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a moderator for this session is Paul Davis he is editor of the community banking bureau at the American Banker he has provided commentary on banking and other large corporations for BBC World News and the nightly Business Report importantly to us Paul has covered this conference since its launch in 2013 so when we thought about a unusual moderator not one of our normal ones we said well how do you think about this Paul Davis guy and for some reason why you passed the test so congratulations on that okay he has his finger on the pulse of issues that do matter to community banks Paul has earned a bachelor's degree in government from the University of Virginia and a Masters of Business Administration from Wake Forest University Paul Thank You Julie and again thanks to everybody who whose efforts have made this event possible and I think it's the it's my sixth sixth time at this conference and normally I sit in the back and so I've gotten a really good feel for what the back of her vice heads look like and this is a totally different perspective sitting out here in the front of the room so but so what we're going to do is we're gonna have a nice conversation looking at kind of the idea of the future of community banking largely through the lens of technology and integration a lot of the themes that we've actually seen earlier and the program today will start off just with Kate if you guys don't mind introducing yourselves and also just giving everybody a general sense of what company represent your business model all that kind of stuff no working better okay thank you well thank you for being here and thank you for inviting me here is truly a privilege to be able to join this open dialogue between the researchers the bankers and regulators and yesterday at the conference the FDIC chairwoman Yelena talked about how transparency Buse trust and I think this conference is a great example of that through this open exchange of ideas it's for Foster's our trust the relationship between the regulators and the bankers and I think is ultimately great for a healthy banking industry my name is Kate Hal and I'm the founder and the CEO of happy mango it's a fin tech company so first I'd like to clarify because fin tech has been used many times at this conference we are not a fin tech competitor we are not one of the syntax associated with the oligopolistic banking core processors we are your friendly neighborhood fin tech our we serve community banks community banks are our clients happy mango is an online consumer lending platform so there are three main functions we do number one we help community banks visualize their customer experience before during and after a lending experience so we not only provide the online application processing and closing experience but we also provide a personal financial management tool for the customers secondly we help community banks to extend credit in their community especially to those consumers were considered credit-invisible we do that using our unique cash flow based underwriting tool and the last thing we do is we foster a collaboration within the community between the community banks and other collaborators ie financial counselors and financial coaches so yesterday at the conference I think it was Jerry curry who talked about the importance of financial education in his community so to the extent that you don't have existing resources to provide that service we can help you find those services mostly free through the not-for-profit organizations in your community to provide financial education to your customers so those are the things that we do at happy mango I know one of our clients who is supposed to be here today they couldn't make it they asked me to say a few words about about them okay so I'm referring to Spring Bank who which is headquartered in Bronx of the Bronx of New York it is a New York State regulated community bank their head of lending couldn't make it today because her son is getting married so I guess she can be excused so Spring Bank have been collaborating with us since 2016 how we found each other was because Spring Bank previously had focused on business lending and commercial lending and around 2015-2016 they wanted to make loans consumer loans in their community and with when they looked around the market most of the loan origination systems for consumer loans have FICO scores credit scores kind of hardwired in in the process when they use that the basic they have to decline almost 90 percent of the loan applicants and for those alternative credit scoring systems which were in the market and they figured out they could use it but it would be very hard for them to explain it to their regulators so that's how we got together and at a time we were working on our cash flow based underwriting system and we built the entire digital lending system for them and since then they have made over two and half million consumer loans in their community to over a thousand New Yorkers and most of these people have either no credit score or very low credit score credit score below below 600 so so far their loan loss has been their lowest rate is five point six percent so I'm going to reiterate that 30 percent no credit score 70 percent with average credit score of around 600 and the long house is 5.6 percent but I guess more remarkable than that is that almost all these borrowers came to them from other banks there were not existing customers who had a depositor account I Spring Bank and but after they paid off the loans those borrowers 30% of those borrowers continued to put money into the savings account that they have open that spring bank so I I want to mention is there any is there any Bank Commissioner from New York State okay I think that's all for okay right well again you know with the name like happy mango it should imply friendly neighborhood FinTech right Trevor won't you tell us about yourself and a Mirador for and wanted echo kate cinnamon as well it's a privilege to be here and Mirador is a small business lending platform where you know like happy manga were not eleven ourselves but we provide the software for banks to help with everything from customer acquisition of new small business customers through a digital process in branch online mobile we can help with underwriting automation alternative credit models if the bank wants to use them and then also help place loans that are declined to our network of CDFIs and other community development organizations as well so that's a briefly about asked our customer base we work with a lot of community banks such as Lewis and Clark one of our earliest customers to nowhere recently certain kind of regional and super regional banks like Zions and M&T Bank great trade thank you I've got from the Wall Street Journal I thought this was interesting because but my name is Trey Moss Jim brought this over to me he said you know did you see the Oregon City was profile the Wall Street Journal this last weekend so I have the shows everybody but the very first line says i sat on the sunny patio or BC Brewing Company we financed the start of the back that's great so I think the reason here is it's sort of an interesting intersection of rural life capital markets community banking union FinTech so I'll talk about that cuz I think it provides some perspective for you and then why I might bring perspective to this panel I was born in rural Oregon grew up