Regional banks are facing unique challenges in the current economy. President of Key Commercial Bank sits down with American Banker's Chana Schoenberger to share how he's navigating the crosswinds, finding opportunities for strategic growth and innovation, and planning to take Key Commercial Bank to new heights.
Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Chana Schoenberger (00:09):
Hello, I'm Chana Schoenberger. I'm the Editor-in-Chief of American Banker, and I'm here today with Ken Gavrity, who is the president of Key Commercial Bank. Thanks for coming in.
Ken Gavrity (00:18):
Thank you for having me. So exciting. I actually just wanted to also add one other thing. It was over the last couple of months, the recognition that your organization has recognized a couple of our folks with John Briggs being one of the innovators of the year,
Chana Schoenberger (00:40):
Absolutely. So tell me about your job.
Ken Gavrity (00:43):
So I'm president of Key Commercial Bank. That really covers two components. First is the customer segment. It covers all businesses that are 10 million in revenue to a billion dollars in revenue. So it's a large swath of companies. When I think about that across the US there's about 200,000 businesses that fall into that category. It's about a third of private sector GDP and employees, somewhere between 45 to 50 million people. So an incredibly important part of the overall economy and what I would say is really the lifeblood of our American economy. So that's a portion of the business. And the other portion is really commercial payments. So all of the core banking capabilities, check, ACH wire, some of the newer ones, digital payments, so card merchant all the way into the software side. So when we think about automation, which is really a lot of our FinTech partnerships as well. So all of that put together in our commercial bank. It's a little under 2 billion in revenue. So a really important part of the overall KeyBank story.
Chana Schoenberger (01:43):
Great, great. Okay. So you've been at Key for about a dozen years now. What's changed in that time?
Ken Gavrity (01:48):
Oh, quite a bit. Interestingly, yeah, 12 years, 2012 when I joined Key Beth Mooney was stepping in as CEO, one of the most powerful women in banking as well.
Chana Schoenberger (02:01):
Yes, for a long time. Yeah,
Ken Gavrity (02:03):
Quite a designation. And really key was in that transition from being a community bank where we'd been stitched together through a bunch of different acquisitions over time to really becoming a super regional and really professionalizing the business in a fundamentally different way. And so I think that's where we started. And with Chris Gorman stepping in to take the helm now four years ago, we've really continued to see that arc of us building out our commercial bank, our capital markets capabilities, our wealth capabilities, and at just a different level of depth than we've ever had. So quite a bit of change.
Chana Schoenberger (02:36):
That's a lot. Yeah. Okay. So in 2023, of course we had a banking crisis. It mostly affected regional banks. It was a really fun month for us here at American Banker. We love a good crisis to cover
Ken Gavrity (02:48):
Great in the banking industry as
Chana Schoenberger (02:50):
Well. So much to say was lots of fun. So what's different about your job now after the crisis is settled and sober?
Ken Gavrity (02:59):
Yeah, look, I'd start by saying this is the fourth crisis that I've been in my banking career. What
Chana Schoenberger (03:06):
Were the other three? The financial crisis in
Ken Gavrity (03:08):
2008. So great financial crisis. I started my career in the fixed income side. And when I started, they were going through a little bit of the asset backed securities, some of the failures that were in manufactured housing and the impact in those securities, and then also the internet bubble. So I've seen a variety of different types of crises and none of them have been the same. So what I would tell you overall is I think as an industry, we know we're in a cyclical industry. You've got to be prepared for that. You've got to be resilient both as an industry and as an organization. And so I think we learned from each one, none of them have been alike at all. But if you think about what really drove this last crisis, this focus on liquidity and core deposits, that is now really the gating item for growth in the banking industry going forward.
