Adapting to Modern Tech Demands in Banking

[00:00:00] Gary: AI is the new shiny object that will not go away.

[00:00:05] Gary: I’m not one of those that jumps on things super early, but this is one that I think is monumental. All right. Welcome everyone to 22 minutes in lending. I’m your host, Vince Passione. I’m happy to introduce Gary Lewis, managing director of lending and deposit solutions at Jack Henry.

[00:00:50] Vince: Gary joined Jack Henry in 2012, and one of his current responsibilities is overseeing the strategy to eliminate duplication and improve efficiencies at the firm. This includes the task of consolidating 11 lending systems under a single market strategy. It’s a pleasure to welcome Gary as a guest on today’s podcast.

[00:01:06] Vince: So let’s get started with these 22 minutes in lending. Gary, welcome. And thanks for joining me.

[00:01:10] Gary: Appreciate the opportunity. Glad to be here.

[00:01:13] Vince: past two years have been a pretty rough ride for both banks and credit unions. We saw about 11 interest rate hikes. In about 18 months, we saw five bank failures in 2023 and the positive growth came to screeching halt and started reversing very quickly. So how did Jack Henry navigate through the past two years?

[00:01:32] Gary: the last two years is just an extension going all the way back to COVID, I mean, if we think back, you know, it was kind of the opposite problem when COVID hit liquidity flooded the market. There was a lot of government programs flooded, a lot of cash into the market, loan demand went in the tank, you know, et cetera, et cetera.

[00:01:50] Gary: And, as that liquidity was absorbed, as the programs ran out. Then we come into a pretty robust heated economy and then the liquidity dries up. You know, And things start changing, right? So the shift moves away from trying to push all that money out on the street in the form of loans into holy moly, how do we fund the demand that we have today as our liquidity is dried up?

[00:02:15] Gary: So, it’s been a real challenge. Not gonna lie. The one thing I always say is. These are market cycles, right? go through it, but some of them we create. Some of them are natural, with the cove it and the government programs, etcetera. That kind of artificially inflated some of those things, in my opinion, but, as we cycle through that, the pendulum is going to swing the other way.

[00:02:35] Gary: Right now, I feel like, you know, we’re kind of at the bottom of the liquidity trough, so to speak. Banks are scrambling. Credit unions are scrambling to fund those things. loans that they have the demand that they have. And unfortunately. That probably limits their ability to really expand and grow those portfolios or expand the types of lending they want to do just trying to take care of their current base that they have today.

[00:02:59] Vince: So Gary, my opening, we talked about consolidating. 11 platforms lending platforms, you said you probably have other platforms as well. And there was single platform. What was the strategy behind that? Was that in reaction to what’s happening in the market that you that Jack Henry felt like there was going to be some type of compression in the market.

[00:03:17] Vince: Talk to us about that,

[00:03:19] Gary: Yeah, no, it really is a separate strategy, more defined by the expectations of the borrower. Or the depositor today’s experience, the expectation of that end user, and I’m not talking about the financial institution, but I’m at their customers, that experience should equal what they do every day on their phone, right? that’s what they’ve become comfortable with. If you think about the Amazons or you think about. Any of the different type of applications. That’s how people are doing business. That’s why the large chains are moving to a digital option as well. Well, the banking and credit union segment, all financial institutions are trying to figure out where their place is in that world, right?

[00:03:59] Gary: Fintechs have come in. Alternative lenders have come in. You got your traditional banks, traditional credit unions, and really credit union space, traditional financial institution space, they focused on that relationship, right? And unfortunately, that relationship has lost its power to some degree.

[00:04:18] Gary: It’s still there. But As the clients age, as the new age folks come in, they want that new modern technology, that new feel. And, financial institutions are struggling a little bit

[00:04:31] Gary: to really identify their place there. Now, surveys will show that if they can get close, if they can get close on the experience level, people would prefer to work with their local institutions because they probably know people there, right?

[00:04:44] Gary: So they want to do it. They just don’t want to be crippled by poor technology. So our strategy going back a few years was to look at all the functionality we provided, right? Set the technology to the side. Here’s all the functionality we provide. How do we take that functionality and bring it to our customers, our financial institutions in a manner that their customers want, right?

[00:05:09] Gary: That’s been the real strategy now. What’s accelerated that has been obviously COVID kicked off. You couldn’t even go into a financial institution for a long time. So that kicked off this electronics modernization, let’s say in the financial institution space and they’re really trying to play catch up now.

