In past months, we have worked with banks, large and small, in the U.S., Europe, Asia, and Africa. When we assess our clients’ portfolios, no matter their geography or size, we often recognize one disturbing phenomenon: account misalignment is rampant.

 

 
The Phenomenon of Account Misalignment

It may be best to illustrate what we mean by a recent example. At one client, bank management has determined that the branch system should be selling and servicing all micro businesses (those with revenues below one million dollars).  The small business bankers’ responsibilities should focus on accounts from one to five million in revenues while the middle market area has responsibility for accounts above that cutoff.

 

However, the reality differs significantly from management’s expectations. Small business bankers state that more than half their accounts generate revenues less than one million dollars; an assessment of their portfolio supports their view. In fact, these bankers even expressed the view that micro accounts were part of their target market, despite management’s stated emphasis.

 

Similarly, we find that middle market portfolios are skewed toward small businesses, not mid-sized companies. At another client, close to 60 percent of the middle market portfolio consists of companies the bank defined as small businesses,

 

Misalignment: A Profit Destroyer

As banks fight for share, they are increasingly focused on showing strong growth rates and maintaining or improving return ratios. Yet account misalignment limits growth and erodes profitability.

 

Branch profitability analysis points to small business deposits as a key driver of profitability, but too many branches fail to emphasize this activity, instead focusing on the consumer segment with which they are most comfortable. Small business bankers focusing on micro accounts obviously are limiting their time on the larger small businesses that provide substantial cross-sell opportunities, resulting in lower per banker productivity and revenues. Similarly, middle market bankers are overlooking what should be high priority and high revenue targets. The issues are even more serious with the middle market bankers, given their historically higher compensation and internal status.

 

Why Misalignment Occurs

Too frequently we find that the situation within banks is as follows: the branch system is underutilized in serving companies; small business is handling micro accounts; middle market activities are dominated by small business customers. Why is this occurring?

 

As always, the buck stops with senior management. Either through ignorance or benign neglect, they have allowed misalignment to occur. Many banks have set internal rules of engagement (that is, which bank groups should handle which type of customers) but few consistently enforce those rules.

 

Furthermore, we are not exaggerating in saying that we have yet to meet a banker who willingly gives up part of his portfolio without a good incentive to do so (examples of two good reasons: fear of job loss or, more positively, higher compensation for doing so).

 

Misalignment occurs for one or more of three reasons: bankers do not trust others within their bank to handle certain accounts; bankers do not want to free up time; bank management has failed to provide small business and middle market bankers with a “growth path.”

 

First, trust. In many cases, we find that branches, while having been given the responsibility for the smallest businesses, simply do not have the time or capabilities to adequately handle these customers. For every ten banks that have pushed responsibility down to the branch level, we estimate that no more than two or three can actually perform effectively with the micro segment. Small business bankers are right to be skeptical about handing off responsibility to a branch staff that is overwhelmed and under-trained. In this instance, management has put the branches in a situation in which failure is likely.

 

Second, free time. Many bankers do not want to be able to sell. Whether in the U.S. or Europe, when we ask bankers how much time they spend selling, we seldom hear an estimate greater than 25-30 percent and, frequently, a much lower figure. Most bankers are account servicers not sales people, and they want and expect to remain in a service role.

 

Third, lack of a growth path. If a banker shifts 30-50 percent of accounts to another group, how is he or she going to replace them? “Calling more” is a simplistic answer. Most banks lack a well designed marketing/sales strategy that focuses on key segments, products, geographies, and a clear articulation of market positioning. Again, management has to step up to create a realistic growth path.

 

From the bankers’ perspective, the risks of realigning accounts often appears greater than misalignment, both to their customers (whom they fear will be poorly served) and to themselves (some of whom do not want to be “exposed” to a situation in which sales and executing an unclear strategy must become their dominant activity).

 

Addressing Misalignment

In our next newsletter, we will suggest some specific actions that bank management should take to resolve account misalignment. However, step one is recognizing the seriousness of the situation that exists at many banks and truly resolving to address it. Today, many banks make half-hearted attempts to resolve this issue, resulting in employees quickly falling back into old patterns in which half steps provide limited benefits to customers and the bank.

 

The mantra “misalignment destroys bank growth and profitability” should drive management resolve and actions.