(03:55):
If you weren't focused on that before March, you certainly are now, but it's not an easy thing to build a core capability around. So what I would tell you what I think we've done particularly well at KeyBank is we've had a primacy strategy, which means we are relationship focused. Client selection is really important. We only want to serve customers where they want relationship with their bank, they want advice, they want typically the core capabilities of operating deposits, payments and lending. And if you're doing those really well, you understand that company, you understand the risks, and they understand us, they understand our business model. So what I'm really proud of is when you hit an inflection point like the crisis where you say, how sticky are those deposits? How sticky are those relationships? We found out they're pretty sticky. We had more customers in December of 23 than we did in March. We had more deposits. We had four and a half million, or sorry, four and a half billion more in deposits in December than we had in March. And 95 ish percent of those deposits are all operating deposits. So the core accounts of those customers. So what I will tell you is we were always focused on that. We're even more focused on it now, and I think the rest of the industry is as well. Yeah,
Chana Schoenberger (05:05):
I don't know if there's a banker who said, well, deposits don't matter. We don't have to worry about that. Everything's going to be fine.
Ken Gavrity (05:12):
But the quality of those deposits is really the magic. So if you were sitting there in March and April and saying, boy, now I need more liquidity. I need to go get deposits. If you didn't have the teams, the specialization, the products, what you could get was hot money. So you could go out and ask for CDs, you could go out and ask for non-operating deposits. But the ability to say, starting as late as 10 years ago, our ability to say, first we're going to organize our teams around the customer. So if it's a middle market team, it's regionally oriented because that's how our bankers go to market. If it's the larger set of customers, they're dedicated around industry vertical. So we have a real estate team, we have a technology team, we have a healthcare team, we have an oil and gas team, we have an industrial team.
(05:56):
That depth of expertise is why we're able to go into those companies and say, Hey, we understand as a real estate provider, I can't just ask you for operating deposits. I need to know that your business breaks into the property management side or the investor and the developer side, and that maybe you're going to need reporting or separate accounts for every property you buy or to not commingle security deposits. You've got to be able to get to that layer of depth, and that's how you get operating deposits. That's how you have the right cost of deposits that are built into that. And if you haven't done that and you haven't built the product capabilities, it's going to take you a while to build it.
Chana Schoenberger (06:32):
So how do you pitch a regional or super regional bank to clients who after last year might either say, I want a mega bank for security and it's basically an arm of the government at this point, or I really want a community bank because they have a branch on Main Street in my town and I've known the guy through the Elks Lodge forever.
Ken Gavrity (06:52):
Yeah, no, it's a great question and it's one that I get quite a bit. So what I would tell you is I'd start back with just the scoreboard, the facts that are on the table. We just reported earnings last week. And to be able to say that our deposit, well, let's talk about overall client deposits for key. We're up 5%. And when I think about it on the commercial side, we were up 9% year over year. So the growth from what I talked about in 2023, we continue to see in the first quarter, saw it in the second quarter. And so clearly it's resonating. And then you get to go away from the scoreboard into what's the discussion. And the reality is when you think about that middle market customer, everything we've talked about before, it's a third of private sector GDP, these companies are growing and they're investing in their businesses and they need somebody that can help them, not just with, can you help me raise capital?
(07:42):
Right? It's more of a, I'm scaling in my business and I'm thinking about growth and I need a strategic advisor. Or hey, the typical middle market company has profit margins that are anywhere between 5% to 15%. And when they're fighting with the cost of inflation, cost of interest rates, and those margins are getting squeezed, they're coming to us and saying, what can I do from a working capital perspective? What can I digitize payments? Are there ways for me to think about automation? Anything we can do to take a point or two out of the expense base for them and help them think about what they can drop to the bottom line continues to allow them to reinvest in the business. So what I'm getting to is this point of you need to be large enough to be able to bring expertise and a full range of solutions to the table, but you need to be able to be small enough to be able to deliver the whole bank to that customer.
(08:32):
So when a JP Morgan or a B of A or somebody like that comes to the table, do they have all the same capabilities we have? Absolutely. I think where they struggle is there's a CEO of their card business, the CEO of their merchant business. There's a lot of infrastructure built up in each one of those businesses. And so it becomes hard to bring that all into a single point of contact to that customer and say, we can deliver across all those solutions. So we like to say we're big enough to have everything you need and small enough to be able to deliver it holistically.
Chana Schoenberger (09:03):
That's a good elevator pitch. Yeah.
Ken Gavrity (09:05):
Well, it's something that's resonated with our customer base and it's been reinforced. We do a lot of these webinars where ask our customers to come in and say, tell us what we're doing well and tell us what we need to do better. And really it's us taking from their feedback of how we talk about the business now.