[00:05:29] Gary: So, Are we ahead of the game? Absolutely not. I think we and everybody else are behind trying to catch up to what we’re used to on the phone we’ll get there. And once we do get there, we set the standard for how financial business should be done. And then that relationship, in my opinion, starts feeding back in.

[00:05:50] Gary: And if I can give them equal technology to work with their customers, the customers will be more sticky. Yes, Gary, to pull on the thread a little bit about deposits and being local.

[00:06:02] Vince: So was listening to Brian Moynihan I guess it was almost two years ago at a conference in Chicago, and he was talking about his experience going digital and reducing the branch footprint.

[00:06:14] Vince: And now, we saw in the Wall Street Journal that Jamie Dimon at JPMorgan Chase is committed to open 500 new branches, and all of a sudden you see, Even the folks at B of A now, right?

[00:06:26] Vince: They’re starting to rebound and increase their branch footprint. Part of your responsibility is deposit strategies as well. the data shows. I think it does that, having that footprint is helpful. It’s expensive, but it’s helpful. Are you seeing some of the same things What role do you play when you think about the technology that goes into the branch itself?

[00:06:48] Vince: Because we talk about being digital and most people feel like, okay, you’re home, right?

[00:06:52] Vince: But how does that translate when I walk into the branch?

[00:06:55] Gary: That’s a fantastic question. So first off, I will say extremes of anything are probably not good. So when we make these huge swings and say, we’re going to get out of the branch business and we’re going to do everything digital or we’re not going to adopt digital, we’re going to focus on the local relationship.

[00:07:11] Gary: Either one of those. going to isolate, right? has to be a blend of everything, and there is a time and place for every interaction and our technology, specifically what I’m focusing on with that user experience that we talk about is no matter where you are in your car in front of your TV. In the branch parking lot before you walk in, you’re trying to do things right and you’re in the middle of an application, let’s say, and you get stuck for whatever reason, and you whip into a branch, you need to be able to walk in and sit down with a person at that point. in time. facility

[00:07:48] Gary: And pick up right where you left off, right? You’re not starting over. They know where you are.

[00:07:52] Gary: And that experience is solid. And, we coined that, that we meet the need at the time and place it’s required. And you use technology to do that, You don’t use technology to replace people, you use technology to enhance people.

[00:08:08] Gary: You don’t use technology to replace relationships, you use them to enhance relationships. that’s the beauty of properly deployed technology is it can make your really smart, expensive people that are in your facilities valuable, more valuable than without the technology.

[00:08:30] Vince: Right now? Agreed. I think that I always say consumers don’t just want one channel. They want every channel.

[00:08:36] Gary: Optionality is the word I use every time.

[00:08:39] Vince: Yep. I agree. So we roll into 2024 and I think there was certainly the recent Fed survey of loan officers in banks and credit unions is they’re a bit more optimistic. But when we look at the backdrop, right? Credit still tightening  in the 4th quarter. Liquidity, when I look at the last numbers for credit unions, at least, think a loan to share was about a little over 86%, which at least in my tenure seems to be a record high. Okay.

[00:09:05] Vince: What are you hearing from your clients? We have credit unions in the audience listening to this. What are you hearing as you go out and talk to clients about how they feel about, 2024 and the things that they walked out of their strategy session with and where they’re heading?

[00:09:18] Gary: Yeah. So again, I’m not an economist, but I tend to play one sometimes, but you know, everybody was talking about the recession and then it was going to be a soft landing. And then now they’re like, it’s so soft. We didn’t hardly feel it, et cetera. I think that’s probably true. Most everyone had built in and accounted for a reduction in fed rates recently, and that did not happen.

[00:09:38] Gary: So, you know, everybody’s ah, okay, they’re gonna hold us up a little bit more, but again, just the discussion of that happening, you probably are going to start feeling that ease a little bit, that rate pressure starting to come down a little bit. That’ll drive down your cost of funds.

[00:09:54] Gary: That’ll create more lending opportunities. it’ll start pushing more liquidity back into the traditional market versus, in the different things such as treasuries, et cetera. So, I believe we’re on that cusp of starting to ease up just a little bit.

[00:10:09] Gary: And I think financial institutions need to kind of plan for that. I said it earlier, you know, it’s really about having a good strategy. A long term strategy with tools in your pocket to help deal with these drastic swings that happen. And I think if you have that long term strategy and you define it, then you’re not wandering on your way to the destination, you know where you’re going.

[00:10:35] Gary: And sometimes you may come up on a roadblock that you have to deal with, but you stay true to that strategy and head that direction. So understanding who you want your clients to be, what types of growth you want, what you want your year over year lending growth to be and in what categories, what kind of deposit growth are you trying to secure and with who, so that you really lay in those strategies out so that you’re not always reacting.

