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Vol. VI, No. 39


Financial Services Insights and Intelligence

FIRST WORD: Highlights from our annual Financial Services CEO Retreat last week. For most of the last 20 years, Second Curve Capital has sponsored a financial services CEO retreat, which we did again last week. Here are some of the highlights from the meeting that included two half-days of presentations, discussions, and a working dinner.

The CEOs wanted to get out of the office, and they did. We could tell right after the first invitations went out in March and April that we were going to get an above-average number of acceptances this year despite the uncertainty related to Covid. We did have a strong lineup, but we have had those in the past, as well. I think this group was just especially looking forward to getting out and meeting other CEOs in person. We hosted the most CEOs this year than ever. We find a very high percentage of CEOs that come one year will keep coming in future years.

The key theme: there are no more digital deniers. Nigel Morris, managing director of fintech VC firm QED Investors, noted in his presentation that in banking, there are no more digital deniers, and he’s right. No one needs to be convinced anymore that banking is in the midst of a digital revolution. Even just five years ago, by contrast, not all attendees believed that moving data to the cloud was a good idea, or even safe. Today, a large institution, Capital One, has completed the migration and closed all of its data centers. We are all digital natives now.

The focus now is on the pace and the depth of digital adoption as well as the effort to integrate high tech with high touch. Ten years ago, the digitization of banking meant offering a mobile banking app. Today, digitization covers just about every banking process, including customer-facing, mid-processing, and the back end. In addition, not just consumer products are being transformed, but also investment products and commercial products. The leaders have two things in common: they have made the furthest transitions in the most areas, and they are balancing high tech with high touch to provide a superior customer experience. Surveys have shown that consumers prefer to conduct basic transactions using mobile and online offerings, but for more complex transactions, they still prefer going to a branch. Consumers will often start a transaction in one channel and then switch to another. Studies show consumers have few problems using the digital products of the large banks, and that large banks are doing a better job at resolving problems when they do occur.

The VC market is pouring huge amounts into fintech companies at valuations that have become quite stretched. Hans Morris, founder of fintech VC investor NYCA Partners, and QED’s Nigel Morris discussed the money being raised and invested at some hard-to-understand valuations. KPMG estimates that global VC investment in fintech hit a record $52.3 billion in the first half of 2021, more than double the $22.5 billion invested in the second half of 2020. Nigel Morris mentioned the valuations are “crazy,” with one startup trying to raise money at 100 times sales. Hans Morris mentioned that his firm is seeing ten times the number of proposals now than they saw just three years ago. The bankers in the room took the most notes during the two Morris’ joint discussion, whose topics included examples of investments they have made in companies that would like to partner with banks.

Banks are beginning to work better with fintechs. Hans Morris brought up the statement by M&T Bank CEO René Jones, who said he wants M&T to be known as fintechs’ favorite partner. Both Hans and Nigel have prior experience as bank operators, and they are now watching as banks work with their fintech partners. The best partnerships are the ones where the banks don’t just use the fintech solution, but also modify bank processes to optimize the solution. Most banks need to be more fintech-friendly.

Leading banks are using data to improve the customer experience by offering personalized products and services. I have been a huge fan of the work Personetics has done for Huntington, U.S. Bank, and Royal Bank of Canada at providing personalized service and advice. Jody Bhagat, Personetics’  president for the Americas, believes personalization is only in its initial stage, but that by the end of 2023 all banks will be providing some level of personalized service and advice. He claims that Personetics’ clients have seen up to a 30% increase in customer engagement, 10% balance growth, 8% retention rates, and a seven-point lift in net promoter score, on average. As someone who has test-driven some of the company’s products, I believe it. However, Bob Hedges, SVP for Global Strategies Initiatives at Visa, warned that about one-third of Americans are concerned about the unauthorized use of their personal data by service providers, even if the use results in a better product or service.  This new era of big data management can bring huge benefits to consumers, but Hedges’ point is that companies need to be aware of and prepare for possible backlash.

Brian Moynihan discussed Bank of America’s dramatic digital evolution. Before taking 20 minutes of questions, Moynihan provided an extremely interesting 40-minute discussion of Bank of America’s complete digital transformation.  Afterward, I heard one CEO say to another, “Can you imagine any other CEO spending his entire presentation discussing a digital evolution?”

Jim Herbert reviewed the phenomenal success of First Republic Bank.  As I have written about in the past, First Republic is a great American business success story. It is one of strategic focus, simplicity, and superior execution despite the complexities brought on by size. The company’s efforts over the last five years to broaden its customer base by offering products that appeal to millennials has been both impressive and phenomenally successful. Not only is First Republic a great American business success story, but so is Jim Herbert, who co-founded the company in 1995 and remains co-CEO.

