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Deposit Management in a Post-SVB World · Leaders in Lending

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You're listening to Leaders and Lending from Upstart, a podcast dedicated to helping consumer
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lenders grow their programs and improve their product offerings. Each week, here decision
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makers in the finance industry offer insights into the future of the lending industry,
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best practices around digital transformation, and more. Let's get into the show.
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Welcome to Leaders and Lending. I'm joined live and in person today by Angela
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County from USAA and James Morgan from Capital One. Thank you guys for taking
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some time out of what I this is a very busy day to come and
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talk with us. Well, thanks for having Yeah, this is going to
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be fun because we're usually a lending podcast, and day we're gonna talk about
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deposits, maybe the most boring banking, most traditional banking product of all time.
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But just let's start with this question, what's the deal with deposits?
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What's going on in the space of deposits? Pretty boring couple of weeks and
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at deposits are kind of all to talk these days. Yeah, I think
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it was a pretty interesting time, maybe pre SBB turbunsypols of that, but
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it's been an interesting time, mostly kind of coming out of the pandemic entering
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into inflation obesusly central processions, and so it's a lot of predicting where the
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world's going to go, what does that mean, how does it impact segments
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differently, different banks differently. So it's just an interesting time to be studying
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the brawl. Yeah, I mean, I completely agree, and I feel
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like the deposit space was one of significant stability for a long term the pandemic
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head and there was a dramatic change right in consumer behaviors and how their money
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was flowing in and where they choose to store their funds, how they transacted,
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and as we're coming out on the other end, there are a lot
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of things that persist and a lot of things that change, right, So
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it's a very exciting time. So I want to want to say ignore we
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can get into the SEV and kind of what's happened. I feel like that's
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more of a short term thing, although do you think there's some long term
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lessons to takeaway? But talking about what were the major trends as we went
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into the pandemic, I think, particularly post the stimulus being introduced all of
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a sudden, there was like a lot of my personal savings rate hit some
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obscenely high number that has never hit. I mean, you look at that
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graph and it's got this one like little thing that looks like an error.
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I mean, if you saw that in a statistics classic, where's where's the
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data point that was erroneously entered and you go, oh, these couple of
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amounts are really long. Well from a segments point of view or a products
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point of view, what was really happening there? And then what's happened on
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the tail end is we've seen the end of stimulus, the savings rate go
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back down to normal or below normal. What's kind of been the trend between
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consumers and products or segments and products and in deposits post the pandemic, not
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that we're post, but post the stimulus at least I'll say yeah, I
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mean I could start there were a lot of changes underway. And when the
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pandemic hit, right, folks were many were flush with cash right and there
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we were in a very incredibly low rate environment, and so the concept of
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what are you going to do with that money? We did see savings rates
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increased. We also saw balances in checking accounts because arguably there wasn't all that
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much difference between whether we had in and checking account of savings account and folks.
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As the world opened up, there was pent up demand rain and saw
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spending start increasing. We're in good economic times and now as we reflect on
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where we are today, we see continued spending and we also see movement in
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the balances right that we've We've been talking about quite a bit recently. So
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I think that pandemic was that seismic cheat. There's certain things about consumer behaviors
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that are persisting to digital is one of those silver windings and all. It
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seems to be more stable than some people have shared. But yeah, a
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lot of change, for sure. Yeah, I would echohlbad. I think
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the the initial pandemic surge was comprised of a number of factors. Right,
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Like I missed Mulis part. You also had this staying hello less spending.
