/by

What Comes Before AI? PI.

, ,

6 minute read – When it comes to newer technologies in the financial services industry, the usage of artificial intelligence (AI) is front and center, but it comes with its own set of challenges including not always achieving promised performance levels and unanticipated pitfalls.  But the challenges don’t mean that the opportunities aren’t worth pursuing.  Institutions are seeking to learn faster as they take advantage of new AI capabilities and they’re finding that applying process improvement (PI) principles before implementation is key to gaining the full advantages of AI without creating unexpected issues.

AI is already commonly used in lending decisions, fraud prevention, and customer service, and as the field advances, new AI applications seem to appear daily.  While the following questions apply to AI implementations, many of them are also relevant for less-complex solutions such as robotic process automation (RPA) that simply automates manual processes.

6 PI questions to ask before implementing AI:

1.  What is the clear objective of this AI implementation?

This question isn’t limited to PI, of course.  It should be answered for almost any strategic initiative, project, or endeavor the institution undertakes.  It is especially important that the objective is crystal clear with AI implementations since there is still so much to be learned.  As you prepare to articulate the objective, it helps to ask, what problem are we trying to solve or opportunity to take advantage of?  How will this support our strategy?  What will be the tangible outcomes?  What benefits will be realized?  How will we measure success?  Starting with a clear objective and measurable success outcomes that align with the strategy is the first and most important step and is critical to hitting the mark.

2.  Are we paving the cow path?

A common pitfall is what is referred to as “paving the cow path” or automating what we’re currently doing without considering whether that’s still the best path.  When pieces of existing processes are automated or enhanced with AI, a question that sometimes remains unasked is, do we really need this step at all?  PI is used to reveal steps that are no longer necessary and highlights business decisions for reconsideration.  For example, when automating report generation, find out if anyone is still using the reports.  Or when automating the payoff of multiple customer credit accounts for a debt consolidation loan, a business decision might be made to instruct the customer to pay them off, eliminating the need for automation.

It’s tempting to think that there’s really not much harm in automating an unnecessary step since it will function on its own, but the cost of automation or AI enhancement is not limited to its initial cost.  Just like other technologies, it must be maintained with updates and any changes made to the data stream coming in or out may necessitate changes in the interface.  This creates inefficiency if the automation or AI wasn’t strictly necessary in the first place.

3.  How would we approach this enhancement or problem if AI didn’t exist?

In PI, it’s important to consider various ways to achieve the objective, so this question is extremely helpful with AI because so many new solutions are being created.  The newness and novelty make it easy for the thought process to be dominated by the capabilities of the solution rather than the problem to be solved or enhancement to be offered.  Take some time to think through other ways to achieve the benefits.  Some have identified less complicated, less expensive solutions by asking this question.

4.  What impacts might this implementation have that we aren’t thinking about?

One of the principles of PI is to seek out unintended negative effects on the customer or employee experience such as, system efficiency, time spent, or costs.  For example, an AI implementation that provides personalized customer experiences could create friction in the account opening or lending processes as they are modified to gather additional data.  Or perhaps the system slows down due to the additional demands.  PI is extremely helpful in uncovering this type of conflict, which can then be weighed carefully against the benefits or adjusted to minimize added friction.

5.  Are our sources of data and data governance policies ready for AI?

The institution’s processes for gathering, protecting, and maintaining data need to be stronger than ever.  Sophisticated AI solutions are built to learn from data without being explicitly programmed and often require large volumes of complete and accurate data to learn from.  This could be internal or external data and the potential exposures to privacy, transparency, and bias issues are magnified with AI.  In addition, regulations are still evolving for how to protect against these and other risks.

Just scratching the surface on data governance, assuming you are using a third party for the AI solution, get clear on how the third party uses data (internal and external) and whether they have adequate guardrails in place.  For usage of internal data, consider whether there is enough for the solution to learn from without creating biases or incorrect answers.  Similar to business intelligence initiatives, there is often work to be done on capturing the right data accurately and consistently as well as clean-up of existing data.

6.  Is our vendor management process up to the AI challenge?

The complexities of working with AI vendors may make this the right time to do PI on the vendor management process.  Strong vendor management can not only track how the institution is using AI, but can also help ensure that your governance policies are applied and tracked consistently.

AI is an exciting, rapidly-developing, area that holds much promise for the financial services industry.  Since it’s relatively new, there is much to learn.  Using these process improvement questions and examining the processes that AI is a part of, as well as other processes it affects, could save some headaches and put you on the road to better results for the whole organization.