Chana Schoenberger (09:21):
Okay. So what are the clients asking for now that's different from before?
Ken Gavrity (09:27):
Look, I think in general, liquidity isn't just a focus of the banks, it's the focus of the customer base. And so I'll break it into a couple of different things. First, they want to know that their deposits that we're thinking through the whole liquidity continuum for them, right? When you were in a zero interest rate environment, customers were a little less concerned about it. Now they're trying to figure out how much do they keep in the checking account? How much are they putting on interest and access? How are they starting to think through off balance sheet solutions and knowing that interest rates are likely to be coming down in the near term future, how do you start to strategically plan for how much of your liquidity is in each one of those buckets? And you got to be thoughtful. You have to have a plan.
(10:06):
Part of our advisory model, again is to not say, Hey, here are all the things we have. What do you want? It's to sit down, understand both what they have in liquidity now, how they're going to be investing in their businesses, how that might change over time, and then the right recommendation to say, how do we think across those buckets together. I think on the lending side, what I would tell you is I think in the last quarter so far what we've heard from most folks is that loan growth has been fairly tepid. I think that's generally true, but I think if you think about the broader macro fact of in late 2022 and 2023, a lot of these middle market businesses we're really focused on making sure that they could absorb the inflation that they were feeling and the higher interest rates that squeeze margins.
(10:51):
And so they needed to adjust their businesses. They really delayed some maintenance CapEx of investing in the next product line or the next warehouse. And so a lot of that has been put off. They've gotten to the point now with stabilizing rates where they're saying, okay, I have a point of view. My backlogs still feel pretty good. I understand that interest rates are settling into a place where I'm not worried about another 200 basis point increase. So they're starting to cautiously invest back in the business, and so we're seeing that as well, and they want advice on where and how to structure it the right way and make sure that they've got the right flexibility because they're all thinking about the next growth cycle here. The last point, and then I'll stop is if you looked at our middle market sentiment survey that we did in March, what you saw was this really interesting sort of cognitive dissonance that if you ask them How do you feel about your next 12 months and you had north of 70% say, I feel really good about my next 12 months.
(11:49):
You then ask them, how did you feel about the broader macro economy? And it was low fifties, and so there was this feeling of geopolitics or noise around potentially the election cycle interest rates, unclear what direction they're going. I don't understand what's happening in the broader macro economy, but I'm looking at my own backlogs. I'm looking at demand from my end markets. I still see strength. So it'll be really interesting in September when we see our next results, whether or not that nap garrow or whether or not that gap narrows and whether or not they continue to be confident in the future,
Chana Schoenberger (12:22):
Is it mostly that they feel they're doing better than their peers?
Ken Gavrity (12:26):
I think I go back to the stats of over the, in 2023 middle market companies, top line revenue growth was 12% year over year, and they had done that the previous year, it was also 12%. So if you compare that to the S&P 500 in 2023, it was up almost a percent, a little less than 1%, and small businesses, mid single digits. There was this optimism that this cohort of customers, which tends to be very resilient through cycles, was able to pass through to their end markets, able to manage their business the right way. So when they saw that there's a level of comfort of we continue to be able to adjust the business and we want to invest to grow.
Chana Schoenberger (13:04):
Yeah, no, that makes sense. Okay. So you mentioned your real estate team. There's a concern which has been broadly aired in the banking community, that commercial real estate is going to be a problem for banks. What are you seeing? What do you think?
Ken Gavrity (13:18):
I don't run our real estate group, but I can tell you just from an executive team perspective, the way that we look at it. I think what we see out in the articles that are being published is a very generic view of real estate. And I think you need to come down a level into the categories because not all real estate is the same, and whether it's office, whether it's retail, whether it's industrial, whether it's affordable and affordable is a huge place of growth of where we've invested in our business and continues to be in its very healthy sector. So I think understanding what categories that, whether it's a private investor, whether it's bank have been in, and then down to zip codes aren't all the same, right? So understanding what regions you're concentrated in all the way down to probably the most important thing for us, which is, and what relationships do you have? Are these scaled operators in the real estate space? Do they have a long history? Were they not over levered going into it because the really good companies that play in the space have been through the cycles over time. So partner selection, client selection is really important to us. So generally we feel really well positioned. We have a lot of reports and information we put out there that show the granularity of our book, but generally we'll see depending on who is focused in what categories, whether that's stresses individual banks going forward.
