AI Exposes Flaws in Bank Advisors' Bold Predictions

It is difficult to predict the future. When I was asked to predict the next banking crisis in 2023, I punted. I accepted the speaking engagement but failed to predict the future. 

I must have been a fool.

Predictions are high currency. I consistently see the most readership, the most listenership, and the biggest crowds for those who are known to predict, rightly or wrongly. Part is that the predictors are good speakers and writers. They are asked so often to do it, they glide across the stage like ballroom dancers.

I gave predictions another shot, this time at a smaller, more intimate event for customers of Atlantic Community Bankers' Bank. I aptly named it Predictapalooza. For a fun twist and to engage the audience, we handed out fake tomatoes for people to throw at me if they disagreed with my predictions. Spoiler: the biggest barrage came when I predicted that the dollar would no longer be the world's reserve currency.

Nobody has asked me to do Predictapalooza again. Maybe because I didn't say it with the certainty and authority that the predictors do. I delivered my predictions not with gravitas but with humor. I still have not figured out how the predictors can be so certain.

This makes it more difficult for bankers to predict the direction of their industry, their markets, and their bank. Go to a conference and you are told with high confidence that this thing or that thing will happen. And that bankers must do this or do that. I spoke with industry veteran Charles Potts about this recently. That the barrage of banking and fintech prognostications has made bankers so skeptical it is resulting in inaction, rather than measured action.

As advisors, bankers want to hear from us about the direction of the industry, and how other banks are successfully navigating the current and emerging environment. We owe it to them to be as knowledgeable as possible and apply that knowledge to our clients' situation. By no means, however, are we certain.

And I would be skeptical of anyone who claims they are.

So far the dollar remains the world's reserve currency. And by making US Treasuries the collateral behind stablecoins, the Genius Act will make my prediction even less likely.

~ Jeff

Bonus coverage: A great AI use case is to evaluate past predictions. I did so below regarding Payments, Branches, and Cryptocurrencies. Remember those bold predictions?

I also did a "where are they now" for Best of Show winners from Finovate in 2015. Ten years ago. Only four of the eight are active and operational. The other four have been either acquired or shut down. And these were the "best."

Predictions on Payments

Five-to-ten years ago (roughly 2015-2020), banking experts and industry reports made several key predictions about the future of payments. Many of these revolved around the rise of financial technology (FinTech) and digital transformation.

Here is a summary of some of those predictions, categorized as proven true or false:

 

Predictions That Have Proven Largely True

 

Prediction	Outcome & Current Reality	Source Examples (General)
Increased Disruption from FinTechs in Payments	FinTechs have significantly disrupted the payments sector, particularly with peer-to-peer (P2P) payments and non-bank money transfers, forcing traditional banks to adapt or partner.	PwC's Blurred lines: How FinTech is shaping Financial Services (2016); McKinsey's analysis of FinTech growth.
Growth of Mobile and Digital Wallets	Digital wallets have become the leading online payment method in many regions, and their adoption for in-person payments has also increased substantially, displacing cash.	Federal Reserve's Diary of Consumer Payment Choice; Worldpay's Global Payments Report series.
Decline in Cash Usage (at least in many economies)	Non-cash transactions, particularly electronic transactions, have continued to grow at a faster rate than overall payments revenue, indicating a clear move away from cash.	McKinsey's On the cusp of the next payments era; Capgemini's World Payments Report.
Momentum for Faster/Instant Payments	There has been a significant push and implementation of instant payment systems globally (e.g., the EU's SEPA Instant Credit Transfer, the US's FedNow, India's UPI). Consumers and businesses increasingly demand faster payments.	American Banker's 2015 Predictions Revisited (discusses momentum for a faster payments system); Treasury's The Future of Money and Payments.
Increased Focus on Customer Centricity	The FinTech revolution has driven banks and payments providers to focus intensely on improving the customer experience (convenience, accessibility, tailored products) to compete with tech-savvy new entrants.	PwC's Blurred lines: How FinTech is shaping Financial Services.

 

Predictions That Have Proven Largely False or Delayed

Prediction	Outcome & Current Reality	Source Examples (General)
Widespread Adoption of Blockchain/DLT for Core Payments	While Distributed Ledger Technology (DLT) and blockchain were heavily touted as the immediate future for core payment system infrastructure (especially cross-border), their widespread, day-to-day use for large-scale, primary payment systems has been slower than predicted. Instant payment systems (like FedNow and SEPA Instant) were often built on established rail upgrades, not DLT.	KPMG's 10 predictions for the future of payments (2020, still predicting DLT as the primary means); Bank for International Settlements (BIS) papers discussing DLT and central bank initiatives.
Disappearance of Cash in the U.S.	While cash usage has declined in the U.S. compared to its global counterparts, it has proven resilient, especially among certain demographics and for small-dollar transactions. The prediction of cash "plummeting" in the near term has not fully materialized.	Federal Reserve's Diary of Consumer Payment Choice (notes cash's resilient "floor of support" in North America); Forrester predictions cited in Payments Dive (often predicting a plummet that has not fully occurred).
Banks' Immediate Loss of Most of Their Payments Business	While FinTechs have captured market share, the prediction that a very large percentage of traditional banking's business would be lost to FinTechs by 2020 often overstated the pace. Banks have largely retained their core role by either modernizing, acquiring FinTechs, or forming partnerships.	PwC's Blurred lines: How FinTech is shaping Financial Services (2016, predicted "More than 20% of FS business is at risk to FinTechs by 2020").

