Executive Summary: Faced with slow growth, a sometimes overzealous regulatory environment, and an increasingly skeptical customer base, commercial banks need to refocus on what they do well and what differentiates them from competitors.

 

 

The phrase “Keep Calm and Carry On” can frequently be seen on T-shirts, coffee mugs, and carrier bags in both New York and around the country. It is a phrase that was featured on an early UK World War II poster. Its intent was to raise the morale of Britons expecting to be invaded at any moment.

 

While the current situation in the banking industry is not quite as dire as what Britons faced in World War II, nonetheless, this phrase may provide a roadmap for banks that are trying to mange through unsettled economic times.

 

How bad is the current situation?

Last time, I wrote about the comments made at the Bank Director’s annual “Acquire or Be Acquired” conference. Speakers almost uniformly agreed that most banks need to become larger to survive, $500 million and probably $1 billion in assets at a minimum. That said, we know banks in the $1 billion range that believe they need to build to $3-5 billion to be meaningful players.

 

Another speaker, the former head of the OCC, suggested that regulators would only get tougher, forcing smaller banks to spend more on non-revenue producing staff and limiting areas in which they can grow. Frankly, due to that speaker and others, the overall impression left with many attendees was that the government was unsupportive of the needs of smaller banks, both community and regional players.

 

Further, discussions I had with several participants indicated concerns about where they can look for growth. Commercial real estate opportunities are limited (and for some banks need to be avoided) while fees related to debit cards, overdraft checking, and other areas are under attack.

 

Why “Keep Calm”?

Even with the above and similar woes, the banking industry remains vital and offers a great opportunity for wealth creation while providing client service. But not for everyone.

 

The fact is that there are too many banks. The expectations of clients and the (usually) reasonable demands of regulators mean that literally thousands of small banks will find it difficult to survive. This can hardly be a surprise in a world in which communications has exceeded the science fiction depicted in stories when many of us were children.

 

In years past every small town had a bank, and serving that community was the rationale for the bank’s existence. At least two things happened to change this. Many community banks lost focus on their communities, instead jumping into loan structures and geographies about which they knew little. Perhaps even more significant, the customer changed. While some customers drank the Kool-Aid offered during the real estate run up, there were many other customers who became more sophisticated and knowledgeable about their financial services requirements. This has been helped along by CNBC, Charles Schwab, and others who changed the way consumers and businesses think about their financial services needs.

 

So, with these major issues – too many banks and a different customer culture – why would a banker stay calm? Because – and this bears repeating – the banking industry remains vital. Those bankers who do stay calm are in the best position to carry on.

 

Carry On.

There remain many good banks in the U.S. and in other countries. And, there continues to be multiple opportunities for banks to continue to grow and thrive. The best banks I know succeed because they follow a handful of fundamental principles:

 

* Risk management comes first. As banks start to go down the growth path once again, they need to remain focused as well on rigorous risk management. It surprised me that when we were conducting interviews for the ELFA’s State of the Industry report, several interviewees stated that large competitors had already begun to compromise on credit to gain growth.

 

* Know who you are. The best banks we know can succinctly describe their market focus and differentiating factors. Whether they use the word or not, they have a segmented approach to the market. We have seen banks succeed with focuses on certain industries, ethnic groups, and products. As I mentioned to a client this week, segmentation is messy, but it is also critical to success.

 

* Push for productivity. Banks need to continue to do more with fewer people. Applying technology can play a role in increasing work output. However, organizational changes are even more important. The best banks are rethinking roles and responsibilities to ensure that the front-line staff is spending as much time as possible in front of customers. Now more than ever, banks cannot afford to have their sales staff behind their desks, unless they are on the phone with customers.

 

* Rethink delivery channels. Most banks should not spend a lot of time worrying about social media, a current buzzword; in most cases a fast follower role is all that can be expected and can be enough. However, banks can much more effectively use email as a communications and marketing tool than they are today. In fact, many banks would benefit from instituting telephone-based RMs supported with email templates to handle the majority of their smaller accounts.

 

* Execution. Banking is primarily an execution game. There are only so many strategies to choose from. Once those decisions are made (and reconsidered every two-three years), then, day-to-day rigorous execution becomes job number one.

 

* The customer comes first (after risk management). One of the true cultural advantages that many regional and community banks have over the biggest banks centers on their genuine customer focus, meaning they care about the customer’s satisfaction. The top performers demonstrate this every day in their response to customer problems and their anticipation of customer needs. A customer-centric culture permeates those banks.

 

Concluding thought.

So, things are tough, yes. There are too many banks, yes. There will be massive consolidation, yes. Despite these and other negatives, however, many hundreds and hundreds of banks will continue to grow, provide benefits to their stakeholders, and generate attractive returns for their owners. As long as they Keep Calm and Carry On.