Bank of the West CEO Nandita Bakhshi talked about her personal journey and building a culture of sustainable finance and diversity. Bakhshi’s personal business story is also very impressive; in her current role as CEO of Bank of the West, a subsidiary of BNP Paribas, she is utilizing the best elements of what she learned on her journey to the top. She is most noted today for her focus on sustainable finance and her promotion of diversity.

Former Citigroup chairman Mike O’Neill discussed the issues in the three turnarounds he has led. O’Neill, with Tom Theobald, fixed the failed Continental Bank in Chicago before selling it to BankAmerica. He then became CFO of BankAmerica and, along with Dave Coulter, forged the merger with NationsBank to create Bank of America. Political and management issues spoiled the early promise of that combination. O’Neill went on to become the CEO of Bank of Hawaii, and proceeded to execute one of the most successful and shareholder-rewarding turnarounds I’ve seen in my career. Finally, bank regulators brought him out of retirement to join the board of directors at Citigroup. After a few years of watching then-CEO Vikram Pandit’s lack of urgency, O’Neill led the effort to oust him, and took over as chairman. O’Neill is widely seen as a turnaround specialist, but his expertise as a strong operator is often overlooked. Everyone could benefit from listening to his discussion of capital management.

Two fintechs, nCino and Mantl, discussed how their solutions can help the banks improve their product offerings. Pierre Naudé, founder and CEO of nCino, discussed the company’s evolution from being a one-solution provider to mid-sized U.S. banks to a global provider of software solutions to banks. The company recently announced that Wells Fargo is its latest large bank client. Nathaniel Harley, founder and CEO of Mantl, talked about the problems his company’s online account-opening application solves. More than half the banks in the U.S. do not enable online account-opening, which seems ridiculous to me given that low-cost, easy-to-install solutions like Mantl exist.

Our annual CEO outing has some great content which facilitates as many questions for those listening as it does answers. In addition, the networking benefits are both helpful and enjoyable.

SUMMARY OF BRIAN MOYNIHAN’S DISCUSSION OF BANK OF AMERICA’S DIGITAL EVOLUTION: As I noted above, at our retreat last week, Brian Moynihan gave a detailed presentation that touched on many of the key elements in Bank of America’s decade-long evolution to become a completely digital bank.  As digital tools replace paper-based tools, the bank’s costs are reduced and customer satisfaction increases.  As customer satisfaction increases, customer attrition is reduced, further lowering costs. As all the elements come together Bank of America ends up with:

  • Lower account acquisition costs;
  • Lower account servicing costs;
  • More sales at a lower cost;
  • Higher customer satisfaction;
  • Lower account attrition.

What does the customer receive?

  • Simpler, easy-to-use products;
  • Better and more timely advice.

The digital evolution is a journey for both the bank and the bank’s customers, whether they be mass-market retail customers, affluent consumers, Merrill Lynch clients, small- and mid-size businesses, or large corporate customers. Here are five slides from Moynihan’s presentation which show the company’s and clients’ progress on their journeys. The first is the increase in digital adoption over the last five years, most recently fueled by the pandemic.

The second and third charts break down  digital adoption in retail banking by generation and income. The younger the customer, the more digitally active, but the boomers and seniors are adopting at an accelerating pace.

Moynihan made the point that it’s not enough for the bank to simply expand the breadth of its digital offering; it also needs to build client knowledge of the offerings, train clients in how to use them, and explain the benefits.  Among the digitally engaged customers at Bank of America, 88% use the mobile banking app but only 23% use the digital wallet. Adoption is a journey at the customer’s pace.

The digital evolution is not just a retail customer journey. Moynihan also showed the path the bank’s commercial banking customers are taking.

What Bank of America has accomplished is indeed impressive.  Virtually all banks and their customers are on their own digital transformations, which are necessary to satisfy customer needs and lower bank costs.

SET TO REPORT: Happy earnings season! Goldman Sachs reports that the consensus looks for third-quarter earnings growth of 27% for the S&P 500 overall, and 15% for the financials in particular.

STAY AWAY FROM THE CAMERA: You don’t say. Investors polled by Harris say that the financial guidance they are least likely to trust comes from the financial nabobs they see on television.

They kind of have a point, actually.