Chana Schoenberger (14:34):
Makes sense. Okay. Do you see any changes in where people are physically working affecting your client companies?
Ken Gavrity (14:46):
It's a really interesting question. I would say this is probably one of the number one things that I'm asking when I'm out with our customers, obviously we're talking about rates, we're talking about the election, but very quickly I get into the tell me about remote work and what do you do and how much are you pushing it? How much is affecting your business? And I can tell you there's still no clear consensus around this. I have customers who are all the way from the, we're back to five days a week. I believe it's the only way to build a culture. It's the only way to scale and fervently believing in that. And I think there's some merit to that point of when we're in person, we talk to each other differently, we solve problems differently all the way over to the point of customers we have that got rid of their headquarters and ultimately have pockets of concentration, but a lot of people working from home.
(15:34):
So I think the jury's still out, but my guess is somewhere in the middle, which is where we at Key have landed, which is we've got a big portion of our customer bank or employee base and what we call mobile, which is we want you in three days a week. But we also understand that we're all over the country, right? We've got locations in 16 states on the commercial bank and the retail side, and then our corporate investment banking side. We have people all over the country. So the reality of what it means to be in the office is just evolving over time. So I think where we're getting to is just thinking about what buckets of work work well remotely and what buckets of work around building culture and innovation need to occur in the office, and then how do we build the operating rhythms around that?
Chana Schoenberger (16:19):
It's interesting because a lot of the research has shown in the last couple of years since the pandemic was no longer a factor in whether people chose to come in or not. People generally like being in an office and interacting with colleagues and having idea meetings and all that, but they hate commuting. So I wonder how that's going to affect both regional banking and the companies that you serve if you want to go in, but you don't want to do the going.
Ken Gavrity (16:48):
Yeah, no, look, it's a really great point. I think it's one where opinions are still evolving. I think the most important thing, if I think about any problem we solve at Key, we always start with the customer work backwards. And so to the point that you're asking there, I think what I push to our team, and really I don't even have to push this anymore, it's sort of in the DNA of our group, is we're going to go out and see our customers that you have to sit across the table from them. You have to hear about this second generation owners who transferred it from their mother or father and how they think about the business a little bit differently and how they want to put their thumbprint on the business. What are the big decisions that they're struggling with? And it could be within the business, it could be how it transitions over into the wealth management among generations. You can't get that over Zoom. And so there are components over Zoom, whether we're filling out applications and they want some advice around that, or there are certain things with onboarding processes, all of that can be done remotely. It can be highly efficient. But when we're building a relationship with our customer and we're trying to understand 'em where the real sensitivities are, you have to sit across the table from them, and that will always be the same for us.
Chana Schoenberger (18:03):
Interesting. Okay. Are there other problem spots in the economy that you're seeing from your client relationships or other bright spots?
Ken Gavrity (18:13):
What I would really say, I think a couple of things. The first is just in general, the fact that over the last, as I said, 12 months, maybe even just six months, we've seen our middle market customers wanting to reinvest in their businesses. And I think that's a really great sign for all of us. I think the other idea of this investment in technology, again, whether it's the middle market customer or us as a bank surveying, that the ability to find ways to automate more of their processes and just again, help them find places where they can take out costs and where they take out costs, they can reinvest back in. I would say those really continue to be the bright spots. And so we've been out for a really long time touting our FinTech partnerships and the automation strategies that we've built over time that always starts with a customer.
(19:01):
And what we found, I think our earliest FinTech partnership was back in 2014, 2015. Avid Exchange was one of our first two and continues to be the largest FinTech partnership we have. And in talking to those end customers, it started with the outside in view of, well, what are these fintechs focused on? Okay, they're trying to solve workflow problems and they're doing it with a software orientation. And what were we doing? Well, we were a little bit more endpoint solution. I can move the money from A to B. But when you then brought that to the customer and say, well, when you think about this workflow cycle, what are you worried about making a payment? Are you worried about transferring the money? Or is it really further back in that cycle of I want to know who's doing the purchasing within my company? Are we consolidating it so we're getting purchasing power when we order something?