---

Source Citation Note:

Sources for these predictions and outcomes are generally found in industry reports and analysis published by major consulting firms, such as McKinsey & Company, PwC, Capgemini, and KPMG, as well as reports from central banks and regulatory bodies like the Federal Reserve and the Bank for International Settlements (BIS).

• For a specific example of a prediction review: The American Banker article 2015 Predictions Revisited: What the Seers Got Right and Wrong is an example of an industry publication specifically tracking and reviewing past predictions.

• For a specific example of early predictions on disruption: PwC's Blurred lines: How FinTech is shaping Financial Services (2016) heavily emphasized the risk to incumbents and the disruption in payments by 2020.

• For a specific example of ongoing payment trends: The Federal Reserve's Diary of Consumer Payment Choice reports and other studies provide concrete data on shifts in cash vs. digital payments in the US.

 

Predictions on Branches 

This is a fascinating look back at the rapidly evolving banking landscape. Based on reports and analyses from the 2015-2020 period, banking experts made several predictions about the future of bank branches.

Here is a summary of expert predictions from five to ten years ago, categorized by what has proven generally true and what has proven generally false or more nuanced, along with representative sources.

---

 

Predictions That Have Proven Generally True

Prediction	Supporting Evidence in Practice (True)	Source Examples (2015-2020 Context)
Net Decline in Physical Branch Count	The overall number of physical bank branches in the U.S. has continued to decline year-over-year, with the rate of closures often increasing in the mid-to-late 2010s, and accelerating due to the pandemic.	A 2018 analysis noted a net loss of over 5,400 bank branches since 2012, with the closure rate nearly doubling between 2015 and 2018. The NCRC noted a loss of over 13,400 branches since 2008. (Self Financial, NCRC)
Shift from Transactional to Advisory Role	Branches are increasingly being repurposed from high-volume transaction centers (like teller lines) to centers for complex advice, sales, and relationship building (e.g., mortgages, wealth management).	A 2021 review noted that the move toward branches focusing on an "advisory focus" rather than a "transaction focus" was a confirmed trend in the industry. (The Financial Brand)
Increased Integration of In-Branch Technology	New and remodeled branches feature more self-service options, such as Interactive Teller Machines (ITMs) and digital signage, replacing some of the functions of traditional tellers.	Experts noted the acceleration of "migration of transactions to self-service... including leveraging interactive teller machines, or ITMs." (BAI via Coconut Software)
Reduced Branch Size and Optimized Footprint	Banks began reducing the square footage of new and remodeled branches to lower real estate costs, preferring smaller, more efficient, and strategically located sites.	Data shows that the average new branch location for the largest banks had decreased its square footage significantly (e.g., 46% reduction from 2000 to 2023 YTD), moving away from large strip-center or first-floor office branches. (Cushman & Wakefield, though the data extends past 2020, the trend started earlier).

---

 

Predictions That Have Proven Generally False or More Nuanced

Prediction	Supporting Evidence in Practice (False/Nuanced)	Source Examples (2015-2020 Context)
"The Death of the Branch" (Complete Extinction)	While closures have been significant, the prediction that all or nearly all U.S. branches would close by a near-term date (e.g., by 2030 or 2034) has not materialized.	Reports around 2020 and later surveys consistently show that a large majority of consumers (e.g., 94% in a 2020 study, 72% in a 2023 survey) still use a bank with physical branches, value having a nearby location, and prefer in-person for complex activities like loan selection or problem resolution. (WBR Insights/Coconut Software, TD Bank via The Financial Brand)
Massive Decline in Customer Reliance on Physical Banking	While digital use surged, the physical branch remains important for a substantial portion of the population and specific interactions.	Even with the rise of digital tools accelerated by the pandemic, a significant portion of consumers (e.g., 84% in a 2023 survey) reported visiting a branch in the past year, and many (41-52%) prefer in-branch interaction for complex issues or financial planning. (WBR Insights/Coconut Software, TD Bank via The Financial Brand)
Smaller Banks Will Quickly Disappear Due to Branch Costs	Community banks have shown greater resilience in performance than some predictions, leveraging their traditional relationship model.	A 2020 FDIC study noted that community banks proved resilient after the 2008 financial crisis, showing faster growth in return on assets, stronger asset quality, and higher loan growth rates relative to non-community banks in the 2012-2019 period. (FDIC)

---

Source Citations and Context

The predictions were often driven by the dual trends of increasing mobile adoption and the post-financial crisis need for banks to cut costs and consolidate, leading to a focus on "optimization."

