Smaller Institutions take the ‘Subtle’ Approach
BY PAT ALLEN
Our roundtable describes a culture that expects employees to add value to retail and small business relationships.
Innovation, as described by a roundtable representing smaller banks, can be a process of leveraging products or technologies developed by others. Innovation, panelists say, is not driven by ego but is an integral part of the process of delivering better products and services to customers. The challenge, they say, is to hire good people who can use the innovative tools effectively . Banks must develop a culture in which employees are allowed to make mistakes in the pursuit of innovation and where revenue growth rather than cost control is the driver, participants say.
A sk them not to wear anything with a loud print,” our design firm instructed as we were assembling three innovative bankers for a discussion that included a photo session. We took our chances, didn’t pass the request on and sure enough, the roundtable participants arrived in the “quiet” colors and patterns favored by their peers in the industry. No disappointment there, and in the first few minutes of sitting down, our guests made it clear that their approach to innovation was not about drawing attention to themselves. Rather, they described their work as subtle but nonetheless effective.
Our roundtable represents unlikely organizations to be featured on the subject of innovation. By design, we had wanted to talk to executives known for innovative thinking in the construct of a “traditional” and smaller financial institution.
“Whose name comes to mind when we say ‘innovative banker?,” we’d asked several sources and then worked through a list of names and endorsements. While we sought to build a threesome to represent a mix — Dugan as a customer-facing innovator, Fitzhugh a technology innovator and Sznewajs a CEO/payments innovator — as the discussion progressed we were struck by the consistencies of what they each had to say.
For all their successes, the country’s largest banks have not been able to consolidate deposit balances. The following may shed some light on the smaller institutions’ strengths competing on what our roundtable calls the next playing field: relationship innovation.
Q What’s your sense of innovation in the industry?
Sznewajs: I think it’s quite high, because over the last 20 years banks have had to innovate to be successful. There are a lot of drivers that make banks successful, whether it’s the productivity level in the backroom or sales efficiency with the customer or the processing. I think the industry has been not only innovative, but also advanced the consumer and businesses a long way, although I think there’s more to go with the business customer.
Fitzhugh: Our core is run by Metavante and as a result, we’ve held a position within their strategic advisory council. They have a group of about 20 banks that provide input to their development. I’ve been on the Metavante group now for 15 years and with Fidelity National Financial’s payments group for just over two years. Fidelity provides items processing, lockbox and image archive services to the bank. I see a lot of innovation.
Dugan: I probably have a different perspective. I’m more customer-oriented than technology oriented in my job. I think we’re very innovative as an industry on the technology and product development side but I think we’ve been traditionally less innovative on how to take all this information that we have — and have had longer than anyone else — in our various systems, and utilize it for more effective acquisition, growth and retention of our customers. I see us now just starting to catch up and realize that CRM can be used to drive relationship banking rather than as a more robust reporting tool.
Q Do you think the industry is more innovative than
it gets credit for?
Dugan: I agree with that, and I think it’s mostly because our products commoditize themselves so quickly. When we make small differences in product functionality that may improve the customer’s experience in the capability of that product, it’s very rapidly commoditized.
Sznewajs: I think there are some other dimensions, too. There are so many different strategies being pursued by different banks. Innovation, I think, is secondary to consistency of earnings, creating shareholder value and reputation in the marketplace. Those things are what I think bankers strive for, rather than being viewed as an innovator. Being viewed as an innovator can be viewed as being kind of ego-driven.
Fitzhugh: If you look at innovation as being the invention of business process or applications, I don’t think that banks our size or smaller are the “innovators.” I think we take advantage of those things that are being brought to market by either vendors or other partners. It’s really how we leverage the innovation that’s developing and emerging, it’s recognizing what we can take advantage of, and what we can’t take advantage of.
I’ll give you an example. It’s not an innovative technology, it’s an electronic signature pad process, which allows a customer to sign a device as opposed to document. We’ve completed a pilot for the stop payment process. Obviously, it’s not something that you’re going to go out and tout, “We’ve got the best stop payment process.”
Today, in our environment, we have 300 miles of geography spread and everything has to come back physically with customer signatures for things to happen. But now we’re looking at a process where if the customer is in the branch signing at 9:03 that he wants to fill out an affidavit for a lost card, at 9:03:30 the people who are in the back office that need to validate that signature and execute are actually acting on it. We’re taking a 15-step process and moving it to three. It’s efficiency for us, but ultimately it’s customer service.