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Now we've got the revenge spending the kind of like a little bit. And
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I think there was always a mentality what was must come down. We didn't
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do anything to earn that search, right, Yeah, and so there's you
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know, kind of an implicit assumption that that would eventually normalize itself. That
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took a lot longer than so you did end up finally back to this repune
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spending thingum coupled with inflation is going to be made. Some of these things
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happened faster, so I think the dynamics of the initial surge saw at least
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her consumers a disproportionate amount going to primary checking accounts, and so banks that
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played heavily in that saw a little bit more searched. Others some of your
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calmline direct stating players not so much, and so you're starting to see some
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of those things start to flip as we come. One of the things it
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was interesting to me as we've seen I mean post us phbe but I don't
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think entirely we've seen. I mean what my CFO tells me is the first
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time in history we've seen decline and deposit balances in history, as far as
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you can see the numbers. That's interesting to me that the outflow, but
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also the sense that there is the ease of the fluidity of movement between institutions
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seems to be much Himan SPB experience twenty five percent of deposits coming out in
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a day, which I think, you know, you can have a discussion
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about the risk management practices they had, but at the end of the day,
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like there aren't many banks that are prepared for twenty five percent of there
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are deposits to vanish. It as a pretty traditional run on the bank that
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would hid at the institution. And it makes me wonder how much are we
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seeing increased competitiveness in terms of sensitivity rates Consumers going hey, I can actually
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there's this online account and I can go get four or five points on an
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account that used to used to never even think about. Interesting you're checking out,
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like, you know, I got point oz eight or whatever. I
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went, Oh, it's like a little bonus. But I was never moved
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picking an account over that, And I feel like there's maybe a shift to
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where there's a little more competitiveness. So I'm curious, is that something you're
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seeing around competitiveness for rates and what are the other dimensions upon which people think
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about the value of an account of one institution versus another, Whether kinds of
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value are there in those accounts. Awful way just think it was like it's
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just a check it it's just like kind of just a thing that you don't
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think of as having very much differentiation. Yeah, I think a lot of
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it has to do with the cycle. I mean, I think the premis
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of your questions started with SVP, but I would go before that. Even
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if you think about the last rising rate cycle, FED rates feaked at two
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and a half, were past that, So you know, I think that's
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just a function of the dynamic extremes of cycles themselves. So where this particular
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time, now you're pushing five percent half five percent, and it starts to
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make things like CDs interesting again. Particularly markets aren't forming the way they need
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to be, you know, and a lot of the things competing for your
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deposit dollar have kind of fallen away like a year or two, like retail
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investing, Bloom Robin Hood, a lot of people got bird kind of came
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back from that crypto and kind of what's happen and there, you know,
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I admittedly was staking some of my bonus into, you know, to a
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stable coin thing at nine percent. Yeah, you're the one's talking about that
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today for Haithe and so you know, it was I bonds, you know,
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it was the kind of the biggest game in town. I'm over the
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past six months for really misk adjusting yep. And now you're those are coming
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back down to Earth as well, and so now I haven't we've seen CB
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demand and the way we haven't seen in years, which is pretty interesting.
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Yeah, I mean, I would say I think it varies quite a bit
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based on who that target consumer is or that hand customer, right, because
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if it's someone who has a lot of money or business, right, there
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may be quite a bit of rate sensitivity they're in if it's at their discretion
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ease move and we didn't. We have and continue to make it easy to
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move money right as an industry, which is a great thing. But if
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you think about someone who is living day to day, like maybe in that
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more mass market, the other elements around halleyeen bank and who you trust right
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like um, if you've got a sense of safety and security is their convenience
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in that account, You've got other elements set up, you might have your
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bills automatically deducted from that account, and you might have other relationships. Those
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elements matter as well. Rate is not just rate. Rate matters too,
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but to varying degree. So i'd say what we've seen, because you did
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touch on you know, the STB aspect, what we've seen has been quite
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a significant empowered especially in the commercial space, but in consumer retail deposits really
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quite a bit of stability right in the week of all that tumult in the
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in the industry at marge, is your sense that the uh, the massive
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shift in the in the larger particularly the commercial accounts, is that's happened in
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the wake of best Is it like a temporary like what's going on with the
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world? We need to find you. I'm going to come back to my
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local bank or where I was at before. I mean, certainly, I
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gotta call. This is one of the weirdest calls I've ever gotten from financialiser
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goes, do you guys need to move your money out of the deposit account?
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I say, why is this for safety? I went, who moves
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money out of a deposit account for safety? Usually moved out for yield at
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the expensive safety. And yet for a moment that felt like not the right
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trade, which was very weird. But I also feel like, then six
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months are going to go back and go, yeah, it feels pretty safe
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again. I'm going to go back and put my money back where it was.
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In terms of high you measures. I don't know how much of that
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kind of commercial shift is a more structural long term thing and how much of
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it is a more short term reactionary experience. Well, so I can't claim
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significant depth of X for effects for choosing comers. I am consumer ely focused,
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how or that that's that's safement. It has long been regarded as rate
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sensitive, right like it's so in the information and that the analysis that we've
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done it very much looks like a duration like a matching issue, right,
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Not a fundamental difference in the depositors behavior, but rather mismanagement around how you
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think about matching duration after the Just a fundamental banking mismatch, is what I
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would say, which is why I think that trust factor and trusting the management
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to know how to understand the consumer or the end customers behaviors and ensure that
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the strategies are appropriately matched it is important. My first comment is I would
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probably rephrase your advisor and say do you need to spread one of around as
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opposed to maybe say exactly like that, but you know, the concept is
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right. The broader thing that I wonder about is the nature of concentration.
