Image Issues Intensifying
The industry’s image is dreadful. Industry “experts” such as Noriel Rubini, appear frequently in the media proclaiming that the banks are zombies, the industry is dead, and nationalization is mandated. When the press is not proclaiming the death of banking, it is presenting the stories of commercial customers who are excoriating their banks. For example, an article in Tuesday’s Wall Street Journal, “Small Businesses vs. Bailed-Out Banks” recounts how several business are fighting with their banks, basically accusing them of acting irresponsibly and causing their businesses irreparable harm. In today’s environment of government bailouts, it is not hard to make a bank look like a bad guy to consumers and businesses.
Monday’s Wall Street Journal featured yet another negative article about banks: “Bailed-Out Banks Face Probe Over Fee Hikes.” This article discusses how a number of banks that are receiving TARP-funds and/or are partially government owned are also increasing costs to their customers. For example, Citigroup is not just lending funds to consumers but “trying to entice customers to borrow at high rates.” Pacific Capital Bancorp, which offers tax-refund anticipation loans “typically have annual interest rates that exceed 100%.” A few weeks ago, banks were criticized for refusing to lend; now they are criticized for lending at too high an interest rate.
Bank Interests, Performance, and Needs Differ
The slant and distortions highlighted above are typical of what the industry is experiencing. Unfortunately, the banking industry has done a terrible job of explaining itself and, when it does, the comments made often seem defensive. One problem for the industry is that its interests are not uniform. The needs of the biggest banks often differ from those of regional and community players. While almost all banks are experience some credit problems, only a few banks are responsible for most of the industry’s poor 2008 performance.
FIC’s analysis of 2008 results for the banking industry shows that three mega-banks (out of over 8,000 FDIC insured banks in the U.S.) generated 41 percent of all charge-offs and held 36 percent of all non-performing loans. They also received about 55 percent of all TARP dollars. At the same time their C&I, commercial real estate, and SBA-lending decreased from the previous year. The banks that received the majority of government funds reduced their support of commercial businesses. Although largely unacknowledged by the media and unknown by most customers, it was the 8,000 other banks who took up the lending slack and increased their commercial lending activities in 2008, providing 76 percent of all C&I loans.
A Sunday New York Times column suggested that banks should return to being boring. By that, the writer meant that they needed to stick to traditional basics rather than focus on exotic areas. For example, the three largest banks held over $158 trillion of derivatives on their year-end books, almost 80 percent of the notional value of all derivatives held by banks. The good news is that most of the 8,000 banks have never been anything but boring, and that is a good thing. These banks left exotic instruments and rocket science-based structures to be pursued by a relative handful of banks.
Loyalty is Shifting
Can you honestly look at your bank’s recent performance and say that you deserve the loyalty of your customers? While some banks can answer that question positively, many, if not most, should not. Unfortunately, the critical stories in the media, while often written with some bias, also contain at least a kernel of truth and sometimes a lot more. Many banks have walked (or, in some cases, run) away from their customers during this crisis; others have pushed up rates and fees, resulting in the well-performing customer paying more to make up for the non-performers.
(There is a reason why credit unions are so well viewed by most of their customers and why so many banks are suffering from disrepute.)
The good news for the customer is that there are many other banks, in fact thousands of them, who have continued to focus on their customers’ needs. Instead of pitching themselves as Trusted Advisors, they acted like Trusted Advisors, providing counsel, understanding, and dollars when they were needed.
When this downturn ends, we believe the customer will be unforgiving toward those institutions that they believe took advantage of them or did not support them when they required help. Many community banks and credit unions can exploit their favored view in the customers’ eyes. Conversely, larger banks may have to work harder to demonstrate that they have been a customer advocate.
Right now is the time for senior management to consider where their bank sits along the loyalty spectrum and what steps need to be taken to maintain or rebuild customer loyalty. Banks that have experienced loyalty erosion should determine which customer segments are critical to their long-term growth, diagnose where they stand with those customers, and implement a granular program to rebuild loyalty with them now.
I’d love to hear your take on all of this. Feel free to send comments to the blog.
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