[00:11:01] Gary: To whatever the shiny object is today.

[00:11:03] Vince: Gary, one of the things that we see and hear is our clients had to suddenly turn around and think of different ways to fund these loans.

[00:11:15] Vince: Up until recently, I don’t remember hearing about the Federal Home Loan Bank. In credit union land, and now when I go out and talk to clients it’s typically 1 of the things we eventually start talking about.

[00:11:28] Vince: And we had Steve Williams from cornerstone advisors on and we started going back and forth about. Credit unions are really return on asset kind of lenders. And now they have to become return on equity types of lenders.

[00:11:43] Vince: What do you think about that? And what role do you think, I always contemplate what role we play.

[00:11:47] Vince: What role does Jack Henry play in helping their clients understand different ways they might leverage their balance sheet as we think about deposits, lending. And then what about this other pool of capital, brokered CDs, right? Going to the Federal Home Loan Bank to fund that.

[00:12:05] Yeah, to me it’s back to optionality We talk about it at the individual consumer level, but, financial institutions have to do the exact same thing. They have a business to run, back in the day it was overnight fed funds. That’s what, that’s all you used it. And then,

[00:12:18] Gary: Then you went through the stage of the expanding use of the Federal Home Loan Bank and then brokered CDs.

[00:12:24] Gary: I mean, I’ve been in those institutions. I know how those things work. They all come with a price, right? Some of them better than others. depending, on your need at the time, the situation you’re in, you have to pull all those levers, in my opinion.

[00:12:40] Gary: And I hate to always keep coming back to strategy.

[00:12:43] Gary: But again, if you have a, good long term strategy, you might have to dip into those different pools at various points in time, but it shouldn’t be where you reside. If  that makes sense, you should always be measured in your approach on how you’re using those because I just, to me, I just consider those financial tools that are available to credit unions, to, to banks, et cetera, to help manage their balance sheet.

[00:13:08] Gary: And that’s the criticality to this strategy that you want to be able to dip in and out without having to live in there, if that makes sense, because it’s debt, right? So when you get married to debt, if you think about your own individual balance sheet, you get too married to debt, then you limit your flexibility on what you can do going forward.

[00:13:28] Vince: Yeah, it’s interesting. We saw that the NCUA issued a letter to credit unions about what their focus will be in examination 2024. And no surprise, right? Obviously interest rate risk, but liquidity risk. Was one of the bigger things that they cited As they sent that out, which means okay this exam cycle, right this nev test, right?

[00:13:48] Vince: How much exposure you have to longer term fixed rate assets is going to be part of the test

[00:13:53] Vince: But your opinion do you think the ncoa is going to do with the controller? The currency is done for larger banks, which is sort of mandate liquidity requirements for them

[00:14:02] Gary: Think they should if you’re going to have an oversight capacity over an industry,

[00:14:09] Gary: I think you have to establish rules from which that industry fall follows. So yes, you know, if they’re going to allow expansion and lending opportunities, that obviously is going to lead to additional risk.

[00:14:21] Gary: The number one offset to risk in a lending portfolio is the capitalization of your institution. yeah, in my opinion, I think they almost have to, if they’re going to continue to broaden the options that those institutions have to put money out on the street.

[00:14:35] Vince: So let’s switch gears. I was listening to one of your, previous interviews and you were talking about PPP, right? so the government steps in, there’s no channel to deliver this money, but They make it available and obviously, Jack Henry and a bunch of other right stepped up and provide the plumbing right to deploy all that capital.

[00:14:54] Vince: And then we roll forward and obviously now, every small business lending is really tightened up. And the question now is all all right.

[00:15:03] Vince: At this point, that’s the way we’re going to drive the economy, right? These smaller businesses getting back on their feet, right? Trying to get working capital loans, expand.

[00:15:12] Vince: What’s the role of Jack Henry and small business lending? What are you hearing and seeing from your clients, right? When they’re building these kinds of portfolios, I often feel that credit unions are in it, but not anything as large as maybe some of the banks are in it.

[00:15:24] Gary: again, I’m a big fan of the small industry. don’t want to get hung up on SBA because that is a piece of funding for small business as opposed to just all small business in general and how they’re funding their industry.

[00:15:39] Gary: And traditionally.

[00:15:41] Gary: They’ve done it by their bootstraps. Quite they go around and they figure out how they can fund their industry. And there’s so many options for them. Again, I think the FinTechs coming into the space. And again, Jack Henry’s, we’re a large company, but we are considered a fintech.