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I think that can be a consumer ormercial aspect. You know, particularly with
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so many banks in America that they're all fighting for differentiation in some different way.
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Yep, that was theirs. I think in the in the end,
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you have to do that responsibly, and I think there's I do think it
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is a great wickup call for kind of traditional boring banking. It's done really
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well. R short, lend long heads your risks. I think like there
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is a value add that's there, and I think we're it's a stark reminder,
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you know, FDIC is pretty boring you. The interesting thing over the
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past few weeks has been FDIC has been interesting too. Older massive fluid clients
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we know more about it that are looking to maximize it, and then for
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younger customers just learning about it, just understanding what it is. It's now
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on the AR. I think for many of the younger consumers, like the
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idea that your deposit isn't just sitting in cash in the bank, but is
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actually like kind of lent to the bank and they're doing things with it is
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almost a wake up quickly. Maybe it's not just as I'm sitting there does
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not work. There's a risk that they can lose is my deposit? Like
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I didn't understand that was true, which is I mean obviously not under the
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account of the idea that it could be lost and the government would need to
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ensure said lots is kind of a wake up call though. I think a
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lot of consumers it's just had no idea that that was a thing A long
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time since we had to do that. I think it's my mom did make
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me watch It's a wonderful life. I don't know if I would not before.
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I work think. I think that's how you learned about it. The
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kids are watching that again anymore. I don't think they're watching that anymore.
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I think that one's I mean occasionally. I mean I've shown my kids,
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but I'm not sure that it's a common watch for the average teenage of these
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days. So you talked about one of the kind of maybe more durable,
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lasting changes being the digital acquisition. What do you see as the next thing
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coming in the digital acquisition and if that becomes up front on the to your
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point, the war for differentiation, how do I like, what is it
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that people should be thinking about when it comes to digital acquisition, digital account
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opening and the kind of thing that fast follows after it, which is fraud
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and now we think about reducing the friction and making an experience that we like,
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but not also introduced seeing a lot of risk of you know, mouthfeasance.
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Yeah, I mean, I would say that digital acquisition has to be
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easy, right, and so it's on us to figure out how to prevent
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the fraud, how to mitigate the fraud. And luckily in our ecosystem there
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is a ton of data right into those of us who are in the industry.
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It's on us to make sure that we can set that up for success.
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And so I think the core of the drive to digital and that persistence
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is consumers and customers at large of seeing the benefit of convenience, they seeing
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the benefit of how they interact in digital spaces, and for us to continue
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to drive that, we've kind of make sure that that value exchange is very
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clear that they clearly see benefit, that they don't feel as if we're trying
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to tell them, hey, you want to do this, but instead you
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should you We really need to integrate ourselves in a way that makes it apparent
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to them how it's easier, how it's more convenient, how it is see
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and really and really see that totally agree. I think, you know,
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post pandemic, you're really looking at a world that has a higher demand of
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digital fluidity and ease of service, um, you know, and coupit once
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been on that journey for a long time. Well, I've been an account
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opening all that kind of um, you know, bring up the right part,
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that dirty underbellue of that is we're also protecting from fraud at the same
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time. Yeah, and that may just be what's next because very often fraud
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defenses or hand in hand with friction for good customers, and so there's always
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this kind of push and pulled dichotomy of creating friction for good customers is kind
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of how you defend or have better rates defense rates against fraud, right,
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or you know, the opposite could be true. I make it easy and
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fluid and way too exposed to fraudsters, and so you know it is going
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to be a vowel for data and capability on doing that well minimizing the most
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positives. That kind of the balancing of those who thinks is really hard is
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we find it even harder and lending to the extent that like when you put
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friction front customers, you end up driving away the goods. You end up
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actually negatively not just losing the accounts, but negatively affecting your credit performance because
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like the best customers won't sit through the friction. So then not only did
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I and I get to balance, but I negatively affected my credit performance by
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putting the friction it. But it's like I can have a no friction process.
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It's kind of it reminds me of my r CEOs sometimes. Class.