on a farm I really learned I think the importance of relationships which later on ended up being very valuable in community banking space I have a particular affinity for community banks and that's been with me since day one I started out at Deloitte in Portland Oregon working on audits of financial institutions and then later on finish attestation engagements moved to New York to work in capital markets M&A for the most part primarily the banking space but a lot of different industries I mean after after 9/11 I at the same time my father contracted a terminal cancer and so it was I got to go back to my roots I think that the rural life was really pulling me back and so I went back to the Portland Oregon area and was the CFO community bank and that's really where I got started inside of a bank very different experience than working on the outside of one and at that point realized that you know okay this community making model we're pursuing with this institution is a little bit different from how I might want to approach it I had the same sentiment as the chief lending officer it was really his idea he was frustrated he said we don't have to start our own there and I wouldn't I think I was on a panel it's three or four years ago here and I said I would do it I would do it over I wouldn't do it a second time so we started we started the Bank in 2006 right before the recession but you know they're going through the recession was really I think quite a learning experience for a lot of us most of us that survived I got involved very heavily in advocacy on behalf of the banking industry and all I'll talk briefly about that but going back to learning experience we they want to talk a little bit about also the importance of specializing in something that's probably something we can do later on when we talk about opportunities and threats because there's some real advantages if we do it right we're able to manage the risk I think very well in fact while sooner or later but it's it was amazing the level of delinquencies that we have lost almost nothing from in Sharjah perspective through the recession for the bank itself I got involved in advocacy at the state level so I'm on the board currently if they're working Bankers Association the bank of Oregon chairman event Board of synergy by association which is a group ersity an organization for over 1200 banks across the nation just outgoing chairman of the ABA community bankers Council on the bankers advisory board for CSVs and I just took on the first part of this year is the chief executive officer role of sheltered Harbor which is the backup of last resort for the entire financial industry in the United States the participants represent 70 percent of all US deposit accounts and fits better send all the retail client brokerage assets we're trying to get that to 100% economy through the community banking space but I bring that up because this cross-section of we need a bank exposure across the United States I think hopefully I can bring something to the panel and again it just reiterates the fact that great great well what we'll do is we'll start kind of talking about things and kind of broader and a kind of a broader sense and you know whoever feels you know like they want to jump in just you know go for it but you know so we talked about the idea of the future of community banking what is it going to look like who what's how our banks gonna differentiate themselves it was just kind of curious I mean let's just talk in general terms about the opportunities that are there for community banks okay I'll get started I learned a lot from yesterday's conference one of the things that that was also talked a lot about is relationship lending or relationship banking and I think that for community banks relationship is a real asset and I see a lot of opportunities for coming banks to continue to build on that I will use an example of I'll use a Spring Bank again when they first started launching the consumer lending program the most successful distribution channel was through their employers and those employers who were their business borrowers and so they were able to extend an abroad and their existing community relationship and with the help of technology so I think that those relationships built in the community could bring a lot more relationship of potential more opportunities to the community banks I kind of building off of that I do think that having a niche and be able to provide a lot of tailored advice we've been seeing is something that's I think really unique for community banking it's something that you know larger institutions try to do purely through technology because that's the only way they can really scale it and it ends up I think in a ringing pretty hollow to a lot of in particular small business owners how can you just have a quick example just personally when I started Mirador at the time you were venture backed had a lot of big checks that were ready to deposit but you know we were just barely starting up and going to several banks in the Oregon area they looked this like we were crazy you know like so what are your revenues we have none but we want to put several million dollars on deposit with you today and they were kind of thinking like something's weird here I don't want to touch these guys and they know we ended up banking with Silicon Valley Bank which knows the tech industry it was a very different conversation it was who are your investors oh we know them which partner invested oh great here's the plan we have here's how we'll help you grow and it felt as a business owner you know really good that somebody new my industry knew the kind of nuances of how we operated and we hear that time and time again from our small business owners that we help facilitate loans for and the feedback that we get on behalf of our banks and pass on generally the positive feedback is in that category of they know my particular business they're really good at underwriting fill-in-the-blank in restaurants or practice finance and we found that those highest satisfaction scores really come with kind of having a niche and really being able to kind of look past the pure numbers when it comes to underwriting and be able to understand where okay this might be a credit policy exception but we think it's fairly low risk because of these other factors that wouldn't come out if a year is purely looking at the numbers I'm trying to decide whether to focus on opportunities or threats first let's let's go with the opportunities first because apparently what we're what we saw in the results here is that FinTech is friend not foe so yes so but but yeah let's talk about you know maybe even build on what Trevor's talking about in terms of niches and opportunities especially you know areas where the technology that we're seeing now can actually supplement an augment that that kind of strategy well that right there I think is the biggest opportunity it's I actually most of my notes were on this one particular topic and that is being a niche bank maybe not entirely a niche banker we're pursuing opportunities in you know different lines of business and I know this is a terrible words using this value but concentrating into something that you know a lot about focus you know it could be a could be a demographic it could be a type of loan it could be a market area geographically it's I think it's the only way that we can when we start getting a soft landing in the