• Net Decline & Branch Redefinition: The trend of bank closures and the re-imagining of the remaining branches into "advisory hubs" were commonly cited and have been consistently supported by FDIC data and industry analysis (e.g., Self Financial, NCRC, The Financial Brand).¹

• The "Death of the Branch" Narrative: While sensationalist predictions of near-term zero branches circulated, the persistence of consumer demand for physical locations for certain needs (especially advice and problem resolution) has demonstrated a more nuanced, "blended model" where digital and physical channels coexist (WBR Insights/Coconut Software, Cushman & Wakefield).

 

Predictions on Cryptocurrency 

During the period of approximately five to ten years ago (roughly 2015-2020), banking experts and financial authorities often expressed a mix of skepticism and cautious optimism regarding cryptocurrencies, particularly Bitcoin. Their predictions have played out in varied ways.

Here is a summary of some of the predictions that have proven true and those that have proven false, along with sources that reflect the sentiment of that era:

 

Predictions Proven True

Prediction	Outcome	Source Reference
Extreme Volatility and Speculative Bubble	Cryptocurrencies, especially Bitcoin, have demonstrated extreme price volatility with significant spikes and slumps, confirming their nature as highly speculative investments rather than stable currencies for exchange.	Bank for International Settlements (BIS) 2018; Brookings Institution (Prasad, 2021); European Central Bank (ECB) (2022)
Use in Illicit Activities	The anonymity offered by early cryptocurrency transactions made them the preferred medium for illicit activities, including fraud, scams, and ransomware payments.	Brookings Institution (Prasad, 2021); Chainalysis (cited in MDPI, 2023)
High Transaction Costs/Scalability Issues (for early Bitcoin)	As Bitcoin grew in popularity, issues like slow transaction times and high fees became prominent, making it cumbersome for daily use as a medium of exchange.	Brookings Institution (Prasad, 2021)
Importance of Underlying Blockchain Technology	While skeptical of the currency itself, many experts acknowledged that the underlying distributed ledger technology (DLT), or blockchain, was ingenious and had potential to transform payment services and financial settlement processes.	Bank for International Settlements (BIS) 2018; International Monetary Fund (IMF) (Lagarde, 2018)

 

Predictions Proven False or Partially False

Prediction	Outcome	Source Reference
Crypto will Go to Zero / It's a "Ponzi Scheme"	While some prominent figures predicted Bitcoin's value would crash to zero (e.g., Nobel laureate Eugene Fama's prediction), the overall cryptocurrency market cap has grown dramatically (reaching over $2.5 trillion in late 2021), and Bitcoin has established itself as a recognized, though volatile, asset class.	Chicago Booth (Fama, cited in Capitalisn't); MDPI (Prasad, 2021); ECB (2022)
Banks Will Be Displaced by Decentralized Systems	While there has been disruption, traditional banking and central banks have not been replaced. Instead, financial institutions have largely remained on the sidelines initially but are now increasingly exploring and adopting the underlying technology and, in some cases, offering crypto-related services. Central banks are also exploring Central Bank Digital Currencies (CBDCs).	Bank for International Settlements (BIS) 2018; Brookings Institution (Prasad, 2021); ECB (2022)
Lack of "Legitimacy" as a Financial Instrument	Initial skepticism labeled Bitcoin as merely a tool for money laundering. However, some major financial institutions and investors (like BlackRock's Larry Fink, who previously called it a money-laundering index) have since reversed their positions, calling it a "legitimate financial instrument" and seeking to incorporate it into mainstream finance (e.g., through ETFs).	Chicago Booth (Fink, cited in Capitalisn't)

Citations and Further Reading:

• Bank for International Settlements (BIS). V. Cryptocurrencies: looking beyond the hype. Annual Report 2018, Chapter V (Published in June 2018).¹ (Reflects expert caution on scalability, efficiency, and role as money.)

• Brookings Institution. Prasad, Eswar. Bitcoin: The brutal truths revealed. (Published June 16, 2021).² (Discusses volatility, illicit use, and scalability issues.)

• Chicago Booth / Capitalisn't. Why This Nobel Economist Thinks Bitcoin Is Going to Zero. (Published January 30, 2025 - but discusses prior Fama and Fink predictions from earlier years).³ (Cites early high-profile skepticism that proved largely false on the "zero" price point.)

