The banking industry is often plagued by misplaced priorities, with resources misdirected in personnel, technology, products, and marketing. Why? Because we don't measure what truly matters.
Why are disruptors needed to develop customer-demanded banking products or create demand for new ones?
Why do pundits offer platitudes instead of practical advice on what a bank branch should be?
Why is "white glove service" focused solely on customers with large balances?
The Misleading Metric: Balance vs. Value
When we look at two hypothetical customers, Jane Doe and Joe Buck, the flaws in current value perception become clear.
The Perverse Math: In current banking math, Joe Buck is valued more and assigned the most capable bankers because of his greater balances. However, while it would take five Janes to match one Joe’s pre-tax profit, Jane is a stronger candidate for "relationship banking" and requires significantly less capital. The underlying issue is that bank revenues are often calculated as simple spread x average balance. As banks grow, this leads them to prioritize larger, more transactional, and commoditized loans. The continuous pursuit of "Joe's" leads to concentration issues, funding issues, and greater commoditization of our bank.
From "Worry" to "Action": The Power of Measurement
The lack of measurement turns potential improvements into unproductive "worry". A classic example is a bank worried about the attrition of its Passbook Savings accounts, which still had significant balances at one of our clients. If they had measured product profitability, they would have a basis for action:
An assigned product manager, seeing the trend of declining balances, numbers of accounts, and profitability, would make necessary modifications.
The discipline of continuous profit improvement enables the financial institution to evolve a product from being demanded by few to something more in-demand.
The same principle applies to managing branch systems:
By measuring the profit performance and trends of each branch, managers can be empowered to try new strategies to improve struggling locations and maintain strong performers.
Continuous feedback loops, judged by improved profitability, allow successful strategies to be implemented across other branches.
The result is an evolved branch system, with resources re-deployed from unprofitable branches into more promising markets.
The takeaway is simple: If we don’t measure it, we can’t manage it. Continuous profit improvement is the key to evolving products, targeting and providing white-glove service to the most valuable customers and segments, and optimizing resource allocation.
By not doing it, we don't evolve, leading to draconian efforts to modernize our products and branches so we can focus on serving our most valuable clients. By not doing it, we are less relevant today as we were yesterday.
And I want my readers to be around for a long, long time.
~ Jeff
Jeff, spot on here. The issue you highlight is compounded by the way the KISS principle (Keep It Simple, Stupid) gets misapplied in incentive structures. Instead of empowering employees, it often demeans them — implying they lack the capacity to understand how the business actually generates value. This stems from management’s unwillingness or inability to teach the underlying model. In practice, KISS devolves into “Keeps Individuals Simple & Stupid,” which is the opposite of what high-performing teams are built on. Ultimately, success belongs to those willing to make the sacrifice to rise above that dynamic.
ReplyDeleteMike, I've seen banks measure activities such as number of calls made, etc. This sucks experimentation and creativity out of those solving for what should be the goal: continuous profit improvement in the product or center leading to a culture of continuing profit improvement for the bank.
DeleteThank you for the comment!