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Entrepreneurs Needed (Again) in Community Banking
As the value of regulated local franchises erodes, community bankers need to revive the entrepreneurial approach that characterized their industry before the 1930s. by NEIL STANLEY
Feb 3, 2012  |  10 Comments

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 Neil@Bank-PS.com.


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andrew williams
2/17/2012 10:30 AM

I agree with this assessment of the banking enviroment that we live in. The big issue is that the industry has taken a very conservative point now when we need the industry to take the very liberal view and assist this economy to step on the gas and propell the growth. Banks have struggled with the regulations and the enviroment of oversite but given what we have been through the smart and forthright organizations are using this as an opportunity to carve out nitches in the business and create value that both the consumer and the industry can win. I think Neil has sum up the opportunities and there is more that can be done. Leaders of the major institutions need to beware as new financial services companies are posied to take advantage of this opportunities that are left on the table.

reid tenkley
2/10/2012 10:46 AM

I agree with Arvind, life would be much simpler and less expensive if banks could leverage economies of scale like this, but my experience is that you just can't get independently minded and budget conscious community banks to standardize. I've tried it at the GL level, loan system, deposit system anything. As soon as you build a standardized reporting data set your next customer will want some "modification" or they deem it unusable. You give in to win the business and keep the lights on, and the next thing you know you are building custom software again, but not able to price it that way.

kay bahl
2/9/2012 10:08 AM

Here is the whole article.

ken filippini
2/8/2012 12:33 PM

I agree with everything in this article. Great work, Mr. Stanley.

arvind thapar
2/8/2012 8:04 AM

All financial institutions have plethora of data at their disposal; the challenge is how to get a single 360 degree view of the customer if they have multiple accounts with a bank. Combine that with data from social media streams, and the issue becomes somewhat more complicated. Even if there are tools, as mentioned in the article, to assist with higher level analytics as opposed to the ubiquitous spreadsheet, it still takes will, time and effort on the underlying organization's part to engage in projects of this nature. Some of these resources may be beyond the reach of a single community bank. Why not have a "data architecture exchange" of sorts in which numerous community banks can participate and rely upon a common set of data architecture as a basis for analytics that serve their individual bank's unique needs?

jeff marsico
2/8/2012 7:49 AM

Forward looking, strategic thinking requires like-minded leaders. Unfortunately, as expanded upon in my artilcle "He's Not Ready" (see link), bankers are not prone to promote such leaders until they are sufficiently turned into the "steady as she goes", and "strategy=budget" leadership. Consultants have a similar bent, as they think next generation bankers would be perfect if only more like them... former bankers as described above. Regulators think it risky to promote a forward thinking, and potentially youthful leader. Give us experienced lenders, CFOs, risk management people, they say. Changing industries need changing faces to lead us into the future. Unfortunately, there are significant headwinds to achieving change in community banking. ~ Jeff http://www.jeff-for-banks.blogspot.com/2012/01/leader-selection-hes-not-ready.html

curt lovegren
2/7/2012 10:23 AM

All I'd like to see in my local banker is for them to stop wasting my time. It took over one hour for a bank rep to figure out how they set up my 9-year old son's savings account incorrectly. He was being charged a $5 monthly fee - really discouraged him from trying to save. He should have had free minor savings and it took me over 1 hours with various people to get his account credited and then fixed so that future month's he'd not be billed. What an awful C/S experience.

brad felger
2/6/2012 9:40 PM

In other words, it looks like the current climate is making bankers choose to be proactive or reactive. As we all know, the reactive business eventually fails and the proavtice business succeeds. Since banking is no longer protected geographically, it has to focus on the one thing the internet cannot do - build one on one relationships with customers that enhance the bottom line, not detract from it.

charlene meyer
2/6/2012 3:57 PM

Will bankers really do this? It sounds like a lot of work that they might not want to train their people for.

kristi adams
2/6/2012 9:31 AM

I agree that bankers need to have more entrepreneurial, out-of-the-box thinking to be successful in today's environment. I am curious about your encouragement to promote debit cards. You reference an article from 2004. So many changes have taken place since then, is this still relevant?