Three Gifts for Bankers

The magi, thought to be named Gaspar, Balthasar, and Melchior, followed a bright star to find the Messiah. According to the Gospel of Matthew, they brought him three gifts: gold, frankincense, and myrrh. 

The journey wasn't easy for the magi. At first, they did not know where they were going. And when they arrived in Jerusalem, King Harrod tried to fool them into discovering and reporting the whereabouts of this King of the Jews. 

Although the magi's perils were greater and their journey quite a bit more significant than the modern day banker, I too see headwinds for community financial institutions, and wish for three gifts for them during this holiday season.

My Wish For Bankers in 2019

1.  I wish Artificial Intelligence ("AI") becomes real. The blaring horns about AI in the news and on social media is loud and frequent. I wish it was as loud and frequent within financial institutions. The truth is, we haven't had many wins yet. But it's coming. And my wish is that it comes soon. Because we continue to invest significant resources in operational functions that are the "keep the lights on" variety. Such as balancing accounts between disparate systems, solving for unread items, and trolling through accounts for suspicious activity. These are belt and suspenders type problems that the promise of AI should help solve. And in so doing, perhaps we can re-allocate resources that we tend to over invest in non-value added activities (see the below charts) and re-invest into a bank that delivers a truly superior customer experience, with highly trained and appropriately rewarded employees. 

2.  I wish employee development rises to be the top strategic objective for banks that want to distinguish themselves through their people. I hear some variation of employee development in strategy sessions often. And see progress in employee development much less so. The fear that investing in functional fluency and a career path might lead to employee departure is real. So employee initiatives remain at the forefront of budget cuts. What if you train them and they leave? I believe your biggest threat is to let them languish and they stay. It's a sure sign that the scales will remain tipped toward investments to keep the lights on, as alarmingly demonstrated in the charts above. And don't statistics support that it is less expensive to develop from within than pick up people off of the street?

3.  I wish financial institutions to remain independent because they've earned it! The accompanying chart should be quite alarming for bankers. I know it is for bank consultants! So often, with recent regulatory activism, a severe recession, rising costs and needed technology investments, and fear of the pace of change, financial institutions' are deciding to throw in the towel. But it need not be so! For shareholder owned institutions, determine the desired return of those shareholders and build a strategy to achieve it (long-term), whether through capital appreciation or dividends. And balance the interests of your constituencies: shareholders, customers, employees, and communities. For non-shareholder owned, you still must earn your right to remain independent, achieve acceptable profitability to add to your capital base, grow, and remain relevant to those other three constituencies. Make it part of every planning retreat. Because if you don't know where you want to go, you're already there.  

Those are my wishes for three gifts for bankers in the coming year. Instead of having three fellas from the east come and bestow them on you, make your own gifts. 

I want to thank all of our current and past clients for the gifts you have given me and my firm. We appreciate every one of you. And look forward to serving you and new friends in 2019.

~ Jeff

Three Wishes for Bankers

If I had a genie in a bottle that granted me three wishes, I would shoot for grander goals such as world peace, end poverty, and ban Mariah Carey Christmas songs. But this is a bankers' blog, and I want to remain topical.

Most readers are accustomed to me being analytical. Searching for trends and truths in a sea of numbers. And it is true, that numbers weave a tale that should be told. But in this post, I would like to rub the bottle, unleash the genie, and go for three grand wishes for banking.

Wish 1: Banks and Credit Unions - Can We All Get Along?

I believe in compassionate capitalism. In an evolved capitalist society, in my opinion, those "do-ers" would maximize their abilities and their legal/ethical earning power, and give their excess to worthy societal goals. Altruism? Sure. There will be those capitalists that buy gold toilet seats or hold lavish spousal birthday parties on Sardinia to prove they are in love. But let's focus on the good, shall we?

According to a 2015 FDIC National Survey of Unbanked and Underbanked Households, seven percent of US households were unbanked, meaning they had no account at an insured financial institution, and 19% were underbanked, meaning they used non-traditional financial providers like pre-paid cards and/or payday lenders. This is a significant percentage of the populace, and ripe pickings for credit unions, that tend to have better success profitably banking these customers than do banks. 

For example, in my firm's profitability measurement service for community financial institutions, credit unions make 80-90 basis points pre-tax profit on consumer loans, while banks make an anemic 5-10 basis points. And banks' have an average consumer loan account balance of over $40,000, whereas credit unions are around $14,000. 

Credit unions tend to deliver profits on smaller balance accounts. Accounts, dare I say, that bankers are happy to yield to them because they are not well suited to serve those customers.

But the tax thing. Bankers' can't get over it. And with NCUA loosening their definition of who can join credit unions, you can see the point.

So here's my idea: Collaboration in a market between a bank and credit union to cure some social challenge.  For example, what if Schmidlap National Bank and Pipefitters Local CU teamed up to end poverty in their local market? Schmidlap could commit 10% of their pre-tax profit to contribute to local charities whose specific mission is to end poverty. The CU could commit 20% of pre-tax profit to do the same, creating greater parity on the expense side of the ledger, and uniting the one-time foes to make their communities better.

