EY's 8 Banking Customer Segments: Where's Your Focus?

EY recently released its 2014 Global Consumer Banking Survey. They surveyed more than 32,000 customers across 43 countries to evaluate 31 banking experience elements. As I read through it, I began to think how a community financial institution would turn what EY learned into action.

They parsed global financial services into eight different segments. "Each customer segment has different priorities, so developing targeted strategies requires careful attention to customer experience, channel preferences, priorities and behaviors." These segments are:

1. Upwardly Mobile - Young and highly educated. Have relatively high household incomes. Are prone to defection from their financial institutions. And value financial advice over multiple channels.

2. Elites - Older with high education and high household incomes. They are heavy users of online channels and value do it yourself financial management tools.

3. New World Adopters - Young and highly educated, they are indifferent to using either a bank or a new market entrant (non-bank). 

4. Balancers - They are comfortable with online channels but value a relationship with their financial institution. They don't open and close accounts frequently.

5. Safety Seekers - The largest segment of the population, safety seekers are less educated and typically have less cash flow per household. They prefer to use the branch.

6. Traditionalists - Less educated and more limited in terms of income, traditionalists own the fewest banking products but are willing to listen to new ways of interacting with their financial institution. They also value being rewarded for their loyalty.

7. Self Sufficients - Older, less educated, and have less financial resources. They have low levels of trust in financial institutions and are not likely to open or close accounts.

8. Unhappy and Unmovings - They are the most critical of their financial institution and the financial industry as a whole. They have a high incidence of complaints, and a low incidence of satisfaction with problem resolution. But they are unlikely to move accounts.

As I read through the list and the more detailed information about each of these segments, I thought through the different strategic approaches to each segment. And it struck me. Why build a strategy to attract and satisfy each of these segments? Their interests are so different, in many cases.

Would it be a more efficient allocation of strategic resources to pick the most populous and growing segments listed above in your markets, and build your strategy around them? Not only will you focus on the products, delivery channels, and brand that is most attractive to a select few segments, but you won't burn energy (i.e. resources) trying to be all things to all of these segments.

But that is not the way community financial institutions were built. We put a branch up in a town, and we tried to serve all eight segments, plus the business community, in that town. Our culture is infiltrated with employees that believe this is our strategy. And perhaps it is.

Now we realize that in this highly competitive landscape, perhaps we should be known to be excellent at serving a few of the above segments, and/or segments of the business community. Because the investments required to chase them all dilute our already heavily taxed resources.

Should community financial institutions focus on only a few segments, or develop strategies for them all?

~ Jeff

Bankers: Here's What I Do

Content marketing gurus tell us not to put sales pitches in your content. But I would like readers to know what I do in case they want greater context to blog posts, or are generally curious people, as I am. So here goes... 

What The Kafafian Group does, by Jeff Marsico

We help financial institutions perform better. How?

We manage and moderate the strategic planning process. From strategy team retreat, to the operating plan, to financial projections. We build strategy components, such as capital plans and strategic alternatives analysis. Yes, financial institutions should regularly perform a strategic alternatives analysis so the Board and Senior Management know who can be bought and at what price, what others can pay for you, and the present value of your strategy. A focused strategy and a disciplined strategic planning process is critical in our changing industry.

We perform profit improvement projects that help financial institutions increase revenue, decrease costs, and allocate organizational resources consistent with your FI's strategy. Today, more than ever, we must focus our resources on the most profitable endeavors in order to build an enduring future. Sometimes senior management deems it preferable to have an outside firm perform this project because of our perspectives from multiple FIs and business models, and our ability to cut through organizational barriers.

We do general advisory work to FI senior management and Boards of Directors. This has included management studies, retainer advisory so senior managers have a go to resource outside of the FI to evaluate significant decisions, assisting the Board perform day-to-day management duties while the FI searches for a new CEO, valuations for private FIs, etc. 

We measure the financial performance of business units, branches, products, officers, and feed customer profitability systems. We do this on an outsourced basis so those FIs that don't have the resources to do it themselves can build an accountability culture at the business unit level. We review results and areas for improvement regularly with senior management. This service includes funds transfer pricing, cost allocations, equity allocations, and most of the other tasks associated with getting an FIs profitability reporting up and running. You might be surprised to read that credit unions also avail themselves of this service. They care about profits because it is their sole source of capital.

We do merger advisory. We are a niche player in whole bank, branch, fee-based business merger and acquisition work. Niche because we don't typically go from FI to FI, pitching deal ideas. We react to client senior management request for assistance, and work hard to achieve client objectives, and get deals done so long as they are additive to the client's long-term performance, as deals should be, right?

So there it is. Contact me if you would like our help. Thank you for reading.

