Featured Guest: Alex Johnson
Alex Johnson is the creator and author of Fintech Takes, a newsletter that analyzes the collision of banking and fintech.
As a marketing, public relations and corporate communications leader, Becca (only her mom calls her Rebecca) started her career in consulting and has been involved with six startups ranging from film, fashion, technology and food, with her first startup being a social enterprise importing leather fashion accessories made by single mothers in Nairobi, Kenya. Speaking across the country, she is known for leading award-winning teams and has received recognition from the Cannes Film Festival for Best Media Campaign, Hermes, MSPBJ Women in Business, and most recently, the Top Women in Communications awards. When the day is done, you’ll find Becca behind a good travel book planning her next adventure, plunking a tune on the piano or laughing with her blended family.
Bryan Toft is Sunrise Banks’ Chief Revenue Officer. In this position, Bryan oversees commercial banking/lending, treasury management, mortgage and fintech partnerships. He has been with Sunrise Banks for more than a decade. From 2014-2017, he served as president and CEO of Community Bank Owatonna.
Bryan has held a variety of roles at Sunrise Banks including credit analyst, commercial loan officer and EVP regional manager of commercial lending in Minneapolis.
Bryan received a B.S. in Computer Science from Buena Vista University and an MBA from the University of St. Thomas. He is a board member of the Minneapolis Chamber of Commerce, Twin Cities Metro CDC and Charter School Property, Inc.
[00:00:00] Alex Johnson: I think that branches are going away. I don’t think they’re ever going to disappear. And I think the reason for that is at some level of scale, having an in-person presence for any business, almost always makes sense.
[00:00:18] Becca Hoeft: Welcome to the NextGen Banker podcast. This is part two of our conversation with Alex Johnson, the creator of FinTech Takes a newsletter focused on financial technology and the future of financial services. In part one, we talked about all things tech from crypto and NFTs to the metaverse and how Alex sees banks adapting to web three. In part two, we talk more about banking as a service and the future of brick-and-mortar branch locations.
Bryan Toft, Sunrise Banks chief revenue officer, starts by asking Alex about his thoughts on banking as a service and its potential for banks and FinTechs.
[00:01:01] Bryan Toft: I’d love to transition to another developing area. And that is banking as a service. And as you know, Sunrise is involved in banking as a service.
We have, you know, 20 plus FinTech partners we work with whether it’s credit builder, earned wage access accounts, and cards, prepaid cards, whatever it might be. And I wanted to, I know you’ve written a lot about banking as a service and wanted to talk to you about that a little bit. Could you just give your, uh, take on banking as a service and its potential in the near future. And, you know, talk about what banks and FinTechs should be thinking about as they start thinking about banking as a service, because we’re hearing a lot about banks starting to explore that and figure out maybe where they should play in the bank as a service market.
[00:01:41] Alex Johnson: Yeah, absolutely. I think the level of competition in banking as a service is going to go up right a lot. And if you think back to the very earliest days of banking as a service, you know, when I was a research analyst covering the payments space, I spent some time looking into, uh, Lending Club and Prosper circa 2015, 2016, when P2P lending was really exploding.
And, you know, I hadn’t realized at the time until I dug into it, that pretty much all of those loans, and we’re talking about billions of dollars as loans, were all flowing through a tiny little bank in Utah called the WebBank. Right. And that was one of the only banking as a service banks in existence at the time.
And it was one of the few that specialized in lending. And so this tiny, tiny little bank in Utah, I mean, you should’ve seen the average revenue generated per employee at WebBank. Like it just broke the dials that made no sense. And so it was a really, really attractive business to be in, in the early days.
Same thing for deposit, same thing for all those use cases you mentioned, but that was because there was an imbalance between. Sort of supply and demand right within the bank as a service space. And I think what we’re seeing is an evening out of the supply and demand and reaching sort of an equilibrium point within banking as a service where there’s still a lot of demand from FinTech companies for banking partners, obviously 2021 broke the all-time record for FinTech funding globally. I think one out of every $5 invested in FinTech around the world or invested in any kind of private company was invested in FinTech. So, um, it’s a very, very hot category still. It’s still growing very quickly.
And so there’s gonna be a lot of demand for it. But now there’s going to be a bunch more supply. And the supply is being provided directly by banks like Sunrise that have a direct banking as a service program, and that signing up FinTech companies directly. But it’s also increasingly being supplied by banks that work through banking as a service platforms. And so this is, these are companies like Modern Treasury, Synctera, Unit, Bond. Uh, Stripe has a little business in this space now and all these companies essentially act as sort of middleware that connects FinTech companies that need a bank sponsor with banks that want to offer banking as a service, but don’t want to sort of get into the weeds of doing all of it themselves.
And, um, I think those banking as a service platforms are gonna radically sort of accelerate the number of banks that are supplying banking capabilities as, as a banking, as a service model. And, um, when that happens, I think the question for banks is going to be, how do you, um, differentiate yourself? Like how do you stand out?
Because suddenly there’s going to be a lot of banks that are doing it. You know, suddenly having a bank charter by itself is not going to be a differentiating factor and in a commoditized market, the thing you want to avoid, but that often happens is that drives the price down and suddenly everyone has to compete on price.
