Win Where You Want to Win With SMBs

Hello and welcome to The Purposeful Banker, the leading commercial banking podcast brought to you by Q2, where we discuss the big topics on the minds of today's best bankers. I'm Dallas Wells. Welcome to the show.

Today, I'm welcoming VP of Advanced Business Hunter Moses to the podcast. Hunter heads up our Strategic Advisory Services team at Q2, which includes all the smart people who work directly with our bank and credit union customers on things like strategic decision making, go-to-market planning, analyzing data, understanding marketing trends, things like that. So, Hunter, this is your first time on the podcast, so welcome. Why don't you tell everybody just a bit about yourself?

Thank you. I appreciate the opportunity to visit. And my name's Hunter Moses. I have been in this space for, like many of us, 25 or more years. Done lots of interesting things and seen a lot of change in this space. In the very, very early days, being able to set up a digital banking server in a coat closet of a branch is very different than what we see today, where it is the single touchpoint for most end users at a credit union or a bank. So, anyway, that said, about 10 years ago I started our Advisory Services team here at Q2 with the intent of helping our customers realize better value, use their products and services better through bundling, understand their markets better, and to just operate digitally more efficiently and better than they ever did before. And I'd say of all those years in service, the last 10 years have been the most interesting for me. So, thanks for the invite.

Dallas Wells

Yeah, you bet. So, Hunter, you and your team work, obviously, across our whole customer base. And that means across the full spectrum, from consumer users all the way up to the largest corporates and all the financial institutions that serve those. We typically focus a little more on the commercial side on this podcast. So, just curious, you talk about the pace of innovation changing so much over, especially, the last 10 years. And it feels like a lot of that has happened in the small business and in the commercial world. Maybe talk about some of the things that you're seeing on that side of it as commercial and small business start to get their own digital transformation.

Hunter Moses

Yeah. I think the biggest change that we've seen in SMB and commercial is facilitated by technology. And that may be a really obvious answer. But when you think about both inside and outside the doors of the institution, or to go outside the doors, traditionally, if it was a really small business, it took a particular mindset to jump and take the risk to open maybe a brick and mortar retail shop or a traditional service-oriented business. In today's world, that technology through social media itself has generated thousands and thousands of business opportunities.

In fact, I think there were 5 ½ million new business applications submitted just last year. And many of those are technology-related or empowered through technology. Nontraditional individuals without the traditional entry points into business are doing it every single day. I think that's fantastic. And then inside the doors we're seeing that same application of technology, allowing ... The large four institutions have always done a great job of commercial and treasury service, but we're seeing entry points from credit unions, from smaller, maybe traditional consumer banks that are dipping their feet into the water of small business and commercial. And that's absolutely empowered by technology as well.

Mobile banking is a catalyst for that, as mobile banking allows you to do a lot more B-related services than traditional consumer. Each year, there's new offerings that are aligned for that. There's better bundling of core products that we're seeing and fintech-related commercial offerings. Those are powerful bundlings that have never been available before, being able to combine those for a small business and then just add them ad hoc or add them as a bundle as that business starts to grow. And I also think that there's a different, more casual approach in the smaller SMB space for how they embrace these, maybe not traditional business owners. And all of that is creating an ecosystem of innovation, an efficiency or a different approach to how to manage that business both inside and outside the institution's doors. And it's creating a ton of opportunity.

And the more progressive institutions are embracing that and moving very quickly to fill those needs, and they're doing well. Not every microbusiness or small business is going to go to one of the big four. There simply aren't offerings, nor is there a customer service level that's congruent with helping somebody enter that space. And we're absolutely seeing that opportunity for small business and commercial for institutions who are willing to embrace them.

Dallas Wells

Yeah. I think an interesting point you made there, especially the high end of commercial and corporate and the more sophisticated treasury services, that used to be just the realm of the big four, maybe some of the largest regional banks. The technology has become the great equalizer. So, now even some of your smallest community institutions and some credit unions that have never done commercial before, that's within the realm of possibility. The technology is there, and viable, and affordable, and they can kind of snap it into their existing tech stack.

I think you all have an interesting perspective on it in that you help these institutions actually get that stuff in the ground, and the change management, and all the people process stuff that has to go in place alongside the technology. So, maybe given that the possibilities are kind of endless, how do you help some of these national institutions think through what's the right place to actually go make that next investment? It's the technology, it's the people, it's the opportunity cost, it's all those things that have to be considered. How do you evaluate the endless possibilities and zero in on the one that's right for that particular institution?

