Fact or Fiction: Bank Service Is Getting Worse

In my firm's most recent podcast, I editorialized near the end of the episode about declining service levels in banks, particularly the largest banks. I compared service levels to airlines, citing my recent spate of bad luck with air travel.

I should note that I type these words while waiting at the Minneapolis airport for my Southwest Airlines flight, which is delayed for an unknown reason for at least an hour. It's sunny at MSP and I squint as I write so I can see the screen. Perhaps it's delayed due to windshield glare.

Do I have a point? Or is it perception? According to Federal Bureau of Transportation Statistics (yes, this agency does exist, and you are paying for it), US airline flights were on time 83.45% in May 2016, up from 80.48% in May 2015. I went back five years and the trend is similarly positive.

So I'm wrong about airlines, right?

Not so fast. How do they measure those stats? Ever wonder why airlines board planes and push off the gate only to wait on the tarmac? Hmmm. Wonder if they measure "on time" from the time you push from the gate. The devil is in the details.

If airlines were so good, why do we not feel it? Why does strategyand.com, pwc's consulting arm, describe air travel as remaining "for many a disappointing, grumble-worthy experience"?

My theory is that airline mergers have reduced our choices. So our overall experience is "disappointing", simply because our options to economically get from point A to point B might be with one or two airlines for that route.

On to banks. My theory is similar. But the proof, like in airlines, is elusive. According to the J.D. Power 2016 US Retail Banking Satisfaction Study, our satisfaction with big banks rose for the sixth consecutive year. Satisfaction with mid sized banks dropped for the first time since 2010.

Again, I think the devil is in the details. I always wondered when working with community banks how they achieved such high satisfaction numbers, usually high 80's to mid 90's. And it seems like every large bank has a trophy case of J.D. Power hardware. But my experience with large banks points to inflexibility, lack of front line empowerment, and basically an "I don't care about you" attitude.

Similar to airlines, I think it relates to how much of US banking assets are in the comfortable arms of so few banks. Seventy five percent of US bank assets are held by the top 50 banks. Losing individual customers is no big deal. But drop a notch in BSA or CRA, that's a big deal. In other words, they don't necessarily care as much about being flexible with you as they do about rigidly complying with bureaucrats. 

This feels like how socialism begins. Continue to consolidate power into fewer and fewer hands, be it government or large oligopolies, and pretty soon we're giving blood samples for our DNA to open a savings account.

If a bureaucrat reads this, he/she is probably thinking: "Not a bad idea. We'll say we're doing it 'for the children'!"

It could happen! 

~ Jeff

Why No De Novo Banks? Math.

There is increasing chatter about relatively small banks, under $100 million in assets, looking for an exit. Because they are so small, there may not be a line of buyers waiting for a book to come out from the investment banker. So perhaps an investor group would be interested in taking out current shareholders and recapitalizing the bank?

During previous periods of bank consolidation, the net decline in financial institutions was buffered by the number of de novo banks. For example, in 1997, the merger peak in the past 20 years, there were 725 mergers, and 199 de novo banks.

Not so today. Conventional wisdom puts the blame on regulators. They’re not approving charters, or making it extremely difficult to do so. The regulators deny this. But there is truth to it, in my opinion.

If a bank has a business model that is unique, or serves a narrow constituency, regulators push back in the name of concentration risk, or untried business models. I recall an Internet bank that was trying to get off of the ground in Michigan in the late 1990’s. The concept was new, and growth was projected to be robust, albeit not off the charts.

The FDIC required the bank to raise $20 million in capital, a tidy sum back in the 1990’s when banks got started with less than half as much. So because the business model was relatively unique, the regulators required a very high level of capital. The bankers couldn’t raise it, and the de novo never got off of the ground.

Today, regulators still favor plain old business models. Yet they are also requiring high levels of capital. Primary Bank in New Hampshire, started last year, raised around $27 million. Sure more is better from a safety and soundness perspective. But that capital comes from somewhere. And that somewhere, investors, have choices on where to invest their money.

In comes the math problem.

Let’s say an investor group, tired of big banks making decisions about their communities hundreds of miles away, decide to explore starting a bank. They put together an outline of a business plan, project out their financials several years, and go visit the FDIC.

The FDIC looks at the business plan, critiquing any part of it that is outside the norm, serving a particular industry or industries, relying on non-traditional distribution methods, and so on. They suggest that being more plain vanilla will increase their chances of approval. And by the way, it will require $25 million in startup capital.

