One of my favorite aspects of industry conferences is the opportunity for brainstorming—the quality time during presentations to process random comments from the stage that trigger new ideas.
I had one of these flashes listening to a keynote address by Plaid CEO Zach Perret at NACHA Faster Payments 2017.
Plaid is an API (application program interface) company that fashions itself as “the fabric of financial technology.”
Perret makes a case for a hub-and-spoke model with the financial institution at the center of an array of third-party applications.
To some extent, this vision has already found traction. Perret points to research showing the average consumer has more than 15 services connected to their bank accounts, many of them from nonbank providers.
Obviously, Plaid has a vested interest in championing such a model. But it’s a compelling one that financial institutions would be wise to explore, or at a minimum develop contingency plans to address if/when it takes hold.
This is where my gears started churning. I wondered out loud why forward-thinking banks aren’t already tacking this model head-on.
My colleague chuckled and quipped, “Because most banks CEOs won’t be in their seats in five years.”
He was right—and that’s the problem. The financial services industry is indisputably changing before our eyes, but the P&L implications of a full-scale transformation won’t be felt for years to come.
Given financial institutions’ near-term operational challenges, not to mention the quarterly earnings pressures facing public institutions, why invest bandwidth in long-term initiatives that won’t bear fruit until after you’re long gone?
I can think of at least three responses to that rhetorical question: money, legacy, and “doing the right thing.”
Let’s address these in order.
Plenty of thought has gone into aligning management and shareholder interests. Stock options are the most common tool, but long-term incentive packages can be crafted for nonpublic companies as well.
“Long-term” formulas are typically based on three to five years of financial results, however. Making infrastructure investments aimed at strengthening the organization for future periods will by definition suppress near-term results.
The Wall Street Journal recently reported that quantitative analysts are fond of trading in stocks of companies with higher-than-average investments levels, knowing they tend to underperform the market.
Consequently, management teams playing the long game are likely paying not only in their own long-term incentive potential, but also in equity appreciation for themselves as well as their shareholders.
Actually, perhaps such devices align interests after all. How many stock pickers these days are content to wait seven to 10 years for their return?
And by the way, five years probably sounds like an eternity to most leaders of young fintechs, whose horizons are most often defined by either an IPO or sale to an established player.
Which brings us to legacy and the credit union advantage (you knew we’d eventually get there, right?).
In an ideal world, one’s legacy and “doing the right thing” go hand in hand. Unfortunately, in business settings things aren’t always so tidy.
Any executive worth his or her salt strives to leave an organization more successful than when they inherited it. However, many also expect credit for having done so, and for long-term plays the glory may well go to their successor.
Such leaders probably also crave the affirmation of board members and industry peers, which is often doled out based on recent profitability and growth.
Although I don’t have data to back up my hunch, I’d venture to guess the average tenure of a credit union CEO is longer than their bank counterparts, particularly those at larger institutions. This means leaders are more likely to take a long-term view as they’ll still be around to reckon with the outcomes of their actions.
Perhaps more importantly, in a nonprofit setting credit union boards and executive teams have one less hurdle to overcome in justifying long-term infrastructure spending.
So long as reserves are sufficiently funded and members properly cared for, pressures to deliver immediate returns to investors are lessened.
The private equity model has proven to be effective for moon shots, bringing big, bold ideas to life from scratch.
Arguments can certainly be made for private equity’s ability to create value and upend stagnant business models. Meanwhile, stock option programs have nicely aligned incentives for steady-as-she-goes businesses, or two- to three-year turnarounds.
We struggle to find incentive models to support longer-term transformations of existing infrastructure like the one facing banking, however. The atrophied state of our nation’s bridges and water systems are a natural analogy.
Credit unions, the ball is in your court: Leave the industry in a better place than you found it.
GLEN SARVADY is managing partner at 154 Advisors and senior payments expert with Best Innovation Group, a CUNA consulting partner. Follow him on Twitter via @154Advisors. His views do not necessarily reflect those of Credit Union National Association.