• European Central Bank (ECB). Decrypting financial stability risks in crypto-asset markets. Financial Stability Review May 2022, Box B. (Reflects the view that crypto's size and complexity grew significantly since late 2020, and highlights high volatility.)⁴

• International Monetary Fund (IMF). Lagarde, Christine. The Future of Currency in a Digital World. Finance & Development, Vol. 55, No. 2. (Published June 2018). (Reflects a more measured expert view, advising to "keep an open mind... not only because of the risks they pose, but also because of their potential.")

 

Source: Google Gemini AI

 

Finovate Fall 2015 Best of Show 

Prompt: ### FinovateFall 2015 Best of Show Winners and Their Current Status (as of October 2025)

 

The FinovateFall 2015 conference, held September 15-16, 2015, in New York City, featured 70 live fintech demos. Attendees voted for the Best of Show winners based on innovation and demo quality. The eight winners were announced on September 17, 2015, in alphabetical order. Below is a table summarizing each company, a brief recap of their demoed technology, and their status today. Many have evolved, been acquired, or pivoted significantly over the past decade.

 

|---------------|---------------------------------------------------|-----------------------|

| **Blockstack.io** | Private, hosted blockchain platform for financial services and enterprises to build apps via APIs and SDKs. | Acquired by Digital Asset in 2015 for blockchain settlement tools; the original entity is no longer active. (Note: This is distinct from the later Stacks blockchain project, which rebranded from Blockstack in 2021.) |

| **Dyme**     | Text-messaging-based savings tool to help users build habits and fund goals in real-time. | Shut down; the San Francisco-based company (founded 2014) ceased operations after participating in accelerators like Bank Innovation INV. (A separate, unrelated Dutch fintech named Dyme, focused on AI savings apps, was acquired by RISK in 2024.) |

| **Dynamics** | Programmable payment cards with Stripe, EMV, and NFC interfaces for enhanced security and functionality. | Active and operational; headquartered in Pittsburgh, PA, it specializes in battery-powered interactive cards (e.g., Wallet Card™) and partners with Mastercard, JCB, and banks like Emirates NBD for connected payment solutions. |

| **Finanteq** | SuperWallet app integrating m-commerce, remote services, and mobile banking for banks. | Active; Polish fintech (Lublin-based, founded 2014) with 100+ employees, now part of eLeader Group. Offers mobile banking platforms, ranked among top Polish fintechs by Deloitte, and publishes on 2025 trends like BNPL and cybersecurity. |

| **Hedgeable** | Digital wealth management platform with active, gamified investing for millennials. | Shut down; New York-based robo-advisor (founded 2009, ~$80M AUM in 2018) terminated services and deregistered with the SEC in August 2018 to pivot toward blockchain tech via a spin-off (Hydrogen). |

| **HelloWallet** | Retirement Explorer tool for employees to model retirement outcomes and optimize benefits. | Active; Washington, DC-based (founded 2009), acquired by KeyBank (undisclosed date). Now a KeyBank company offering personalized financial guidance via app, integrated with employer benefits and partners like Vanguard. |

| **SaleMove** | Engagement platform with OmniCall for face-to-face-like live interactions between online consumers and businesses. | Active (rebranded); New York-based (founded 2008), rebranded to Glia in 2020. Provides unified customer interaction management (messaging, video, AI) for financial services, serving banks, credit unions, and insurers. |

| **Soundpays** | Ultrasonic/sonic waveform recognition for app-based engagement in noisy environments (e.g., payments/proximity marketing). | Active; Toronto-based (founded 2015), focuses on inaudible soundwave tech for real-time mobile engagement. Recent activations include Houston Texans NFL partnership and app launches like @The Lightshow for fan experiences. |

 

Source: Grok AI

Bank CEOs Most Pressing Issues: Hear From the Experts

Imagine stepping into the breach to moderate a CEO panel on the burning issues keeping bankers awake—intrigued yet? I had my hunches about their top concerns, but I wanted greater precision. So, we took action: the trade association polled its membership, while I tapped our content email list. Despite the challenge of coaxing responses, we crafted a single multiple-choice question, letting respondents pick their top three issues. The results? They’re revealed below—surprised?

Forget my lengthy take on the top four burning issues—Funding Strategies, Personnel Recruitment and Development, Customer Experience, and AI/Fintech Integration! Instead, I teamed up with industry insiders and experts to set the stage before turning the tables on attendees to have their roundtable takes.

Before I summarize our expert commentary on each hot topic, first meet our subject experts (SMEs):

Summary of SME Remarks

• Bank Funding Strategies and Demographic Shifts: Neil Stanley discussed evolving bank funding strategies, the impact of changing depositor demographics, and actionable approaches for attracting and retaining deposits in a competitive environment, with follow-up questions on engaging younger depositors.

