Barefoot Innovation Podcast

America has about 5,000 banks -- more than any other country. My guest today leads their national trade group. He is Rob Nichols, CEO of the American Bankers Association. He joined me for a conversation about how technology is changing banking, and especially community banks. While total banking volume is disproportionately done by large institutions, small community banks play a critical role in both our financial system, and in the life of the nation.

I, for one, worry for their future. Major forces are arrayed against them, driven by megatrends in competition, demographics and technology. The core problem is that the main competitive realm where these banks excel, the factor on which very few large banks can beat them, is in face to face personal service -- and the demand for face-to-face service is declining. People love it, of course. At many small banks, you can still walk into a branch and chat with a teller you may have known for years, or get advice from your loan officer who has worked for years with your small business and really understands it. But today, that whole model is receding as customers increasingly find their financial services online.

Of course, community banks are rapidly adopting new technology. They need it to meet the demands of today’s customers, who expect a wonderful online UX. They need it to build increasingly sophisticated risk models. And they need it to wring costs out of back office functions, including in regulatory compliance, where they carry a disproportionate burden. But they are competing with both large banks and fintechs that have world-class technology for all these functions, and also have world-class technologists under their own roofs, to build and run it. Small banks don’t, and they won’t. They can’t afford to hire Silicon Valley engineers.

This means they must rely instead on vendors and, increasingly, on partnering with fintechs. And both of those challenges are loaded with complexity. Most small banks have long term contracts with core IT providers and can’t easily plug in a new tech solution. In addition, regulatory rules on third-party risk require extensive vetting of new vendors and partners. There are good reasons for this, of course, but it is still a cumbersome process. (Note, by the way, that the FDIC is working on some really interesting ways to address this issue.)

Rob Nichols is working on all these challenges and tells us about them in our wide-ranging conversation. We talk about how COVID has accelerated technology adoption across the board. We talk about what stands in the way of community bank modernization, and the ABA’s two-pronged strategy to remove the obstacles. We talk about how to equip community banks to vet the suitability of young companies that may have superior technology but short track records. We talk about how AI will change banking; and whether high-tech underwriting can help small banks be more competitive; and how regtech could help reduce compliance costs without reducing compliance.

We recorded this episode during the trial of Derek Chauvin for killing George Floyd. Rob talks about the initiatives the ABA has taken, dating back before the murder and redoubling since it, to build diversity in the banking system.

He also shares the key principle that regulators should embrace as they steer their way through the changing competitive terrain in financial services.

Last but not least, Rob talks about why community banks are so important. I’ll share a story of my own that illustrates it. When I left my role as Deputy Comptroller of the Currency years ago, I moved from Washington to midwest and started a consulting firm that did a great deal of strategic planning work with banks. I remember, one year, having a meeting just before Christmas in a small Ohio town. I arrived to find the bank leaders distracted by the fact that three local nonprofit organizations suddenly had year-end budget crises. Two of them were the library and the health clinic, and I can’t recall the third -- I think it was something related to the high school. The bank had already made all its planned charitable contributions for the year, but it couldn’t let these vital institutions fail. That’s because they cared about the community -- their own town. And it’s also because the self-interest of a bank like this is fully bound together with the wellbeing of its community. A bank like this needs to have a thriving small business sector. It needs the town to have quality of life amenities. It needs to have local health care services. If these are missing, over time, incomes will decline, job opportunities will dry up, and the young people will move away and raise their families somewhere else. And the bank will decline if the town does. The bankers and customers are neighbors. Their kids go to school together. The bank has a stake in taking care of the whole.

Many of America’s small towns and rural areas are struggling with economic and demographic and social threats. They need their local banks.

More on Rob

Rob Nichols is the president and CEO of the American Bankers Association, which represents banks of all sizes and charters and is the voice for the nation’s $21.9 trillion banking industry.

Rob joined ABA in August 2015 following ten years at the helm of the Financial Services Forum, a non-partisan financial and economic policy organization. Before joining the Forum, Rob served in the George W. Bush administration as the assistant secretary for public affairs at the Treasury Department, a position requiring confirmation by the United States Senate. In that role, he acted as chief spokesperson and head of the office of public liaison, serving as Treasury’s lead representative with the media, business, professional trade organizations, consumer groups and the public.

Rob’s earlier career includes working as communications director for the late U.S. Sen. Slade Gorton and as press secretary for the late Rep. Jennifer Dunn, a former member of the House leadership. Rob also worked in the West Wing as an aide in the Office of the Chief of Staff in the George H.W. Bush administration.

Rob is a recipient of the Alexander Hamilton Award, the highest honor of the U.S. Department of the Treasury. He also is consistently ranked as one of Washington’s Top Lobbyists by The Hill and was described as one of the “new generation of trade group CEOs” by The Washington Post.

In 2020, Rob was elected to serve a two-year term as chairman of the International Banking Federation, whose members include the national banking trade associations representing every major financial center. As chairman, Rob works with IBFed members to develop international consensus on critical issues, actively engaging with international standard setters and global supervisory bodies on issues that affect banks across borders and around the world.

Rob serves on the Board of Governors of FARE (Food Allergy Research & Education) and is a Corporate Advisory Council member at the Children’s National Hospital.

Rob is a graduate of the George Washington University.

More for our Listeners

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On May 3, AIR is partnering with Consumer Reports and the Consumer Federation of America to host a webinar called ‘Consumer Protection: Hot Topics in Digital Finance.’ It’s a virtual convening that will dive into three hot issues, hearing from both consumer advocates and fintechs about data rights, new lending models, and cryptocurrency. Is innovation bad for consumers? Or good? Or both?  You can learn here.

Next up on Barefoot Innovation is an amazing conversation I had with Doug Arner of Hong Kong University, who seems to understand everything that’s going on in the whole world in financial change. I’m excited to say that we will also have Paypal CEO Dan Schulman, as well as CSBS CEO John Ryan and Sultan Meghji, the new Chief Innovation Officer of the FDIC who, as you will see, is doing huge things.

The LendIt Conference is coming up next week! Join me for a panel discussion on ‘Reading The Tea Leaves of President Biden’s Initial Financial Appointees’ and for a main stage fireside chat with Colin Walsh, CEO of Varo. David will also be there, moderating a panel on ’New Ideas for Compliance in the 2020s: An App Store for Regtech.”

In May, I will be at Compliance.ai for a session during their Expert-in-the-Loop forum.

And June will also be here before we know it, so make sure to register for Fintech South!