This is the question Ken Olan, EVP / CFO of a $2 billion assets Victoria, TX based First Victoria Bank asks in his opinion post entitled Mission Possible: Creating a Category-of-One-Bank published on BAI’s Banking Strategies website.
There is no doubt that retail banking is highly commoditized and without breaking out of the sameness, retail banking will continue to be plagued by cannibalization from non-traditional competitors and will eventually evolve into what Brett King refers to as ‘Utility’ services.
In the article, Mr. Olan posits that
“…banks need to start thinking more like category-of-one retailers and less like banks. The great companies of the world innovate more than products and services. They consistently challenge the status quo to create brands of ever greater relevance. Sometimes that means creating a vision to deliver something that your customers don’t even express a desire for.”
And I completely agree. Financial Institutions – particularly Community Banks and Credit Unions – must dramatically reshape virtually every aspect of their business to grow and prosper. The traditional 80/20 rule is actually 80/2 in banking — that is, 80% of Assets, Loans, Deposits, and Profits are controlled by 2% of the Banks in the country. Most Community Banks and Credit Unions are simply distractions for the regionals and mega-banks who are fiercely competing to win market share and profits. Community Banks and Credit Unions are losing the battle for customers’ mind-share, for relevance as a key participant in the banking space, and ultimately for their own survival. And they are losing badly.
But what can a Community Bank or Credit Union – with limited resources and capabilities – do?
– Should they play catch up by deploying online banking?
– Should they play catch up by deploying mobile banking?
– Should they redesign their branches to be yoga facilities, cafes, stationary stores, or provider of other non-financial services related activities?
– Should gamification play a role in customer interactions?
– Should they deploy PFM? What about Reward Checking? Or how about merchant-funded rewards tied to debit card transactions?
Many believe that some or all of the above are important and, indeed, necessary component for Bank turn-around.
Some believe that loyalty, cross-sell and new customer development opportunities can be generated by turning a Bank Branch into a mash-up of Banking, Yoga, Café, and Stationary store.
I don’t agree! In fact, to my best knowledge nothing supports the notion that bank customers actually want or need their Bank to offer marginal services not only in Banking but also in a variety of other sectors. I don’t know about you, but if I want coffee, I am more than happy to drive to my favorite coffee shop, and if I need stationary store, I prefer to go to a specialty location rather than a wannabe. My guess is that most bank customers feel this way.
But perhaps more importantly, it isn’t clear that selling coffee, stationary supplies or yoga classes benefits a Bank or Credit Union in any way. Is it plausible that a customer might engage in a conversation about a mortgage, car loan, personal loan, investments, wealth management, life insurance or other value added products just because (s)he took a yoga class or had (what is likely to be a pretty bad) cup of coffee?
Bank and Credit Union executives understand that their institution – and really the entire industry – is under attack, and some are willing to try different things. For this, these executives must be applauded. Yet, not all things make sense, and some initiatives have as much chance of creating value as I have of becoming an Olympic Gymnast (trust me when I say this is an extremely remote possibility).
So, this gets us back to the initial question – How does a Bank or Credit Union generate true loyalty that drives measurable financial benefit to their bottom line? How does a Bank or Credit Union differentiate / stand-out in a commoditized industry dominated by a few?
Banks and Credit Unions must refocus their attention on satisfying their customers’ financial wants and needs. Sounds simple, but in fact, not so easy to execute well. Effort should be focused on factors including:
How is your Bank or Credit Union going to be different from the other 10, 20, 50 or 100 other Financial Institutions within close geographic proximity and thousands of others that can be accessed online and via mobile.
Critically, key factors must be considered such as: What can your Bank or Credit Union do to ensure that your customers would miss you if your Bank or Credit Union disappeared tomorrow? What product or service could they not replicate at one of your competitors? What is it about your offering that is unique / different from the competition? That is, what is your Bank’s or Credit Union’s unique value proposition?
Is the Bank or Credit Union benefiting from existing customers’ relationship?
Profit is the only mechanism that enables businesses to meet their customers’ needs and re-invest in new product & services. Banking is no different. Profits are essential for Community Banks and Credit Unions to introduce new products & services (yes I know your FI hasn’t done this in 10+ years, but this much change), to address the ever increasing regulatory burden, to deploy customer facing technologies, to deploy internally focused capabilities that drive operating efficiency, and last but not least to compete effectively with incumbents and new entrants.