economy right now the economy is in our favor certainly those that made it through the recession are able to capitalize on that when we do hit a soft landing which at some point we will want to be prepared for beautiful weather that not just with capital but also with things like economies of scale for a small institution to have a scale we have to have those within certain areas of our business as opposed to being a small version of a large diversified bank and so I want to I think later I'd like to talk about is that okay is that is there other risk management opportunities there versus risk mitigation and risk aversion so number one would be niche or concentration and then there are couple other areas and that is we are agile enough to adapt so we're small enough we it's not you know related to the oligopolistic core that was discussed by Kate and earlier today it is difficult to move that ship with five FS and Jack Henry I think for for us it's not that difficult if we feel we have a direction we need to turn certainly we have to evaluate the balance of resources and and rewards for that particular and exposures that's a good decision but we can turn very quickly accessing to technology certainly is at our disposal and more so now than we've seen even just a couple years ago what I think it is recognized that it is not a competition for us for certainly for the smaller fintechs that startup fintax there there's a little bit different issue we have and that is making sure we can align in culture but but being able to access those is there's more now than we've ever had and then finally I think being able to leverage the fact that we can connect with people we're not just providing a platform that is sterile or faceless or you can connect with people so if we can you take that strength that nobody else has and no has to be trained to on a large scale and leverage technology to amplify it that's where I think our biggest opportunity is to kind of follow up on that we're with the discussion kind of going down the path to talk about you know niches demographics concentrations if if you will do you think that the idea of the term community and community bank is kind of evolving as we move forward I mean is it it's not just in some cases the local bank in terms of where this town's bank I mean you can define community in many different ways now with technology as an enhancing part of that I I I think that that there's definitely a point about that and I'd like to pull up slide 48 here is a slide that I have I got this slide from FDIC research that was published in 2012 I think Jim and his team kindly updated it for me this is really great so it shows the percentage of assets for for community banks and at the beginning of the night early 90s I mean there's a coastal half of the loan assets are consumer loans and that just declined over time so let me talk about communities community are made of people and made of consumers so should there be a higher percentage of loans made to consumers in those communities who are making those loans today so for a period of time and the larger banks are doing a lot of those consumer lending but that seems to have peaked and in my mind that is another opportunity for the community banks to pick up and we read in height lines about the challenges of managing cash flows for many American consumers and I would characterize particularly a segment of the I would call the third quartile people who are making income at the middle or lower to middle income at that segment they are having income but they have a lot of income or cash flow gaps that they have they need help to manage that and a lot of them where they turn to larger banks they do not get that cash flow management products that they needed so they don't have good credit and they can't apply for the credit cards that are the the affluent customers will qualify for so I think those are the consumers and serving their needs to help them manage their cash flows could be also be a great opportunity for community banks gets a little bit too advice and it seems like over time banks have kind of turned one to product companies the way I'd say it where they're just delivering a product that's increasingly commoditized I was at another research conference and when they were showing over time where small business owners turn to advice and if you know two decades ago their banker was kind of the first place they would go and then he'd have you know accountant and lawyer and friends now banks bankers are down in fourth place they go to their friends over there banker they go to their accounted their lawyer over their banker for financial advice and that's to be absurd and I think it's because there's been this race and maybe as some of it is with pressure from technology toward providing the lowest cost products that are out there and I think that we're seeing that small businesses in particular are really hungry for advice and that's I think a competitive edge that community banks can't have over not only the large banks but also all these non-bank actors they're gonna be non-bank actors out there like Amazon if you're a merchant on Amazon they've done a couple billion in loans to small businesses today you're going to be hard-pressed if you're a bank to make a loan that's faster than that because they're purely underwriting based on their inventory based on the performance in the platform there is literally no application or underwriting the loan is just there and offer same thing with square and a lot of the point-of-sale providers it's gonna be hard I think to compete on that level as a community bank in terms of the speed you can absolutely compete when it comes to advice and we've seen small businesses really hungry for that how hungry for somebody to help them understand what type of credit what's the right product for them how do they better manage their business over time to be able to kind of achieve their goals the small business owners are generally not all that's naturally sophisticated only 2% of small businesses with revenue hundred million dollars have somebody who's a CFO or kind of a financial background so it's very kind of needs driven seeking credit is you you know and folks that are not particularly sophisticated borrowers but I would also interject say in a market like we have now right we have larger banks you have non banks a lot of competition it's hard to be able to be that advisor and actually monetize it and actually make that trickle down to the bottom line correct perhaps but I think that there's also you see small businesses vote with their feet on things other than purely price we talked a lot the bankers they think that I've got to have the lowest rate out there that's not what this isn't sure I'm sure there's some that are very focused on borrowers very focused on that you also see small businesses that are going to non-bank sources and they're paying 30 40 50 % APRs because it's fast it's convenient or they're kind of getting some kind of advice somewhere else so I'm not implying that between eBay to start charging 50 percent APR for the advice but there's a lot of room in there where you can still be charging very reasonable rates and monetizing it I think that it's particularly in small businesses there are a lot of other factors at work than purely the rate okay yeah that's a good point I need to talk about Lewis and Clark bank earlier but it is a I mentioned in 2006 