. because you're building infrastructure to support clients, who today have a very transactional need, but tomorrow will have a very relationship based need.

Mitch Woods: Yeah, and you know, David, I think, you know, you brought up some good points about that. It just in, you know, off mic conversations and previous You know, episodes of the podcast as well. Even thinking about these digital first companies that are out there or these people that are these companies that are creating, really specific. Digital experiences for their customers. How, how does that translate into all of this that Bryan's talking about? No, you, you know, you talked about the amazonification Netflixification of, of banking. where do you see that headed?

David Catalano: Net sets the high bar for the digital experience. So, you know, Facebook's got a 34 billion budget for data centers next year. There's no bank that's going to do that and there's no bank that should ever be expected to do that. I think we have to go back to the golden rule and those with the gold make the rules.

And when you have FDIC insured deposits, so you have a very low cost of money, you can pick and choose who you want to lend money to. And if you're a commercial borrower borrowing a million dollars and it's 300 basis points less, you're going to go there. And if you've got to carry your stuff in or somebody is going to have to come pick it up. Great. Can you imagine borrowing a million dollars from Amazon? Like, who would you call? Like, how would that work?

Bryan Peckinpaugh: I'd call Jeff. Say, Mr. Bezos, I got a, I got a need.

David Catalano: I mean, think about that, that, that's not possible. So, I wouldn't get too hung up if I was a bank, I would, I would want to give my, my employees the tools to facilitate their work. And then I would focus on the relationship required to attract and retain customers. Somebody owns a 40 million roofing company, you know, wants somebody to show up and sit across the desk from them and talk to them.

That's easy to do. You're lending money in the community in which you reside. It's called community banking. It's a perfect thing. It works just fine. They don't need to worry about having an Amazon approach to what they're doing. And they sure don't need a bunch of people that aren't going to borrow money from them.

I mean, they need their deposits, but how big are those? And, you know, maybe, maybe they need to demand all of the business deposits if they're going to make the business loan. I mean, that could be the tide that changes. assuming they have the. Fortitude to do that. But I just don't ever see the traditional, if we're going to have 4, 000 banks, I don't ever see the typical bank having anywhere near the budget required to keep up with an Apple or an Amazon or a Google or any of those people.

And they're already availing their solutions to those banks on a very low cost basis. Like we're part of the Azure cloud platform as a service. You can scale up and scale down your platform. It's amazing. And those banks that we serve are being, are taking advantage of that. It's wonderful. But there's no need to be Google if you're a bank.

And if you're pushing in that direction, you're going to attract a bunch of people that want that, but don't necessarily own a business. Don't, they don't own the 40 million roofing company. And guess what? Those aren't going away anytime soon.

Mitch Woods: Right. And I think something that I hear from both of you, right, is that And maybe this is the undertone of it. Maybe it's not something that you've said directly, but I think a lot of this comes back to this human desire, this human need for a connection with other people. You know, I, I think about even this, the Peloton craze, right?

It happened through the pandemic. Everybody bought these $2,000 bikes with a hundred dollar a month subscription to be able to take a spin class from their house. And what's happened now, right? Now they have a 2, 000 towel rack sitting in their bedroom, and they've canceled their subscription, and they're going back to a physical gym, right, because they want to interact with those people.

That's like a human, a human desire and a human need. And I think there's a lot to learn from that as well. That digital experience. Did pay dividends for Peloton there, but they didn't, they didn't think ahead. They didn't have that future plan. It was like the opposite of the Blockbuster effect, right? They went all in on digital and in an industry where they needed that relationship as well.

David Catalano: You're a CrossFitter, Mitch. Think about the viral nature of CrossFit. I remember 2009 when I found it and I thought, Oh, it's just over. There's too many CrossFit boxes. There's just too many at this point. Could you imagine buying one at that point? Now it's 2023. I don't see it slowing down. So yeah, you're right.

It is. It's a, it's a group of people you're involved with. It's camaraderie. It's the familiarity of. That relationship and how you build trust amongst each other, with each other. that's just humans, right? It's, it's human nature. That's what people want. And community bankers are kind of wired that way, right?

They want to serve the communities in which they reside.

Bryan Peckinpaugh: Exactly. And that's where you, you got to come back to who are you as a financial institution? What's your vision? What's your mission? Who are you looking to serve? Which comes with who are you not looking to serve? And, and making sure all of your, Strategies tie back to that. All of your technology decisions tie back to that, that we're not doing digital just to do digital, you know, because you have to have it.

You have to have online presence. You have to have online solutions. You have to have ways in which your clients can engage with you without coming into the branch. That there's no question, right? We are there. That is never going away. What you have to understand is what What do my clients demand? What differentiates me and helps me get more of what I want?

And in some instances, that may well be an online application. In some instances, that might be deposit account opening. In some instances, that online application may include automated decisioning of certain types of credits. But until you do the hard work to understand all of the things before, you don't know what to go buy.

You don't know what to go build. And you don't know what of the many, many solutions that are out there is a good fit for you. And so I, you know, encourage everybody to engage with existing technology partners, engage with, some of the other experts in our industry, whether those are consultants or, you know, going to some of the trade shows, to, to talk about and hear about what, what is out there and what is possible.

And find the folks that align best with you, find the ones that serve like minded financial institutions. so if you're a community bank, you know, it's all well and good to talk to somebody who, you know, sells exclusively to the top 10 or, or large FIs. That doesn't mean the solutions are at all relevant to, to what you're doing as opposed to somebody who focuses on, you know, billion dollar banks every single day.

So it's, you know, good, gonna have differences for what's fit for purpose depending on who you are and what you're looking to do.

Mitch Woods: Well, and as, as we're wrapping up here, first of all, I just want to say thanks to both, both of you, Bryan and David for some great insights. I think taking away from this, just the idea of. a digital experience can't be the only thing that we focus on. Right. We have to, we have to provide the human experience in banking and get back to those basics and really have a strong vision and understanding of who we are as a financial institution to, to strategically have a plan in place for that digital.

Experience but also keeping in mind that all of this is tied back to what we do best and that's building relationships with the people in our community. So thank you guys both for for your insights today and thanks everyone out there for listening to today's episode of Lending Made Easy.