The investor group puts together a prospectus, and begins soliciting shareholders for commitments. 

Now, Joe Investor has $10,000 to invest. Does he put it with this new bank? Or does he invest in an S&P 500 Index Fund?

The S&P 500 has a compound annual growth rate of 5.0% over the past 10 years, and 13.0% for the past five years. And The 10-year includes the Great Recession, so Joe Investor projects the S&P 500 compound annual growth rate of 9.0% for the next 10 years. For reference, the S&P 500 grew 9.2% annually during all of my adult years since 1984. 

For Startup Bank, the organizers have projected the following over the next 10 years.

A $10,000 investment in a de novo bank pales in comparison to the return Joe Investor could receive by investing in an S&P 500 mutual fund. And if Joe needs his money out of the fund, he places his trade and the money is in his bank account within three days.

Startup Bank, on the other hand, would likely trade very little. For all publicly traded banks between $400-$500 million in assets, the average trading volume is 1,432 shares per day. Joe putting in a sell order on his holdings could move the market and decrease his value. I learned this the hard way, by the way. So take it from my experience.

Lest you think that the dearth of de novo banks is a regulatory problem. I got news for you. It’s a math problem.

~ Jeff

Colin Cowherd Thinks Poor Reporting is Bloggers' Fault

Riding my exercise bike over lunch, I often watch The Herd, featuring Colin Cowherd and his co-host, Kristine Leahy. Both are sharp sports minds and I respect their opinions. And oh they have opinions.

What struck me today, and The Herd is supposed to strike a nerve, was Colin's seemingly random comment that the quality of news reporting has degraded as a result, in part, because of bloggers. Hmm, do I degrade the quality of bank reporting because of my blog?

His context was the poor reporting done by Al Jazeera America about the theory that Peyton Manning used PEDs. Al Jazeera America was formed in 2013 when the Qatar based Al Jazeera purchased Al Gore's Current TV. Both are/were news organizations, not blogs. So blame the blog for the poor reporting of a news organization? Reporters that dig no deeper on issues than reading celebrity tweets on the air comes back to bloggers? The irony about The Herd being a three-hour opinion show must be lost on him. 

I do not think blogs degrade news reporting. The Huffington Post, now considered a legitimate news organization, albeit quite left of center, started in 2005 as a blog. Current TV, started as a news organization aimed at a younger audience, was by all measures except one a failure. The exception being the $500 million of Qatar-financed consideration paid to it by Al Jazeera. Funny that their name starts with "Al". But I digress.

I don't want to be presumptuous. But I do not think my blog impacts bank industry reporting in the slightest. American Banker isn't worried about Jeff For Banks jumping them for a story. Or any other financial institution blogger for that matter. In fact, I wouldn't be surprised if some news story ideas emanate from industry bloggers. In that regard, industry news organizations may welcome our existence. But to think that SNL Financial gets a news story out quickly and recklessly so a financial industry blog doesn't get there first is nonsense, in my opinion. I can't think of one example where that was true.

Blogs have different reasons for existing. Some hone writing skills, or simply are hobbies. I do it to increase my knowledge of micro issues, engage with people I wouldn't otherwise know, and hopefully spur discussions among financial institution executives on the future of their institution and our industry. I don't own a fedora, monitor newswires, or watch CNBC, fingers at the ready for my next blog post. I struggle to post three per month.

So Colin, with regard to your theory that bloggers decrease the quality of reporting, your Herd is thin. 

~ Jeff

Is That a Risky Bank Customer?

Customer risk assessments are a fact of life in banking. Banks must determine how a new customer will affect its overall risk profile. Most, in my experience, do it in the form of a Q&A form, to be filed with the rest of the customer paperwork. What I see as papering the file.

But let's think about how it could and should be.

It is prudent to determine the risk profile of a customer and how it will impact your bank. Taken alone, it is highly unlikely one customer will impact the bank in a significant way. But grouped together, customers with similar profiles that act similarly within the economy can elevate risk. Think loan concentrations. As a matter of course we measure loan concentrations by loan type, such as construction or non-owner occupied real estate.

And there are red-flag industries that elevate risk, such as check cashing or marijuana businesses.

I have written about banks determining their own well-capitalized by allocating capital to different balance sheet categories based on the bank's perceived risk of those categories. It is a top down approach. But what if this analysis starts at the most granular level... every customer? And the bank uses its customer risk assessment process to determine the amount of capital allocated to that customer?