Q To what extent is your bank’s size an advantage or disadvantage in the pursuit to be innovative?
Sznewajs: The greatest industry-wide innovation in my banking career has been the Internet, especially for banks our size. If you have really good people, and they’re aware of what’s going on, they will find the solution out there someplace. And the ability to plug into a Web-based solution is one of the real equalizers. If we want to make a change, we can do it, we don’t have a legacy system to amortize or write off. You can make a change and go on.
Q A bank your size can offer obvious advantages but can you compete for innovative talent? Can you provide the resources that will satisfy the innovation-minded on your staff?
Dugan: Absolutely. To me, “innovation” is often execution. I’m not trying to change anything that we as an industry haven’t been wanting and trying to do for years. But I’m leveraging the technology now, which is more attainable from a cost point of view, to deliver on the promise that we’ve been trying to work around.
Our bank uses Open Solutions as our core provider, and they’re a plug and play model. You can add any third party program to use Open Solutions’ platform or utilize their program, whatever the solution that you think is best. We can do that rapidly.
We may want to interact with a new customer from a specific segment eight times in the first year. We define what those interactions are. We have technology that allows us to put those individual customer interactions into a database, and it automatically manages the process. When it’s time for my customer service rep in the branch to reach out and contact that customer, they get an automatic reminder to do just that, and it will stay there until they do it, and if they don’t do it in a reasonable amount of time, their manager will be prompted.
So now, I can take what we had attempted to do manually, but it’s no longer out there being executed at different levels; it’s literally managed by the technology.
Sznewajs: Innovation comes by having people in your organization who can take the technology that’s out there and use it. If you have an F-16 fighter plane in the parking lot and you don’t know how to fly it, it doesn’t do you any good. You don’t have to know how to make the plane, but you need to know how to use it effectively. And the challenge is to get good people who can use the tools effectively to make money for the company.
Fitzhugh: The reason my management is so supportive of innovation is that they know it’s important in order for us to build a relationship bank. We’re 120 years in the Baltimore area, one of two banks left that has real roots in Baltimore. We compete with our own 800-pound gorillas and the way we compete is to be inventive. We call ourselves the “Right Size” bank.
We have created a 360-degree customer view that we’re rolling out this year to take the rich data that traditionally we’ve only had on the desk of an analyst in marketing. We’ll show it to the sales folks, and they will be able to understand the relationship and the profitability and, oh, by the way, the last offers we presented to the customer. We now have a sense of where we can go in a relationship discussion if the opportunity exists.
Dugan: Pushing the information out, coordinating it across all lines of business and providing value to the customer when we have an opportunity is critical to deliver on our brand promise. Because we’re not going to have better products than our bigger brothers, but we have to run faster to get and keep the customer. That’s what puts pressure on us to push this information out that we’ve had for years so we can be better at execution.
One of the biggest ironies is that as we’ve revolutionized the transaction environment we’ve emptied our branches of customers. They don’t have to come in anymore. So when they do come in, you better know who they are and you better have a meaningful exchange with them and add value at that moment — as well as figure out how you’re going to communicate with them when they’re not coming in.
Part of the technology that we’re using, when we have a propensity identified, allows us to drop the same message onto the teller’s screen, the call center screen, the customer service screen, and the customer’s online banking screen.
Q You’re each known for being individual innovative thinkers. What’s needed to foster innovation across an organization’s culture?
Fitzhugh: If you want grass to grow, you don’t cut it; and if you have a management style that promotes the growth of innovation, you’re going to get it. I’ve worked for the same manager for 21 years and my peers have been the same for 20 years. So, we’re developing across a continuum.
Allow people to take risks, let them know that there is a budget for innovation and that you want people to think. I know how to stop innovation, and that’s basically when a mistake has been made and somebody at the top takes somebody out and has a public execution. That will stop innovation immediately, because no one will be willing to take the risk.
Sznewajs: I think the other dimension to it is within the management team or wherever the ultimate decision is made. Regardless of what’s going on in terms of the performance of the bank, as long as you’re meeting some minimum level of performance for your shareholders, you have to be willing to invest. I think the easiest thing to do when things aren’t going well is to say, we are not going to invest.