/by

The Power of Seeing Multiple Futures

, ,

3 minute read – While none of us can predict the future, those who anticipate various future scenarios and work through their options tend to fare materially better than those who don’t.  Utilizing scenario planning to rehearse for potential future events can boost confidence in decision-making for an unknown tomorrow, while building the strength to handle it along the way.  

We have always been impressed by Brett Martinez, and his team at Redwood Credit Union.  The consistent strength of their performance in delivering for their members, their community, and their financials, is impressive.  There are many factors that led to the success they have created, one of which is their relentless focus on scenario planning.  The message that Brett brought to the Governmental Affairs Conference (GAC) is one that can benefit the industry.   

If you didn’t have a chance to hear Brett speak at the GAC in early March, we thought you would appreciate the opportunity to read an article published in CUtoday that summarizes his message.  Click here to read the full article.   

We know that Brett, like us, has been passionate about scenario planning for years.  We are equally as excited to see financial scenario planning gain traction across the industry, making its way into more and more strategic discussions.  In addition to the summary of Brett’s message, we gathered a few more resources to help decision-makers approach scenario planning and alternate paths. 

Consider starting with the exploratory scenarios that the Fed released last month.  These scenarios are designed to test the resiliency of the banking industry and take a different path than their typical supervisory stress test for large institutions.  The exploratory scenarios can be found here. 

In response to the Fed’s Exploratory Analysis, we recorded a new episode of c. myers live, where we discuss our takeaways from this report, and how it can help any institution prepare for the future, regardless of their size.  Click here to listen.  

You might also find this blog helpful, where we dive into the 4 main components of scenario planning and its importance, as decision-makers plan for a future they cannot predict.  Scenario planning should cover a wide range of environments and combinations of events to understand potential challenges and opportunities.  We agree with Brett, “it’s never just one thing,” and until we perfect our ability to see the future, we will continue encouraging the industry to proactively embrace scenario planning.   

/by

Strategic Thinking: An Approach to Strategic Planning

,

8 minute read – Each year we work with hundreds of financial institutions, helping them think through their business model for today and into the future.  Because of the successes we’re seeing, we thought it would be helpful to outline processes and habits that can help strengthen the thinking among leaders and Boards across the industry.  By focusing on ways to strengthen thinking, particularly on how decision makers in your organization are thinking, you can position your organization to be better able to examine multiple perspectives then expand, revise, and build on them.

Once a year planning sessions are not enough.  Let’s start high-level by framing what an approach to strategic planning through strategic thinking might look like.  More and more, we find that once a year planning sessions aren’t enough to keep up with the pace of change.  Our clients have found tremendous value and relief by shifting away from a singular planning session where many big decisions are made to include regular strategic thinking discussions throughout the year so that when big decisions need to be made, they feel more prepared.  This cadence allows ample time for identified stakeholders to gather and research necessary data and business intelligence to help inform the strategic decisions when the time comes.

This graphic, from futurist Amy Webb, is reflective of the timing of the type of thinking and planning we encourage our clients to engage in.  The further into the future, the more it is about exploring what-ifs and potential scenarios without making decisions.

 

By expanding the more traditional strategic planning process to include strategic thinking opportunities throughout the year, teams are better able to build awareness, have alignment, and pivot quickly while staying focused on the strategic view.  Practicing strategic thinking can take a multitude of forms but here are some specific tools that can help initiate these types of discussions.

  • Align Board and leadership team’s tolerance for risk.  Taking time to complete a visual check-in – like the example shown below – and engaging in a follow up discussion can help your team understand individuals’ risk tolerance across a range of areas and ask what steps you can take today to help set you on that path.  This can also be an opportunity to ask why.  Risk tolerance is often a reflection of people’s previous experiences, or lack thereof, so engaging in conversation is a pivotal component.  While there isn’t a strict timeline for this conversation to happen, we recommend making this a routine part of your team’s conversations either annually or semi-annually or whenever big environmental changes happen as these can affect people’s sense of risk.

The areas of risk included below are examples only.  Depending on the labels you decide, categories of risk could mean many different things.  Take time to gain clarity so everyone is assessing from the same understanding – when your organization defines relevancy risk what does that mean?  For some, it means AI and technology, and for others it reflects branding.

 

 

 

 

 

We find it beneficial to consider both the average answers and the range of responses;  in this visual example, the mountains illustrate respondents’ answers and indicate that respondents are not aligned.  By exploring why respondents have varying assessments and appetites, you can engage in discussion to better determine how to approach your future path and develop cohesion among stakeholders.