So, forgo the gimmickry espoused by some vendors and consultants (I am referring to those who try to fool you by suggesting product profitability based on marginal cost analysis), and do a simple, straightforward cost accounting exercise to generate relationship (not product) profitability.
Identify your customers using demographic factors. What are their needs? How well are you meeting their current and future needs using objective metrics? Define why you are positioned better than your competition to address each customer segment? Which customer segments should be avoided?
It is essential for Banks to have a crystal clear understanding of who their customers are, and how the Bank is uniquely positioned to meet those customers’ needs. Utilizing Customer Profitability analysis determine if you should, if you can, if you can afford to continue to serve all of the current customer segments. Which customer segments should be prioritized? Which product / service offerings should be altered? Which channels should be emphasized? Should service be free across all channels, or should some service activities delivering via some channels be priced at a premium? How can pricing be changed to positively effect customer profitability while still delivering value to your customers?
Product Development, Channel Management and Pricing
Armed with insights into Business Strategy, Customer Profitability, and Customer Base your Bank or Credit Union is now ready to begin developing an offering that will effectively differentiate in the marketplace. Most likely, the product development will focus on product bundling of traditional products rather than necessarily an effort to create something new. However, there may be instances where Customer Base assessment will dictate the development / deployment of new products and services (examples could include Mobile, P2P, A2A, advisory services) and in some instances products may be delivered through partnerships with other providers rather than directly by the Bank or Credit Union (for example, wealth management, investments, insurance, etc.).
It is essential that revenue and profitability benchmarks are established so as to enable a mechanism to measure performance. Trade offs much be deliberated between products, channels (branch, call center, email, social, etc.) and pricing. Everything is interconnected, and understanding relative trade-offs between customer offering and profitability is essential for the viability of the Bank.
Operating Model Rationalization
Rationalization of current business practices to Business Strategy will impact most, if not all, parts of the organization. Simply said, this is about internal alignment. Aligning every part of the organization to focus on the handful of Key Metrics that are essential for success.
Critically important is that the entire organization understands that there are no sacred cows… performance must drive decision-making process… metrics based on established Key Performance Indicators (KPIs) will be the sole judge of success. Furthermore, it should be understood that this is a process rather than a one-time event — KPIs will guide the organization to continually adjust its product, its customer segment selection, and its tactics.
Virtually every part of the organization is likely to be impacted – including IT, back-office, customer service, product development, sales (ie. relationship managers, banking officers, etc.), marketing and the executive suite.
Effective Customer Acquisition will depend on the success of collaboration between product development, marketing, and sales teams. The objective and KPIs will help guide these teams as to customer types, and profitability expectations. KPIs will provide feedback as to the success of marketing initiatives enabling the team to adjust as needed.
Customer Retention and wallet-share
Similarly to Customer Acquisition, Customer Retention must focus on not only to retaining customers in the priority customer segments but also growing loyalty as defined by wallet-share metrics. It is likely that different service and sales tactics will be used for various customer segments, as a result, unique KPIs must be developed to guide the teams in assessing performance and implementing improvements.
Non-Traditional Growth, Revenue & Profit strategies
There are a variety of initiatives that Community Banks and Credit Unions can undertake to further improve their revenues and profitability. These initiatives include participation loans, loan purchases, mortgage warehouse lending, and “white labeling” services (to non-bank entities such as stand-alone P2P providers such as Prosper and LendingClub, bank front-end companies such as Simple and MovenBank) among others.
The process outlined above is a journey, rather than isolated event. Unlike many annual strategic planning sessions, this effort is hands-on and must be shepherded by senior management with full support from Board of Directors. For many, the type of changes prescribed above will be “revolutionary”, and some may struggle. Support, guidance, education and sometimes, new skill sets will be required. But, given the trajectory of financial services, we believe that Community Banks and Credit Unions have few options. Change and hard work is the only path if your Bank or Credit Union wants to remake itself so as to attain the prestige, the following of the likes of Apple, Disney, Harley Davidson, and Starbucks.
Serge Milman is the Principal Partner of San Francisco, CA based SFO Consultants and Principal of Optirate – a blog dedicated to growth and profitability strategies for Banks and Credit Unions. He can be reached at info@SFOconsultants.com.