Board Q&A with Julie Stackhouse
October 23, 2020
With over 32 years of experience in bank supervision with the Federal Reserve, Julie Stackhouse understands the challenges and opportunities facing today’s community bank leaders. For many of these leaders, figuring out how to smartly and safely invest in technology to meet customer expectations and keep pace with a digital transformation is currently top of mind. In this recent interview, Julie discusses where bank executives should focus as they consider their technology strategy, how the regulators view technology investments and the likely consequences of inaction.
What drew you to the fintech sector in general, and Neocova in particular, after retiring from the Federal Reserve?
In the last few years of my career at the Fed, I spent a lot of time in the area of financial technology. We had a Federal Reserve working group and met with a number of fintech companies, including Neocova, to better understand their products and how those products would begin to shape the future of banking. I was quite intrigued with what Neocova was doing for a couple of reasons. One, they were a St. Louis-based fintech, and there’s not a lot of those. I also felt compelled by their mission of adding direct value to mainstreet communities by supporting their financial institutions with secure and affordable technology solutions. That was very meaningful to me because community banks are struggling. They’re struggling not only with adding the right technology, but they’re struggling with affordability as well.
Given this struggle, what does a community bank executive need to be thinking about when it comes to planning for technology investment?
This is an intriguing question. Today, the vast majority of people use their computer or phone to buy retail products. So, it is clear that banking services should follow this path. Yet, in some situations, and particularly in some very rural communities where there’s still a lot of lobby traffic in branches, it’s not a given that bank executives will be thinking about the technological transformation of banking. Some basic data can be useful. According to the Pew Research Center, over 90% of Millennials and Gen Xers have a smartphone, so that’s a pretty good sign that things are changing. Particularly for Gen Xers, that trend continues to go up, which is amazing since it’s already over 90%.
There is also a story underlying what is happening with physical bank offices. Bankers know that the number of bank charters has been on the decline for decades, but the thing that changed in about 2012 is that the number of bank branches started to decline. For banks with declining traffic, those branch facilities can be too expensive to operate. The marketing value of the external signage doesn’t warrant the cost of the branch. Figuring out how to retain the customer, while at the same time finding ways to promote the bank but also cut square footage, is front and center and probably the reason we’re seeing the decline in branches.
For bank executives struggling to get started on technology transformation, where should they focus their efforts?
My advice is simple: this use of technology needs to be aligned with your strategic planning. I realize that not all strategic planning is formalized, but every banker thinks about the future in some fashion. It is a matter of bringing technology into that thinking.
One aspect that I really encourage banks to look at is what the customers are asking for in terms of products and services. Some banks don’t make mortgages anymore because mortgage regulations have made it too expensive. But can they keep the customer by using a technology solution that assists the customer even if the bank does not hold the mortgage? Second, what customers are you losing? Could you have kept the customer through an expanded technology product suite? And finally, and probably the most overlooked area, what customers are never coming to your bank? It’s important to understand why that customer who might be a logical user of your bank chooses another institution.
Then there’s the bank’s internal operations. We did research at the Fed that showed clear economies of scale in banking. Support and overhead costs, particularly compliance costs, are substantially more burdensome for the smaller banks than the larger banks because smaller banks can’t spread those costs against scale. It is valuable to consider whether technology can reduce or at least contain those costs. Technology solutions can be used for BSA/AML, data analytics, and process automation, to name a few. These services are growing as a strength for Neocova.
And finally, what about your people? Technology should not be chosen because of a good sales pitch. You have to have someone in the bank who has a solid understanding of technology and the associated risks, and it should be someone who can bring associates to the table to fully understand what the technology might mean to the banking organization.
Once the strategic needs are known, bankers have many resources to help them get started in product selection. I encourage CEOs to think about leveraging their peers, banking associations, other trade associations, and of course the regulators, for information. At the Federal Reserve, we had a group that was very willing to take questions from bankers. We even offered an “office hours” program. Through their work, regulators are able to see the technologies that are working well for banks and those that haven’t worked so well. Regulators can also advise on more complex technologies, such as the risks associated with the use of artificial intelligence.
What are the consequences for banks that fail to make the technology investment?
I worry about banks that aren’t at least thinking about it, because it may well result in a slow drain of their customer base. Some rural communities, in particular, are very challenged. They’re losing population and they’re losing businesses, both of which are very challenging for banks. But customers’ demand for services doesn’t decline.
I like to use my two millennial kids as an example. One is 26 years old, one is 33. They have both been in a traditional bank one time, and that one time was to open their account. And I’m sure if they were to open an account today they would want to do it at home and online. My son recently purchased a home, and he found it easy and cost-effective to use an online mortgage company. If that’s the way that generation is going to behave and act, then bankers have to have a strategy for technology if they want quality customers to use their services down the road.
Where do you think tech is on the priority stack for community banks that want to thrive in the long term?
That’s actually a difficult question because it’s hard to separate technology from the strategy for any of the bank’s services. Does the bank want to stay in the lending game? The deposit game? If so, management needs to be thinking about the need for a technology strategy while keeping the “touch” aspect of banking readily available when true banker consultation is wanted. And any technology introduced has to be highly usable. As one banker told me once, no technology is better than bad technology. So at the end of the day, I don’t know if it’s a separate place on the stack or if it’s within every priority on the stack. If you think of technology as part of every priority, you’re probably going to move along faster.
Do you think central bankers “get it” that younger consumers care less about the things that traditional bankers have thought were important?
I think all the banking regulators “get it” because they’ve all established an office or a portal for financial technology that either provides resources to bankers or creates a mechanism to visit with the regulators. But regulators think about financial technology in different layers. When bankers propose automating services they’ve traditionally done as a bank, regulators are very supportive as long as the bank understands the technology and complies with laws and regulations. At the Fed, we really enhanced our examiner training on financial technology, and increasingly, examiners are asking bankers about their fintech strategy.
As the bank uses technology for other business outcomes, regulators will look at the operation through a different lens. Perhaps most prominent are banks that offer “banking as a service” to fintech companies since fintech companies do not have access to the payments system. Banking-as-a-service carries enhanced risks. Bankers and regulators both need to fully understand those risks, and regulators will expect banks to carefully manage them.
You’ve emphasized rural communities today. Why is that?
From my own experience, small rural banks are facing huge challenges simply because of their small scale. That doesn’t mean other banks don’t face challenges, too. Urban bank customers may demand technology services sooner. Said simply, a strategic investment in technology is important for all of the banks that want to be in business 20 years from now.