And so I think the question for banks is going to be, can you compete on something other than price in the world of banking as a service? And that could be a product specialization. So I mentioned like lending and deposits, but you know, we’re seeing banking as a service for crypto. We’re seeing it for online gaming.
We’re seeing it for cannabis. We’re seeing it for all these sort of areas where banks have historically sort of shied away from it. But we might see that sort of cropping up a bit more. We might see specialization around something like commercial lending or small business. So I think that’s definitely one aspect where you can potentially differentiate.
And then I think the other way to differentiate is just, you know, do you have the ability to build relationships with FinTech companies directly, or are you reliant on a banking as a service partner to do that? And I think the banks that we see being the most successful long-term in banking as a service are the ones that have some other mechanism for connecting with and finding FinTech companies.
And that can be investing in FinTech companies, it could just be going to south by Southwest and Money 2020 and all the places where FinTech companies are. It could be having an accelerator program. There’s lots of different ways to do it, but I think that’s the other sort of differentiating factor long term in that space.
[00:05:46] Becca Hoeft: So Alex, with this, you know, the onset of digital banking, digital transformation, and then banking as a service playing a role with, I would say those banks who are thinking ahead, who are innovative. What’s going to happen to that local bank or credit union who doesn’t, you know, who don’t make that jump, but to FinTech in the next five years, three years, two years, whatever that is.
[00:06:10] Alex Johnson: Yeah. I think that’s a good question. I mean, I think that’s the reason that banks, community banks in particular, are really drawn to banking as a service is it’s kind of an easy way out, so to speak, um, for, uh, for resolving that exact question and not having to like digitally transform your organization, it’s like, oh, well just do banking as a service and we’ll be fine.
Um, I think that that’s probably short-sighted and I think that, you know, the, the thing that, uh, banks and credit unions need to do is re-entrench around the group of customers that they can best serve. And I think there’s a good analog to this in FinTech, right? There’s lots of FinTech companies and neobanks that are making good business and growing quickly by focusing on a particular niche of customers and serving those customers better than any others.
I think the difference is that, um, the way they’re defining their communities isn’t based on geography. It’s not based on these sort of lazy assumptions that banks and credit unions have kind of gotten used to over the last 50 years. And so you have to be much sharper in the way that you define who your customers are.
And the key sort of question you need to ask yourself is what do we, as a financial services organization, know about this group of customers that no one else knows? Right. And I’ll give you an example of this. Um, I was talking to a credit union that grew up serving and their sort of initial membership base was built around, uh, airlines, right. And airline employees. And, um, much like any other credit union, they’ve sort of grown beyond that. And they’ve kind of got a little, little, a little lazy, maybe about sort of how they define their customers and solve their problems. But when I pushed on this point with them, I was like, okay, what do you know about these customers?
Like what are the things they do that no one else would know about that might represent unique financial needs? And one of the things they mentioned that I had no idea about was, um, these housing arrangements that airports have with pilots, right? Where they allow pilots to buy private property at airports, right?
That are sort of adjacent to the runways so that if you’re a pilot and you sort of live on the road all the time, you can have a home away from home somewhere else in another city or another hub that you fly through. And you can just sort of live at the airport, but you can have your own kind of house within this, these confines it’s only available to a select group of people.
And as you might imagine, um, underwriting mortgages for that particular type of property, going back to Bryan’s point about you sort of have to know the history of what you’re underwriting to do it well, like no one can do that. And, and the person I was talking to was like, well, do you think that would be like a good business?
It’s like, yes, that would be an amazing business to do. That would be like the greatest business ever, because you’re the only people who can do that. So I think there are lots of those little sort of micro-opportunities hiding within certain communities. You just really need to kind of refocus around who your community is and how you can serve them.
[00:09:01] Bryan Toft: Thank you, Alex, that was really interesting. Um, we do want to go to one more thing and that is, um, the future of banking in terms of brick-and-mortar locations. This has been discussed over the years and just want your opinion on where do you see the future as brick-and-mortar locations? In our view, the pandemic has totally sped up digital transformation and we’ve seen it over and over again.
PPP was an eye-opener I think for many banks, as they shifted into digital applications and processing and all that kind of thing. And, uh, I know that happened for us and is continuing to propel forward. Um, so where do you see the brick-and-mortar bank locations going? And, um, will it be a thing of the past?
Will they not exist at some point?
[00:09:43] Alex Johnson: Yeah, yeah, exactly. Well, um, it’s interesting. I think there’s a couple of different concepts here. I mean, one is just to give you my history on this particular topic. We’ve been talking about this my entire career, literally. I remember one of the first blog posts I wrote at my first job was a blog post, basically arguing why Brett King was a moron for predicting the branches are going to go away.
And I was trying to sort of pick a fight with Brett. Who’s a great guy and did not deserve my, my snark. I was like, 18 at the time. So like, I didn’t know what the hell I was talking about. And I, I owe Brett an apology for that and he was very gracious about it, but, um, you know, he was right. We were way over indexed on branches relative to where I think we all now recognize we’re going.