I know one Midwest bank CEO that will disagree. How about you?

Wish 2: Simplify

In every executive meeting, every operations manager meeting, every sales meeting, I wish bankers would ask "how can we simplify?". Simplify their processes, their systems, and for their customers.

We have enough complexity in the world. I spent half a day trying to get my Mom's iPad to interface with Alexa. I was so successful that Alexa gave us the time and the weather, and nothing else. My Mom had to enlist the support of the Geek Squad.

There is enough complexity in everyone's lives. Internally, we have been over-reacting to interpretations of regulation, hyper-complying to avoid an audit finding or, shudder, a matter requiring attention (MRA) on our exam. Externally we have been doing the same to customers. 

Finances, either personal or business, are more complex today than at any time in my life. And quite possibly, in anyone's life. Technologies that have been making finances easier are growing at a rapid rate. I believe customers want to interact with humans about their finances. But we can't heap all this complexity on them and expect them to reject easy to use tech solutions.

Financial institutions that come out on top will be the ones that figure out how to simplify their processes, their infrastructure, and their customers' financial lives.

Goal 3: Automate and Elevate

I did a back of the envelope estimate that a $1 billion in asset financial institution might have 240-250 full-time equivalent (FTE) employees. I also estimate that less than half of them would be customer facing.

The investment financial institutions make in support center functions that scream for automation is not sustainable into the future. In a prior post, I made one slam dunk prediction that robotics was coming. Repetitive tasks will be increasingly performed by an application or a robot. Reconciling the suspense account now done by an accounting clerk? An app. Five point checks on personal check capture images now done by a clerk in Deposit Ops? A robot. 

This will make available significant resources to invest in employees to perform higher level tasks either in support or the front line. How often do I hear executives hope their branch employees would elevate from efficient transaction processing to customer service and advice? Often. How often do senior lenders exhort their lenders to be relationship focused and not solely deal guys/gals? Regularly. And how often do I hear frontline staff wish that support staff would find creative ways to get things done instead of erect road blocks? Every performance improvement engagement team I have ever been on.

So, for financial institutions, always look for ways to reduce paper, automate repetitive processes, and invest greater resources into delivering the financial institution your customers deserve.

Those are my three wishes for bankers. What are yours?

Happy Holidays everyone!

~ Jeff

Bankers: What should the magi bring you?

The Gospel of Matthew reads (Chapter 2):

"When Jesus was born in Bethlehem of Judea, in the days of King Herod, behold, magi from the east arrived in Jerusalem, saying, 'Where is the newborn king of the Jews?' We saw his star at its rising and have come to do him homage."

King Herod dispatched them to Bethlehem. Matthew's Gospel goes on to say:

"And behold, the star that they had seen at its rising preceded them, until it came and stopped over the place where the child was. They were overjoyed at seeing the star, and on entering the house they saw the child with Mary his mother. They prostrated themselves and did him homage. Then they opened their treasures and offered him gifts of gold, frankincense, and myrrh."

I'm no biblical scholar, so I am not aware of any significance to the three gifts bestowed on Jesus by the magi. Three wise men, men of stature, traveling long distance, with nothing to guide them but a star, to bestow a gift to a child, a child born under the most humble conditions, was symbolic enough.

But the gifts were chosen by the givers. We can all reflect this Christmas on what three gifts we would give to improve the lives of those around us. Not gifts such as the fruitcake, or piece of jewelry. Something more profound.

This got me thinking about what three gifts I would like to give to bankers, if I had such power. Here is what I came up with:

1. The Gift of Leadership

Leadership is not managing the day to day affairs of the bank. Leadership is motivating others to follow you through difficult and uncertain circumstances, keeping firmly focused on a vision. In no other time during my career in banking, has there been a more difficult and uncertain road ahead. Banking needs leaders that form a vision, communicate it so effectively your team lines up behind you, and pursues it with incredible passion.

2. The Gift of Talent

Banking used to be more about efficiently processing transactions and less about helping customers navigate financial complexity. As a result of automation, transactions are handled less and less by human hands. Efficient transaction processing is more likely executed in the IT department than on the teller line. At the branches, and at our customers' offices, there is a need for bankers to make customers' financial lives less complex. We need the talent so we are capable of doing it.

3. The Gift of Prudence

Yes, bankers must be prudent in developing and executing their strategy. But if I could bestow prudence, I would first focus on bank regulators. We long for a regulator that interprets laws for their intention, and implements rules that follows the spirit of the law with a watchful eye towards minimizing unintended consequences. Have you ever sat at a mortgage closing? The volume of documents and disclosures that few borrowers read are the result of imprudent regulation. Did it help us? We are on the precipice of making the same mistakes again. It would be a beautiful gift to have regulators that know this and act accordingly.

So, in the spirit of the magi, I offer three gifts to bankers. I wish I had the power to make it so. What gifts do you want from the magi?

Merry Christmas everyone!

~ Jeff