Saturday, October 29, 2016

Five Challenges to Your Bank of the Future and Ideas to Overcome Them

I recently spoke at a Financial Managers' Society (FMS) breakfast meeting on this subject and thought I would share my comments with you.

With all of our anguish, torment, debate, and deliberation about the future of our country, our industry, and our bank, here are some common themes that I have been seeing that can be improved should bank management commit to making them happen.

Forget the things outside of your control. These five themes are firmly within your ability to make a positive impact on your future.

1. We merge, citing economies of scale, but fail to realize them. In 2006, when the median asset size within my firm's profitability outsourcing service was $696 million, the operating cost per business checking account was $586 per year. In 2016, the median sized financial institution is $1.1 billion, and the operating cost per business checking account is $710. In other words, the financial institutions grew, and the cost per account grew. This is the theme across nearly every product category. Don't believe me, check your banks' expense ratio (operating expense/average assets) or efficiency ratio as you grew.

Idea: Create measurable incentives to support centers to provide more efficient support to profit centers and for risk mitigation. For example, deposit operations' expense as a percent of deposits should decline as the bank grows. Loan servicing expense as a percent of the loan portfolio should do the same. 

2. We over-invest in under-performing branches. I recently mentioned to a community bank management team that community financial institutions are slower to close branches because their decision making goes beyond the spreadsheet and market potential. Community bankers know the town mayor, and key business leaders. So they worry about other things that go beyond the fact that their branch in that market has little chance of being profitable. But allowing branches to operate at losses takes resources away from areas that need immediate resources, such as technology acquisition and deployment.

Idea: Develop objective analyses for entering markets. If the branch does not meet profit objectives within a reasonable period represented in the original analysis to open it, close it. Make it near-automatic.

3. Our brand awareness and customer acquisition strategy is moving at a turtle's pace, not the hare pace of the industry. In my firm's most recent podcast, we discussed the recently released FDIC Summary of Deposits data that showed, with all of the negative press surrounding large financial institutions, FDIC-insured banks with greater than $10 billion in assets moved from an 80.6% deposit market share in 2012 to an 80.7% today. This phenomenon was brought home when a banker told me that, in the Philly suburbs, Ally Bank was the most recognizable banking brand. Aren't they still owned by our government? 

Idea: Develop a clear message on what your bank represents and align your culture, and all sales and marketing channels to deliver your value proposition. 

4. We embrace complexity when we should be seeking simplicity. The decline in defined benefit pension plans combined with the increases in defined contribution (401k) plans, the abysmally low US savings rate (31% of non-retired people have no retirement savings), and the increasing complexity of running family and business finances presents an opportunity for community financial institutions to make their customers' lives simpler. We should start with ourselves. For example, when onboarding a customer, an FI can perform needs assessments, risk assessments (needed for risk management purposes), and customer capital allocation needs all at once, and add value to the customer relationship. 

Idea: At account opening, build an automated business process that includes the needed Q&A to assess customer needs that spurs post-account opening follow up, know-your-customer information, and risk assessments required to risk rate customers that assigns a rating that drives capital allocations to that customers' balances and rolls up to determine the bank's capital requirements.

5. We under-invest in the people that can build our bank. Because of over-investment in areas such as regulation and unprofitable branches, we under-invest in elevating the abilities of our employees to serve as advisers to customers, as highlighted above. Also, we tend to buy key people on the street, such as commercial lenders, rather than raising them within our bank, because of the time and resource investment needed to turn junior level people into productive commercial lenders.

Idea: Build a bankwide university that includes on-the-job training, web-based seminars, in-person training, and banking schools to create career paths for junior-level people that will reduce our need to buy senior-level people on the street, and elevate the skill sets of employees to actually advise customers, rather than only sell to them.

If I were to end this post with a theme, it would be urgency. We are past the time to lament about the interest rate and economic environment, and Dodd-Frank. They are outside of our control.

We are intuitively aware of the above challenges. The good news is we can do something about them. Address them this year, this month... no, this week! And your bank will move forward to an independent future for your employees, customers, and community. 

Did I miss any challenges within our control?

~ Jeff

Sunday, October 09, 2016

Evolution of Banking: Three Slam Dunk Predictions

The sheer number of strategic initiatives and technologies in the banking industry makes it very difficult to predict outcomes with any certainty. Not that me or other industry pundits don’t try.

I have been noticing some trends that are providing insights on our direction, evolution, and ultimate picture of our future.

Future Picture was coined by the US Military for defining flight mission success, and was brought to business prominence in Air Force pilot James D. Murphy's 2005 book, Flawless Execution.  Using his example of envisioning what success would look like, a bank’s Future Picture should be a detailed description of successful execution of strategy. I challenge bankers’ to describe their Future Picture.