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It's the lending business is the easiest business in history to grow and she's hard
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to get your money, man, but there is room for hope, right
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and I go where like even in lending, Like when you think about how
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far we come in terms of instant positioning, right, Like, all of
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that to eat is out there, and as banking becomes more and more real
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time, it's yeah, it's it's just an exciting challenge. It's one that
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we're Yeah, I feel like we're just at the early stages of getting really
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good at these things, and particularly machine learning AI models. We have to
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go into chat GPT, but the things that it is doing even we're what
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we spend a lot of time in the AI space. We've got a lot
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of AI models and what I looked at, I want, are they doing
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something we're not thinking about? Because the delete frog in terms of abilities so
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large we start applying this technology in the right ways, can we get really
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good at these things? And I think, I think there's a lot of
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opportunity there, but it will be Yeah, I think it will be a
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competitive space. That's how boring deposits become exciting. And they're not boring it
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a leak. Not I think boring about deposits either think I mean, I
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don't know if you guys want to comment on this, but deposits will become
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I'll be curious. The stability of deposits I think has become into question.
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And so like if you think about not that we need to delve into SVV,
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but I think at the end of the day making long term bets that
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maybe you're not great right in terms of interest rate risk, they still aren't
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bad love Like I have lot people call all s people hell a lot of
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bad loans, but then it actually bought us treasuries and they're not bad loans,
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they're just wrong interest rates. But there's an assumption that I can I
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can survive the cycle because my deposits are saying so I don't. Actually I
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can live through a low return. It just hits my returns attle bit.
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I like it's fine. And the idea that your deposits can come and go
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like held to maturities, only held to maturities as long as your depositors don't
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ask for their money back, and the percentage of depositors that might do that,
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I think we have to now think that that's a more fluctuating number than
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we maybe thought five years ago. That's going to change risk management and the
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way you think about the risk of your deposits permanently for I think many banks,
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and that's understanding your risk and your ability to maintain stability deposits, I
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think is changing pretty dramatically in terms of how the market thinks about it and
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probably how banks want to start calculating how at risk are my deposits? How
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do I think about the likelihood of some larger number of deposits coming out the
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door that causes me to be exposed in some way I wasn't expecting for sure,
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I can only speak for Capital one where notoriously conservatives the three practices you
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know, so does sound really good right now? They do? They sound
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conveniently good right now, But I mean, I do think it's going back
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to my station on Classic boring banking and doing it being risk managers at the
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core of who we are, whether that's from capital, liquidity, credit,
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risk, floods the organization that way, I definitely it's like sub heads.
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Yeah for sure. Yeah, I mean, I completely completely agree. I
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feel like the fundamentals of the business are critically important. You've got to understand
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them and got to appreciate them, and got to control and watch that data
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and watch the ve here, right, so that you're not caught off guard
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or surprise, because understanding what's a core deposit versus a deposit that has likelihood
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and body is very very important. Not every deposit is incredibly right sensitive.
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Right, people still have money in their operating account and their checking account.
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They still have convenience even more or dollar savings accounts. Right. They might
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have goals that they're setting up they're saving towards, So watching that closely is
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one of their our obligations, right, is to monitor that and ensure that
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we are we're creating the solutions that are meaningful for our targets. Are there
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new points of data or ways you're looking at that and the you know,
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not just we are in the pandemic or what happened sf be at Over the
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last couple of years of deposits have become interesting. Are there different ways you're
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looking at distinguishing between core and more transactional deposits that are more and less at
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risk? And kind of like thinking about that because that's an interesting category of
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like how do we understand that? Particularly is the nature of what we're trying
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to measure might be shifting a little bit under our feet. I mean what
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I would say to that is we have more data today than when I started
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in banking twenty few years ago. I could have ever even dreamed imagine,
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right, And so the concept of getting down to like the detail of intra
19:33
day how things are going, not just at the segment level, but down
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like getting really really granular. I think that's where we're headed. And we're
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we've made tremendous progress. They're in and we've got you know, certainly more
19:45
to do in that space, but it is possible, right, Like you
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need to understand like what is of interest, what is of importance to your
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target customer solution against that and ensure that your strategies are not betting or an
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interest ry, because that is not a job if any backo to do either,
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but rather that you are thoughtful in how you're managing your books, and
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you're using your deposit book to enable prudent lending and other ways injuring your capital
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and investments. So I do think there are lots of silver alignings in this
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and the CORE. I guess to your question about stability, the fundamental around
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primary checking and just that CORE operating a care rate, like, there's really
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much that's more important than like, I worked really hard to earn this money.