Q Turn it on, turn it off?
Sznewajs: Turn it on, turn it off, and that is a very discouraging thing for people who you’ve asked to be innovative. To say, “Let’s don’t be innovative this year because we’re not going to spend X amount of dollars doing something.”
We’ve told our shareholders that we’re looking for a consistent return on equity and a consistent return on earnings per share, but we’re going to re-invest the difference in the business.
Dugan: It’s when you stop and start that people get disenchanted and they leave. I think that’s something that smaller banks do better. I think they have a consistency that allows people to stay around.
All of our people are contacted regularly by recruiters. And they stay for a reason, and it isn’t because it’s the best pay. Exceptional employees can always find a better salary somewhere else, but it’s different here in the way that we’re willing to invest in our employees. They’re not expendable, they are important to us, they know it, and that builds loyalty.
Q Does every employee know that innovation is a value at your organization?
Dugan: Our steering committee, our group in charge of vetting various projects against available resources and priorities, went out and ran a number of small group half-hour brainstorming sessions reaching every employee in the bank. They came back with 1,200 ideas cataloged and assigned to different line of business managers and the progress is reported on the Intranet. That’s a strong message to employees that we’re looking for you to add value to this organization.
Sznewajs: What will differentiate us is our level of service and the quality of our people. We developed a client value proposition that when it comes to products and services, we are committed to having products and services that are as good as — not better than — the major banks have.
When we’re competing against the community banks what will differentiate us from them is that we will have better products because they won’t be as progressive in taking on new products. We’re not going to out-service another community bank, but we can differentiate ourselves on our products.
We do annual employee surveys and ask, “Do you know what the client value proposition is?” and 80% of the employees respond yes.
Fitzhugh: Our desire to move toward innovation is very public. My group is called Strategic Directions and within my group I also have a Project Management Office. We physically track and manage our project efforts and portfolio, with titles such as “evolve” and “transform” using what I believe is the Gartner definition. We utilize a balanced scorecard approach where we have metrics that we’re trying to hit year to year, to ensure that we’re working toward transformation and evolutionary deliveries, products, services and efficiencies.
Dugan: The other message that we send out is that we focus more on the revenue side of the equation than the expense side. And that builds a different culture. We want to be at peer or better for many of the different benchmarks, but when it comes to the efficiency ratio, we want to be at the highest end of that peer range. At peer or below peer, people start to become expendable. Whereas, if you focus on revenues, you can grow into the appropriate efficiency ratio, and that sets a whole different mindset for the employee and the organization.
Fitzhugh: You’re exactly right, I call it “kneeling at the efficiency altar.” The low-cost provider strategy is not a strategy that’s going to combine with convenience and customer service.
Q So now the obvious question: Can you say that your embrace of working innovatively has produced better results?
Fitzhugh: We’ve accomplished the success we’ve had as a result of innovative people or innovative products and processes. It’s what allows me to be at this table. Through innovation, we’ve remained competitive, whether that’s product innovation or delivery innovation. As we move forward, it’s going to be the relationship innovation.
Dugan: It’s difficult, most of the time, to measure one innovation. We have our enterprise benchmarks such
as ROE, ROA, etc. that we are using, and our innovations tend to be the strategies we’re trying to execute on,
so we know how successful we’re being based on what
our overall return is. But, I think it’s kind of publish or perish; it’s more the cost of not innovating than the ROI for a particular innovation. If you are not keeping current, and reaching a little beyond, then it’s very hard to be viable when the table stakes keep getting higher.
Sznewajs: Banks that don’t innovate will find themselves, over time, behind in their ability to compete. We’ve been in an unbelievable cycle over the last five years for community banks. Credit is as good as it’s ever been, we’ve had more loan volume than people know what to do with.
But over time, it’s like anything else, if you don’t fix your house up, it reaches the point where you need to do more than just paint. It’s the carpeting, it’s electrical, it’s the plumbing, and then the porch and the roof and whatever.
We can all gather CD money all day long by posting a rate, but the banks that are going to be around are the banks that can develop revenue streams from different segments of customers. The banks that will have the ability to continually attract low-cost deposits will always require a certain level of continuous innovation and improvement.
Pat Allen is publisher and editor-in-chief of BAI Banking Strategies.