~ Jeff

Flawless Execution: Plan, Brief, Execute, Debrief

How do we connect our strategy to our vision? Can bankers identify, in high definition detail, the bank they want to become to remain relevant to their constituencies, and translate this future bank vision into action?

Regular readers of Jeff For Banks know I recently read Flawless Execution by former Air Force pilot Jim "Murph" Murphy by my post about defining your High Definition Destination. Far be it from me to send multiple shout-outs to an Air Force guy. The Navy has more planes (GO NAVY!). But, as the book's title suggests, Murph has some interesting thoughts on execution that I think can help banks bring vision to the ground floor.

Murph outlines how pilots plan for missions in a model represented in the accompanying picture. Could this work for community financial institutions? Let's walk through an example.

Suppose the FIs vision, or "high definition destination" is to be the number one business bank in the counties served for businesses with less than $10 million in revenue. The strategy team identifies a few Strategic Objectives that are critical to achieving the vision. For example, one Strategic Objective could be to develop a robust, yet simple suite of products designed to make the business persons' lives easier.

In the Flawless Execution model, a team would be assembled with all functions critical to the execution of the Strategic Objective present... commercial and retail banking, IT, compliance, marketing, etc. A plan is developed with responsibilities and timing. The team completes the game plan, and disperses to execute, re-assembling for regular updates and inter-dependencies.

After the product suite is developed and launched, per the plan, the team comes back together for a debrief to dispassionately discuss surprises, hurdles, miscues, and successes. This debrief is critical to organizational learning, ensuring the next Strategic Objective is executed better than the last. Yet, in my experience, the debrief rarely happens. 

Part of the reason is the increasing lack of candor in banking, and our society as a whole. I dedicated a blog post to this subject over three years ago, and I haven't noticed much improvement. How do we construct a culture of continuous improvement if we do not recognize execution flaws and impediments through a candid, yet dispassionate and impersonal debrief process?

Fighter pilots debrief this way because flaws in plan execution could end up in tragedy. Get better or risk death tends to add greater urgency than get better or have your FI relegated to the dust heap of irrelevance. 

But, as the numbers bear out, FIs need to get better at execution or risk irrelevance.  

How do you execute and do you debrief?

~ Jeff

Guest Post: 2013 Economic Year in Review and Outlook by Banker Dorothy Jaworski

We’ll Miss You, Ben

Now that the holidays are over, it is time to recognize that January, 2014 marks the last month as Federal Reserve Chairman for our favorite helicopter pilot, Ben Bernanke. He was just in Philadelphia on January 3rd delivering his last public speech and he nostalgically proclaimed that “the recovery remains incomplete,” which will qualify his comment for the understatement of the year award. 

Despite his heroic efforts, including a Fed Funds rate near zero for the past five years, forward guidance, scatterplots, press conferences, a new “openness,” and his trillion dollar QE bond buying programs, economic growth has not returned to “normal.” Our student of the Great Depression tried everything. He succeeded in saving us from true disaster in 2008, but has not been able to accomplish his goal of strong economic growth.

To put that GDP growth into perspective, consider that, in the three years following the recovery which began in June, 2009, real GDP averaged +2.2%. In the ten previous recessions, real GDP averaged +4.6% during a recovery. This helps to explain the Fed’s continued easy money policies, stretching now into year six. It also helps to explain my constant whining about sub-par growth!

Ben, we will miss you tremendously when you ride into the sunset on January 31st and we eagerly anticipate the reign of your successor, Janet “She Devil” Yellen. She will continue your zero rate policy and will “taper” your QE 3 program, because the markets have already dismissed its impact and tightened long term rates despite your wishes.

Incidentally, your QE 1 to 3 programs ran for six years, accumulated three trillion dollars of securities, and pushed long term rates lower when your forward guidance could not do so. But in nine short months of 2013, you and the Fed stumbled with mixed signals and miscommunication and the markets pushed the 10 year Treasury yield up by 130 basis points to 3.00%, removing all of the good attained by QE over the years. 

This anomaly occurred despite inflation readings that are trending downward in both the producer and consumer price indices. Mortgage rates rose just as much and they may potentially damage the housing market recovery. Another anomaly continues in that the 3.00% yield on the 10 year Treasury is much higher than the dividend yield on the S&P 500 index of 2.15%. Stocks are supposed to have more risk. That is all I will say on stock markets, because they usually sell off once I write in depth about them, although PE ratios are fairly average and don’t call for huge correction. It shows that while the Fed may have a tight grip on short term rates, the market will decide long term ones.

Cautious Growth for 2014

We expect that GDP growth will continue in a cautious mode in 2014, likely between 2% and 2.5% once again. Many of our bank’s customers remain cautious about borrowing and spending on large projects. Many businesses remain uncertain due to the increased regulatory burden, the drama in the insurance markets due to Obamacare, income tax changes, and a still high unemployment rate at 7%, which serves to keep personal incomes in check and consumer spending under wraps.