TOO FAR AND WIDE: This seems nuts to me. If I’m reading this chart right, up to around half of middle-market companies surveyed by accounting firm Marcum LLP say they plan to let their employees work from home full time if they’d like.

Seriously? I just don’t see how you can maintain a cohesive, effective enterprise full of highly motivated employees in an environment like that.

OUT OF SIGHT, OUT OF MIND: Oh, and it’s not just employers who are apt to be hurt by continuing to allow widespread WFH. Employees, too. From Bloomberg, on Tuesday.


Employees just starting out are risking their career advancement by continuing to work remotely, hedge fund manager Ken Griffin said.

“If you are early in your career, you are making a grave mistake not being back at work,” Griffin said Monday in a conversation with Bloomberg’s Erik Schatzker at the Economic Club of Chicago. “It’s incredibly difficult to have the managerial experiences and interpersonal experiences that you need to have to take your career forward in a work-remotely environment. . . .

“So for our youngest members of our workforce, I’m gravely concerned that the loss of early career development opportunities is going to cost us dearly over the decades to come,” he said. [Emphasis added.]

This should be obvious, no? Plus—and I’m only half-kidding when I say this—have you seen the sorts of apartments that entry-level workers in cities like New York and San Francisco have to live in? Let’s just say that being cooped up all day in places like that can hardly be a morale- or productivity-booster.

ON THE RISE:  Golly. Ride-share companies sure haven’t been shy about hiking prices this year.

UNLOVED: I take this as a contrarian sign that Dr. Copper—the metal with a Ph.D. in economics—has a way yet to move higher. Speculators have abandoned the copper market to such an extent that open interest is now back to where it was when last year’s recession began.

THEY ARE MOVING BACK TO MANHATTAN: I must admit this surprised me. Manhattan apartment purchases set a 32-year record in the third quarter.

LOWER AND LOWER: Disappointing economic news ahead? Maybe! The Atlanta Fed’s GDPNow real-time economic model—whose predictive power, I’ll grant you, has been a bit off since the pandemic and lockdowns began—now points to third-quarter economic growth of just 1.3%, well below economists’ consensus expectation.

STEADILY FADING AWAY: I’m a little surprised people haven’t been paying more attention to this, to tell you the truth. Americans’ confidence in the federal government’s ability to adequately handle domestic and international problems has fallen by roughly 50% over the past 20 years, and now sits near an all-time low, according to Gallup.

LATE TO THE PARTY: Oh great. Now he tells us.

EVER HIGHER: Just what the housing market needs! Even as home prices surge at a record pace nationwide, mortgage lenders have begun to ease their lending standards.

It’s a good thing that home values have never, ever been known to go down, right?

BETTER AT CIVICS?:  This is sort of an improvement, I guess: 56% of people polled by the Public Policy Center could name all three branches of government, up from just 40% who could two years earlier.

NOT AGAIN: Oh, please. From MarketWatch, on Monday.

Really? I’m trying to think of a time when some market watcher or other wasn’t predicting an imminent re-run of 1929. It’s as if it’s the only lesson of financial history these people are capable of learning, and then they learn it all wrong, anyway.

GROWTH/VALUE STOCK VALUATION GAP BACK TO BUBBLE LEVELS: With the Fed apparently set to start the process of allowing interest rates to rise to market-clearing levels (and with inflation on the rise), it seems likely that the extreme valuation gap between growth stocks and value stocks should ease considerably, to value stocks’ favor.

SPINNING, SPINNING: Oh, for goodness’ sake:

CONCERNING BASED ON HISTORY:  I have to admit, this is a pretty ominous-looking extreme. It’s especially ominous-looking, in fact, if (as seems likely) both interest rates and inflation are set to rise.

PLENTY COMPLACENT: Maybe investors aren’t as addled by the prospect of rising inflation as the financial poohbahs on TV keep letting on. Among fixed-income investors polled by Standard & Poor’s, no one thinks that the yield on the ten-year Treasury will be higher than 2.5% a year from now.

TOO MUCH: I’m as concerned about the climate as anyone, but considering how much Jerome Powell has already piled on to the Fed’s plate, this strikes me as preposterous overreach:

TIMELY: It’s the most wonderful time of the year! Over the past two decades, the fourth quarter has been by far the best period to own stocks.


CROSSOVER: A notable milestone: In Europe so far this year, electric cars are outselling diesel-powered ones.

DIVERGING: More evidence that long-term interest rates ought to be a lot higher than where they are now. The gap between the copper-to-gold ratio and the yield on the ten-year Treasury is wider than it has been, well, ever.