Hunter Moses

Obviously, that answer is different for everyone. There's lots of ways for an institution to enter SMB and commercial, but we see three primary ways. The concept of realizing, embracing, and starting to grow nested microbusinesses that are already in the consumer route. That's pretty low cost, but there's also a long road to return. That's really a customer centricity play. And being able to become more intimate with my customer, grow them through a slower path. Their microbusiness is using, potentially, consumer checking accounts and such for a reason. So, there's that.

The other end of that spectrum is I can go acquire a small to mid-sized commercial bank and their attendant commercial customers. That, obviously, is the other end of the spectrum in terms of cost, and planning, and what that does to my operational ecosystem, but you definitely get on the radar quickly there. 

And then the third and probably the thing that we see used the most is a combination of the first. So, I'm going to tend to my smaller businesses that just need some care and feeding, but I'm going to put my onus on what's really called personalization or segmentation. I'm going to understand, do some analysis in my market and know where I want to go, and then create bundles that resonate with those groups, and then go out and pursue those groups. And as I become more efficient, as I become more professional, as I become better at it, then I can roll in tangential groups and start to reuse some of those same plays, until I have a base that I feel very comfortable with. And then I can go and do a quick, let's look forward 18 months and see what new segment I want to get into.

I think that is what we see the most of, a combination of curating our smallest customers into mid-sized customers or business members, but really starting to embrace the notion of segmentation, creating bundles, messaging sets, things that resonate with that new customer that we haven't yet acquired. And so, when I think about that, that is the bulk of that effort. And when you think about segmentation and why does it matter today and, more importantly, how does it matter more than it did years ago? 

If we roll back the hands of time several years ago, for a small business or a small commercial entity, a lot of that banking, as we know this story, was done in the branch. You'd come in, grab a cup of coffee, do your checking deposits, and you would chat with your personal banker, with your business banker. And that business banker was not only the center of your financial world, but he or she was also the center of your social business world. It was very easy in that conversation to talk about your business, talk about some business needs. They would make a recommendation based on some other customers or clients that they had, that provided that service, give you a business card or phone a number. And this little ecosystem was self-generating and growing at all times.

We still have great business relationships with our business development officers and business individuals at the bank, but there was this little period where that was lost, and we hadn't started using data to start to inform how we wanted to use bundling and create messages to our customers. So, there was a lot of shotgun, "Here's our offerings." As bankers. We'd come in and do our banking services and be able to have not only a financial interaction, but a social interaction.

So, if you fast-forward that to today, how do we replicate that experience digitally, where it really comes about understanding how our customers use our features, understanding where they want to go, that's the social interaction portion of it, but being able to create bundled offerings that match their journey at the point of the road that they are. Last year, just spring of 2023, we did an analysis of about 100 of our business customers, banks and credit unions. We looked at the messaging that was on their landing page for business services. And 99 out of the 100 that we polled or looked at, all had derivatives of the same two messages. It was cost of services and we are pillars in the community. "We've been here a long time, we know our business."

Now, this is rural and it's very regional. I understand not everyone's going to advertise this way. But their landing page was very specific with seasonality to tractor loans. And that resonated incredibly well with the folks who landed on that page at that time of year. They understood their client and they had a message for them. That is how they use segmentation. 

Now, we can be much more personal. I can get a different message than you can and we should be embracing that, but that personalization and that segmentation, that is a modern version of going in on a Thursday morning and having a chat over coffee and depositing checks. The sky's the limit. Data is informing things that we never even dreamed of five or 10 years ago, in terms of being able to personalize that experience, but make it more efficient through digital, because no one has the time these days to have those deep and abiding conversations on a Thursday morning for an hour at the branch.

Dallas Wells

It's an interesting evolution you described there. I think that's the way a lot of financial institutions have viewed this move toward digital, is this attempt to sort of replicate, recreate that branch business banker experience in the digital channels. But while there's some nostalgia around that, it was also not just expensive, but also wildly ineffective and inefficient. It was super reactive. So, there were lots of jokes about the 363 banking, all the golf and the bankers’ hours and all that sort of stuff. I think what they were describing is that the job of banking was you sit in your office and you wait for somebody to come in or you wait for the phone to ring, and someone will walk through their business, and then you can regurgitate back, "Well, here's the best fit. For your business, here's the services and connections and all the aspects that you described."