it was launched it's a about a 200 million dollar commercial bank in Oregon City which is in the polar metropolitan area focused on the loan side almost exclusively in the commercial lending side and then deposits a mix of commercial and retail but I would certainly echo what Trevor is saying there is a when we look at advice and I think that's let me preface it what applies aim and I think some of this move towards standardization Orca monetization is driven in large part by the industry so 20 years ago I think we saw some charts that would support this but 20 years ago it took 85 the top institutions to achieve 50% of the US banking assets today is 9 I think with what happens there with so few institutions that constant the majority of the banking of assets is that they have to be standardized and in doing that and I think it's doubly impacted I think somewhat by coming out of the recession that the scars that we have coming out of the recession in terms of risk mitigation and de-risking so the combination that - I think makes it difficult for us to pursue anything that's sort of outside a really narrow core but to your point on providing advice you're right there is no question that business owners will will pay for customized structure will pay for a strategic advice will pay to know that they're headed the right direction when it comes to financing an expansion of their business or an opportunity that they want to pursue that's sort of I mean our local pros Testament today because the entire loan portfolio is made up of a mixture of loans and from our two to small business owners that are looking for that and have an MP we where our yields are very strong this that's why there's definitely something there it's capturing that I think is is a big opportunity we can leverage technology for great well let's um let's shift gears to iwitness let's not say threats per se but let's talk a little bit about some of the slides from the study particularly slide 40 here I know it's this one you know the idea of the competitive landscape you know obviously when you look at the first slide FinTech was really really low hardly a blip obviously at some point in the future this is what community bankers see as their landscape it's kind of curious if you had any takeaways on that I mean do you think those numbers from your experience seem on point do you think there's any anything that you know just what your what's your thoughts on that I know you Kate you had some thoughts about some of the who you think are gonna be the kind of the bigger competitors in in in the community banking space yeah I uh I don't feel maybe I must attack myself I don't feel FinTech should be such a threat to community banks because there's a lot of things that banks do that Fink Tech's have no idea what to do and today the most prominent syntax if you look at them every single one of them is a a mono line be it cabbage or Lending Club and you know they no one not a single FinTech has been able to provide a holistic customer experience for financial services and in terms of risk management in terms of maturity transformation all of those critical functionalities that the banks provide I don't think fin tech companies has expertise to do that yet some of the emerging technology such as AI in people are having feel a little nervous about you know what if AI Alexa is going to replace my bankers or Tyler's all that is it possible it could be some time in the distant future but I personally I would ask Alexa for weather I probably will never ask Alexa for banking services you know options so so that's my view I think there will be more technology for sure in the banking and financial services but there are some core fundamental businesses that's embedded in the financial services industry that cannot be replaced by just the technology one thing I thought was interesting is that large banks came as well as they did we just kind of look now coming out of the recession at the pure numbers chase a lot of circles they run these technology congressman say openly that they are consider themselves in a transformation to be a technology company that provides banking services they have over twenty thousand software engineers that work for chase alone Citibank is investing a billion in technology you know it's some pretty staggering numbers that I think will be interesting to see going forward if the large banks start kind of moving up in that survey have seen as a bigger threats where over the past few years they haven't really been stay didn't really focused on compliance and kind of shoring up you know their their businesses coming out of recession you know the primary competition we received from the larger institutions that would be anybody really enter probably ten to fifteen billion is on price and and using the traditional phone method yes we can do this and they'll give as many as I can in the fall and generally forty-five to sixty days later kicked most of us out of the pipeline certainly from an advantage standpoint we can as community banks be able to tell very quickly upfront this doesn't look like we're gonna be able to get there and here's what it would take um you know I think our primary competitors though right now do reflect that our credit union competitors are very aggressive particularly on pricing terms and loan structure there's very little expertise in those areas even when there are recruited over from the banking space and I think that that that can be problematic for that industry from a systemic standpoint and something to watch for those of you that supervise both banks and credit unions on the state side I'm sure it's nothing new there but just be aware we certainly have experienced in other Community Bank peers of mine around the country have as well but by and large our primary competitor is the banks that are under more like 10 billion mm-hmm that's also probably indicative of the size of customers that you're targeting as well yes yes and complexity and it's ensuring it's not just on the lending side I did a road article about maybe a year and a half ago about when Bank of America was selling off all their branches in some of these smaller markets and the banks that were buying those branches we're not getting as many deposits at the time of closing as they thought they were gonna get when they agreed to do the deal and as I started talking to some of the bankers involved in this one of the biggest they lost most of a lot of their deposits to Bank of America because even without a branch they had a platform where these people could still transact so I mean that some I think that's something to think about as well and you had talked Kate a little bit about your thoughts about Amazon's the googles those kind of companies are those really a threat at some point I mean you talked about you did talk about Alexa but I mean I mean art is that really something to think about I think if I were come community banker today I would feel very especially if I'm sitting here I would feel very safe about the potential compelling threat from Amazon because if I look around me I see my regulatory friends and they will help me to keep those threats away because you know it's it's tough to get for size of for a company like Amazon and Google the size that size of a company because I'm a bank holding company today they have to go through a lot of regulatory transformation so I think it could be without seeing task for them