 

  • Review the Business Model Clarity questions.
    • Why?  Clarify the driving purpose of your organization.  Why do you exist?
    • Who?  Who is your target market?  What segments of the market should be the strategic focus of your business?
    • What?  What is your value proposition?  What should you do/offer that your target market will find valuable and will motivate them to do business with you?
    • How?  How will you deliver on that value proposition better than your competitors?  What do you do/have internally that is unique?

Similar to risk tolerance, gaining understanding and alignment on these questions can help guide your approach to opportunities and challenges your institution faces as the world around us continues to change.  Additionally, like the risk tolerance conversation, you may not need to have this conversation more than once or twice a year, but every member of your decision-making team should be able to articulate these ideas so that they help drive your decisions.

  • Adjacent markets matter.  Think beyond the financial institution and beyond the typical 3-5 years of a strategic plan.  Look for emerging trends – what’s happening in other industries?  Many financial institutions are striving to be the easier place to do business, citing the personalization and accessibility that is becoming the expectation across industries.  Taking time to step outside of the financial industry and looking at what is happening in other business sectors can help you understand what is influencing consumer’s perceptions of what is “easy” and what’s table stakes.

These conversations can be shorter in length and might incorporate some pre-work or prereading.  Consider making these routine practices among your team – scheduling monthly or bi-monthly meetings to have these kinds of conversations can help you stretch your strategic thinking and create cohesion in your team.

  • Game changers.  Another conversation to have might be as simple as identifying potential game changers of the next 5-10 years and getting a sense of what kind of likelihood and impact your team thinks these might have.  By thinking without committing, teams can feel freer to explore a wide range of what-ifs without feeling restricted by the consequences of decision-making.  These conversations might happen in conjunction with thinking about adjacent markets – use this exercise as a means to identify potential topics to prioritize in your strategic scenario thinking practices.

Each organization’s perspective on potential game changers can be quite different but the image below is an example of what you might include.

A scatterplot can aggregate strategic planning session participants’ thoughts on what might be game changers, the likelihood these things will happen, and the degree of impact they anticipate these might have on their financial institution and consumers.  Some survey platforms also illustrate the range of individual answers which can be key in facilitating discussion.

 

  • Always come back to your core purpose.  As you will probably notice through your regular strategic thinking practice, lots of shiny new technology and opportunities will come and go.  In much the same way that being clear on your risk tolerance can help guide these conversations, understanding your why as an organization can act as a compass amid a rapidly changing world.  Ask yourselves, how do you keep your purpose front and center as thinking deeply becomes a path towards action – while not all thinking needs to become action, remembering your purpose can help you filter what opportunities are in line with your business model.

The way you approach strategic planning and the thinking behind it needs to evolve if you hope to stay competitive in this changing world.  Even in organizations that are happy with their strategic plan, leaders are excited to utilize these conversations as a tool to think strategically about the future and continue to build their capacity for thinking.  If you can make engaging in thinking that stretches your perceptions a key and continuous component of your strategic planning process, then your ability to optimize your business model, timely, will increase tremendously.

/by

c. myers live – Takeaways From the Fed’s Exploratory Analysis of Risks to the Banking System

, , ,

Regardless of the asset size of your institution, we encourage you to consider how the message in the Feds new analysis can help your organization plan for the future.  On February 15, 2024, The Federal Reserve released the Exploratory Analysis of Risk to the Banking System.  This iteration of analysis goes beyond typical Dodd-Frank Act Stress Test scenarios, and focuses more on the economic stresses which have been recently experienced in terms of higher interest rates and inflationary pressure.  In this episode of c. myers live, we dive into the 4 elements of the exploratory analysis, and continue the conversation of scenario analysis and testing potential impacts to help financial institutions make more informed decisions.  Open the Exploratory Analysis of Risks to the Banking System and follow along with us.

About the Hosts:

Rob Johnson

Rob, one of five c. myers owners, has a reputation for deep, original thinking on asset/liability management and every conceivable modeling methodology, as well as analysis of investments, liquidity, aggregate risk, concentration risk, and other related topics. While Rob is a familiar face to the managements and boards of many of the largest organizations, he has helped financial institutions of all sizes tackle some of their toughest challenges, such as rebuilding capital and navigating safely and soundly with the smallest of margins. He has become quite familiar to many leaders in the regulatory world, both as an educator and a thought leader.

Learn more about Rob

Dustin Wright

Dustin brings years of valuable experience from his myriad roles within the financial services industry.  He has worked for many financial institutions, including a community bank in Phoenix.  As the controller, he was responsible for regulatory financial reporting, ALM, budgeting, forecasting, and monthly financial and ALCO reporting.  Dustin’s variety of roles within the financial services arena, and first-hand knowledge of banks and credit unions, allow him to think strategically and offer the best solutions to our clients.

