The quote accompanying this article (“A lot of customers think it is easier to work with a small bank, but it really is not.”) repeats the comment of a business banker from a multi-billion-dollar community bank. Her job is to compete with the big banks and represent her bank as different from and superior in service and care to a big player (namely, Citibank, Chase, Bank of America, and any other bank that, comparatively, is big).
This banker suggests that customers continue to believe that smaller banks operate with a service advantage over larger players. While many customers believe that small means better, this perceived advantage may be quickly disappearing, particularly in the current higher-rate environment. Any service advantage is disappearing as bigger banks improve their offer and smaller banks fail to differentiate themselves effectively.
Most disturbing, increasingly bankers at smaller banks are expressing frustration with their institutions. While previously many bankers viewed representing a smaller bank as a competitive plus, internal challenges and improved execution by big banks have eliminated much of that benefit both for the banker and, more critically, the customer. If the banker at a smaller bank no longer believes he or she has something distinctive to sell, neither will the customer.
We have had the opportunity to work with bank clients that range in assets from the very low billions to a trillion dollars plus. Initially, when we worked with smaller banks we expected them to be fast moving in decision making, close knit in how they cooperated, and realistic about the local market. Unfortunately, in many cases we have been wrong on all counts.
Small May Not Mean Better for the Customer or the Shareholder
To our surprise, we have found that many small banks possess at least as much negative cultural and organizational baggage as larger banks.
Silos abound. Remarkably, internal organizational silos are as present at small banks as at large. Small banks cannot afford the internally-focused politics that historically have been a part of large bank culture. They cannot afford it, but still many employees spend significant time and energy in fortifying their silos. At the same time, the largest banks operate with senior managers who often emphasize the need to break down silos and insist on doing so.
Ironically, small banks may have more silos than their larger competitors. The best large banks have top managers who forcefully confront the silos. By the way, smaller banks should take some comfort in the fact that some large bank managers avoid this issue, hoping it will go away or take care of itself. It won’t.
Profitability and performance do not rule. Big banks are driven to make money and high returns; the marketplace and shareholders demand that of them. While smaller banks want to succeed, oftentimes other motives beyond profit are given priority. This may involve “serving the community” or “being a good corporate citizen.”
There is nothing wrong with these aims, but we have seen them get in the way of a consistent and disciplined approach to profitability and excellence. This may be good for the customer in the short term, but smaller banks may be deluding themselves concerning the importance and perceived value to customers of their “mission”. Customers want good service, excellent products, and, increasingly, 24/7 access. In a higher-rate environment, they also want competitive interest rates. A community focus, a strong local relationship, a branch manager knowing your name when you walk in the door may be worth a differential of about 25 basis points and little more. The discipline of achieving a higher ROE makes bankers tougher and more market-oriented.
Consistency and discipline are rare. At virtually all of our bank clients, we face the fact that consistency in approach across the geographic footprint is rare. That footprint can involve a limited section of America’s Midwest or all of Asia. Both small banks and large banks share the tendency to allow their bankers to define their jobs and activities: for example, if middle market bankers want to monitor accounts, that’s OK; if they want to sell (few bankers do), that’s fine too.
The bigger banks we have worked with have been more forceful in requiring (not suggesting but requiring) that their bankers follow a prescribed job definition. They decide on, develop, introduce, and execute a process that they believe will increase performance in the branch or small business or the middle market. Bankers either sign up for the new role, whatever it is, or exit. That approach is direct and relatively unbending.
At many smaller banks, “nuance” reigns. Each banker sees his or her job differently and, after an initial attempt to drive a consistent approach, management, in effect, gives in to the various internal pressure groups. Example: one bank launched an extensive job redesign initiative in its commercial banking area aimed at freeing relationship manager (RM) time for increased selling. Not only were the sales-related percentage increases low, but some RMs continue to remain distant from sales: “If the bank wants to sell more they need to hire more business developers. I handle the relationship, not new sales.”
The competitive set is ill-defined. Increasingly, the smaller bank’s competition is not another small bank. No matter where in the U.S. (or, for that matter, in the world) one operates, “new” non-local banks are entering the market, bringing with them increased sophistication and desire to win. Wachovia in California, North Fork and Commerce in New York City, WAMU in many locations, among others, have or will change the competitive landscape. Focusing on the bank next door as competition has some relevance but is too parochial given how competitive dynamics are changing.
Big Banks have improved and the customer knows it. Smaller banks used to cite Fleet or Banc One as the “gifts that kept on giving.” By this, they meant that these banks’ poor service and bad image helped to feed their prospect pool and positioned them as very good alternatives to larger players. No more. To a large extent, Bank of America, Chase, and many others have their act together in terms of product, segmentation, and market positioning. They represent tough competition that is getting tougher almost daily. The resources they can bring to a market or segment far exceeds what a community or regional bank can muster.
Concluding Thought
The management of smaller banks now face the most difficult competitive situation most have ever faced. Marketing and serving their customers and prospects with the same approach going forward as they have in the past will ultimately lead to reduced earnings and market share. In our next newsletter, we will outline some practical approaches these banks should consider in order to stave off the big players and secure their position with key targets.