Greg Baer, Bank Policy Institute: You’ve had a long career at U.S. Bancorp – 33 years and counting. Obviously, you’ve seen a lot of industry changes over that time. What are some of the big shifts you have experienced?
Andy Cecere, U.S. Bancorp: When I started in the banking industry in 1985, the common belief at that time was that branches, checks, and cash were going to go away. The fact is, for 30 years, that was not true. But it has been happening during the last couple of years, so when I speak with our employees I say that I’ve seen more change in the last three years than the 30 years before. What’s driving that change is a confluence of things: the technological and innovation changes that are occurring rapidly; the customer’s expectations driven by other industries – Amazon, Apple, and such; and the fact that we have the ability to use data to know and serve our customers better.
All these things are happening at once. As a result, 65% to 70% of customer transactions with our company are happening on digital devices, including smartphones that weren’t here 10 years ago.
All the change that we thought was going to happen 30 years ago is happening now, and at the core of what is changing most rapidly is money movement and payments.
Lending and deposit-taking are mostly the same, but the way we move money and the information that goes along with the payment is the core change.
Baer: This leads to a related question. By the latest count, if I recall, you still have over 3,000 branches?
Cecere: Yes, we do.
Baer: How do you think about the bank branch as you plan for the future? Is it a customer convenience, or do you think it is becoming obsolete?
Cecere: Branches will always be here, but their function has changed and will continue to change. So, while 65% to 70% of service transactions happen on a digital device, 80% of sales still happen in person.
I believe over time that sales will increase on mobile devices, but there will always be a face-to-face discussion for the most complex financial needs. When people want to talk about their retirement or investment needs or what type of mortgage would most benefit them, they still want to talk person-to-person. We will continue to see the combination of the digital channel together with the physical branch in the future. The physical branch will continue to focus more on consultation, advice, and person-to-person interaction, as opposed to transaction activity.
Baer: Do you think the trend is going to change the type of person who’s working at the branch?
Cecere: We already have people in the branches who are focused on consultation and giving advice; that’s what they do, and that will continue to be a focus. We’re trying to get our employees to be more digitally active themselves so they can offer advice around the digital components.
Baer: Turning back to your experience at U.S. Bancorp. You were CFO from 2007 to 2015 – throughout the financial crisis. How did that experience shape how you’re approaching the job as CEO now?
Cecere: First, it was an interesting and rewarding time to be a CFO. That period included the first stress test, and TARP [the Troubled Asset Relief Program], the issuance of equity to pay off TARP, the debt issuance that went along with that, a lot of M&A activity, and the FDIC transactions we went through. It was an incredible learning experience.
What I recall most from that time was senior management getting together at 6:30 almost every morning to talk about what happened the night before. It showed why you need to have a great team. We had great communication and great discipline.
U.S. Bank came through the crisis very well.
Baer: Do you think generally, for you or other CEOs, it’s made you more conservative from a risk perspective or more thoughtful and wanting more data?
Cecere: We were always rather conservative; that has been our reputation. It has served us well, and it served us particularly well during that difficult time. We would get together and we’d say, Company ABC has an issue or Bank XYZ has a liquidity issue – what are the connections and what could happen, and what are the downstream impacts? We wouldn’t look just for the first level but also the second- and third-level impacts.
Baer: That’s a great point. Currently, U.S. Bank is one of the largest in the country, and I think you once called the bank “The best bank no one has ever heard of.” You’ve obviously made a major marketing push, between the Super Bowl and other efforts, to increase the profile of the company. [Editor’s note: U.S. Bancorp bought the naming rights to the Minneapolis stadium where the 2018 Super Bowl was played.] What’s the goal in terms of expanding your brand?
Cecere: In the early 2000s, we were very well known by investors, analysts, and rating agencies, but not as well known by customers and potential customers. We had the best returns, the highest debt ratings – and we still do – but we just didn’t tell our story very well. We knew we needed to change that.
Our best move was retelling our story internally. We created a purpose statement and defined our core values. We wanted to make sure our employees understood what was unique about our role in the industry, and what was special about how we played that role. We also wanted them to believe the words were true and that they could live up to them authentically, because the crux of our story – at the center of every relationship we build – is trust. We believe our purpose is to invest our hearts and minds to power human potential – and that is grounded in the notion of being a trusted partner to all our stakeholders.