and comes back to for some time the most of successful fin tech companies have been providing very very limited very limited financial products there's no way in comparison to a full-service financial firm so in my mind there might be some threat from those larger technology companies but I think it's still a better distance right I take a little bit different view on that that I think that one we're starting to see some as you guys know some regulatory change the OCC charter and some kind of easier ways to bring non-depository institutions into the regular for a framework personally I imagine some of that is based on that they're starting off these services anyway and we all I think we collect we feel better if there is some supervision to it but I do think that these non-bank institutions they're really good at one understanding a customer and to iterating very very quickly this is not the way that they don't push out technology the way that you know banks adopt technology which is let's look at a whole bunch that's out there let's do an RFP let's take a lot of months we're really really worried we're gonna make the wrong decision and have to kind of roll it back these companies roll out new beta products all the time and they've trained consumers to understand that you know it's not always perfect and then they sometimes roll it back and they quickly learn and iterate and learn and iterate and I think that the thing that I see is a big threat is if the banking industry is not able to keep up on customer expectations folks are going to start kind of going elsewhere even if it costs them a bit more because you know all of the bank customers are consumers first and foremost as well and they're being trained by Apple that you can order something online you can pick it up in the store when you walk into the store they know who you are you don't have to wait in line to check out they've created a nice online offline experience I think those expectations are starting to show up in other aspects of their lives and I don't think the change will be you know next year or in five years but I think that and I do think the banking industry can compete very strongly but has to start think collectively getting a little bit better at adopting technology at a faster pace and being able to kind of iterate and experiment a little more if you think about historically financial technology innovation came from the banking sector I mean banks started the credit card system and you know ATMs all of that was born out of banks and we're not seeing that innovation now within the banking community but I do think it can come back and if it does the regulatory framewor the access to the low-cost capital will make it pretty hard to to for these companies to compete with the banks if they can in my and get a little bit faster and more nimble on technology innovation so I'm gonna add to that I do agree with you on the from customer experience perspective all the technologies companies definitely has set the bar very high for all the rest of the industries including the banking and financial services industry and but I think with the help of technology providers like us banks can catch up with those technologies early the main technology companies and I think that there's a some deeper side the relationship and also the risk and management side of the business will be difficult for the larger technology companies to be able to adopt that kind of expertise let's talk a little bit about the whole idea about technology we've talked about also the relationship nature of community banking at what point can a kid at what point can technology really help but at what point you know obviously it can help what point is it really more about the relationship I mean technology can't completely eradicate the need for human interaction right I absolutely agree so for example on our platform we can automate a number of things including you know the application and closing but some of our clients purposely choose not to have the closing done online if it is a new customers they want the customers to come into the branch so that the case shake their hands look at them in their eyes and smile and welcome them to the new bank and maybe give them an apple pie so I think all of that that's it's hard to quantify the impact of that but that is something that could be lasting I was gonna say that's even reflected I believe in the study as well I mean we have this chart right here that shows that you know a large percentage of community banks are open to accepting applications online but we don't have the slide but if you look in the study a much smaller percentage are actually interested in closing online so I mean that goes back to what to your point there and they assuming that's also one part of the customer but also our own part of the bank itself wanting to keep that kind of that personal touch and that makes us may think it's a misnomer that it's either personal or technology the best technology enables that personal relationship if you think about it technology in my view should do the things that are kind of mundane and that would take you a lot longer if you're doing any human interaction so you know why makes somebody walk into a branch to transfer money between accounts why make them walk into a branch to positive check there's not really any kind of value in the human interaction there but when you're closing a loan when you're talking about how's your business doing help us understand the right structure of credibly that's highly valuable to have human interaction and I think good technology even in the lending space can take care of the mundane things data collection application stuff that would take far longer for paper and pencil base and save the really high-value interactions for the person-to-person interaction and if it's done well and seamlessly where it doesn't feel like two processes they can kind of in that Apple like store experience I think it in fact enhances the relationship because people say wow you made this really fast this is amazing I didn't have to repeat myself to four different people you already had all the information there and that rubs off is strengthening that relationship and so I really see it as an enhancement to community banking if it's done correctly it weaves in humans into the process yeah that's very much I mean very much aligned with using technology and amplify what we do best and we talk about the future branch facilities as well I think that's something that folds into this very very clearly and that is the feature of the branch is less transactional it's hopefully going to become more high-value interactions where we're talking about where somebody is in the stage of their life or their business where they're going how we can help or where we've seen it be successful and where we see pitfalls so if we're looked at as a trusted adviser I hate to hear that we're number four on that list I mean I have friends of mine that I would never turn to for financial advice and yet somehow they're ahead of the banking industry in a lot of ways that's strange that is interesting yes oh no I would certainly echo it char was saying and I think what one to ducktail off something you said earlier then actually we have written it down when you know in preparation for this and that is rapid iteration is there a way for us to take advantage of rapid iteration of whether it's business lines whether it's