• Evolving Funding Strategies: Neil explained that traditional distinctions between savers and investors have blurred, with more people viewing themselves as investors due to increased access to investment products and technology. He emphasized that banks now compete directly with U.S. Treasury products and money market accounts, and must adapt by offering more than just low interest rates to attract deposits.
• Challenges with Traditional Approaches: Neil highlighted that relying on static rate sheets, frequent CD specials, and ad hoc pricing is outdated. He recommended banks move towards hybrid deposit products, such as companion accounts, and implement a sequential sales process similar to commercial lending to better serve different customer segments: sleepers, the curious, and shoppers.
• Hybrid Deposit Products and Data Insights: Neil advised banks to introduce companion accounts, where new CD customers qualify for high-yield savings accounts, to attract both shoppers and curious customers. He also suggested leveraging data insights to identify single-service CD customers and broaden their relationships by offering additional products.
• Addressing Aging Depositor Base: In response a question about the increasing average age of depositors, Neil noted that this trend reflects broader societal aging and the wealth concentration among baby boomers. He recommended not neglecting older customers, but also suggested banks offer efficient, reward-based checking programs and digital wallet integration to appeal to younger generations who value convenience and efficiency over traditional community banking.

• Personnel Recruitment and Development in Community Banking: Amy Vieney from People's Security Bank and Trust addressed the challenges of talent recruitment and development in community banks, focusing on succession planning, generational differences, and the balance between hiring externally and developing internal talent, with the audience prompting a discussion on the pros and cons of each approach.

• Succession Planning and Leadership Development: Amy emphasized the critical need for intentional staff and leadership development, noting that many community banks face a talent gap as long-tenured employees near retirement and younger generations have different workplace expectations. She described her bank's implementation of structured leadership development programs, including partnerships with third parties to build a pipeline of future leaders.
• Generational Workforce Challenges: Amy discussed the conflicting dynamics between a shrinking baby boomer workforce and high turnover among Gen Z and Millennials. She highlighted the importance of adapting leadership and development strategies to meet the expectations of newer generations, who prioritize flexibility, technology, and career growth.
• Balancing Internal Development and External Hiring: Prompted by a question, Amy outlined the advantages of hiring externally, such as bringing in fresh perspectives and filling urgent skill gaps, but noted higher costs and potential cultural fit issues. She contrasted this with internal development, which fosters cultural continuity and long-term loyalty but requires significant resources and time to build effective programs.
• Strategic Importance of Development Programs: Amy stressed that leadership development and succession planning should be viewed as business strategies rather than HR initiatives. She argued that investing in people secures institutional culture, strengthens customer loyalty, and ensures long-term organizational stability, especially in the face of industry consolidation and technological change.

• Enhancing Customer Experience in Community Banks: Tara Brady from Provident Bank explored the complexities of delivering exceptional customer experiences in community banking, focusing on generational expectations, the impact of technology and fraud, and the importance of employee empowerment, with further discussion around relevant KPIs and strategies.

• Changing Customer Expectations: Tara described how customers now expect immediate, accurate, and consistent service, influenced by social media, AI, and the prevalence of fraud. She noted that younger generations are not necessarily attracted by traditional banking rewards or branch access, but instead seek financial education and security.
• Financial Education and Early Engagement: Tara shared findings from internal and market studies showing that younger customers often lack financial education and rely on parents for guidance. She emphasized the need for banks to engage with potential customers earlier, ideally before college, and to provide accessible educational resources for both students and parents.
• Fraud and Trust Issues: Tara highlighted the growing challenge of fraud, with customers frequently unsure about whom to trust. She stressed the importance of proactive fraud education and support, as well as clear communication about protections like FDIC insurance, to build trust with both younger and older customers.
• Employee Empowerment and Customer Support: Tara advocated for empowering employees with tools and training to address the needs of diverse customer segments, particularly younger customers who value being heard and supported. She recommended active listening, tailored guidance, and upfront fraud conversations as key strategies.
• Measuring Customer Experience: In response to an audience question, Tara recommended using customer effort score, customer lifetime loyalty, and wallet share as key performance indicators, rather than relying solely on Net Promoter Score (NPS), to more accurately assess and improve the customer experience.

• Fintech and Artificial Intelligence Integration in Banking: Shea Gabrielleschi from Hartman Executive Advisors, provided an overview of the current state and best practices for integrating fintech and AI in banking, addressing operational efficiencies, data strategy, security concerns, and the importance of proactive adoption, with questions from attendees on AI tools and data privacy.