After employees were on board, we started to widen the story to the customer base. Our work around the “Big Game” was just one example. Telling our story is a continual journey, and it’s a combination of every interaction, every communication, and every experience a customer or a potential customer has with us. When everything is said and done, we have a great bank that’s performing very well for the benefit of customers and communities, and the principal reason an individual, a small business, or a corporation chooses a bank is not location, product, or pricing – it’s trust. That’s really the goal of our brand work: to bring our unique story and the reasons to believe in us as a trusted partner to a broader audience.
Baer: Do you worry about being known as a big bank, whether that’s in the eyes of consumers or regulators?
Cecere: For us, it’s about being a great bank that serves customers well. We’re actually at a very good size. We are the largest non-G-SIB [global systemically important bank], which gives us some advantages from a capital standpoint. But at the same time, we have the scale and the ability to invest a billion dollars for the benefit of our customers and employees every year in technology and innovation.
Size is less important than the platform you have, the services you provide, and how you treat the customers. That’s where we’re focused.
Baer: Interesting. Do you think the move to mobile and online, from the perspective of community banks, is that making size, scale, and scope more important or less important?
Cecere: The more interesting question in my opinion is what will happen to the industry overall as consumer behavior continues to shift and as we are compared to more companies outside financial services. No one has a perfect crystal ball to anticipate what is coming, but I suspect you will see new partnerships emerge, new roles established for banks of all sizes, and new customer value propositions created that promote greater differentiation between banks. Consolidation is likely to continue – we’re already down from 14,000 banks 30 years ago to 5,000 now – but there will always be a place for niche markets, for unique offerings, and for innovative approaches to the customer relationship. Size, scale, and scope will be important – just in different ways.
Baer: On the deposit point, I often think that small banks, whose trade groups have advocated strongly for heightened liquidity regulation for large banks, may not have anticipated that the liquidity regulation would increase the large banks’ appetite for deposits, which previously had gone to community banks. Is U.S. Bank’s desire for deposit share driven by regulation as well as just a good business practice?
Cecere: It’s almost entirely good business. When you step back, the greatest advantage a bank has is deposit-taking. It is the best source of liquidity, low-cost money, and it is the magic around what a bank does. It is the driver of loan activities, the driver of relationships. Deposit activity and gathering deposits is about gathering customers, and it’s about gathering low-cost funds. It’s not about regulation at all; it’s about a good business model.
Baer: Let’s switch topics. U.S. Bank sponsored seven teams in the recent Technovation competition, which offers middle school and high school girls the opportunity to learn the skills they need to emerge as tech entrepreneurs and leaders. The girls even had a chance to pitch you and other senior leaders at the bank about their creations. Why do you focus on events like that, which are geared toward very young folks, and do they serve as a long-term recruitment strategy?
Cecere: First, let me tell you, it was the most impressive set of individuals I’ve seen, ever. They developed these apps after school and on weekends, and they came to our boardroom to present to senior leaders at U.S. Bank. They were very eloquent and articulate, they were enthusiastic, and they were smart. It was a great experience.
We have a strong focus on education and building skills for tomorrow, innovation and women in leadership. Technovation fits all those priorities.
Baer: More broadly, how do you think about the competition for talent when you look at FinTechs, which can offer equity and Ping-Pong tables and free coffee? What’s your offer to people who have the talents that make them attractive to both U.S. Bank as well as FinTechs?
Cecere: I’m on the board of the University of St. Thomas, where I graduated, and the Carlson School at the University of Minnesota, where I earned my MBA. When I talk about U.S. Bank, one of the great attributes of our company is that if you want to work in technology or marketing or finance or accounting, you can do all those jobs at the bank. And if you want to work days or nights, you can do that. If you want to work with people or by yourself, you can do that. There is great variety and a ton of opportunity. I always tell people that one of the things you should think about is working for a great company that’s growing and doing well, because opportunities will present themselves. I think all those attributes are advantages to working at U.S. Bank, so we’ve been able to attract great talent.
Speaking specifically to FinTechs, I think we have an opportunity to partner and learn. The optimal structure between FinTechs and banks is a partnership, combining our expertise with theirs to create a better customer experience. When you look at it that way, it’s better for all of us.