It can be highly subjective and difficult, particularly in an era of unprecedented change. But I would like to share three strategic directions where the train has either left the station, or is boarding.

1. Branches must be larger to survive. According to my firm’s profitability database, branches generated revenue (defined as consumer loan spreads, deposit spreads, and fees) as a percent of branch deposits of 3.50% in 2006. Today, that number is 2.08% due to the interest rate environment, the regulatory environment (reducing deposit fees), and customer behavioral changes. Therefore, the average deposit size of branches grew, to over $60 million at the end of 2015 (see chart). This trend is not likely to change, as bankers are more apt to prune their network and increase overall branch profitability. And the customer. Don’t forget them. They use branches less, although many still identify branch location as important to bank selection.

2.  Technology expenditures will grow faster than overall expenditures. I recently performed this analysis for a client, identifying the “Data Processing” expense as a percent of total operating expenses for all FDIC insured banks as identified in their call report. Surprisingly, it represented only 4% of total operating expense.  Note this excludes IT personnel expense. But the number is growing faster than overall operating expense (see chart), meaning that IT expense is becoming a larger proportion of operating expense. It is disappointing that this trend is slowing so banks can meet their budgets and profit objectives, regressing back to old habits of cutting IT projects to make budget. But overall, banks are seriously evaluating technology to improve efficiencies and their clients’ banking experience.

3.   Robotics are coming. It was only recently I began to believe this. But there are opportunities being evaluated and implemented to automate repetitive processes to reduce overall costs, minimize risk, and speed the process. A couple examples where automation and/or robotics are ripe to improve processes include reviewing remote deposit checks, currently eye-balled by humans. Not scalable. The x-point evaluation could more quickly and effectively be accomplished by a robot. Another area where automation is coming is BSA case evaluation, where the bank’s BSA application identifies potentially high-risk client activity and a program goes through several standardized checks to clear the case or elevate it for human intervention, reducing the overall number of cases needing human review.

These aren’t the only changes. Just the ones that I believe are coming, no matter who tries to stop them.

So why try to stop them?

~ Jeff

Saturday, October 01, 2016

Thank You Mr. Stumpf!

Bank reputations were on the rise. After the financial crisis of 2007-08, led by making mortgage loans to people that had little resources to repay them, banks were climbing from the reputational abyss.

Then came September 8th, when the Consumer Financial Protection Bureau (CFPB), and the Office of the Comptroller of the Currency (OCC) jointly announced the issuance of a consent order to Wells Fargo that included $185 million in fines due to the widespread, illegal practice of secretly opening up customer accounts without the customers' consent. Fifty million of the settlement was to go to the City and County of Los Angeles, which brought a lawsuit against the bank a year ago for the same charge. For further discussion among my colleagues on this subject, click here for our podcast.

And the stench of that little news item is likely to sully the reputations of financial institutions across the country. Don't believe me? How many subprime mortgages did you make where your customers had little hope of repaying? And did the bursting of the housing bubble hurt your bank's reputation? 

Wells Fargo is so large, that many people view them as a proxy for the whole banking industry. Much like Apple or Samsung might be viewed as a proxy for the whole smart phone industry.

What does reputation get you? For Wells Fargo, it gets you $32.9 billion. Or lost them $32.9 billion. That is the decline in market value they suffered from August 31st to this writing. Thirteen percent of their market value, vanished like a puff of smoke in the wind.

According to Cutting Edge PR, sources of information that impact influencers (CEOs, senior business execs, analysts, institutional investors, etc.) are as follows:

Source of Information                          Proportion
Personal experience                                  64%
Major business magazines                        37%
Articles in national newspapers                35%
Word of mouth                                          31%
Articles in trade journals                           30%
Television news                                         14%
Articles in local newspapers                      14%
Television current affairs programs           13%

Is Wells Fargo lighting up the newswire? Yes. Will commentators start dropping Wells Fargo from the discussion and start generalizing that this is typical bank practices? I have little doubt.

I said it before in a previous post on branch incentives, and I'll say it again. Bankers should hold business line managers accountable for the service levels, profitability, and profit trends of their business units. When you begin to drill down and start measuring widgets, employees will gravitate to finding widgets. Which is exactly what Wells Fargo did.

And if you think this culture started recently. Guess again. Google the much lionized former Norwest and Wells Fargo CEO Dick Kovacevich that touted the "eight is great" cross-sell ratio. Stumpf has worked for Norwest/Wells for thirty four years. 

I guess eight isn't so great after all.

And the Schleprock cloud hovers above us all.

Thank you Mr. Stumpf.

~ Jeff