• AI Adoption and Strategic Policy: Shea explained that AI is already present in banks, whether formally adopted or not, and advised against trying to ban or ignore it. Instead, banks should develop policies aligned with strategic goals and governance, and begin structured adoption to avoid security risks from unsanctioned use.
• Operational Efficiency and Early Use Cases: Shea noted that most banks are focusing initial AI investments on operational efficiency, such as automating back-office tasks, drafting documents, and searching internal files. Tools like Microsoft Copilot are being piloted to safely introduce large language models within secure environments.
• Data Strategy and Vendor Integration: Shea emphasized the importance of banks taking ownership of their data to enable effective integration with fintech and AI tools. He advised banks to negotiate for better data access in core platform contracts and to organize data for secure, efficient use by third-party vendors.
• Security and Privacy in AI Tools: In response to audience questions, Shea clarified that tools like Microsoft Copilot keep data within the bank's secure environment and do not use customer inputs to train global models. He contrasted this with public AI models and recommended using business-grade, secure AI solutions.
• Leadership and Ongoing Learning: Shea encouraged bank leaders to personally experiment with AI tools to build familiarity and to foster a collaborative approach to AI adoption. He stressed that no one is an expert yet, and that ongoing peer learning and adaptation are essential as the technology and regulatory landscape evolve.

Reader to-do's:

• Funding Strategy Product Enhancement: Evaluate and consider implementing a hybrid deposit product (companion account) to attract new money and broaden relationships with single-service CD customers.
• Leadership Development Program: Engage with outside providers to launch structured leadership development journeys for new leaders, aspiring leaders, and high potentials within the organization.
• Customer Education Initiatives: Develop and offer educational resources and webinars targeted at parents of students and students to address gaps in financial education and support early engagement with banking services.
• AI and Data Strategy: Review and update core platform contracts to ensure greater ownership and accessibility of bank data for effective integration with AI and fintech tools.

A big thank you to our SMEs and I hope you can benefit from the discussions our bank CEOs enjoyed while discussing their and our most pressing issues.

~ Jeff

Guest Post: Financial Markets and Economic Update Third Quarter 2025

My third quarter started off with ten wonderful days in France- Paris, Noveant-Corny, and Mont Saint Michel.  I always said I didn’t want to go up into the Eiffel Tower, but this time I went to the second level, which was high enough for me.  The view is astounding.  The Notre Dame Cathedral is glorious once again, so clean, so beautiful!  We went to Mont Saint Michel off the coast of Normandy and to see the GIs Association, who welcomed our eighth visit since 2013 to spend time with them as they honor my Uncle Stephen and the men of the 5^th Infantry Division who fought there for their freedom in 1944.

We went to Atlantic City for two days but were chased by the hurricane at sea with rip tide risks, rough seas, and rain coming inland.  I’ll end the quarter with a trip to Rhode Island.

Stocks continue their upward climb.  Bonds are rallying despite the bond vigilantes’ best efforts.  The Phillies clinched the National League East for a second consecutive year last week and our hopes are alive again.  And on Sunday, the Eagles pulled off another comeback miracle to beat the Rams as, with two seconds left, Jordan Davis blocked a field goal, picked up the ball, and ran down the field to score a touchdown.  OMG!  As Merrill screamed, “Game Over!”

The Fed Lowers Rates- Finally!

Well, they finally did it!  We got a measly 25 basis point cut in the Fed Funds rate to 4.25% and no relief from QT liquidating of bonds, especially MBSs.  We are not much closer to neutral today than we were yesterday.  Some economists estimate the neutral rate to be 2.50% to 3.00%.  Adding to my frustration is the fact that the Bureau of Labor Statistics announced their annual payrolls revision for April, 2024 to March, 2025 of -911,000; 2024’s number was equally surprising and disappointing at -818,000.  They blame the small business birth-death ratio adjustment, yet they never seem to make any changes.  I’ve been writing about this for years!  Instead of average payroll growth of 146,000 per month during the revision period, we now have 71,000 per month.  Payrolls have gotten worse since then, with August adding only 22,000.  June’s number was revised to a negative number, or loss of jobs.  And the Fed gives us 25 basis points?  Last September, they cut 50 basis points when employment was not as dire.

Chairman Powell gave his obligatory press conference after the FOMC decision on September 17^th.  The statement he read was seemingly out of a textbook, with: dual mandates…we work for the American people…the rate cut was for “risk management” purposes…we are data dependent (backward looking)…we are well positioned, we were right to wait and see how tariffs, inflation, and the labor market evolved.  No, I’m sorry.  You were not right.  Are you and your FOMC members not embarrassed by your GDP projections of less than 2% for years?  Are you not embarrassed that you have not reached your PCE inflation target of 2% for the past five years and won’t achieve it, according to your own projections, for the next two years+?

And now I have a new goal- to avoid watching Powell’s press conferences for the remainder of his term.  I will not listen to his double speak, textbook excerpts, and refusal to acknowledge that reporters’ questions raise good points and deserve answers.  So, avoiding these press conferences will make my life simpler.  I can read about it later.    