And certainly the pandemic just accelerated these trends that I think have been obvious to some like Brett for a long time and to people like me less time than that. But I, I certainly am on board with that idea. So I think that branches are. Going away. I don’t think they’re ever going to disappear. And I think the reason for that is, um, at some level of scale, having an in-person presence for any business almost always makes sense.
Right. Like maybe not always, but it almost always makes sense. I’ll give you an example, speaking to the metaverse point. Um, brand’s just want different ways to sort of touch or interact with customers. And so you think about like a brand that would never ever build an in-person store. Like what’s the like last brand that would ever build an in-person store to me, like Netflix is a good option for that, right?
Like Netflix is just, they’re a streaming video company. They’re never, ever going to build a store. They’re never have an in-person store. Guess what they have in Oculus, they have a Netflix app, and you know what the Netflix app is when you go into Oculus, you click on the app, you go into it. And it is literally a big, gigantic virtual living room where you sit on a virtual couch and there’s a big TV screen where you watch Netflix on it.
So it’s literally just a re-creation of my living room, except I’m watching it on my stupid headset rather than watching the TV. And it’s giving me a headache and kind of hurting my neck. Right. Yeah, it wasn’t as good as my TV. I was like, what am I doing in here? And I like, take it off immediately. So, like, I think every brand is always going to want to have some sort of more immersive way to touch or interact with customers and to a certain degree branches or physical location is going to be a part of that.
So I don’t see that ever a hundred percent disappearing, but going back to the point that you made about going into the metaverse and shifting resources around, I think a really important point for banks to understand, and this is important for FinTech companies and something that FinTech companies have not historically, uh, gotten right away and it’s caused some trouble for them is there’s a difference between branches and customer service, right?
And, um, FinTech companies like to brag about the fact that they can afford to offer great pricing or offer these accounts with no fees or whatever, because they have a much lower cost to offer those services. They don’t have all these heavy like branch costs, but part of what they’re also dismissing when they say we don’t have those costs is customer service.
Right. And what they mean is we don’t have 1,500 people working in our customer service operation or call centers or branches or whatever. And, you know, to a certain extent that’s probably good because there probably are, in fact, I know there are, customer service, people who work at branches who don’t get a lot of business every day, people aren’t coming in and they just sort of sit at their desks and they don’t do very much, and they’re not very productive.
But I do think that one thing FinTech companies underestimate a lot is regardless of whether they’re sitting in a branch or they’re behind an app or they’re on a call center or whatever. People always want to talk to people about their money. They just do. There’s just like a natural desire. It’s like healthcare, right.
There are just these certain industries where, when something goes wrong as a human being, you want to talk to another human being and you want to be able to do it immediately. And so I think that one thing we’re going to see is as banks move away from brick and mortar as their primary distribution strategy, maybe they keep a couple of flagship branches in a few locations.
But for the most part, they close them down or they consolidate it a lot. I think they are not going to get rid of a lot of their customer service people, nor should they, I think those customer service resources are going to be deployed to the metaverse and to the digital app and to new experiences.
Like there’s a FinTech app out there that, um, has like finance coaches that are sort of almost like money therapists that help people talk through money and sort of deal with the emotional sort of challenges around money. I think that’s a huge, huge unaddressed need in the market. And I think there are people working at banks, working in branches who are super qualified to do that work.
They’re just not in the right channels to enable that, that skillset. And so I think that’s directionally what we’re going to see is those resources getting shifted around.
[00:14:36] Becca Hoeft: Which is an absolutely perfect segue to our last question, which we ask every one of our guests. Alex, what do you think the next generation of banker looks like?
[00:14:50] Alex Johnson: Oh, that is a good question. Um, I think the next generation of banker is going to be at heart, a product developer. So I think that the, the skillset you’re going to need is a combination of tremendous sort of customer and user empathy. And an ability to always know exactly what your set of customers that you’re focused on needs and a proficiency for working across all of the infrastructure that you have at your fingertips, your APIs, your SDKs, your developer tool kits, your user interface, design patterns, and being able to pull all of those together into these products that might not be designed for the mass market. They might only be designed for a small niche of customers, but the ability to get products into market quickly for those customers go out into the field, get feedback from those customers, come back to the bank, iterate on those products and do it quickly.
To me, the future role for a banker is as an iterative software-based product developer with a tremendous amount of user empathy.
[00:15:57] Bryan Toft: Thank you so much for being on the NextGen Banker podcast, Alex, this was fascinating. We appreciate all the great insight you gave to us. We really appreciate it.
[00:16:06] Becca Hoeft: And it was a ton of fun. Thank you so much.
For this episode’s musical feature. We’re showcasing Stranger Kings. Stranger Kings is a five-piece group that describes themselves as cali-gaze. Here is Tall Skinny Boy from their 2019 release, Blue.
That was Tall Skinny Boy by Stranger Kings, you can find more of Stranger King’s music at strangerkings.com. If you would like your music featured on the NextGen Banker podcast, email David@nextgen-banker.com with a link to your music and website.
Thanks for listening to the NextGen Banker podcast.
We’ll see you next time.