I think what we have the abilities to do now, as you described it, there is a much more proactive process rather than reactive. We can go seek out. And the reality of across our entire business banking network, all those humans, we may touch, I don't know, 5% of the actual customer base, the ones who would actually dial the phone and call us or actually stop in the branch. There was a lot of others that were sort of lurking in the customer base or in the member base we just didn't have the chance to have that conversation with. 

And so, now with the digital tools, we can proactively seek them out and maybe we can pull on the thread a little bit of that tractor loan example. It's a simple one. It's the first one everybody thinks of, kind of the next likely product. Obviously, we don't want to offer a tractor loan to everyone. That fits for a very specific audience. But if we can figure out what those audiences are across our customer base, and there doesn't have to be thousands of them, but maybe there's 10 or 12 that are applicable at the moment, and you can actually get pretty dynamic with it. They can have a different landing page. Their digital banking screens can look different. You can have different email campaigns toward them. You can have different ads showing in the digital spaces. And that starts to feel like this very personalized, again, proactive approach. 

Obviously, the thing that you mentioned there that is the necessary ingredient is data. I know you and your team spend a lot of time helping financial institutions figure that out. It's not from lack of data, it's more how do they make sense of it. What are some of the common starting points that you have to go through there, where it's like we have all this stuff, but how do we figure out who to direct where and what to do with all this stuff?

Hunter Moses

That's an excellent question. Data comes from a variety of sources. A lot of our clients are surprised at how much data they actually have available. Just to your point, they don't understand how to use it. So, I would say, really, it's about understanding a day in their life. We always start with this notion of once I've gone out and I've kind of done the research to understand where I want to go, I need to create—and we help customers with this all the time—day-in-the-life narratives. 

For instance, somebody in medical services. "I own a small practice. My passion play is to help customers. I'm not potentially a good business person. I'm a really good doctor." And that plays itself out across all of the different facets of business. Whether it's a medical practice or a diesel engine repair place, my passion is probably less about making money and margin and understanding the fundamental dynamics of business, and more about servicing customers. 

So, as bankers, being able to understand those day-in-the-life narratives, create core-based or third-party fintech-related product bundlings that service that to make their lives easier to actually run that business, that absolutely resonates. We've had a lot of success in the last year creating what we call vertical integrations—15 or 20 of these medical service or construction or legal service, whatever they are. They're a quick snapshot and overview of what that person's life looks like daily, what services they need. What are the primary selling aspects of that when I have a conversation with them? Understanding it's not about, “We have this checking account and we have this integrated payments module that will help you.” It's about bringing it up, moving it over and going, "Here's how we can help you in your day." In fact, that person may care less completely the name of the product. It's what the end benefit of using that product means. And in the last year and a half, as we have started to kind of shift over to, “We're going to help you grow your business in these ways,” the product names become less important, but the adoption rate is much higher.

That diesel mechanic, business owner, those folks, that resonates really well with them, and they can continue focusing on the things that are important. Interestingly enough, that also comes as part of that process. You have to build this universe of here's the day in the life, here's the products that work. You also have to build messages. Everyone in your institution, at least in the business side, should be able to have a 30-second elevator pitch about why this matters, and then a more elevated pitch stack or pitch approach to be able to go and do an in-service call to talk about these business owners.

I really saw the best expression of this recently with a customer we had, that they had done all this work and they arrived at medical services. It's not cash-intensive. They didn't want to deal with cash in the branches. They wanted to see at least a 15% growth over the next three years. And in their market space, there's lots of opportunity in medical services. So, they built out digital offerings that were aligned with each of the medical services that they wanted to do. And then when they got really good at that, they hopped over and said, "Well, let's do something kind of tangential, but similar. Let's do veterinary practices." 

And so, the ecosystem they built there, they did all the same digital work and the same approaches and the same bundling, but they took it one step further with veterinary. They actually didn't have the expertise in the institution, but they went and partnered with a group that knew how to manage the acquisition and disposition of those businesses. So, if I came out of veterinary school and I wanted to partner with or buy a practice, the bank facilitated that as ultimate subject matter experts. Conversely, if I was retiring, I could use the same service to sell or to acquire a partner. That was really the most sophisticated way I have seen in recent years of an institution getting right in the middle of a sale. Not just dominating their core pack of offerings that they had, but getting outside their comfort zone and facilitating the sale or acquisition of, even if that wasn't done in their walls. To the customer who called them, it didn't matter. I really like it. It was sophisticated. And then they took that business model and started to apply it to different verticals as they went in. 

