A few weeks ago, I spoke at the Consumer Bankers Association’s annual small business conference. Bankers and financial services executives from the U.S. and beyond met to discuss their key issues and concerns. Reviewing some of the topics of discussion, both during and between sessions, provides insight into issues, priorities, and action steps for 2007 and beyond.
Lending issues dominate. Many of the sessions and discussions centered on lending. Yet, as we all know, most small business profitability results from deposits and not loans. Further, the loss of deposits or their shift to higher interest products has become a major issue for much of the industry. So, why did the bankers attending not put more focus on deposit-related issues?
At many banks, the small business area is run by lenders. At some of these banks, incentives and metrics are lending oriented, oftentimes — in part — as a result of internal silos. In many instances, the silos and traditional loan orientation have resulted in bankers at these institutions being unable to transition beyond being “loan jockeys” to becoming providers of solutions to the company, the owner, and the employees.
Times are changing, but change in banking occurs slowly. More bankers are focusing on deposits versus loans and a holistic emphasis rather than a product orientation. But the reality is that, today, lending continues to dominate the mind set and focus of most bankers. This continues to represent a growth opportunity for those players who pull together the resources of their banks.
Focus on product simplicity. More bankers are emphasizing the need to simplify their product offer. Increasingly, both the customer and the bank staff demand that. Most small businesses have relatively simply lending, deposit, and other needs. However, banks often seem to forget that, rather than creating a better product, the bells and whistles they add to their offers can lead to customer confusion and indecision. In addition, the bankers tasked with selling and servicing these products have become overwhelmed by the impact of product proliferation.
As Julie Curren of Harris Bank noted at the conference, product simplicity can enhance the customer experience and the bank’s bottom line. Harris’s research indicated that the customer’s interest in simplicity resulted in an opportunity for the bank to offer packaged solutions. A streamlined account opening process, product bundles aimed at a target’s lifecycle and/or industry, packages aimed at the owner and employees — all build off an emphasis on product simplicity.
Poor growth expectations. Cece Sutton of Wachovia began the meeting by discussing the outlook for retail banking in a talk appropriately subtitled, “From Nirvana to Normal.” While no one believes disaster looms, the easy money days are over.
Many of the bankers I spoke with at the conference, as well as our clients, expect 2007 to be a tough year. Certainly some of the recently reported third quarter results indicate that more disappointments are on the way. We have already written in earlier newsletters on why earnings growth will be slower.
The best response to a more challenging macro-environment includes focusing on the most attractive segments, increasing the sales effort, and improving incentives to target sales activities. Unfortunately, we heard from too many at the conference that their bank’s response to slower growth primarily involves cost reduction rather than rethinking how best to enhance the sales effort and sales productivity. Focusing on cost reduction represents the easy and mediocre path that too many take.
Strategic cost reduction makes a great deal of sense, but we do not see enough of that in the industry today. Strategic cost reduction results in salespersons focusing on selling to high priority and potential accounts. Other accounts are shifted to lower cost channels. Strategic cost reduction results in a team-oriented approach to client management whereby bankers focus on customer/target development and others handle administration and, frequently, underwriting. Banks emphasizing this level of thoughtfulness in reducing costs will outperform those pursing a less focused approach. Too frequently, cost reduction activities lack a philosophy or theme to guide them. The result is that, at least temporarily, costs may decline but at the same time, longer-term growth opportunities are being eroded. Cost reduction outside of the context of a strategy centered on how best to grow is a mistake.
Payments are becoming more critical to success with small businesses. While much of the discussion focused on loans, a CBA-sponsored report conducted by Barlow Research offered one of the high points of the program. This study emphasizes the need for banks to develop a payment strategy related to small business. Apparently, half of the banks surveyed stated that they operated with no compelling business model for payments.
Our experience confirms that smaller banks often operate without a coherent business-oriented payments strategy. Larger banks may put significant resources into this effort but, oftentimes, fail to leverage payments as a differentiator or appreciate its importance to priority segments. The net is that banks are underemphasizing the importance of payments to customers and the role payments can play in differentiating their bank from others.
Concluding Thoughts
Conference topics also included relationship management strategies, engaging the branch in the small business effort, streamlining the credit process, employee training, and incentives, among others. Of course, none of these are new topics, but they remain areas of critical importance to success. Recognizing their importance is one thing; developing solutions and gaining internal consensus behind them represent a bigger challenge. Ultimately, effective execution becomes the greatest hurdle. Our experience and the comments of attendees underscore the difficulty of doing so.