[00:15:58] Gary: But, those fintechs coming in that solve a single problem, they really created a lot of disruption in a traditional lending environment.

[00:16:07] Gary: So, if you just think about the. folks that come in and do uh, merchant cash funding or the folks that are doing receivable funding or, all the by now pay later stuff that’s in place today, all those things.

[00:16:21] Gary: Very few of those things are being driven by a traditional community financial institution. They’re all fintechs doing one specific thing really well, but it is filling the need of that small business. It’s helping them get the funding they need because, again, most larger financial institutions tend to be reactionary when rates go up, they squeeze it off a little bit. Their liquidity starts getting tight. Well, can’t loan any money. Right. And it’s an on or off tap. It’s not,

[00:16:49] Gary: Hey, over the next six months, we’re going to slow this thing down. It’s literally like rates go up.

[00:16:54] We stop.

[00:16:55] Gary: It just happens like that. And a small business is just crippled. When that happens, if all of a sudden any opportunity they had to get funding is gone, then they’re just crippled overnight. So that really opened the door for all of these fintechs to come in, all these alternative lenders to come in.

[00:17:12] Gary: And they have done a great job of filling that void.

[00:17:15] Gary: Now, the real challenge is how does the traditional financial institution get back in that space the right way, and they’re going to have to do it with technology. They’re not gonna just tomorrow decide we’re gonna go do, accounts receivable lending, right?

[00:17:30] Gary: That’s a cultural challenge for a lot of institutions. it’s an intangible, right? It is an asset, but it’s in the air,

[00:17:38] Gary: As opposed to a piece of real estate or a piece of equipment or something like that. So that creates a challenge for them culturally.

[00:17:45] Gary: So have to create and utilize technology to help them be more comfortable lending in that space to open up that funding channel for business.

[00:17:55] Gary: And that just repeats itself regardless of the different type you’re doing, whether it’s, looking at restaurants, for example, where some of the largest users of the merchant. Strategy, to do that because they could just see what their receipts were, and they could turn that into instant cash off their credit card receipts.

[00:18:10] Gary: So it’s just things like that is what we’re gonna have to deliver from a technology standpoint to allow these institutions to be the good partner locally that they used to be.

[00:18:21] Gary: And that’s kind of been siphoned off of them today.

[00:18:24] Vince: Yes. Wonderful. I want to go back and just pull on this a little bit further. So you talk about niches in our discussions you’ve had in niche lending and whether it’s buy now pay later or medical lending or cash advances. And certainly when we think about fintechs in general and not large established firms but new firms, right?

[00:18:41] Vince: New firms are just getting started. Firms that are going out to venture firms are getting seed financing. You’re right. They tend to be product companies. They find a niche. They hyper focus on it, they disrupt it using technology, and then they prove to, I think, the larger institutions that technology really can change the way the product is delivered.

[00:19:02] Vince: And when I think about Jack Henry and innovation, how does that, when you see that happen you see a small sort of nascent company come into the space and start exploiting technology and sometimes taking risk. How do you innovate right, at Jack Henry that way?

[00:19:20] Gary: that’s a twofold question.

[00:19:22] Gary: So first off, I will say, at Jack Henry, We have a philosophical goal position that we want to have open technology.

[00:19:31] Gary: Okay. And what that means is we don’t have a closed ecosystem you don’t just use Jack Henry stuff, so to speak when I’m working on my modernization and my unification of all my functionality, part of what I is understand what I do really well.

[00:19:47] Gary: And then the things that I don’t do, maybe the best. Is there a best of breed solution out there? I need to partner with on that and bring them in.

[00:19:57] Gary: And we do that over and over again. And sometimes those partnerships blossom and sometimes they fizzle out. But the whole point is optionality.

[00:20:06] Gary: I can’t be everything to everybody as A provider.

[00:20:11] Gary: But what I can do is create an infrastructure that any institution should be able to use any parties, myself included, and others pair them together to create the business model.

[00:20:24] Gary: They want to go to the market with that’s the real key. I think that’s a huge differentiator for Jack Henry is our position on openness and our willingness to be partners with competition to the experience that each individual financial institution to.

[00:20:40] Vince: So on the partnership side, and specifically in small business lending, we don’t need to talk about the specific companies, but are there partnerships that you say and what’s the characteristics of them? Because obviously many credit unions listening many credit unions are partnering directly with fintechs.