technology something to find what because otherwise what's gonna happen because we are so concerned about risk is that I love that I love the differentiation yesterday or risk managers I think we get away from the idea that we're solely risk mitigators over solely risk-averse and really manage that risk appropriately I think part of that equation can be for us to rapidly iterate so how do you quantify that while of Bob's paper earlier because I think it puts some quantification on how much capital does it take and what does that mean so if we're willing to say allocate 2% if Lois Clark Bank as 20 million in capital and allocates 2% of our 11 a half percent capital her tier one that is equivalent of around six million dollars in pre-tax capital I mean that's a tremendous amount of money to allocate say yes you can start taking some risk in these particular areas and really iterate at the moment it's our approaches to mitigate as much as we can just because of the headaches over but that's part of the threats well and actually it's it's great that you guys you know brought up a couple of points because I think I can really you know move us into another section of this talk and I mean you mentioned Trevor that banks have the ability to innovate they still have the capabilities of pushing things forward you mentioned risk mitigation do you think you know so the idea is you know why has innovation moved outside of the banking industry is it that idea of risk mitigation is it you know financial concern why have banks kind of given that territory up in a sense to other firms I can give my personal perspective on that so I think there's there a couple factors nightly it's interesting because at least from my perspective and I think those are those that I know well we as bank executives and leadership want to do the right thing I want to do the right thing by our community we also want to do the right thing as a leader of our institution we want to do the right regulatory and safety soundness and compliance thing so I would always encourage you to always keep that in mind because it's not an adversarial relationship it should be a an aligned relationship but I think what's happening since the recession in particular is we still on the banking side were still very much scarred by what some of us went through and I'll give an example I testified at the first a gripper hearing in LA it's the very first one three years ago and at that hearing I mentioned that we've welcomed 19 examiners into our bank little Bank at that time and if we extrapolate that onto this or the employee ratio to the largest institution in the US that time will be the equivalent 86,000 examiner's on site of JPMorgan Chase but it gives you the sense that the amount of just it just it felt very confining and so it's almost a bit scary to step out of bounds and I think that has not left and a lot of our psyche yet over time hopefully it does so if I would it certainly would encourage a cooperative relationship to say you know what it's okay to take some risk as long as but in more than one area as long as you've addressed it appropriately so I think there's gonna be a little bit and I can give you an example on the compliance side that unfortunately caused our board to decide to exit residential mortgage which I didn't want to do but it was too much risk for us to take on from a compliance standpoint because of the rest of our business model but yeah so if we can address those I think I think that it would go a long way and I think the thing that just the overlay that also makes of this worse and harder for innovation designs be inside banks is you think about the technology companies a lot has changed in the last 20 years in the way that technology companies develop software so 20 years ago software was done in a much more kind of waterfall approach and south wouldn't she called waterfall where's first like we're gonna spell our requirements we're gonna kind of gather everything get it all SPECT out to every little kind of detail know what every button is gonna go and it's gonna go move over and go into development and there's gonna be quality assurance and there's gonna be testing and kind of throughout this whole process the good thing about that is unless people get very comfortable with where the software is going to come out and it takes a long time and there's therefore provides a lot of time for for example you know regulators or other stakeholders to be able to understand what the software is doing pressure tested things of that sort the software industry has now moved to agile development which is a very different process it's where you are kind of finding needs you are understanding the requirements building them in short of two-week engineering sprints they even call them engineering pushes you're releasing code every single day sometimes multiple times a day in an automated fashion and you release learn tests kind of all in a very short cycle and then work on the next little piece learn what did you learn from that now let's develop more code let's quickly test let's release it again so it's these short little loops instead of kind of a long arc that's really hard I think if you are you know you're a regulator you're concerned about you know security or things of that sort to really feel comfortable in these short iterative cycles now agile processes are not insecure security is built in from the ground up and companies can do that as part of it but I think that you kind of layer that on top of it what's happened is the banking industry is more comfortable with a much more waterfall long arc approach and the rest of the technology industry is iterating very very rapidly very quickly and therefore the customer experience is diverging and that's what I think also kind of compounds this why you're seeing a lot more innovation come from outside the banking industry now and financial technology just because they're able to hone in on and perfect that software much much faster pace what would it take to kind of change that I mean obviously we've got a audience of regulators I mean are there things that can be done on the regulatory front to bring back innovation or is this really the direction that it's gonna go and we need to talk more about collaboration rather than you know building stuff in-house I personally love the idea of a technology sandbox it's starting to kind of get some traction in Europe and I think the UK in particular idea there is let's carve off kind of a you know kind of a walled protected area of the bank so we're not gonna make sure that you know a bank is putting too much capital at risk we're gonna make sure that they're not putting you know taking on unnecessary risk when it comes to customer data but give kind of a small area for them to be able to test new technologies with much lower you know third party diligence requirements much lower regulatory oversight but it's in a wall of controlled area that doesn't cause you know overall systemic risk to the institution and then as they kind of test and rapidly iterate figure out what their customers need what their customers want then when they're ready to roll it out big great and go through the normal kind of third-party diligence regulatory process to make sure that that is you know safe and sound and really secure when you roll it out broadly across so I think it gets to Trey's point of its a concept of risk mitigation and risk management I