(19:52):
Are we getting what we actually ordered And when I'm getting an invoice, is it for what was delivered or what we agreed upon in the initial terms? And then ultimately when I make the payment, I just want to make sure that the payment is done in an economically advantaged way, and then on the backend, well give me some analytic. I mean, you're seeing my whole flow end to end. Tell me what you're learning about me and offer me some advice and solutions. So I think when we saw that, we saw that move towards software and automation, it was clear to us that it resonated with the customer. We needed to get much more advanced there. And so we put some capital into avid. We really brought our organizations together to say, we've got to become experts in delivering this. We've got to be able to talk about it. We have to customer service this the right way. And so from those early days of this was really an education sale to where we are now, where there isn't a customer conversation we have that doesn't reference automation, they understand it. They want to know how applicable it is to their particular industry, and they want to know how fast can we deploy it. So I think you've seen this really big shift of people leaning into that which they have to drive efficiencies in their business. They can continue to invest. Well,
Chana Schoenberger (21:01):
This is a story when I interviewed your colleague Mina,
Ken Gavrity (21:04):
Exactly,
Chana Schoenberger (21:05):
She said the same thing, which is that she had a client who had inherited a large family business and insisted on personally signing all of the checks and would not listen to any suggestions that he automate them because he said that was his fraud mitigation strategy.
Ken Gavrity (21:21):
You would think that that's a unique example that Mina was providing. But the reality is, if you just go back to the data again, 40% of payments in the middle market are still done with check. Why now, that certainly would not be the way that we do that in our personal lives. I can't remember writing a check over the last couple of years. The reality is these systems of financial management were just built up and they were put in place and the perspective was they're operating fine, leave them alone. And that's when the back office was truly the back office. But now as middle market customers are serving small businesses or consumers that expect delivered in software or they want instantaneous point of view of, did you get my payment? Was it applied? Did I get the loyalty points associated with it? Everyone's had to speed that up a little bit more.
(22:12):
And I also think the industry's finally come around to understand that there's a lot of risk that's embedded when you're doing those paper-based. And so check fraud's been on the rise. Again, it goes through various cycles. And when you start to say to a middle market company, 70% of businesses had an attempted fraud on them over, I think that's the 2023 stat. So you are going to be a target. And if having a check is going to be one of the places where it's seen as a vulnerability and they're going to come after you, you better think about that. Then you get back into just the sheer economics of you're paying for an envelope, you're paying for the paper of the check, you're paying for the postage. So this concept of it's working, right? So don't try to fix something that's working when you back it into you're exposed to fraud. It's not efficient at all. And by the way, you're getting no data from this on the backend. I think that has started this shift and this acceleration toward digital things that you would've expected a lot further along given where we are now. But I'm seeing a lot more conversations on it now than I did two, three years ago. Well, that's
Chana Schoenberger (23:22):
A good thing. We had a big story today about check fraud, which is sort of a perennial topic for us because it's such a big problem.
Ken Gavrity (23:29):
I think look, fraud in general, look, there's two sides to this. Check fraud is the easiest way to deploy it right now, and it's been very effective. And so you continue to see it there. But at the same time, the other side of the coin is you still had the FTC report for 2023 was fraud was up 14% year over year, and that was after being up, I think it was around 25, 30% the year before that. So it's finding its way into the system regardless. And I think when you get digitized, you're also putting more of your business and more of your life into software, and that's creating a lot more access points for fraudsters there as well. It's easier for us to be able to put more analytics embedded into those programs, more security around how you log in a portal, but you've got to watch it regardless of whether it's paper-based or whether it's software.