[00:20:57] Vince: And try to understand how to do that. So are the areas that say is, well, let’s stay in small business lending that are intriguing to you. And then what’s the characteristics of that partner?

[00:21:08] Vince: What are you looking for?

[00:21:10] Gary: so again, the open strategy doesn’t limit me to certain areas, right? So the fact that I’m open and we’re building everything with APIs that, you know, other people can connect to, that’s the gist of creating a broader ecosystem.

[00:21:50] Gary: But what I specifically look for with partners is number one, somebody that fills it a known gap that I have.

[00:21:57] Gary: Something that I know, you need it, I can’t  it, right? Or I have to build it, on the runways X, whatever that is. But if there’s a partner out there or another provider that does that, or a financial, this is what happens 90 percent of the time. A financial institution calls me and says, hey, do you work with such?

[00:22:15] Gary: Because we saw their stuff and we love it.

[00:22:18] Gary: And I’m like, no, let me call them. So we call and figure out, and I try to understand what gap they’re trying to close or what, what they’re doing to enhance their relationship and how that fits in my ecosystem.

[00:22:30] Gary: And then if it fits, then we figure out how we can work together to deliver that experience for a broader audience.

[00:22:37] Gary: But if you look specific things. Like, we have a partnership. I know with autobooks.

[00:22:42] Gary: I know that’s a public one. And that’s, working with small businesses and their accounting systems that they have to create.

[00:22:49] Gary: Uniform financials as well as funding through various avenues, right? So that’s an example partnership. But then have all types of things that we plug into our solutions to make them better. you’re opening accounts,

[00:23:04] Gary: we partner with third parties that do everything from identity verification to account validations to, you know, all kinds of things that you see big data type stuff happen.

[00:23:17] Gary: We plug them into our technology to make both parties better.

[00:23:21] Vince: So as you were talking, I was about lending and deposits and which one drives the other. it’s interesting. We had Chip Mahan, the CEO and chairman of Live Bank on the podcast think it was back in August of 23. And it was very interesting,

[00:23:36] Vince: yes, they’re an SBA lender and Chip had just come off his Q2 earnings call, and I’d listened to the call, and he had this really interesting fact that I thought was out of characteristic for what was happening in the rest of the landscape, and that that he basically declared to all of analysts that Hey, our deposits are up 21%.

[00:23:56] Vince: That’s almost 475 million of deposits in one quarter, right? Where most, of the banks were saying, still seeing flight. he said, I did that by offering a business checking account, right? And the nature of businesses, these are small businesses. They are doctors. They are lawyers.

[00:24:13] Vince: These are veterinarians who are trying to fund the practice.

[00:24:16] Vince: So he places it in that business checking account when he actually disbursed the loan. So it’s a very interesting way to create very sticky deposits.

[00:24:24] Vince: And I always, go through this chicken or the egg. What came first, right? The checking account or the auto loan, right?

[00:24:29] Vince: The mortgage or the checking account. How do you this? And strategically, how do you link? Look, because most of our clients do a great job. For example, credit unions, they’re great indirect lenders, but they struggle really hard turning that into a true, Relationship because they define the relationship as yeah, we open the share account in order to create the membership to get that auto loan.

[00:24:52] Vince: But what about the checking account? What about the debit card? What about direct deposit of that paycheck? How do you see that bridge being connected? Do you see any best practices out there where folks are driving deposit growth through lending?

[00:25:06] Gary: Yes. But I think we have to take a step back and understand what drive, the basic business model for a financial institution, which is we take deposits, which is a liability and cost us money.

[00:25:20] Gary: And the reason we do that is to make loans so that we can Have an asset drives interest.

[00:25:28] Gary: And the difference between the two is how we grow our institution to serve more people, that’s the basic foundation of every financial institution created. So to me, structurally, the deposits precede the loans from a strategy perspective. Now you flip that. To a consumer and the consumer very rarely is out shopping. Where am I going to open my checking account? They’re like, I need money for X.

[00:25:56] Gary: I need money for this. I need money for a house. I need money for a car. So they lead with loan always so that the two work.

[00:26:03] Gary: Counterbalance each other, right? So, the financial institutions customers are always going to lead the loan and you’re trying to catch the deposit on the backside of that.

[00:26:12] Gary: Whereas as a business strategy. You always want to have the liquidity available and then loan that out to make profit to then grow your overall institution. So, there’s many ways to skin that deal. And again, some institutions lead and are and want to

[00:26:30] Gary: be known as a deposit generation tool.

