We hear bankers today talking about “getting back to the basics.” That’s fine as a sound bite but what basics are they referencing and how far back are they suggesting we go?
Banking last went through a major transformation in the Great Depression of the 1930s when the newly created Federal Deposit Insurance Corp. (FDIC) granted local banking franchises in exchange for deposit insurance. The industry adapted. Bankers learned the new formulas for success in operating within regulations and the limited government-insured choices available to their customer base. Community bankers moved away from the entrepreneurial attitudes that drove successful pre-regulation bankers. For the next seven decades, they settled into the traditions and patterns of an industry regulated and protected by government.
Unfortunately, government regulation and protection did not provide much safety for community bankers in the recent Great Recession. But the problem goes beyond the failure of regulation. This current transformation in banking is driven by the elimination of the effectively “local” franchises as technology and social changes have exponentially expanded the number of viable banking choices available to every consumer, business, and government entity anywhere in the United States. Rather than wax nostalgic about “the good old days,” community bankers must compete to win business in this intensely dynamic national market.
Pursuit of Opportunity
Many bankers today appear to be cautious, afraid and hunkered down as they seek to withdraw from risk and save their way back to prosperity. No industry or business ever saves its way to prosperity. We must produce to prosper. We must deliver service that restores pride and passion. There must be a sense of confidence and integrity in the decisions that are made regarding the commitments banks make to customers and employees.
Essentially, bankers must again embrace the entrepreneurial spirit that characterized pre-FDIC times if they are to deal with the intensity of non-local competition. As Harvard Business School professor Howard Stevenson said, “Entrepreneurship is the pursuit of opportunity without regard to resources currently controlled.” That describes community banking today and therefore bankers must embrace collaboration with others who possess resources they don’t. Such collaboration would allow bankers to do such things as:
Properly use pricing models and customer relationship profitability models. The industry is purging the undesirable and marginal today. Bankers recognize that they cannot make all relationships profitable and have to be more discerning. That means making some difficult choices. Banking doesn’t generally have a strong record when it comes to pricing efficiency and effectiveness. Both the history of regulatory pricing controls and long periods of relatively high profitability may have stunted the industry’s maturity in pricing sophistication. Today, pricing models are urgently needed to provide robust pricing alternatives that meet the win-win criteria.
Utilize data analytics for analyzing risks and opportunities. Commercial credit analysis needs exceed the capabilities of simplistic ratio analysis on simple spreadsheets. Today, bankers need to stress test individual credits and entire portfolios. Scenarios analysis, sensitivity analysis and reverse stress testing on an enterprise-wide basis as identified in recent regulatory guidance will not be economically accomplished without the collaboration and leverage of well-designed analytic tools.
Promote PIN-based debit cards for free cash access across the country. Consumers today want it all. They want to be able to go anywhere and get their banking services free. In the face of the vast branch and ATM networks offered by the large banks, community banks and credit unions often capitulate and waive their fees, creating a win-lose situation. So, why don’t bankers go the extra step to leverage a system beyond their own and market free cash access across the country by using the point-of-sale merchant/debit card system?
Promote email and text alerts for low-balance and non-sufficient funds (NSF) situations. Consumers are looking for guidance. Many of them have considerable technology in their hands in the form of cell phones. Why don’t more bankers seize the opportunity to deliver the information customers use to manage their accounts on a real-time basis? Yes, you might have a few less NSF fees. But, if you believe you are in the financial service business, use the tools that can provide excellent financial service.
Authorize NSF at point of sale. Consider the opportunities that arise from a great portion of our customer base carrying texting devices. What if we enhanced the capability of our systems to provide customers immediate overdraft authorization opportunities while they are at a point-of-sale terminal? When a customer attempts to purchase an item that would generate a NSF, they receive a text message asking for approval of the overdraft. If the customer approves, everyone is happy. If the customer says no, everyone is still happy. That is the type of service the industry needs to displace the bad press and recent regulation associated with overdrafts while preserving the bulk of bank revenues and customer choice.
Enhance deposit sales processes. We can replace the traditional two-stage certificate of deposit (CD) sales process with a four-stage sales process. We can introduce customized CDs that are “tailor made” and “dynamically priced” to meet the customers’ cash flow needs and give retail bankers the tools to consistently provide the most flexible choices and compare alternatives quickly and clearly.
Use market-value time deposits to align the depositor’s risks and rewards. A conventional bank CD investment is comprised of a federally insured CD with a contractual fixed interest rate to maturity. Because there is a substantial penalty for early withdrawal, any new decisions about managing this investment need to be deferred until maturity. Bankers are generally not aware that they have options for their customers in this situation. Entrepreneurial bankers are delivering CDs that can be “actively” managed by the depositor.
Use data analytic tools for strategic assessment. Understanding your competitive position requires a great deal more analysis when your competition is global. We can now use tools such as Bank-Trends and Fiserv’s Bank Intelligence that are designed to give you the best perspectives on your opportunities and challenges. With a clear understanding of your situation, you can align your strategies appropriately.
The above list is not, of course, meant to be exhaustive but rather to illustrate the possibilities that abound by taking a more entrepreneurial, outside-the-box view of your situation. Is your bank’s leadership operating as if the institution was still effectively protected as a local franchise and determined to be totally self-sufficient? In today’s environment, that’s no longer going to be enough to win. Success in this banking era demands the collaborative and adaptive entrepreneurial spirit of pre-FDIC banking.
Mr. Stanley is president of Bank Performance Strategies, an Omaha, Neb.-based consulting firm offering a web-based retail deposit pricing and sales platform. Mr. Stanley also serves as retained counsel for banking strategies at WebEquity Solutions. He can be reached at [email protected].