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I need a safe and secure, an easy way support out right,
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those fundamentals, I think they are going to persist. I don't see that
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that CORE is becoming overly volatile in the future. I think they're very different
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segments till agree. I do think there's there's an interesting thing where we're talking
20:52
about the non rate intangibles. Trust security, Well, that's security in all
20:57
forms broad defend your data, and then we're also always looking at the data
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to trying to figure out if we can analyze and figure out where that is
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right and really kind of obsessing, you know, what are the indicators of
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that trust, of loyalty, of deposit resilience, thinking about multiproduct relationships,
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the entire value that you're offering out there. Do you have the tools to
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help people grow and manage the money, are reducing their stress levels based on
21:25
a servicing experience and things like that. So that's where it becomes really interesting.
21:30
We're using data and analysis to try to get to that kind of core
21:33
stickiness typob idea, and at the same time we're chasing something a little bit
21:37
more intangible and earned. All right, So last question for you guys,
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what's what comes next? It's been an interesting He's not been a dull last
21:45
call at twelve twenty four months, but what are your predictions for what comes
21:51
next in this space and what bankers should be doing to prepare for what's coming.
21:56
No one makes to make it predictions. It's a scary time to make
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a prediction as we think of how I feel like the consumers have spoken like
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they want everything in real time, they want it missionless we have, and
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I feel somewhat repetitive here, but I think that data as a differentiator is
22:14
going to be critically important. Right. We need to work with speed so
22:18
that we can make it easier for that end consumer. We need to come
22:22
up with lights that we can provide actionable insights in the moment tack so that
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it doesn't feel like work to bank. It ought to be something that's very
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seamlessly integrated into their lives. And there's been so much advancement in the speed
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of processing data that I can see that as a reality in our future.
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We've made really great progress along that journey, so that that's where I think
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we're Also I feel like there's this thing for not just Bank, but any
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any instititions, like the presence of so much data. We have so much
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more data, but turning that into actionable insight that is a thing that is
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still a struggle. And sometimes I feel now like often for for anybody in
23:00
a large organization, like yeah, used to go to the store and there's
23:04
like two options of something you want this A or B, and out it's
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like there's thirty five options. I don't know. I just want to I
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don't I don't know what to do. And I feel like data is that
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way now where there's so much it's on it's harder to extract though the insights
23:18
from the data because there's so much of it. You're that's learning how to
23:22
do that. Building institutional capability, the technical capability to turn data into real
23:26
knowledge, insights, useful information for your customers, for your own internal stakeholders,
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is like such a critical skill to be building and take advantage of what's
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coming. Yeah, to transform the complex into the simple. Right, Yeah,
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there's room magic in that. Yeah. I think going back, I
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think it is kind of the dual mandate of customers new expectations, like they
23:45
don't order food in the same way or people the same way, a burden.
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And I think about these kind of non finance expectations setting that's out there
23:56
around us that says everything's fluid and easy, and then we just talked about
24:00
protecting your data, protecting you against fraud and all those things are kind of
24:03
a competing dual mandates. And I think them actually is trying to get that
24:07
right, you get that bell trying to balance the two and iliver the expectations
24:11
while falling down on their prudent risk management. There we got there. We
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got nothing dull about deposits. James Edge, I appreciate you guys joining me
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today. This is a fascinating discussion for a guy in the lending space to
24:22
learn about the deposits space. And I appreciate your sharing your thoughts. Upstart
24:26
partners with banks and credit unions to help grow their consumer loan portfolios and deliver
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a modern, all digital lending experience. As the average consumer becomes more digitally
24:37
savvy, it only makes sense that their bank does too. Upstarts AI lending
24:41
platform uses sophisticated machine learning models to more accurately identify risk and approve more applicants
24:48
than traditional credit models. With fraud rates near zero, Upstarts All digital experience
24:53
reduces manual processing for banks and offers a simple and convenient experience for consumer.
25:00
Whether you're looking to grow and enhance your existing personal and auto lending programs or
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you're just getting started, Upstart can help. Upstart offers an end to end
25:10
solution that can help you find more credit worthy borrowers within your risk profile.
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With all digital underwriting, onboarding, loan closing, and servicing, It's all
25:18
possible with Upstart in your corner. Learn more about finding new borrowers, enhancing
25:23
your credit decisioning process, and growing your business by visiting upstart dot com Slash
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four dash Banks. That's upstart dot com Slash four dash Banks. You've been
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