Some of My Favorite Economic Indicators

Leading Economic Indicators (LEI)- This Conference Board indicator continues to slip, with August at -.5%, July revised +.1%, June -.3%, and May unchanged.  The Board’s recession signal was triggered in May and again in August.  For 35 of the last 39 months, the index has declined.  (Exceptions were a tiny rise in July, 2025, and unchanged readings in March, 2024, November, 2024, and May, 2025).  There used to be a time that, when the LEI was negative for over 6 consecutive months, recession would follow 6 to 9 months later.

Real GDP bounced back to +3.3% in 2Q25, following -.5% in 1Q25 with the tariffs/imports/inventories unusual activity, and +2.4% in 4Q24.  The latest Atlanta Fed GDPNow estimate for 3Q25 is +3.3%.  Tariffs can help create a diversified industrial economy which brings back manufacturing production that left the US over the years.  Increased investment in our country will lead to more domestic production, a stronger dollar, and lower inflation/lower rates.  Artificial intelligence has the potential to increase productivity, improving GDP while keeping inflation in check.   One note about headline GDP: it is masking the fact that real final sales have slipped to +1.9% in 1Q25 and 2Q25, following +2.9% in 4Q24.

Productivity improved in 2Q25 to +3.3% from a dismal -1.8% in 1Q25.  Higher productivity affords companies the chance to increase production and keep costs in check, i.e. lower inflation.

Moody’s Beige Book Index- In a follow up to last quarter’s newsletter, the September index returned to zero from its negative readings of -16.7 in July and -5.6 in June.  The latest Beige Book showed six districts increasing modestly, including Philadelphia, two with no change, and four in decline.  Half the country is begging for lower rate relief…

Unemployment continues to get worse and the rate rose to 4.3% in August from 4.2% in July.  Payroll growth was anemic at +22,000.  Household growth was +288,000, showing a real dichotomy in the two surveys.  The pool of available workers (a Maestro favorite) is currently at 13.738 million.  The augmented rate derived from this pool rose to 7.8% in August from 7.6% in July.  Employer demand for hiring has definitely slowed; with the previously mentioned benchmark revisions, markets are uncertain and skeptical about having accurate employment measures.  Some mention the Quarterly Census of Employment and Wages, or “QCEW,” as a better source, but its release would not be timely enough.

The M2 money supply continues its upward growth trend, with August and July y-o-y at 4.8%, June +4.5%, and May and April +4.2%.  Milton Friedman would be pleased that M2 is increasing nearer to the growth rate of nominal GDP, after the Fed allowed M2 to outright decline for 15 months, from December, 2022 through February, 2024, for the first negative growth in M2 since the 1930s.

Housing- August was a dreary month for housing starts -8.5% and permits -2.3%.  Builders have not yet cut back on rate buydowns and price discounts/incentives as new home sales rose +20.5%, paring inventory to 7.4 months’ worth of sales from 9.0 months in July.  Mortgage rates have provided some relief recently, with the 30-year at 6.35%, which is clearly better than earlier this year.  But affordability is still holding back buyers.  Inventories for existing homes are still tight at 4.6 months’ worth of sales.  Mortgage rates above 6% are still not low enough to encourage widespread sales of existing homes with mortgages below 4%.

Inflation

The headline CPI for August was +2.9% y-o-y; the core rate was +3.1%.  Goods prices y-o-y were +1.5%, showing little effect from tariffs, while services were +3.6%.  PPI for August was +2.6% and the core was +2.8%.  PCE for July was 2.6% and the core was +2.9%.  PCE is the Fed’s preferred measure and their 2.0% targets are based on PCE.  Their targets are not based on CPI, which generally has run about .40% to .50% above PCE.  So consider 2.5% a target for CPI.  One of Powell’s few revelations from the recent press conference was that the Fed thinks that tariffs have added .30% to .40% to the inflation level so far.

When Will the Yield Curve be Normal, i.e. Positive?

The Fed’s restrictive stance has distorted the yield curve for several years now.  The curve was inverted for 26 months for the 10-year Treasury to the 2-year Treasury from July, 2022 to September, 2024;  the 10-year Treasury to the 3-month T-Bill was also inverted for 26 months from October, 2022 to December, 2024.  The usually historical prediction from both of these inversions for a recession never came true.  Since 2024, we’ve seen flat curves, parts of the curve steeper such as 10-year to 2-year Treasuries, and an inverted curve for 10-year to 3-month Treasuries before it became positive again with the September 25 basis point rate cut.  Bond vigilantes attacked again, right after the Fed announcement on September 17^th.  The 10-year Treasury was close to breaking 4% to the downside, but traders quickly sent it up 10 basis points.  In protest of something, I guess…

If the Fed continues to ease toward neutral, which could be 2.50% to 3.00%, long-term rates could decline, not in tandem , but about 50% of the move in short-term rates.  That would be “normal” and would help the cause of lower mortgage rates.  Slowing of QT in MBSs would help lower mortgage rates, too.  By the way, the historical average of the10-year Treasury to 3-month T-Bill spread is about 1.10%; for the past 10 years, it has been about .80%, pulled lower by years of low inflation prior to 2021.  Today, the spread is .19%

Happy Events

I mentioned our trip to Paris in July.  It is very special exploring that city.  And Mont Saint Michel!  I must admit, I really needed to catch my breath after climbing 300+ steps up to the Abbey.  What a glorious feeling it was to be at the top of this mountain.  Views are spectacular.  The feeling is very spiritual when thinking about the millions of people who have made this journey before us to the island and climbed this mountain.  Saint Michael, protect us!