[00:26:33] Gary: And then they’re off trying to figure out how to place that money get profitability. Others, probably more common is they outrun their deposits with their loans. Then they’re back into the other funding sources, federal home loan bank, overnight funds, brokered CDs, et cetera, et cetera, because they’ve outpaced their deposit growth with loan growth because they need the profitability to grow their institution. So it’s really a balancing act. And I’m going to go all the way back

[00:26:58] Gary: the beginning. It’s about having a defined strategy for your institution that is a long plan. And then you figure out tools to use in the middle when you run into a roadblock that’s created either economically or through some other outside influence.

[00:27:15] Vince: Yeah, we used to say back in the days when I was at Citi, nobody wakes up in the morning and says they want to go Citi banking.

[00:27:20] Vince: They’re looking for a car. They’re looking at homes, right? And then suddenly they find up a car loan and a mortgage. now your job as a good banker is to try to gather those deposits.

[00:27:29] Vince: But you’re right. There’s no easy solution. And I think you’re right. And as you characterize the extremes, right? We have folks that are really good. Asset gatherers, and then we have folks that are out there doing a great job on different channels, right? Acquiring loans. as I was at the same conference this last year it was interesting they showcased 3 AI companies and afterwards and there probably.

[00:27:54] Vince: A hundred community bankers this room at the cocktail reception. You could not get near the 3 CEOs of these 3 startup. AI companies, everybody’s talking about it. It’s pretty clear. Every CEO of every financial institution has to answer back to their board what they’re doing with AI.

[00:28:12] Vince: Now, you had a bunch of panel conversations.

[00:28:14] Vince: You had a payments conversation panel, I believe, another one on digital banking, and this was surrounding AI. And, we’ll talk a little about payrolls, hopefully in here. But what were the key takeaways coming out of those panel conversations?

[00:28:27] Gary: Yeah, so, AI is the new shiny object that will not go away going. Everybody’s grabbing it. Yep. it. is not going to go away. That’s here to stay. I’m not one of those that jumps on things super early, but this is one that I think Is monumental. And it’s not gonna go away. And it’s not gonna go away for the simple reason.

[00:28:47] Gary: It brings much efficiency to the table. So, I’m lone guy from my beginnings, I’ve been all over financial institutions, but primarily in my heart. I’m a lone guy. And where AI really comes into play is the difference in.

[00:29:04] Gary: The approach when you’re looking at how to handle a transaction, and I’m gonna use lending just as this specific example, but it can be applied across anything in lending,you have two different schools of thought.

[00:29:16] Gary: You have the old gray guys ladies that say, lending is an an art,

[00:29:20] Gary: right? It’s an art that, they’re the five C’s of credit And then you have the modern spin, which is, it’s a science. right?

[00:29:29] Gary: This is a science. We can run all this stuff through a machine and get the answer.

[00:29:33] Gary: We don’t need the art. And the answer is back to the extremes. It’s neither.

[00:29:38] Gary: You need to bring together the art and science. And  that’s where AI  comes in. So AI has the ability to  efficiently process the mundane. Data that you need to assess the team, right? So often we don’t get to do the art because we’re too busy gathering enough data to make a decision.

[00:30:02] Gary: Whereas you can use AI to drive a lot of that data, to drive a lot those calculations and things to put in front of that, truly has the art of lending and can go, oh. Based on all this data, this is the right type a scenario. And again, I’m being extreme there. I’m saying use a machine do this and use the person to do that, but it’s going to be a combination of all of those things to in the art and the science of lending.

[00:30:31] Gary, I worry that obviously this is all dependent upon training data, right? It is machine learning and we have to teach

[00:30:39] Vince: It is machine learning and we have to teach machines and The last I don’t know decade two decades if I look at credit performance And I look at where the interest

[00:30:48] Vince: were Right. It was pretty clear sailing.

[00:30:51] Vince: And then we had this black swan event called the pandemic, which, I hope we’re not going to have to model that over and over again, although we may, but I always worry that the training data that’s out there right now. is not conclusive enough. It hasn’t had enough choppiness in it, right?

[00:31:06] Vince: For us to feel comfortable that, wow, if I take this algorithm for underwriting really

[00:31:12] Vince: well enough that it’s found signal and it can underwrite better Then anyone else can write because you talk about right the human touches sensibility, right? I talked to underwriters all the time cheap lending offices.

[00:31:25] Vince: They have a certain sensibility about their business. Now we’re training this 2 year old, right? And I would say training them to sale. But they never went out where there were choppy waters and we say, Oh they’re great sailors. And then suddenly there’s a storm  and they’ve never a storm.