Chana Schoenberger (24:19):
So I guess the top line is just be more careful
Ken Gavrity (24:24):
Whether it's your partner in the bank, you need to understand how you are investing in it, whether it's access to portals, whether it's analytics, whether it's pattern recognition, looking at abnormalities, the real-time nature of how you're able to get that to the clients. You have to understand that, but at the end of the day, you're only as weak as your weakest link. And so customers need to understand that business email compromise is still very successful. Some person in the middle of your company, maybe it's your assistant controller, gets that email, thinks it's from the CEO and sends out the wire. That's all based on making sure that you are educating your employee base on those risks and you're taking advantage of all the basic things like positive pay that are available, multifactor authentication. But these are conversations that you can't say as a middle market company, I'm going to leave it to somebody else. It's you, the CEO. You as the CFO have to understand it, and you have to create the mandate of education to your employee base.
Chana Schoenberger (25:22):
Yeah, no, it's super important. And not just the cyber aspects of it either. The physical ones are also a little scary. Absolutely. We just had a story recently about how branches and customer call centers are one of the biggest avenues for fraud, physical branches. People walk in and physically defraud you.
Ken Gavrity (25:43):
Yeah, I mean, it just continues to go through cycles. They're very creative. The fraud stirs, you wonder if that aimed toward more productive uses, what we could do in the overall economy, but in general, anytime there's a weak link, they find it quickly. Once they find it quickly, it gets to the dark web. They educate themselves across the fraudster universe quite quickly. So this is a place where I'm really proud of the overall banking industry. I can tell you that between our organization and other banks, we share information around what are you seeing in the fraud landscapes? What are best practices? We have to solve this as an industry. And so I am proud of how we're attacking it. It doesn't mean we're going to always be in front of the next attack, but I will say when we're collectively looking at information together, we're more powerful.
Chana Schoenberger (26:33):
So how do you see AI affecting what you do that's related to this whole problem and both at your company and at your client's companies?
Ken Gavrity (26:43):
Look, I think artificial intelligence, right? There's no shortage of articles around this. It's an incredibly exciting time. There's the threat vectors of what this could mean is you think about social engineering and total
Chana Schoenberger (26:57):
World domination.
Ken Gavrity (26:58):
Absolutely. Right? I mean, just this notion, I think Elon Musk's example of putting the fraudster out, I think it was impersonating a 15, 16-year-old girl talking to her parents. I thought that was a great use case. It really educated people on how visual it could be, how audio it could be. It sounded like the same person. And how they were able to pull a bunch of facts that were available in the public sphere to really authenticate that person. And so when you think about the threat vectors that are available through something like that, you've got to make sure that you have a plan around how you're thinking about it, where you're potentially exposed, and how you're continuing to both think through the product landscape of how you protect against it and how we're educating our customer base, as I said before. So I think that's the threat side.
(27:48):
If I think about the potential side, and it's really exciting, and I think no differently than we were back in 2014, thinking about FinTech partnerships could offer. I think we're at that next inflection point again, and as you've seen use cases from all of our customers that actually I think in our middle market sentiment survey, 44% of middle market companies said they were of the next 12 months deploying some form of artificial intelligence. That blew me away. That number was so high. And as you unpack that and you talk to that customer, you find out they're dipping their toe in the water the way you would expect, right? And the way that you would hope they're using A CRM and how they manage their Salesforce, and that has an artificial intelligence module that they're able to turn on and start to offer next best product solutions or ways to think about where they're being successful and where they're not.
(28:42):
So I think whether it's in the sales focus process, whether it's in the operation side where they're starting to think about AI for predictive maintenance and where they're going to need to think about shutting down lines or they need to think about being able to buy more equipment for refresh cycles, I think you're seeing it in places like that where it's really small, it's not affecting their bottom lines yet, but it's showing that they're willing to experiment in order to learn from it. I think maybe the only other area I've seen quite a bit is the content and sales marketing side. The ability to put pitches together, especially business service companies, to be able to aggregate information that they have internally and be able to get that into pitch decks and marketing decks. So we're seeing it a bunch of places, and it's fascinating. And I can tell you there's information sharing between inform us and our customers. They're asking what we're doing, we're asking what they're doing, and it's a really exciting time for us to see where this goes. Great.
Chana Schoenberger (29:39):
Well, thank you so much for coming in. I really appreciate it. This has been very interesting, and I am not going to write any checks anytime soon.
Ken Gavrity (29:47):
Well, thank you for having me. It was really fun.
