Printer-friendly version (PDF)

Last week I had separate conversations with two banks, non-competitors, that operate on opposite sides of the country and are at quite different asset levels. Each bank independently mentioned their desire to focus on the same business segment, one that we will not mention for confidentiality reasons. Separately, they had determined that segment was attractive from a revenue and growth perspective; FIC’s experience is that it is, or certainly can be, if approached effectively.

The major difference between these two banks, other than location and size, is their near-term need for deposits. One bank currently operates with excess deposits. Those deposits have been built up over decades with a loyal and upper end client base living in an increasingly wealthy geography. The other bank also has a strong deposit base but has been growing assets rapidly and expects to continue to do so with multiple quality loan asset opportunities outstripping current deposit growth.

Both are well performing banks that are highly regarded in their respective markets. But, they need to approach this and other segment opportunities, first, with similar upfront analysis and, then, with a different marketing emphasis.

Quick diagnosis of current status. Each bank needs to begin with a diagnosis that results in the creation of a “fact pack”. We put quotes around that phrase because facts are hard to prove, particularly in situations in which numbers may be unreliable and interpretation of them can differ significantly. These banks should begin by assessing their current position with this segment; given their market strength, it is a certainty that each bank already serves a number of those customers in that industry, but management should want to understand who these customers are, which products and services they provide, and quantify their profitability.

One of the banks is large and is likely already serving these customers in multiple business units without coordination across (and perhaps even within) the bank units. This bank should revisit how it defines the segment, clarify each unit’s responsibility, and set guidelines so that the bank pursues a unified bank wide approach. The other, smaller bank has historically emphasized a generalist approach, but now sees a market opportunity that requires specific products/solutions and targeted positioning. This may be a new discipline for the bank, one that its bankers may resist. As a bank considers expansion it wants to capture not just the business it has today, but also the business that is going to other competitors. One of the bankers I talked with mentioned that his “lenders” (his term) did not focus on deposits or the personal needs of the business owners.

The need for partners. Today, banks are in a fight not just against big bank competitors but also with focused Fintechs that concentrate on specific areas and want to pick off selected customer needs or types of customers. Over the next few years expect many of these Fintechs to disappear by acquisition or economic collapse. Banks, large and small, need to determine which Fintechs merit partnering in order to enhance their solutions offering as quickly as possible. The partners exist to do so, but many banks lack the management temperament, culture, IT agility to assess and onboard them quickly.

Acting on deposits and wallet share. Regarding deposits, banks that have less of a need for deposits operate with a greater degree of flexibility. In some cases (depending upon the borrower’s quality and the loan’s ROE), that bank can pursue a loan for its own sake…but only for the short term. Even deposit rich banks need to obtain the deposits and other accounts of a borrower if they are to claim that they are important to the company and building franchise value. Customers may see loans as a commodity and view their deposit bank as their key provider.

Banks needing deposits cannot fall into the trap many bankers face, namely, borrowers promising to bring deposits ands cash management to the bank in the future. As we know, hope is not a strategy, and both the banker and the customer may be kidding themselves in this area. The deposit needy bank must be more rigorous in the loans deals it takes and operate with a heavier emphasis on grabbing as much of the customer relationship as possible. How? “Lenders” may be incapable or unwilling to take a holistic view of the client; this is where a team approach becomes essential with groups including cash management, wealth, and retail reviewing an account, determining its potential, and, then, setting a roadmap for achieving that potential.

Setting the goals for an account may be a struggle in itself, but it is worthless unless each bank establishes a review process to judge progress and act when progress does not occur (for example, triggering a loan rate increase).

Building market strength in a segment requires discipline in selecting where and where not to compete. But, banks need even greater discipline in execution, if they are to build franchise value in a segment, one that includes a rich deposit stream.