Despite the “headwinds” mentioned above, the Federal Reserve has very optimistic GDP forecasts for future years, with 2014 at 2.8% to 3.2%. The National Association of Business Economics, or “NABE,” is almost as optimistic at close to 3%. Some of Wall Street’s brokers expect more moderate growth, with Sterne Agee at 1.7% to 2.3% and Janney Capital Markets at 2.1% to 2.5%. 

I find it interesting that these same forecasters expect continued drops in the unemployment rate, with the Fed lowest at 6.3% to 6.6% in 2014, yet growth is not even returning to the normal post-recession pace of 4.6%.

That is because the unemployment rate itself is also an anomaly, having fallen from above 8% in the third quarter of 2012 to 7% in November, 2013, mostly from people dropping out of the labor force and not from the measly pace of job creation, whether viewed from the payroll or household survey. The labor force participation rate has fallen from 66% pre-recession to 63% currently. The primary aggregate impact on the economy of this difference of 3 million workers no longer participating in our labor force is reduced income and thus, reduced purchasing power.

And So…

And so, we find ourselves over four years removed from the end of the last recession, a time when most recoveries would be ending, and this one has barely begun. The data as of late has continued to improve. Real GDP grew by 4.1% in the third quarter of 2013, but the strong growth numbers were the result of huge inventory building, to the tune of nearly $116 billion annualized. No wonder retailers were slashing prices for the Christmas holiday spending season. 

This high GDP number aside, we still have slow growth and structural changes occurring in our workforce, resulting in less income, less spending, and more incessant whining by me. 

Businesses are still cautious in capital spending. Several wild cards may improve growth—such as energy availability and prices, improvement in overseas economies in Europe and Asia, and our new Fed Chairman, Janet Yellen, who should follow the low rate policies. And so, all of this adds up to cautious optimism for 2014. 

Our Philadelphia Eagles excited us and made us optimistic that their 2014 will be bright. We can be proud of what they achieved this year under new coach, Chip Kelly. I keep thinking back to the Phillies playoff loss in 2007, which taught them “how to lose” before they came back strong and won it all the following year in 2008. Just saying... 

And so, as I finish writing this, the polar vortex is about to give us two of the coldest days and nights in over twenty years. But we count our blessings; it will be back above freezing in a few days.

Stay tuned!

Thanks for reading and Happy New Year!  DJ 01/06/14

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with First Federal of Bucks County since November, 2004.

American Greed: Can being an honest broker be banks and credit unions competitive advantage?

Americans are becoming more responsible for their financial well being now and into retirement. According to a 2012 Boston College Center for Retirement Research study, 63% of American males (why only males I do not know) participated exclusively in defined contribution (DC) retirement plans in 2007, up from 47% in 1992. Those that participated in defined benefit (DB) pension plans was 16% in 2007, down from 31% in 1992. We are increasingly bearing the burden of managing our money.

Yet money management is a discipline done well by only a very few. My firm, full of banking industry consultants, just held an education session regarding our 401k plan. I would say, for me, it was interesting and educational. I will probably select the auto re balancing feature because I don't want to take the time to actively manage it. Will I take the time to do a good job researching my fund choices. Probably not.

So, if those involved in banking don't have the time or inclination to do it, how about the engineer, retail store manager, or forklift operator? I think, as a nation, we will need lots of help managing our money. Not just in retirement, because day to day money management is becoming more complex too. Gone are the days of keeping money in an envelope in the nightstand to save for a new refrigerator, or to pay the annual insurance premium.

Could this need for personal financial management prove to be a viable niche for community financial institutions? I think so. One reason is the amount of fraudsters that will emerge with messages of help and hope on an unsuspecting population, only to turn the helping hand into a backhoe to rake their customers cash into their own bank account. Don't believe me, check out a few episodes of CNBC's American Greed, a favorite show of my wife and I.

Although fraudsters don't typically use a community bank or credit union as home base for their antics, some do, such as Aubrey Lee Price who defrauded a community bank in Georgia for $21 million. Most fraudsters establish their own small financial services firm to do their work. Others use very large financial institutions that can only loosely be called banks. My point is that bad actors are not typically associated with the local bank or company credit union.

With this in mind, can the local community financial institution be viewed as the "go to" resource for those of us that are dazed and confused on how to manage our financial lives? Can we brand ourselves as the trusted advisor in our communities?

If so, we have to ask ourselves if we have the personnel, processes, and systems to execute on such a strategy. Because if we position ourselves as our customers' trusted advisor, and can't deliver, it will be difficult to overcome the negative brand perception.

Can we specialize as the trusted source for personal financial management?

~ Jeff

What is the better banking strategy: low expense v low deposit costs?