guess rather than really trying to manage risk down to zero so just I think that allow would allow the bank industry to work with FinTech companies a much faster pace or even in-house be able to kind of develop and test at much lower expense and cost to the bank they still do it in a way that is gonna be secure and safe and sound can I just throw it out to you Trey is that something that would even work within the construct of say Lewis and Clark something I mean or is this really something more for larger institutions should also apply think beyond fatigue applications really serve our approach to business lines and might special intimate niche perspective or technology but so let me can I can I give some perspective okay this my wish list for for fintechs one is we figure out how to integrate with Korres I know that's your job so that's not what I mean that time when I think about adoption if it were turnkey like that it makes a lot easier and I know that's what I said a wish I know it's a wish list is yeah another one that that I think is a challenge is the investment that was product earlier so if the investment upfront is too much that that's generally there's only so much you can allocate and so many resources internally Kanaka also as well it's dollars or its people ticket something to implement and that's something you've done very well it makes it easy for us to test something out without having invested a ton hundred thousand dollars and fifty thousand or whatever the number is but you know very affordable so kind of pay-as-you-go our success based and the final one which i think is probably even more important is that we somehow align the culture of a traditional FinTech with the culture so the entrepreneur that sometimes shoots from the hip or ready issue aim to the bank leader who is or chief compliance officer is even more more risk mitigate or risk eraser so if we can somehow do that because the point comes to a vendor risk management when it comes to vendor do diligence and all of the arms that we have an ensuring that we're not putting the bank at risk from a compliance or a signal science perspective well if we had those dollar and I know here is a good job of that but I mean in general for fintechs it would really help with the rapid iteration because it reduces that perceived risk I think both from the banking perspective as well as got you okay I was gonna ask you not we've talked about in-house but let's talk about collaboration again right community banks working with FinTech from your perspective that had a mango I mean how do you help community banks become more comfortable with that kind of collaborative partnership I mean I'm sure there are gonna be some that are ready to embrace it there might be some that are a little bit skittish I mean how do you have those conversations to try to get them to feel more comfortable working with you guys well it comes down to relationship building which I think many of you sitting here are so good at and then you know and getting deciding which FinTech to work with it's a big decision I think to know the management team to understand the management's background to see whether the management not only can fulfill your current technology need but can even understand and appreciate your vision for your business for your bank and can anticipate your potential needs I think those are very important factors and also I want to touch on some of the points that were mentioned earlier when FinTech the emergence in tech like the one that Trevor and I where we are working on is very affordable it is affordable because that's the nature of technology the nature of technology is such that that you know something that costs hundreds of thousand dollars to build 30 years ago when it comes to storage costs or or computing power nowadays only cost a few cents so when I read in the survey says that the high cost of technology I had to scratch my head so what do people mean by that and I would lso like to ask you the researchers in the sea to why is it that by nature technology costs you to decline over time but why is it so costly for community banks and also we heard the discussion about larger banks seems to get more out of their technology investment than smaller banks why is that I have an intuitive answer and this is something that other people have touched on as well it is the market structure of the today's technology providers for the banks so our way in this room regulators bankers have a very healthy fear about the concentration of the banking sector right we don't want banks to be too big to fail too big to concentrate it but if we look at the technology providers banks they're way more way more concentrated than banks so the top three core processors occupy more than 70% of the market if you look at the top three banks they have less than 30% of the assets that's a very very different level of concentration and especially when it comes to community banks when you are at the negotiation table with such big behemoth technology companies or your processors that relationship is very lopsided and in my mind that could have hampered the innovation of technology in in community banks as well so I would like to encourage the researchers in this room to take on this initiative to look at what is the impact of that oligopoly market structure have had in community banks innovation and also I would like to also make a recommendation I think to summarize what you guys said about innovation and and regulators oversight there is an earlier analysis and stress testing of a capital of community banks it looks like commune banks have very not more than sufficient amount of capital so I based on what Trevor and and the trip is saying could we recommend regulators the field examiner's to consider letting community banks size a portion of their capital as capital for innovation risk appetite size of a percentage of app capital for innovation and maybe adding that to you to the examiner's handbook and so because innovation as we all talk about necessarily involves making mistakes and there will be losses financial losses so if we can let the banks size a certain amount of capitals that they can play with and that will help the industry to innovate as well well great well thank you guys and great suggestions I wanted to leave a little bit of time obviously for some questions so no questions off-limits anybody Alan why don't you go first thanks very much very very engaging panel I have a very fundamental question about the cooperation between community banks and did tech lending platforms now when we think about how do banks or lenders get information about the borrowers we think of three channels what is screening before the loan is made what is monitoring the borrower to make sure that they're doing the right thing with the money and one is gathering information through relationships now we know I think we're pretty it's pretty clear that fintechs are very good at very good screening before the loan is made but they don't probably really know how to do monitoring or relationships so my question is when in community bank invests money with a lending platform with a big wedding pepper do they actually fully cooperate and do the monitoring and relationships also so for a consumer lending on our platform your assumption of number one two and three right number three in terms of the information gets through relations that's hard to build into a software