It’s fair to wonder how, years from now, financial historians will view the Fed’s policy of deliberately suppressing yields across the curve at a time of rapidly accelerating inflation. For myself, I bet they’ll think it was nuts.

HAPPY AT HOME: Well what do you know. The longer you pay people not to work, the less eager they are to go back to their old jobs.

I can’t say that I blame ’em, to tell you the truth.

IS THE S.E.C.’S GENSLER SERIOUS?: S.E.C. head Gary Gensler says investors could save money if the size of the financial services sector reverted back to where it was in the 1950s.  Does he really think he can reverse progress and change?

HOUSING AFFORDABILITY DOWN TO 2008 LEVELS?: Back in 2008, the rate on a 30-year mortgage was around 6%, while today it’s around 3%, but housing affordability has not been this low since 2008 because of the increase in home prices.

MISPLACED CONFIDENCE: Oh, great. The Fed has a formula for predicting inflation. I’m sure this sort of thing gives a real confidence boost to policymakers. Whether it actually works in times of great economic flux, though, could be another matter.

RIGHT AWAY: Ah, the perils of overthinking things! In running an investment bank—or maybe any business, for that matter—sometimes the simplest, quickest solution to a sudden problem is the best one. From Bloomberg, yesterday:

A flustered executive back at Jefferies Financial Group Inc. was interrupting [CEO Rich Handler’s] vacation to discuss the messy unraveling of a client—Bill Hwang’s Archegos Capital. Handler said he was going to fetch his cocktail and that when he got back he wanted the Archegos positions gone and to be told the tally of the losses.

“I spent the entire weekend thinking I’m an absolute incompetent idiot,” Handler said of the time spent stewing over the roughly $30 million hit in March. “But then we saw the headlines that started coming out Sunday night, I realized maybe we weren’t complete imbeciles.” [Emphasis added.]

“Get it over with already” really can be a useful rule to live by sometimes.

NEXT WEEK: On Tuesday, the National Federation of Independent Business will release its Small-Business Optimism Survey for September. The consensus looks for 99.5 vs 100.1 in August.

THE LAST WORD: A few years ago we moved the location of our annual CEO Retreat from Scottsdale to Chicago. When we did, Chris Murphy, the CEO of 1st Source Bank, headquartered in South Bend, Ind., home of the University of Notre Dame, invited Amy and me each year to a Notre Dame football game on the Saturday after our meeting. Since our two youngest children were still in high school, we were mindful of the prospect of underage parties being held at our house in our absence, so we declined the kind invitations. This year Chris asked us again and, with no kids around, we said yes. Little did we know at the time that the game between Notre Dame and Cincinnati would be between two top-ten ranked teams. We drove to the Murphys’ house Saturday morning and began an incredible experience that included a little bit of everything. We were joined by Bob and Christie Hedges. I have known Bob for 30 years; he was a presenter at our meeting in Chicago and is now working at VISA in charge of strategic initiatives. The Murphys have a long family history with Notre Dame and are major benefactors, so when they packed us all in their car for a tour of the campus it was not your usual campus tour.

Chris had permits which enabled him to drive to areas blocked off for the game. The first thing we noticed was how beautiful and well-organized the campus is. Chris explained the old buildings, the ones which had been rebuilt after being destroyed by fire, and the new ones; they all went together. Then the Murphys took us to the Basilica of the Sacred Heart, where they were married in front of 800 or so people many years ago. It is truly awe-inspiring when you walk in, and no pictures can do it justice. The Murphys knew just what time the marching band would be coming playing through the heart of campus on the way to the stadium.  The band walked right by us, five across, with friends running alongside heckling a band member to try to get him to break a smile. It didn’t happen. The band was huge, and the whole experience of being in the middle of the campus with so many people around and the band playing brought a tear to my eye; we were all alike at that point in forgetting our differences and enjoying a great college experience.

We made it to the stadium with its rich history, and of course the Murphys had seats in a club section on the 50-yard line. Everyone knew Chris and Carmi on the way in, it was as if we were with the mayor and first lady of South Bend. Notre Dame didn’t play all that well and lost the game. The Murphys never mentioned leaving early, because they wanted us to see a terrific postgame tradition at Notre Dame and other universities and colleges around the country.  The game ended and players from both teams met and congratulated each other on the field. Then all the Notre Dame players gathered in front of the student section, locked arms with one another, and sang the Alma Mater. Classy is the word that came to mind, as was our entire experience with the Murphys and Notre Dame.

Edited by Matt Stichnoth.

Copyright © 2021, Second Curve Capital LLC

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