[00:31:39] Vince: So you have that concern Yeah, I

[00:31:43] Gary: And that was that exact scenario was experienced back in 2008, 2009. You remember that last disruption that we had brought in a ton of alternative lenders, and they were truly booking loans on their balance sheet.

[00:31:59] Gary: They were balance sheet lenders, right? They were doing everything data points. Okay, they weren’t bringing the art. It was pure science. And what happened was, to your point, there’s not enough history there.

[00:32:11] Gary: There’s not enough skint knees, so to speak, in that data. To deal with that. So what happened is they all had to pivot ’cause all the loans started going bad.

[00:32:21] Gary: And so they pivoted and became software providers and they did create disruption in the ability to electronically do transactions that traditionally were done manually in financial institutions, but they didn’t have the science perfected, so to speak. And that then triggered  an event where they couldn’t survive it on their balance sheet. So they flipped a lot of them and became software providers and went to large institutions and said, okay, let us bring technology in with your balance sheet that you can handle this risk. And then we partner together and go forward. think the same is here in AI

[00:32:59] Gary: AI today. We have to crawl, walk, run with AI. You can’t go all in day one. your point, everything’s built on large language models. It’s all about machine learning. And we have to continue to tune these tools to get the outcomes that we want.

[00:33:17] Vince: So it’s interesting. I like the crawl, walk, run. have a company. I have a company that we deal with every day. And my view is that. We won’t ever effectively use AI productizing it until we use it as individuals, employees coming to work every day, making ourselves more effective in our jobs.

[00:33:39] Vince: So do you see that at Jack Henry? Do you see that in the same way were. You try to get your employees to use it first so they understand it.

[00:33:48] Gary: So at Jack Henry right now, we’re those guardrails. so it’s the Wild West with AI.

[00:33:54] Gary: Anybody that, just Google it and then sit back  and watch screen flow. It’s the Wild West. And literally, There’s probably no you can’t tackle somewhere with of the public consumer AI tools are out there.

[00:34:11] Gary: ChatGPT, the BARD model, et et cetera. The problem with all of that is It wants please you. A. I is designed to provide you an answer. Okay, so you got to be careful that it’s not just connecting dots that maybe shouldn’t be connected because it wants to give you an answer because you ask it to, right?

[00:34:33] Gary: So what we have do is utilize a I for framework. and then we have to our subject matter expertise in to the framework, right? So if you take a large task that has. A, multi stage challenge of completing this task. You can ask AI to help you complete that task. Here’s what I want to do.

[00:34:58] Gary: And boom, it’s to spit it out and you can turn a blind eye and say, okay, here’s my answer and go.

[00:35:03] Gary: But the tools good enough for that. The tools are great to give you that framework, but then I have to insert one of my people, a subject matter expert that says yes, oh, we need to tweak that.

[00:35:14] Gary: Yes, we need to tweak that, and we have to teach that and get it to the final refined product that we want. And I don’t mean product that I sell.

[00:35:23] Gary: Output that I’m seeking in whatever task I’m to accomplish. And that’s the real key. To your point. I will absolutely wear this stuff out inside my own shop before I expose a single client to it.

[00:35:36] Vince: so let’s talk about the shock to the system then. So in I think it was in 2022: Jack Camry announced you were going to acquire pay rails. So we’ve got this AI enabled payments platform. So here you are, you’re, trying to build this in the foundational pieces in the thinking of your staff as you productize AI.

[00:35:54] Vince: And now you purchased this company that comes with this, complete suite of both, I think it’s consumer as well

[00:36:00] Vince: corporate payments. How does that, do these two things ever come together? How did they come together?

[00:36:06] Gary: Yeah, so I’m not a payrolls expert. I’ll start with that. That’s out of my area of expertise there, but I can tell you again, my answer will be more philosophical.

[00:36:14] Gary: That’s an example of looking at an opportunity, looking at a gap that Jack Henry uh, Knew had acquiring people and technology to lift our brand.

[00:36:29] Gary: That’s what it’s about. So, it is about taking what they do  best, bringing our culture, bringing our infrastructure, bringing, the things that make Henry, Jack Henry, bringing those two things together. And one one equals three, right? Lifting the whole thing. And we’ll, all of us, ancillary tools. our peers to pay rails. Will we learn from them?

[00:36:55] Gary: 100%. Will  payrails learn things from Jack Henry?

[00:36:59] Gary: 100%. So that’s really where it And I think  you’re spot on that acquisition was two years ago. I think now

[00:37:07] Gary: And look where that was and where AI is today and where it’s just imagine where it’s going to be years from now, that’s scary part about AI is I could spend all day every day on AI and not keep up and you can tell I’m excited about it.