so that's not something we do but number one number two both of those we cover in terms of screening and in terms of ongoing monitoring so we have the ability to continuously aggregate and individual borrowers financial data across his or her financial accounts and continuously monitoring that and provide that information to our bank lender I would say that they're in both those kind of number two and three the monitoring and the relationships technology can provide some additional data that might not always be obvious so I think it can be powerful that's coupled with kind of humans on there and what do I mean by that I guess one is if a they a borrower for example is connecting up their accounting software and bank accounts elsewhere that's data that's automatically it can be sucked in and built into the monitoring systems that the FinTech is using to give a banker much more up-to-date and kind of real-time analysis so they're able to kind of sometimes spot some trends then it might be you know okay there's now a miss payment well it's almost too late where if you can start seeing alright it looks like you guys are going to run into a little bit of a cash flow issue three months down the road unless something changes so there's some additional data that I think can be provided in real time and similarly on the relationship side you know they're being able to pull in data out there that is kind of a proxy for customer sentiment so whether it's online reviews whether it's you know the effectiveness of marketing campaigns things of that sort there's some additional data shipping data that some of these guys bring it as well that could help give a banker some insight into the health of the business and kind of how are the customers are doing it when it comes to monitoring any other questions yeah we're going right here you were commenting about the speed as to which banks brute technology is slow to you other than I remember back when we brought Etienne is online and all in but you too who are not in the banking industry here if you both provide technology and you don't have a risk assessment that you have to do for your technology you don't have to check to make sure your customer is compliant with any of the compliance there's issues that come along you don't have to check to make sure they pass BSA tests that we all have to do in advance so from your perspective how does that delay banks from bringing technology they hope that question makes sense is that the upfront cost to us is different than to you who's out there without any regulation would that be an accurate statement I think that could be an accurate statement for many fintechs Mirador is not a lender ourselves so we're really a software provider so we do have to build into our platform all of the compliance pieces as well so we don't build that in the platform you guys are not gonna be able provide that information easily to the regulators when they're asking for it and it's not a good business model so we're having you know when humba is rolling out we have to incorporate that into our platform we have to Radio bsa/aml controls into the platform but I do think that you know yes four completely non-bank lenders are lending themselves yeah that is an advantage that they have and I think that where community banks can compete is on the relationship side is on lower cost of capital and I think that they do still have to kind of make that process somewhat easy or we're seeing particularly the small businesses will pay more for ease and convenience in terms of a rate but yeah I think you're absolutely right that you know non-bank lenders do have a lower burden when it comes to compliance certainly it also opens them up some additional risks as well I think in the next you know downturn and we've seen some things with Lending Club and some these others as well where they've had a couple high profile kind of issues where if they are a little more on their you know bsa/aml I think that could have avoided them oh yeah I again we so the the reason that we are here and the kind of technology the kind of service would provide to the community banks is to help them equalize with the other syntek mono lines so that will make it as convenient as speedy as easy it is for someone to apply for a loan from your bank as it is from Lending Club so that's why we are you know that's the kind of service we provide that's what we do well know our time's running short does do we have any more questions yes Julie raised you know just local disaster and all of a sudden critical and I think we all expect that someday hopefully not too soon there will be an economic downturn are we going to see high up in credit availability or do you see FinTech companies becoming relevant making allocations or adjustments for those types of future events well I think that I'm glad you mentioned that I think that I would I would add that as one more of my argument why I think some of the tech companies is difficult for them to become a financial service providers it exactly because of those kind of Black Swan scenarios I don't know if they know how to deal with that especially for some of the marlyne financial service providers such the Lending Club the cab page they're the source of capital is not stable and we've seen what happened to us the securitisation market in 2008 so I think similar things could happen so that's my opinion I I don't think that they will be nimble enough to shift I think there will be a lot of risk among those protect service providers I agree as well I think that as I think as banks have gotten faster at making loans the thin techs in tech lenders have been falling it seems like that their loan quality is probably going down a bit and that in a good market it's fine when you're charging you know 40% APR and your loan losses can you know still be 10 percent and that's fine but in a downturn I do but I would be surprised there's gonna be a lot more consolidation in the industry in a downturn one source of capital that I hope in the next downturn that steps up in a big way is capital through the Community Development Organisation CDFIs the SBA I know and some of the disaster areas they've done a lot to kind of help push capital out into businesses that needed a lot kind of through the banking industry and kind of still provide some of that a backstop where banks might be kind of inclined to tighten down otherwise got you well again I appreciate you guys for participating on the panel and I will say that maybe you know some of the takeaways I'm getting from this conversation is you know for the regulator's out there as Kate and Trevor said maybe there are ways to you know - not to sound too cliche to think outside the box in terms of you know how you can help your banks be more innovative and do things perhaps on the capital side things like that for the researchers keep doing what you're doing obviously take some of these statements I'm sure there's gonna be data over the next few years hypothesis techno come up with these hypothesis and test these things to see what happens obviously you know whether it's core provider whether it's the competitive landscape there's certainly going to be a lot of data to parse over in the next few years and as far as the bankers are concerned you know as we've been seeing here look at FinTech as not necessarily a threat but also as a potential opportunity as well so thank you guys again for your time [Applause]