I appreciate your support!  Thanks for reading!  DLJ 09/24/25

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy recently retired from Penn Community Bank where she worked since 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

Disclaimer: This publication is provided to you solely for educational and entertainment purposes.  The information contained herein is based on sources believed to be reliable but is not represented to be complete and its accuracy is not guaranteed.  The expressed opinions, views, and estimates are those of the author as of this date and are subject to change without notice.  The author cannot provide investment advice but welcomes your comments.

The Valuable Bank Customer

Over the past two weeks I taught at two separate banking schools. What value do I get from teaching at banking schools? Learning. So often I am trapped with bank executives that carry career-long paradigms with them. Some are beneficial, such as knowing when you should say no to a loan, even one that meets your Debt Service Coverage Ratio (DSCR) hurdle. Some paradigms, however, become outdated because of our changing industry. 

Such is the case for our funding strategy paradigms.

But bankers that are newer to the industry carry no such paradigms. And I was interested to hear how their bank is navigating the challenging deposit environment when they compete with names such as Capital One and Sofi Bank, both of which have much higher-yielding assets than the local community bank and therefore can pay more for deposits.   

I wrote about this extensively in my book, Squared Away-How Can Bankers Succeed as Economic First Responders. Specifically in Chapter 10, The Hot Rate Stalemate. In that chapter, I distinguished between Store of Value versus Accumulation Accounts. One was price sensitive (Accumulation), the other not so much. They key is to have a blend that will deliver a superior cost of deposits. 

This is where the back and forth with students was valuable. The bankers who specifically dealt with deposit customers, either retail or business, discussed the challenges of offering so much less than the Capital One's of the world. Here is an example of what I wrote on the board:

Question #1: What is the value of a relationship? 

Does a customer value the relationship manager and the bank, the branch location, the customer experience, the work you do in the customer's community, and the fact that you lend the vast majority of deposit dollars into the customer's neighbor's home or the local business? 

I think they would, if it is well-positioned, visible, and meaningful to your customer and his/her community. The community bank could do a far better job at positioning the value of your bank beyond price.  Your customers make premium pricing decisions almost daily. Why not for you? 

I don't think, however, that the difference a customer will pay to bank with you versus a competitor is significant. The example above shows a 50 basis points rate difference between Capital One and you, or $500 annually for an account with an average balance of $100,000.  That puts the value of your relationship at 50 bps, which is good except that the average direct operating expenses to average deposits in the hundreds of branches that my firm measures is 99 bps, an expense a branchless bank does not have. Somewhat offsetting this disparity is the average of 35 bps of fee income to average deposits in branches.

Question #2: Is the customer price sensitive in his or her specific account? 

The answer to this question is rarely known but should be discovered during the account opening process (know your customer should be more than a compliance exercise). If not known during the account opening process, perhaps technology could answer this question based on how it is used, or some good old gumshoe investigation by the relationship manager. 

In the above example, Capital One hypothetically thinks the customer is price sensitive in every account. We intuitively know this to be untrue. I have no idea what I'm earning in my checking account or the account that I use to accumulate money for taxes and my next vacation. But if the Money Market Account was my family emergency fund, I would likely want a competitive rate. Community banks should know what's what in terms of what an account is for and what the customer's price sensitivity is.

The above customer collects 2.47% in interest from their community bank. Assume this customer pays 35 bps of fees, and the net cost to the bank is 2.12%. The transfer price on this deposit relationship, assuming a four-year duration is 3.85%, driving net revenue of 1.73% (3.85%-2.12%). This would be a much more profitable relationship than just getting the $100,000 Money Market Account at a 10 bps spread (3.85%-3.75%) because that is what Capital One is paying. 

This math should drive funding strategies into the future. We can no longer rely on Rip Van Winkle customers accepting 250 bps less than branchless banks because the customer is not paying attention to what you are paying them in their price-sensitive accounts. It erodes trust, is easier to uncover, and easy to switch to a competitor. There is a reason why FDIC-insured banks lost $900 billion in deposits during the last Fed tightening and money market mutual funds gained $900 billion.

Our cost of funds should be managed by mix of funds. 

Few of my banking students knew this math. Shouldn't all of them know it? For my students, they know it now.

 

~ Jeff