The Credit Brain, Equity Brain Split

The popular, (but very oversimplified, and inaccurate) view of neuroscience is that there are 2 sides to the brain. The Left Brain is logical, analytical, and detail oriented. The Right Brain is the creative, intuitive, and holistic side. The theory is that people use   each sides of their brain at different times. This theory also suggests that people can be more Left- or more Right-Brained.

There’s a similar divide in the brains of financial professionals: the Credit Brain and the Equity Brain.

The Credit Brain originates in lending where the primary concern is getting paid back. The goal of the Credit Brain is to protect against downside risk, avoid the loss of principal, seek out predictable cash flows, and capture your predictable returns. Credit Brains generate those predictable returns while attempting to control the losses. Success is achieved by constructing and utilizing models that ensure that few outcomes fall short of the expectation.

The Equity Brain is associated with growth and investing, and its primary concern is Capturing upside. The goal of the Equity Brain is to find the opportunities that drive accelerated, compounded, or even step-function growth, far more than your standard rate of return. Equity Brains seek undefined returns with a tolerance for risk, volatility, and loss of their principal. Success is achieved by making constrained bets across a diverse collection of opportunity areas; and when there is a winner, the winner must win BIG.

Credit Brains focus on the downside; Equity Brains focus on the upside.

Credit Brains are short-to-medium term oriented; Equity are more long-term oriented.

Credit Brains prioritize protecting their capital; Equity Brains, prioritize growth.

Credit Brains think “how do I not lose money?”; Equity Brains think “how big can this get?”

Banks are Credit Brain businesses.

Obviously.

They’re balance sheet businesses, focused on their ROA, ROE, and Efficiency Ratios. They take in deposits, make loans, and try to generate a NIM above the 3% industry benchmark. They understand risk above all else. That’s why community bank CEOs typically come from commercial lending. And it’s why the CFO is often the final decision maker in the organization.

The focus on risk can also prevent banks from driving growth. Growth itself is risky; just ask any regulator. Unfortunately for banks, they no longer compete in a Credit Brain world.

Banking is harder today. Competition for customers, deposits, loans, and other services that fuel the bank business model are under threat by challengers that play a different game. Disruptors armed with novel value propositions, business models, and scalability are each threatening parts of the bank’s balance sheet. Not only are they not afraid of growth, growth is their default stance. For banks to keep pace, they must also adopt a growth mindset.

The good news for community banks is that they’re being infiltrated by Equity Brains, and more so every day. Equity Brains are occupying roles in marketing, digital banking, and innovation.

They’re seeking partnerships with early stage fintechs, not expanding vendor relationships with their cores. They’re building capabilities, not buying technology. They’re trying to acquire customers, not just capture more deposits. They’re winning with payments, apps, and treasury services, not just loans. They’re finding new ways to add value, not trying to compete on rate alone. They’re building embedded finance and banking-as-a-service, not just running the old playbook.

They’re managing the business, not just managing the balance sheet.

The Credit Brain strategy of banking hinged on never taking too much of the wrong risks to ever blow yourself up. The Equity Brain strategy requires we don’t take too few risks so that we never grow. The magic comes when banks figure out how to operate both sides of their brains effectively, and in concert, to create compounding, lasting value.

The challenge for most banks will be figuring out how to kickstart the dormant side of the brain when the organization has been governed by the other for its entire history. Alloy Labs members are activating their Equity Brains more each day; spurred by collaboration occurring amongst Equity Brains across organizations, resulting in growing momentum and influence within each of their banks.

If you’re trying to change your bank’s approach, processes, way of thinking, and culture, you don’t have to go it alone, either. Get in contact with Alloy Labs.