So, that's a long-winded way of saying you can enter this market space relatively shallow with your own core offerings and just become very conversant about it. You can do a midpoint of let's expand that into three different verticals that are very close to it, or I can go all in and become a subject matter expert. Even if I don't have that expertise on staff, I can partner such that the customer uses me in my community as the know-all, be-all, do-all for whatever that is.

Dallas Wells

Yeah. So, I think a lot of what you described there is, to borrow more of a consumer term, but it's sort of a demographics approach. So, you're talking industry and maybe size of the business. And so, you can target these specific verticals in a very specific way. And I think we've seen some institutions have a lot of success with that, of being able to ... What used to be a community institution was whatever your local geography was. Now a community can be around a certain business. We have a customer who focuses on over-the-road truckers, and so helping them manage the very unique way that truckers have to deal with tables and receivables being all over the country on any given day of the week. And so, it's something that they can specialize in and they can understand that customer, they can do it well.

I think the other data set that we're starting to see used more often, I'd love to get your perspective on it, is more around some of the behavioral patterns that we can start to pick out from the user base. And so, things like, if you see big batches of payroll checks. So, obviously, that should be an ACH origination to manage payroll more effectively. If you see payments out to the big four or transfers between Stripe or PayPal or Cabbage or the SBA servicers, you can start to see where maybe some of the rest of that relationship might be, certain patterns and receivables that would show that maybe that we should be using lockbox services for a particular customer. So, this is kind of a potentially complex thing to go tackle, but it intuitively makes sense to financial institutions. So, what are some of those behavioral patterns that are maybe relatively easy to go seek out and potentially have some kind of veins of value there?

Hunter Moses

It's funny you mentioned the payments modeling. We've had a lot of success in the last two or three years on identifying pockets of customers that were using perhaps expensive to them payment methodologies. And having that institution be able to swoop in and go, "OK, for what you're doing, this is way too expensive." And maybe that becomes an ACH or a different service, more advantageous for the customer to use and for the institution, certainly. The trend analytics data was every bit as powerful as the mechanical data that you use to go look at entry points into a given market. 

And so, recently, we did some work for a customer using some AI on customer sentiment analysis. We were able to go through and load up the last six months. And you would think this is at your fingertips. These are message sets that the customer has sent to the bank via their own pure messaging. But there were tens and tens of thousands of those, scores of thousands of those. And so, the only ones that really got looked at were the ones that were the most on fire. Well, when you frame that up and you're able to come back to the customer and say, across all ... You can do this on the consumer side, but the commercial side was really interesting, to be able to frame up, "Here are the top three things that you should be focused on in the next quarter. These are things that customers are talking ... And here are the three things that you're doing really, really well." And manage through that list.

Each of those has a different route to correct. Some of that's more personal, some of it can be generalized. But to actually begin working through those tool sets to increase that customer perception of value with you and the customer intimacy, that was a runaway hit. And we kind of backed into that quite by accident, but it's a great example of exactly what you're seeing. The customer many times gives you every indication. You just have to not lose the forest through the trees. So, being able to take a step back, do some analytics. And then I think it's one thing to do a report and say, "Hey, here's what we saw." It's really quite another, you have to organize and analyze that, and then that has to create actionable insights.

You have to go set some markers out to, “I see this thing, I'm going to execute on it, I'm going to see what that execution meant. I'll course correct and I'm going to wash, rinse, and repeat that in that endless cycle of using data, making an edit, and seeing how that mattered.” And then editing that and moving further down the path. 

We see a lot of institutions with great intentions. They get this great report and either the report is just overwhelming or it makes too much sense to them. They're like, "Oh, yeah, we'll just handle this through the call center." Then there's never a follow-up on that. And so, you have a lot of loose ends, pathways that never reach completion. So, I think that's really important. Whatever your data pathway, it has to result in actionable insights and then a loop of action report. It's kind of an indirect answer to your question, but it's important to take it all the way to …

Dallas Wells

I think you're dead on right there. And I think that's part of what ... anytime we start having a conversation about data and how to go use it, the first instinct, it's deeply embedded in the banker DNA. I've got it in my mind too from the start of my career is, "Well, let's build a report for that or a dashboard." As long as we can see what's happening from this just constant flow of data, surely that will lead us in the right direction. And I think it's not wrong. There is some value and some merit in that, but it's usually not enough. There's usually sort of a last-mile problem there, as you describe it, of you actually have to put that information in front of the right people at the right time, where they can take a different action. Rather than often those dashboards end up being used as an after-the-fact punishment tool. "Look how poorly you did," and we go slap our staff around with the numbers, instead of guiding them in the moment. 