Here is a question that dogs us: should we follow a strategy that drives top quartile performance in operating expenses or cost of deposits? If your answer is "yes", your execution better be flawless. Because the two don't often go together. In my search, described below, only one bank made top quartile performance in both categories.

The low operating expense bank typically comes with a limited branch network. Bank futurists think this a good thing since branches are millstones around our collective necks. So in order to attract deposits, these banks tend to use premium rates to get people comfortable with not having a nearby branch. 

Low expense banks tend not to have sophisticated commercial banking operations too. Preferring instead to focus on residential real estate lending combined with transactional commercial real estate lending. By transactional, I mean the bank may resort to price to get deals, and not extensive customer relationships, as many of these customers don't value relationships anyway.

Conversely, low cost of deposit banks tend to have more expansive branch networks to get core retail and business account balances. Anecdotally, the most often heard reason a business customer objects to opening an operating account at a bank is because it lacks a nearby branch. But, admittedly, that could just be an objection that is not the "real reason".

Also, low cost of deposit banks tend to be heavy commercial lenders, both commercial real estate and business loans. That requires a good product set, and lots of resources. Asset-based lending requires much greater borrower interaction than plain vanilla commercial real estate lending.

So which strategy results in better performance? I went to the numbers (see table), and it's tough to tell.

I searched for banks of a certain size ($1B - $20B in assets) to eliminate trading anomalies from very large and very small banks. I also controlled for capital levels and asset quality to limit the number of factors impacting pricing. 

The picture is not totally clear on which strategy delivers the better returns or higher trading multiples. To be sure, both sets of top quartile banks are well run and rewarded with relatively high trading multiples. And they have delivered very good results, as indicated by their 3-year price changes.

So, which one is better? I think it depends on each financial institution's individual circumstances. Do you operate in slow to no growth markets? Perhaps a low operating expense/cash cow strategy is appropriate. 

Is your FI in business-rich markets and your niche is concierge-like service to tech firms? Well the low cost deposit strategy with higher expense ratios may be appropriate. 

Whatever strategy you choose, I implore you... to choose. The zigging and zagging, the all things to all people, the yes, yes, and yes strategies are misallocating resources and driving our financial institutions into homogenized and commoditized, irrelevant, soon to be sold and quickly forgotten memories that our 7,000 brethren that have been sold since the early '90's have become.

Are we going to let it happen?

~ Jeff

Bankers: What Is Your High Definition Destination?

Future Picture: "A high-definition picture that shows in great detail the future as you want it to be." Future Picture and its definition are from James D. Murphy's ("Murph") 2006 tome, Flawless Execution. I liked it so much, I e-mailed Murph at his consulting firm, Afterburner, for permission to quote from it.

Murph and his colleague, Will Duke, called me back. Since the 2006 book, their thought process has evolved. They created a more versatile version of Future Picture, one that can be applied to multiple industries with greater precision. They termed it High Definition Destination ("HDD") in their as-yet to be released book, Courage to Execute. 

In an excerpt of the book, HDD is described as follows:

" A HDD should be so described as to provide a beacon-like objective that drives the entire organization forward.  It should be clear and simple, yet high-definition."

In other words, Future Picture, and it's successor HDD, describe in vivid detail the organization you want to be. So vivid, in fact, that all levels of the organization know it, understand it, and can describe it in less than five minutes. 

I discussed with Will and Murph our industry's vision problem. Many if not most of our banks date back many generations, in simpler times when we had one branch that did all things banking to an entire town. Competition was limited and sometimes non-existent. So our vision started as something like this... Schmidlap National Bank. We're a bank. To the town of Schmidlap. 

Now things are more complex. We are in dozens if not hundreds of communities. Our products sometimes number in the hundreds. We compete with financial institutions that are located within those communities and outside of them. We don't just compete with banks, but also with credit unions (and vice versa), insurance companies, brokerage companies, virtual banks, and non-bank financial intermediaries. 

Yet our vision has evolved to something like this: Schmidlap National Bank. We're a bank. But not just in Schmidlap.

Don't believe me? Take this vision statement from an anonymous bank that I found randomly looking through bank vision statements on the web:

"Our vision is for [bank name] to build value by employing those human, financial and technological resources which will enable and insure its expansion, prosperity, and reputation for superior quality, performance and value returned to the communities, customers, team members and investors it serves."

How about that for a High Definition Destination? There's gotta be a yadda yadda yadda in there somewhere. Does this vision statement read like yours? Even a little bit? Does your vision provide that vivid picture where all employees know your HDD and make decisions and develop tactics to achieve it?

As Murph told me on the phone call, general vision gets general execution. Executing to achieve some general HDD promotes wasted effort. And minimizing wasted effort is critical to flawless execution.

So tell me, how specific is your vision? Do you have an HDD?

~ Jeff