If built appropriately, it could be a desktop app the lender, branch, or call center employee could complete in front of the customer. See a sample of what I am talking about in the accompanying table.

Multiply this times every customer and every account and you would be able to calculate the capital required to support your balance sheet from the bottom up.

You can integrate ROE hurdles to feed pricing models in order to meet or exceed the hurdle. You can calculate customer profitability in terms of ROE, and create actionable customer tiers, giving platinum service to top tier, active cross-sell to middle tier, and efficient service to lower tier. And when regulators review your customer risk assessment process, and see that it is integrated into your pricing and profit models, capital plan, and strategic plan, trumpets will sound.

Sure, there will be challenges. I'm no compliance or risk expert so I'm not sure what other risk information should be collected on the customer. And what if Joe's year over year profit picture changes, or reality determines that Joe is bringing in bags of cash twice per week. A well designed system could send ticklers to the relationship officer to revisit the customer risk assessment based on the new information.

A disciplined, yet simple design that is integrated into your systems and processes could yield more accurate capital needs based on the sum total risk by each of the bank's customers. 

Do you think this is how it should be?

~ Jeff

Banking Regulators Should Major in the Majors

The amount of agida being given to the Current Expected Credit Loss (CECL) standard mandated by the Financial Accounting Standards Board (FASB) reminds me of Chicken Little's claim that the sky is falling. It hammers home my belief that bankers dedicate significant resources, swerving to and fro, conforming to the myriads of standards, regulations, and exam practices that have little to do with their safety and soundness.

Rick Parsons, author of Broke: America's Banking System and Investing in Banks: Strategies and Statistics for Bankers, Directors, and Investors, drove this point home in Broke, stating regulators, directors, and bankers should major in the majors. Namely, focus on those risks that cause banks to fail. Rick recently spoke about CECL and other current banking topics on my firm's June podcast.

I should note that Rick is in favor of CECL, because it would improve loan risk-based pricing and elevate reserve levels. Point taken. When a bank tech vendor asked me about building a CECL platform, I said if it raised the reserve for commercial banks to 1.2% of loans, then bankers would buy it! That's the ALLL levels bankers defaulted to before all of this complexity surrounding loan loss reserve calculations, and now CECL.

Rick was spot on in his major in the majors commentary. We have diluted examiner resources to the point of ineffectiveness. Instead of focusing on what causes banks to fail, namely operational processes that lead to excessive risk taking, especially credit risk, they focus on everything. Meaning they focus on very little. 

Instead of examiners majoring in the majors, bankers spend countless hours responding to regulatory concerns over their search criteria within their Bank Secrecy Act (BSA) programs, and how many errors the bank had in SAR reporting. For the uninitiated reader, BSA was Congress' means to use banks to police their customers to ensure they weren't laundering money or funding terrorists. To my knowledge, there has never been a BSA violation that caused a single bank to fail. But bankers sure spend a lot of time on it. And HMDA reporting? Don't get me started.

One major law that Rick pointed out that has been a total failure was the social engineering pie'ce de resistance, the Community Reinvestment Act (CRA). To ensure banks lent money into communities where they took deposits, banks are required to report, and regulators are required to grade banks' efforts on this ridiculous law that did nothing to help the plight of inner city residents. 

But ample resources are dedicated to it. And banks must at least achieve a "Satisfactory" to be approved for many things, such as mergers. And there is no lawmaker that will propose its demise even though it has been a "Fail" at achieving their social engineering goals. The press might report the lawmaker is "against inner city residents". Stupid.

No bank failed due to having a poor CRA record. And how many communities were adversely impacted by a bank's "needs improvement" CRA rating?

These are the rabbit holes examiners jump into, and require bankers to dedicate human and financial resources to comply and improve them. 

CECL is another ridiculous concept foisted on banks by the FASB that, although at least focused on credit risk but in the name of financial transparency, will do little to nothing to make a bank safer and sounder against failure, in my opinion. 

Yet here we are. Diluting banker resources further. Have we lost our minds?

~ Jeff

In Banking, Content Is Showing Results

Kevin Tynan, a regular American Banker contributor, recently penned an article: Digital Bank Marketing, It's All About the Content. He cited a recent survey that found content marketing ranks as companies' most significant digital marketing trend for 2016. 