On those lines, we think about trying to measure this. That's probably a whole separate discussion on the mechanisms of how and where to do that. But setting that aside, how do we know if we're doing segmentation right? What are some of the metrics that we should see to know that the effort and the investment that's going to go into this is turning into the outcomes that we would hope for?

Hunter Moses

I think the from-the-hip answers are, "Hey, how does our deposit growth look? Is our churn rate improving?" But before we answer in that way, I think we need to come up a level. This is another thing we see a lot of and we try to coach on. Anything you're doing should result in better revenue, better efficiency, or better relationships. And so, that said, being able to create an ecosystem that you can report on, you can't manage what you can't measure. It's funny how in the modern time of technology and data analysis, those old adages are still super relevant. It's having a little bit of sophistication around those three items of revenue, efficiency, or relationship.

I met with a client, a bank, three months ago, and they said the hardest lesson for them when they started into this commercial was convincing senior management that we're not going to make as much money as you think we're going to make. And the first 16 months for them was about creating better relationships. There was a little bit of cost. It was about going out and creating a market space and an ecosystem of customers, that then the next six months was about being efficient in that. Finally, the 18-month planned out was about we're going to create better margin modeling and better revenue. That has to be a plan.

You can't accidentally enter the market and then be disparaged, just that, and we don't get the revenue, the margin that we expected, so this was a bad move. You have to have enough foresight to know that you're going to pass through those different layers. And it's OK, we're going to turn the dials up on customer intimacy. In the first 12 months, we go ahead and create that base. And then the next segment that's one click out from that, we're going to arrive there way more efficiently than we did. And then you can apply those standard measuring points.

Deposit growth, a lot of folks are getting into commercial because that is where the highest potential in deposit growth arrives and churn rate improvement, I mentioned that, and penetration of add-on services. There's any number of things that we can report on based upon the direction that we're going that show us improvement or not. And also, bear in mind, I think we should always be trying to roll that up to is this a revenue play, an efficiency play, a better relationship play, a combination of all of those, where they're not always equal based on the maturity of the segment that we're growing.

Dallas Wells

That sounds exactly like the conversation that we have on the product side here at Q2 all the time, of asking those teams, looking for a clear intention. Just like on our customer side, there's sort of infinite things that we could go build that feel like they're inherently good. That would obviously be a solid feature or a good product and it would make sense, but we have to get really focused on what do we expect to happen. What's the hypothesis here, that we expect this to do what for our users? And I think financial institutions, those that do it well, approach it the same way of, "All right, we're going to put this strategy in place. What exactly do we expect to happen by when?"

So, you can measure against that, rather than just kind of throwing things against the wall and be like, "Well, surely spreads will get better, surely churn will go down." I think you have to connect the action to the expected outcome much more overtly so that you can go see if it's working and adjust accordingly.

Hunter Moses

Yeah, I couldn't agree more. It's a fascinating time and a fascinating space to be in, because it's more than just product bundling and seeing the customer light up at being exposed to some new features. You think about, if I'm going to launch a new market segment, not only is there the research that is required to go into that segment, but also, hey, how do I support this? There's an entire ecosystem. If you're going to build it, we have to analyze front to back and start to finish. But it's very satisfying. You can enter those spaces as slowly or as rapidly as you want. And as you become more sophisticated in your product development or product management around how you bundle those products, enter those spaces, it's never been a more interesting, may I say fun time to be in this space.

Even with a downturn economy, the upside is so incredible right now. The world literally is our oyster in terms of where we want to go strike next and develop those commercial or small business relationships. Or if I don't have that budget, even you can start next week turning that attention into your micros and start to evolve those. And the lessons you learn there, all of this pays forward wherever you go in your commercial journey.

Dallas Wells

Yeah, I love it. Wherever possible, we try to wrap on a positive note, so I feel like we just kind of scratched the surface today. So, appreciate you joining. We'll have you back to pull on a couple of these. So, Hunter, appreciate you taking the time and joining us on the podcast today.

Hunter Moses

Yeah, yeah. Thank you very much. I enjoyed it and look forward to the next one.

Dallas Wells

All right. And thanks everyone else for listening to this week's episode of The Purposeful Banker. If you want to catch more episodes, please subscribe to the show wherever you like to listen to podcasts, including Apple Podcasts, Spotify, Stitcher, and iHeartRadio. As always, we'd love to hear what you think in the comments. And you can learn more about the company behind the content by visiting Q2.com. Until next time, this is Dallas Wells and you've been listening to The Purposeful Banker.