More than ever, a significant portion of FIC’s work centers on issues related to internal bank conflicts and barriers to change. Instead of looking outward to define new market segments or vet new product opportunities, all too often bankers are trying to find a course through their own minefields. The fact is that unless and until these internal issues are addressed, a bank’s focus on its customers may be inadequate and certainly will be less effective than it should be. While it would be nice if these internal issues did not exist, it is far better to recognize and resolve them rather than ignore them, a situation that we have seen at many underperforming banks.

 

 

A slow growth environment serves to heighten the tendency for banks to look inward as managers act to protect their businesses and, not so incidentally, their jobs. Many of the areas of internal friction occur with topics related to organization and reporting lines, namely, “turf” related topics:

 

• Where should small business report, that is, retail or commercial?

 

• How is small business defined? Who is responsible for the microbusiness segment?

 

• How is the middle market defined and how firm is the line separating that segment and small business?

 

• Where does geographical responsibility begin and end? How should the bank balance geographic and functional responsibilities?

 

• How should the credit organization align versus the various businesses and where should credit groups report?

 

 

Again, the first step to resolution is to admit that a problem exists. Rather than wasting time and energy by trying to tap dance around the issue, banks are better off in the long term by giving each irritant/conflict the spotlight it deserves. But then, how can they be resolved?

 

1. Begin with a fact base, meaning determine the current situation and its pros and cons by reaching out to the various interest parties across the bank.
2. To the extent possible, quantify the potential revenue and cost impact of various options.
3. Look at competitors to assess if they provide any practices that your bank should emulate. That is not to suggest that just because bank x or y does something you should, but this assessment usually provides worthwhile insights.
4. Agree on a process for resolution. Banks are great at holding meeting after meeting, sometimes with little justification for doing so. Rather, try to begin the process by having the various parties agree on the information and analysis they require in order to make a decision and then deliver it to them.

 

 

By the way, we have views about each of the issues outlined in this newsletter. Usually…

 

• Small business should report to retail. Applying a commercial banking mentality to what is largely a retail business can add unnecessary complications and increase expenses. Moving forward, more banks will be trying to apply retail approaches to commercial banking rather than the reverse.

 

• The definition of small business continues to depend on revenue and credit requirements. Based on the bank’s size and focus the revenue cut off can range from $5 million up to $25 million.

 

• Microbusinesses need to be handled within the branch. However, most branches are ill prepared to sell and service these customers. This necessitates some type of cooperative arrangement between the branch system and the small business group, another reason it is often best for them to report to the same bank head.

 

• While the middle market segment begins where the small business segment ends, overlap exists between the two groups based upon client need and potential. Faster growing and more sophisticated small businesses should be moved to the middle market, if a strong upside exists. In addition, middle market bank groups need to continually shed themselves of small business customers that remain in their portfolios. Decades ago, my first involvement in the small business space began when we were analyzing the middle market group of a major regional. We found that a very high percentage of the customers handled by that segment merited transfer to the small business world. Not surprising, only a small number of that high percentage was ever transferred, as bankers worked hard to explain why they needed to maintain their relationships with those customers. Bankers will not be surprised to read that 20 years later, the surviving bank that this regional was merged into has the same unresolved and expensive problem. Senior bank management has long been unwilling to address this area, one that increases operating expenses, dampens revenues, and may result in poor customer service.

 

• Banks emphasizing their geographic focus do so in part in order to establish themselves as community oriented, even if part of a large bank. However, this can result in a lack of consistency in approach and coordination across the bank. Where a balanced geographic/functional approach works, bank leadership sets clear expectations and a culture of cooperation exists. Often, the functional group sets the rules and the field executes them. But, for every one bank that manages to operate successfully with a geographic emphasis there are probably ten banks that fail at doing so.

 

• Largely depending upon a bank’s size the support organization (including operations and credit) may be centralized or segmented based upon the business line. As with all of the issues outlined above, there is no one answer for every bank, but there is a best approach for each bank based upon its size, sophistication, operating philosophy, and aspirations.

 

We have seen banks emerge stronger from resolving some of these and similar internal controversies. Once the various stakeholders agree on the path forward, backbiting ceases, and the organization moves ahead, an approach that can result in higher profits and growth; avoiding the airing of these issues simply perpetuates frustrations and postpones the day of resolution.