He went on to say that at his bank, Liberty Bank in Chicago, pay-per-click mortgage leads cost $162 per lead, while content-related leads cost just $36. He said that there are even greater differences in lead generation for checking accounts and credit cards.

Content, in my opinion, is moving more from the wish list in the Marketing Department to front and center for bank customer acquisition initiatives. As with most digital marketing concepts, the talk surrounding using content to acquire customers is within the retail realm. See the ad in my Facebook feed today. A local supermarket. Clearly a retail customer acquisition approach.

But what about business customer acquisition? At a recent bank client strategic planning retreat, I pulled up my Twitter feed that had a sponsored tweet from Accenture Banking, directing me to a recent survey. Clearly this was a B2B marketing approach, as Accenture is a B2B consulting firm. If Accenture is working to extend its reach by using promoted tweets directing potential clients to their content, should banks consider it too?

There is friction within banks in considering such an approach. In most strategic planning retreats I moderate, the social media talk, including content, centers on retail. In senior management ranks, I do not think using social media for business client acquisition gets much consideration. But look at the sponsored tweet I just looked up in my Twitter feed?

Google Cloud. So if Accenture, and Google, think social media can promote B2B client acquisition, should your bank?

Read any sales book or go to any sales seminar and you will hear theories on number of touches and conversion rates. In my opinion, commercial bankers consider number of touches as phone calls or in person visits. Not a recent blog post, or information in the client's Facebook stream. 

If, at your bank, it takes seven contacts to turn a business prospect into a client, and reading a blog post or seeing content in their social media streams count, would you be more aggressive in your content efforts? Would this drive down your acquisition costs, as it did for Liberty Bank?

I think it's time to take content and social media marketing seriously for business customer acquisition, even if your "shoe-leather" commercial bankers think it's bunk.

Because what if it's not.

Do you use and have results from content marketing for business customer acquisition?

~ Jeff

Fiserv: Give Your Clients a Test Bank

Community banks are struggling to build a training curriculum to develop branch bankers of the future. Aside from moving from a transaction to an advice, sales, and service culture, they also struggle with operational training.

Why?

The story of declining branch traffic, and the resulting reduction of branch transactions, is reducing the repetition of common and uncommon transactions alike, and therefore the opportunity to improve operational skills of branch employees.

When I was a branch banker over 20 years ago, I went to headquarters, stood at mock-up teller lines with a dozen of my colleagues, and a trainer drilled us on running common transactions with enough repetition to imprint the "how to" in our brains. Well, at least my colleagues brains. I never claimed to be an operational wizard.

Some banks still do this. But with branch turnover down due to a weak job market, and the industry moving to universal banker, these training test beds are on the decline, in my experience. As they should be. No reason to institutionalize what is quickly becoming an outdated model... tellers standing behind the rigid teller line anxiously awaiting for the flood of customers that no longer come.

So how do banks increase proficiency with transaction processing? Most accomplish through on-the-job training (OJT), in my experience. But with common transactions being done less frequently, particularly in smaller or more rural branches, and uncommon ones perhaps happening once per month or less, how are branch bankers getting the reps needed to become proficient?

Some are being deployed to a bank's busiest branch, typically the headquarters office, for some OJT before being deployed into the branch network. This is a natural reaction to get reps, and be productive once sent to their primary branch.

But how can your core processor be helpful?

Those that have been through the painful core processor conversion experience know that the Fiserv's and Jack Henry's of the world establish a "test bank" to get your people proficient at all sorts of interactions with your soon to be deployed core.

My question: Why give this up?

I reviewed all data processing expenses for Southeast banks with assets between $800 million and $1.2 billion in total assets. Community banks. The results of my analysis are in the chart below.

In terms of the Call Report, Data Processing Expense category, these banks spent on average almost $1 million in 2015. And the trend is decidedly up. Not a small sum.

In my firm's profit improvement engagements, we see wild fluctuations in core processing expenses. Telling me: 1) banks buy different services from their core processor, and 2) there should be negotiating flexibility given the dollars involved.

What I suggest is negotiating a "test bank" that remains open for continuous training with your employees. Not just branch employees, but everyone that interacts with the core. This will improve the effectiveness of your OJT program, increase transactional proficiency, and allow your bank to dedicate more resources to higher level employee development. It will also retire "Mickey Mouse" and "Donald Duck" as customers. Bankers know what I'm talking about.

There's enough margin in that Fiserv contract to make this happen. Make it so!

~ Jeff