Deposit Management in a Post-SVB World

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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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00:18:11.839 --> 00:18:15.799
them and got to appreciate them,
and got to control and watch that data

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00:18:15.000 --> 00:18:18.519
and watch the ve here, right, so that you're not caught off guard

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00:18:18.599 --> 00:18:25.279
or surprise, because understanding what's a
core deposit versus a deposit that has likelihood

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00:18:25.279 --> 00:18:30.640
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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00:18:36.480 --> 00:18:41.359
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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00:18:47.240 --> 00:18:51.240
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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00:18:59.359 --> 00:19:02.279
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

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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

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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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00:20:30.200 --> 00:20:33.880
much that's more important than like,
I worked really hard to earn this money.

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00:20:33.079 --> 00:20:37.240
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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00:20:41.200 --> 00:20:45.960
that CORE is becoming overly volatile in
the future. I think they're very different

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00:20:47.000 --> 00:20:52.359
segments till agree. I do think
there's there's an interesting thing where we're talking

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00:20:52.359 --> 00:20:57.680
about the non rate intangibles. Trust
security, Well, that's security in all

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00:20:57.720 --> 00:21:03.920
forms broad defend your data, and
then we're also always looking at the data

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00:21:03.960 --> 00:21:07.200
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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00:21:11.640 --> 00:21:17.559
that trust, of loyalty, of
deposit resilience, thinking about multiproduct relationships,

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00:21:17.599 --> 00:21:21.519
the entire value that you're offering out
there. Do you have the tools to

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00:21:21.519 --> 00:21:25.440
help people grow and manage the money, are reducing their stress levels based on

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00:21:25.480 --> 00:21:29.480
a servicing experience and things like that. So that's where it becomes really interesting.

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00:21:30.039 --> 00:21:33.119
We're using data and analysis to try
to get to that kind of core

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00:21:33.160 --> 00:21:37.880
stickiness typob idea, and at the
same time we're chasing something a little bit

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00:21:37.079 --> 00:21:42.000
more intangible and earned. All right, So last question for you guys,

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00:21:42.000 --> 00:21:45.519
what's what comes next? It's been
an interesting He's not been a dull last

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00:21:45.720 --> 00:21:51.240
call at twelve twenty four months,
but what are your predictions for what comes

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00:21:51.319 --> 00:21:56.039
next in this space and what bankers
should be doing to prepare for what's coming.

317
00:21:56.599 --> 00:21:59.240
No one makes to make it predictions. It's a scary time to make

318
00:21:59.240 --> 00:22:03.799
a prediction as we think of how
I feel like the consumers have spoken like

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00:22:03.839 --> 00:22:08.160
they want everything in real time,
they want it missionless we have, and

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00:22:08.359 --> 00:22:14.880
I feel somewhat repetitive here, but
I think that data as a differentiator is

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00:22:14.880 --> 00:22:18.920
going to be critically important. Right. We need to work with speed so

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00:22:18.960 --> 00:22:22.279
that we can make it easier for
that end consumer. We need to come

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00:22:22.359 --> 00:22:26.920
up with lights that we can provide
actionable insights in the moment tack so that

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00:22:26.000 --> 00:22:32.200
it doesn't feel like work to bank. It ought to be something that's very

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00:22:32.240 --> 00:22:37.200
seamlessly integrated into their lives. And
there's been so much advancement in the speed

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00:22:37.240 --> 00:22:41.440
of processing data that I can see
that as a reality in our future.

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00:22:41.519 --> 00:22:44.960
We've made really great progress along that
journey, so that that's where I think

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00:22:45.000 --> 00:22:48.599
we're Also I feel like there's this
thing for not just Bank, but any

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00:22:48.640 --> 00:22:52.640
any instititions, like the presence of
so much data. We have so much

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00:22:52.640 --> 00:22:56.960
more data, but turning that into
actionable insight that is a thing that is

331
00:22:56.960 --> 00:23:00.480
still a struggle. And sometimes I
feel now like often for for anybody in

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00:23:00.640 --> 00:23:04.400
a large organization, like yeah,
used to go to the store and there's

333
00:23:04.400 --> 00:23:07.960
like two options of something you want
this A or B, and out it's

334
00:23:07.960 --> 00:23:11.359
like there's thirty five options. I
don't know. I just want to I

335
00:23:11.400 --> 00:23:12.240
don't I don't know what to do. And I feel like data is that

336
00:23:12.279 --> 00:23:18.440
way now where there's so much it's
on it's harder to extract though the insights

337
00:23:18.519 --> 00:23:22.319
from the data because there's so much
of it. You're that's learning how to

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00:23:22.359 --> 00:23:26.839
do that. Building institutional capability,
the technical capability to turn data into real

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00:23:26.880 --> 00:23:32.359
knowledge, insights, useful information for
your customers, for your own internal stakeholders,

340
00:23:32.400 --> 00:23:33.920
is like such a critical skill to
be building and take advantage of what's

341
00:23:33.960 --> 00:23:37.519
coming. Yeah, to transform the
complex into the simple. Right, Yeah,

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00:23:38.119 --> 00:23:41.200
there's room magic in that. Yeah. I think going back, I

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00:23:41.240 --> 00:23:45.799
think it is kind of the dual
mandate of customers new expectations, like they

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00:23:45.799 --> 00:23:49.519
don't order food in the same way
or people the same way, a burden.

345
00:23:49.920 --> 00:23:56.680
And I think about these kind of
non finance expectations setting that's out there

346
00:23:56.680 --> 00:24:00.279
around us that says everything's fluid and
easy, and then we just talked about

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00:24:00.279 --> 00:24:03.200
protecting your data, protecting you against
fraud and all those things are kind of

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00:24:03.200 --> 00:24:07.119
a competing dual mandates. And I
think them actually is trying to get that

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00:24:07.319 --> 00:24:11.400
right, you get that bell trying
to balance the two and iliver the expectations

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while falling down on their prudent risk
management. There we got there. We

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00:24:15.720 --> 00:24:19.680
got nothing dull about deposits. James
Edge, I appreciate you guys joining me

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00:24:19.680 --> 00:24:22.319
today. This is a fascinating discussion
for a guy in the lending space to

353
00:24:22.400 --> 00:24:26.160
learn about the deposits space. And
I appreciate your sharing your thoughts. Upstart

354
00:24:26.200 --> 00:24:30.920
partners with banks and credit unions to
help grow their consumer loan portfolios and deliver

355
00:24:32.000 --> 00:24:37.240
a modern, all digital lending experience. As the average consumer becomes more digitally

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than traditional credit models. With fraud
rates near zero, Upstarts All digital experience

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Whether you're looking to grow and enhance
your existing personal and auto lending programs or

361
00:25:04.400 --> 00:25:10.039
you're just getting started, Upstart can
help. Upstart offers an end to end

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00:25:10.119 --> 00:25:14.240
solution that can help you find more
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