[00:37:21] Gary: I actually dig it. I like it. And I think it has a huge opportunity. to help me do my job better, which is going to help financial institutions take care of their customers better. But man, it’s a lot to digest and we have to do it in a manner that is safe and not get out over our skis.

[00:37:43] Vince: So, Gary, if you think about the regulatory and what’s happening with AI. How do see it evolving and how do you see companies navigating the regulatory environment?

[00:37:54] Vince: And as you saw Zest AI now, Rodney Hood, who’s the ex chairman of  the NCOA is now a board member of Zest AI. So very interesting when you think about Rodney’s position in financial innovation and Zest AI’s position in providing underwriting tools using artificial intelligence.

[00:38:13] Gary: Yeah. So, we are obviously regulated by the same entities that Our financial are we fall under all the FFIEC guidance as well and we continually communicate with those regulatory agencies. In an outbound manner. we as a company communicate in an outbound manner.

[00:38:34] Gary: We have associates that are assigned to maintain relationships. And then conversely, we get the inbound requests as well. We go through exams like everybody goes through exams.

[00:38:45] Gary: So we have that communication of what’s going on. so I’m not concerned there. I had a concern about specific to AI and regulation, it’s going to be how are we as a tech provider and how are those examining bodies going to adjust their tactics based on that, right?

[00:39:08] Gary: How are they going to their process? To account for AI, because again, I don’t think it’s going away. I think it is here to stay. so we have to figure out the best way to harness it and use it in a safe and secure manner. Obviously, not going to use any kind of an AI a company and create any kind of a public access.

[00:39:32] Gary: To personal data. I mean, It’s just not gonna happen, right? So that’s the number one thing as a provider we have to guard against. So any I we use is going to be locked down so tight that nothing can get out. So that’s why when I say crawl, walk, run. The crawl part is how can we a I and understand how it works with non secure data. Let’s start with that, right?

[00:39:57] Gary: Non secure tasks. tasks that have no PII in them, those sorts of things. And let’s understand the value and how it can work. And then let’s see how we can safely into use cases beyond. I think the regulatory bodies are going to have to do the same thing.

[00:40:15] Gary: How do they do the things today?

[00:40:17] Gary: What are they seeing in the industry as far as how financial institutions. Forget me

[00:40:23] Gary: how financial institutions themselves are using AI. And then how they’re going to adjust their practices to account for that.

[00:40:31] Vince: Gary, do you see the need to create special sort of, you know, we ever hear this conversation about backdoors or tools for the regulators to actually examine because they can’t see, today they’ll come in and exam and they do it through our software as well, I’m sure through yours.

[00:40:46] Vince: Right. They come in and examine a credit union or bank. They select a bunch of loans, they. Take out the scorecard they look at pricing and they can basically do a desk exercise right and say yes We believe that we have a statistical significant enough sample to say that What your credit policy and what’s happening in your scorecards is actually working then pull some stats out when it’s a black box Right.

[00:41:08] Vince: That’s the big concern right? We keep hearing this black box lending do you see a need for special tools for regulators to be able to do their jobs effectively? If, and when this is like fully AI enabled underwriting.

[00:41:24] Gary: I don’t know if need a backdoor to do that. Again, this is opinion I’m just thinking how to solve that problem that the black box, it scares me because I don’t know what’s in it. So I do not have a single solution at Jack Henry. That’s a black box. Everything I have is configurable by the F. I based on policy.

[00:41:41] Gary: So, so there is black box. Jack Henry is not anything out there that says adopt this thing, we’ll give you the answer. Right. It just doesn’t exist. Cause personally don’t want to dictate credit culture in a financial institution. That’s my opinion. But from a regulator side on institutions that do use a black box,

[00:42:01] Gary: I would think they’d more just on the outputs, right? And they’re going to at a stream of funded loans, and they’re going to look deviations between, Protected groups and things like that. how they get to the end, I don’t think is as important as the actual result. and if they find a deviation in the result, then they’re going to start asking questions. And that’s when the black box a problem because you don’t know how it made that decision.

[00:42:31] Gary:  to me again, if I’m running a shop of examiners, I would focus much more on the output that the process.

[00:42:37] Vince: That’s great. Well, listen, we’re going to leave it there, Gary. Thank you so much. I’ve enjoyed the conversation today. I also want to thank all of our listeners and remind them to hit subscribe so you can enjoy future episodes and I’ll meet you back here in the next 22 minutes and lending. Thanks again, Gary.