Executive Summary: Senior bankers must manage through a period of unprecedented change. However, many banks lack the organizational speed and deftness to do so effectively. Their challenge is to maintain an emphasis on rigorous operational excellence while, at the same time, rebuilding relationships with alienated customers and employees.
Banking’s Dynamic Landscape
Even a cursory reading of the business press demonstrates how quickly and fundamentally competitive dynamics are changing in the banking industry. Some examples:
* The way banks sell: American Banker writes that credit card sales are changing to become part of a package rather than being sold as a standalone product. Another example involves the role of the branch, which is being downplayed by some while, at the same time, others are expanding their branch presence.
* Consolidating market power: The “too big to fail” banks have gotten bigger in the last year, making them even more protected. Another sign of the big getting bigger: four banks generated 57.8 percent of second-quarter home loan originations.
* Increased constraints on fees: Whether related to credit cards, overdraft fees, mortgages, or many other consumer and small business areas, the pressure is on banks to simplify and limit fees. Both the consumers and the legislators are increasingly focused on eliminating what they consider to be abusive charges. For example, Tuesday’s USA Today featured an article that favorably compared taking a payday loan to paying bank overdraft fees which it portrayed as excessive.
* The role of the government: TARP money, while probably critical in stabilizing the banking industry last year, may have made some banks long-term wards of the government and beholden to its demands, pushing many back to utility-like status.
* Uncertain credit future: Many (us included) expect more negative credit “shoes” to drop. Commercial real estate is the most likely problem area (Moody’s commercial property price index is down almost 39 percent from two years ago), but not the only one. (Note the recent American Banker headline, “Deferred tax assets may be the next bottom line hit.”)
* New non-bank competitors: Private Equity (PE) firms appear likely to play a greater role both in investing in toxic assets as well as failed banks. While the FDIC appears to favor commercial banks as partners for these transactions, the reticence of some banks to participate as well as the intense focus of PEs in this space will likely result in the entrance of several well-financed and highly focused competitors.
* The market image of banks: The industry’s image with regulators, legislators, the public, and various stakeholders is at its lowest point since the Great Depression. Increasingly, community banks are pulled into the same negative orbit as the largest players. Populism seems to be on the rise à la Michael Moore’s new movie.
* Disheartened employees: Many bank employees are emotionally exhausted by layoffs, cost cuts, increased reporting hurdles, and stagnant salaries and bonuses. In many cases, this has increased the already existing alienation between employees and bank management. Employees cannot serve the customer if they feel insecure.
* FDIC requirements. Even if the very recent “pre-pay” initiative does not impact profitability, the FDIC’s ongoing requirements will continue to impact banks in ways that may not be known today.
The above scratches the surface of issues facing the industry, and it seems that new issues emerge almost daily.
Managing through Change
While, arguably, the environment in which banks are operating has more moving pieces than ever before, the approach required for success really has not changed very much over the years. I wish there was a “secret sauce” that we could offer (and package), but none exists.
* Start with the employee. In the near term, banks need to stabilize their internal employee base and give them confidence that management knows where it wants to take the bank. Obvious, yes, but many bankers continue to complain about lack of communication from senior management. In this case, size does not matter; we have seen this as an issue in small banks as well as very large ones.
* Decide what your bank is about. To this day, many banks describe themselves using vanilla-sounding mission statements rather than offering specifics regarding their customer segment focus, preferred product/service offer, distribution channel strategies, and priorities for growth.
In a previous newsletter, we quoted a Financial Times columnist who depicted how some managers make their investment decisions based upon what he termed a peanut butter philosophy. By that, he meant that investment decisions are spread evenly across multiple investment areas like peanut butter on bread, rather than requiring managers to make tougher decisions. This is one sin we see being committed today in many banks. Areas that are potentially faster growth or that provide higher levels of fee income are still not being given sufficient priority over others, even though the economic logic behind doing so is undeniable. (Think Wealth Management, Treasury Services, and Small Business Deposits.)
The banks that are positioning themselves as long-term winners, banks like BB&T, JPMorgan Chase, US Bancorp and Wells, among others, can articulate what they stand for and what they will do to succeed.
* Stay the course. I remember reading a speech that Dick Kovacevich gave in 1992. In it, he referred to commercial lending as akin to a cheap tube of toothpaste used to draw customers into a store so that they could be sold higher margin goods. About that same time, he also directly challenged his people to work together across silos to build wallet share and meet customer needs. Incredibly, those comments made almost 20 years ago remain relevant in light of continued internal silos and a lack of customer focus at many, many banks.
Too often, the philosophy and focus pushed by leaders like Kovacevich loses out to fads and the hope for quick fixes. This weekend in New York City, one bank had its personnel out on the sidewalks sporting tee-shirts with various “promises” they were making to the customer. Pot-bellied bankers touting phrases that have no credibility does not make for an operating philosophy.
* Stress simplicity. Banking should be a simple, straightforward business. Many of the industry’s current travails result from getting away from simplicity, whether involving risk decisioning, loan structures, or investments. But, simplicity requires making explicit and sometimes controversial choices.
I recently heard a bank Chairman articulate in about 60 seconds the customers he wanted and did not want, the products he wanted to emphasize and avoid, and the geographies in which he wished to operate. He is making these choices clear to key stakeholders and building his organization and related support structure with those choices in mind. His strategy is established, his tactics to support it are being put into place, and the key metrics to track success are few in number and clear to all employees.
Concluding Thought
The banking industry will continue to experience head-turning changes that may make recent years seem tranquil. Being precise and disciplined about what you stand for and who you wish to serve will be more important than ever.