Baer: Relatedly, within a larger, broader-based organization, how do you foster innovation? Do you need laboratories or sandboxes, or do you think of innovation as everyone’s job?
Cecere: It’s a little of both. We are thinking about things in a different way than we did in the past. The typical bank process has been to create a set of requirements, go through a series of tests, develop and test, develop and test some more, and in over a year you have what you were trying to develop. In today’s environment, by the time you have gone through the typical bank development cycle, you’re already out of date. That has happened to us and other banks. We need to shift toward rapid, agile development.
More than that, we have to approach innovation from the customer’s perspective. We have to have customers as part of that creation process. In other words, what is the problem you’re trying to solve or what’s the need you’re trying to fulfill from their lens?
Today, customers are part of the process, we’re much more rapid in the way we innovate, and we are testing and learning, releasing and releasing, as opposed to these annual processes that historically have been the way banks develop.
Baer: I recently heard another bank executive say that she used to refer to her company as a FinTech company but doesn’t do that anymore because FinTech companies are allowed to fail and FinTech companies can roll out products very quickly, and the regulatory environment simply doesn’t allow that for a bank. Do you agree?
Cecere: No. One of the unusual things about banks is that we’ve been conditioned to act when we’re incredibly certain. We are right 99% of the time when it comes to things like credit losses, for instance. So, when we went through the development process historically, the way it was structured was to be right 99% of the time. You try to get all the perfect answers, you try to understand the ramifications, you went through testing, and more testing, and the objective was to be almost entirely correct when all is said and done.
In this environment, you have to be willing to be a little wrong. What we’re trying to drive toward is an acceptance of the fact that we won’t have perfect information, that we’ll continue to evolve and develop. That’s the way we need to do it. Regulation doesn’t necessarily hinder that, and I believe you can make mistakes in technology, adjust, and then react.
I’ve been sending the message to our team that we have to accept the fact that we’re going to make a number of bets, and sometimes they won’t pay off – but many will.
Baer: While we’re discussing innovation, let’s talk about real-time payments, which you mentioned earlier. As you know, The Clearing House and its owner banks are quickly moving ahead with its Real-Time Payments (RTP) system, and in November 2017 the first new payment on the real-time system was initiated between U.S. Bank and BNY. What benefits do you think RTP will provide your customers in the future?
Cecere: This is a game changer. One of the keys to the future is money movement and payments, and among the things supporting that shift are these new real-time rails that are being built by The Clearing House and Zelle.
It’s a huge difference. It’s going to be more secure, more convenient, and it’s going to provide additional data. It is going to change the way payments have occurred for 150 years. Things such as checks and Automated Clearing House and wires are going to be, over time, replaced by this new real-time rail, which will provide greater convenience, greater information, and greater communication between businesses. It is fundamentally the most important change I’ve seen in banking.
Baer: What do you think the remaining obstacles are to achieving ubiquity for RTP? I think that is an important component of it; everyone needs to be on the same rails.
Cecere: One of the challenges with the U.S. is we have 5,000 banks, and we have 25 big banks. Getting us all to think the same way can sometimes be a challenge. The process that we’ve gone through with Zelle, and having seven owner banks, is actually quite good. We were all focused on the end objective, which was ubiquity, common standards, and common processes. In the end, we have to have that because if we’re going to build rails that everyone can use, we have to have a common methodology and a common way of thinking.
It is a challenge, but it’s a challenge we will overcome.
Baer: We’ve just seen rather significant tax reform, which most people believe is having a greater economic impact than any bank regulation. How do you think that’s affected U.S. Bank?
Cecere: If you step back from the financial crisis, I think the financial services industry is much safer today than it was in the early 2000s. We have more capital, more liquidity, better processes, and better technology; that can’t be disputed. It is always a balance, and the goal today is to be more balanced in a positive way. While a lot of the legislative changes and regulatory changes that have occurred are not going to impact us directly, the way the current law is interpreted and regulated, so to speak, will be impactful, and we’re already seeing that in the way we’re doing things today. There are positives not only for the banking industry but for the customers we serve and for the economy.