Learn more about Dustin

Other ways to listen to c. myers live:

listen on google podcasts listen on spotify listen on apple podcasts

/by

Harvesting Resilience From the Seeds of Disruption

,

6 minute read – The following blog post was written by c. myers and originally published by CUES on January 3, 2024.

 

The nature of disruption 

The thing about disruption is that it’s always coming toward us.  No matter how well we’ve adapted to the last thing, there’s always a next thing.  Because disruption is part of the fabric of business, cultivating a mindset and practices that embrace disruption can help position organizations to be more resilient and successful. 

The seeds of most disruption can be seen far in advance.  For example, recent advances in artificial intelligence are not a total surprise, but many are trying to quickly come up to speed to understand which of the new capabilities should be adopted.  Even the Fed rate increases that started in 2022 were telegraphed months ahead of time, yet parts of the industry were slow to adapt. 

It’s not as much an issue of being surprised as it is of not being fully ready.  Being ready means having thought through and articulated how the coming disruption affects the business model, how any new solutions or practices will ideally be incorporated (if at all), and any mitigating actions that should be taken in order to prepare.  Some disruptions like Covid and 2022’s geopolitical upheaval were surprises.  In those cases, strong team leadership, resilient people, and the agility to pivot quickly, along with efficient operations with enough income and capital to weather a storm are key. 

It’s not about technology 

Disruption isn’t driven by technology; behaviors drive disruption.  When someone somewhere comes up with a way to solve the customer’s pain point (with tech or not) and people find it useful, they’ll adopt it.  If it doesn’t solve a pain point or provide a great new capability, they won’t.  Case in point:  the Razor Phone (not Motorola’s Razr) that was both a cell phone and an electric shaver.  This did not cause great disruption in the cell phone industry because the inability to talk on the phone while shaving was not a pain point that needed to be solved.  ATMs, however, solved a huge pain point – not being able to get cash outside of business hours, without cashing a check at the grocery store or some other willing business. The reason technology is commonly linked with disruption is because advances in technology often make it possible to solve pain points that couldn’t be solved previously. 

Think about the disruption to the talent arena that has been going on for the past few years.  It’s not driven by technology, rather it’s driven by the changing behaviors of newer generations that think about work and careers differently than previous generations.   

Behavior change never stops 

Part of the reason that disruption is always on the horizon is because behaviors will never stop changing.  Younger generations are known for their willingness and desire to engage differently, which is why it’s so important to understand what these new potential customers value, along with what your existing customers value.  Knowing this is what makes it possible to embrace disruption and sort out what is important to pay attention to. 

Intentional efforts to track potential disruption 

Conscious effort is required to ensure that potential disruption is efficiently tracked, discussed, and decided upon in a timely manner.  The process doesn’t require large amounts of time, but some time must be allocated, and individuals assigned to research.  A team could be created to meet periodically, perhaps quarterly, to discuss what’s on the radar and report on updates to the situation.  A dashboard or roadmap for future implementation could prove useful.   

Consider these questions to prompt productive discussions.  Not all the questions will apply to every situation: 

Tracking 

  • What disruption is happening now? 
  • What disruption might be coming? 
  • What does the timeframe look like? 
  • How big might it become?  How far-reaching are the consequences? 
  • Should we do a deep dive on it, high level investigation, or just keep it on the radar? 
  • Are there others who should be made aware or brought into the conversation? 

How important is it to us? 

  • How could it help us fulfill our mission? 
  • How could it damage our business model? 
  • What is the benefit?  Does it improve our target market’s experience or provide new value that they find meaningful?  
  • What pain points could it solve for our target markets?  

Positioning 

  • How far out on the adoption curve do we want to be – fast follower? Leading edge? 
  • How far out on the adoption curve do we NEED to be? 

Solutions 

  • Are there steps we should take to mitigate negative effects?  When? 
  • Are there decisions we should make about adopting new solutions?  When? 
  • What vendors are offering solutions?  Should we look for a partner that can help? 
  • Should we experiment with our own ways to alleviate the pain point?   
  • How are other organizations handling it and how is it working out?   

Embracing continuous disruption 

It’s easier to embrace disruption when it’s been recognized and planned for in advance.  Implementing practices for disruption tracking and analysis will not always result in seeing every disruption clearly ahead of time, but it certainly results in fewer surprises.  Change can be scary, but it can also be exciting, especially when you’re ready for it.  Having a forward-looking process can help shift mindsets from avoiding change, to welcoming it and using it to the organization’s advantage.