Talking specifically to the recent tax reform, we decided at the outset to invest the value we received from tax reform back into our business across all our stakeholders. We invested in our employees with a one-time bonus for most of our staff, increased our minimum wage, and invested more heavily in our health-care benefits. We invested in our communities with a contribution to our foundation. We invested in customers with additional technology spending and an investment to provide better products and services, and ultimately all of that has benefited shareholders.
Tax reform has done two things – it’s created more certainty and more confidence. Companies – small to large corporates – were waiting to see what would happen, and we are seeing increased activity.
One of the leading indicators we have is a large corporate payments business, and we are able to monitor how corporations spend money. If I go back a year or two ago, spending in areas like T&E and payables was in the low single digits. More recently, that has been in the high single to low double digits. So, activity in businesses is increasing. Part of the driver of that is tax reform because it’s created certainty, confidence, and ultimately the ability to invest more.
Baer: In addition to the data, you probably have a lot of anecdotal experience talking to business leaders around the country. Is that the impression you get from them?
Cecere: We do a small-business survey every year, and we’ve been doing it for a decade. For the first time this year, regulatory and tax reform are not even in the top five concerns, which is good. This is an indication that those concerns are behind them. And actually, their No. 1 worry was finding the talent to do the business they need to do.
Baer: That’s a nice outcome for the country. We talked about this a little bit earlier, so in terms of U.S. Bancorp’s reaction to tax reform, there’s been recently some sort of political criticism of banks doing share repurchases.
You’re authorized to do share repurchases now – I think $3 billion over the next four quarters. How do they add value for shareholders, and how do you believe this is consistent with doing the best for your employees and your customers?
Cecere: We generate a lot of capital at U.S. Bank, and we have a tangible return on equity in excess of 19%. We generate, frankly, more capital than we can use in this slower-growth environment. Appropriate financial theory would say if you’re not able to achieve the cost of capital on the capital you’re generating, you should return it to shareholders. And that’s exactly what we’re doing. And we’re returning it to shareholders in a combination of dividends and buybacks. It’s about 50/50, with a little higher on buybacks and a little lower on dividends.
Baer: I’m just curious. The mix between dividends and repurchases, is that affected at all by CCAR?
Cecere: Yes. I think it is influenced by both CCAR and the environment. You have to have more certainty with a dividend because it’s difficult to change that. With buybacks, you have more flexibility because of their approval threshold.
During the last few years, when there was uncertainty about rate increases and the environment and growth overall, we wanted to be careful about the dividend side of the equation because of that uncertainty. In addition, the language in CCAR that said anything in excess of 30% will receive additional scrutiny caused us to be more careful too.
Baer: U.S. Bancorp has a good view of the economy from a unique and very valuable perch. Do you see sectors that are lagging or sectors that are overheated?
Cecere: First, I’ll say that things are generally pretty good. Credit quality is stable, and activity is good. There is more spending occurring in business, consumer confidence is up, and employment numbers are strong. Inflation is starting to occur, and rates are starting to go up. So, it’s sort of a pretty good scenario if you’re a bank, right? Now, one of the challenges is the flat yield curve, and what that indicates and what that is signaling.
There are a couple areas in the industry that are a little heated. One is commercial real estate. Our commercial real estate growth has been a little lower than some of the other large banks and small banks because we’re seeing some structures that are a little bit more aggressive than we are comfortable with.
Baer: At Bank Policy Institute, I think one of our real priorities is going to be to study why so many low- and middle-income borrowers and depositors are operating outside the regulated banking system, and then advocate for policies that would bring them back in. As you stated, a deposit is a very good product, and bank loans are a low-cost alternative to credit.
On the deposit side, we still see millions of unbanked Americans. We see people using check cashers. What do you see as the obstacles to banking those folks?
Cecere: I agree with you 100%. As a bank, and as the industry, we need to think about products for those just entering the banking systems, to allow them to graduate to other products, and the banking system is where we ought to have those products. Small-dollar loan products, which would be an alternative to payday lenders, are a good thing. We’re working on alternatives to that. By getting unbanked individuals into the banking system, it allows a better product from the customer perspective and a much-safer process from a regulatory perspective.
Greg Baer is the Chief Executive Officer at the Bank Policy Institute.