Banks as Villains

[packy]

Banks as Villains

I have family members and close friends who are executives in small, regional and large banks. Today, political pundits and politicians alike are painting all banks with the same negative broad brush and the bankers who run them as villains. Articles, speeches and blogs all have noted the banks’ “newly developed” evil attributes.

Odd as it may seem, I have seen no such changes in my family and friends. They still care deeply about their communities, care about the struggles their customers face in these uncertain economic times and care about providing growth opportunities for existing and new businesses.
What has changed in the last two or three years is nearly every aspect of the professional life of these bankers. Loans that were sound when they were negotiated two years ago are now listed as non-earning assets. Interest rate spreads are razor thin. Deposits are dwindling as customers move money to accounts opened on the internet which pay higher rates. Historical sources of income are drying up due to new legislation and regulations.

After spending decades in the industry, many bank presidents are facing the challenge of rethinking the traditional paradigm of delivering service to their customers. Until a few short years ago, if they wanted to grow their bank, they built another branch. Today, with online banking, online account opening, mobile banking, check scanners and direct deposit, fewer and fewer consumers have a need to go to a brick-and-mortar facility. CEOs are trying to understand whether their bank would benefit from building an e-Branch and, if the answer is yes, how do they explain the concept to their board of directors. A community bank CEO recently told us that online account opening could help his bank gain new depositors and reduce his fixed costs, but he had no idea how to present the idea to his board, three of which didn’t regularly use the internet and one who didn’t even use email.

The villainous bank financial officer faces new challenges of his own. With loan income down, treasuries basically at zero and non-interest income being dramatically reduced due to new regulations, where is the profitability to come from? Which customers are the most profitable and what do we do to retain their business? Are my products priced properly to provide a reasonable rate of return? Will competition allow me to re-price my products to offset reductions in non-interest income? The vast majority of CFOs didn’t invest in interest rate default swaps and hedge funds, yet they are now dealing with the consequences of those institutions that caused the financial crisis.
Today’s IT manager is involved in so much more than installing and maintaining hardware, software and networks. Security is at the forefront with the explosion of pharming, phishing and man-in-the-middle attacks on the bank and its customers. As these attacks increase, the bank’s balance sheet can suffer either with higher insurance premiums or actual losses through deductibles. And, as consumers demand more electronic access to their bank, the IT manager is being asked to review online account opening and mobile banking programs. Will these new programs provide a positive interface with your current systems and, more importantly, with you customers? Are they better than your competition’s? Is account information available in real-time? Surveys indicate all of these will be must-have benefits to meet customer expectations.

Marketing must deal with dramatically changing customer expectations. All they have to do is look at the exponential growth of mobile and online banking. These services can be great for future profitability but may be a drain on income for the next few years. The majority of new customer growth will likely be acquired using technology. Consumers are beginning to demand the availability of opening accounts online, making deposits using a scanner from their home or office, and moving their money between accounts and different banks using their phone or laptop. As the reach of traditional media declines, the marketing officer must learn how best to use social media, blogs and online advertising to communicate with consumers and build their brand. And, it’s not just the Gen X and Gen Y consumers who are using Twitter and Facebook. Parents and even grandparents are enjoying the benefits of current technology.

All of these “evil bankers” must address the industry’s changing landscape and delivery system. The internet has reduced the value of location, location, location as it refers to banks. It’s not time to disregard your brick-and-mortar network, but it is time to develop a strategy to augment your traditional delivery system with electronic alternatives. Our partner spoke with a young professional in her late twenties who has not been in a bank, even to open an account, in almost ten years. She has loans and deposits with balances in the tens of thousands in two different banks and both are located hundreds of miles from where she lives. She doesn’t need to go to the bank as long as she has her Blackberry, her laptop and her scanner - she may embody your future customer.

Market analysts and industry observers seem to be on the same page when they say that banking as we know it may be changing more than it has in 100 years. Wal-Mart changed an industry with a basic value proposition – lower costs with no reduction of basic product quality. While Wal-Mart may not stock all products, they provide merchandise their customers want in an efficient and profitable manner.

Changes in the financial industry mean banks must also understand their value proposition and how it affects their pricing, profitability and delivery systems. They need to delve deeper into understanding their costs and income as they relate to product type and customer demographics. Relationships will remain as important as ever. However, the definition of “relationship” may be changing. ING has nearly $90 billion in assets and, as far as I know, have never shaken hands with a customer. The challenge is to develop ever deeper relationships simply by providing multiple, high value services to their customers.

In other industries, managements often try to be in front of trends. Historically, most financial institutions have been followers. I feel that with all of today’s changes, successful banks of all sizes need to offer leadership in customer services and products.

The country’s top ten banks “get it” and have developed alternative methods to reach customers and increase profits. Unfortunately, if anyone has earned the label of “villain”, it’s a few of the banks at the very top. In my circle I see no villains, only business executives managing through some extreme changes and difficult times. Come on pundits, look at the big picture.

[Bradly T.]

While the differences between big and local banks is as great as the difference between Merril and my indie BD, I'm not ready yet to join the bankers pity party. First, for a banker, you don't seem to know much about the banks' spread - it's anything but "razor thin". It's as wide as the Mississippi right now. Second, all banks have abandoned their core revenue source the past few years to embrace transaction and service fees - like credit card companies have. Nickling and diming their way to billions with nefarious billing and business practices. They have also made financial product peddling a major revenue source. Bankers have found "better" ways to make money than their core deposit and lending services. There has been a nearly perfect corelation in lost customer loyalty with these new banking priorities.


The on-line competition hasn't helped but it is not the cause either. As bankers sell more and more annuities and mutual funds, more and more fund families and insurance companies are providing banking services. Between computer application credit score decisions (rather than personal knowledge of the customer), external mortgage brokers and on-line "bankers", will the brick and mortar model survive? Even big banks cannot be all things to all people very well.....local banks? Not a chance. The greatest advantage for local banks has been relationship driven - what are they doing about that????? The irrelevance of banks is another casualty of ending Glass/Steagal - which I recall they lobbied hard for. They have sown the seeds of their own destruction.



Don't get me wrong, I believe in community banks...but I'm not sure I believe in their future. If you abandon the people long enough, they will abandon you back. So, how do you think this problem should be solved???

[Bob H]

Idiots are villains.

Stupid, self-centered, greedy morons who make decisions based on how much money they will make. Don't care if its big, small, banks, hedge funds, whatever.

You lose all your money...you go out of business.

No bailout. No help. There's the unemployment line >>>>>

[packy]

Bradly, Bob, thanks for the comments. I think banks have looked at regulations, bottomlines etc so much they have lost sight of the customer. When you read that ALLY and ING are the most respected financial institutions in the US it is evident that the customer is shifting to a online/mobile customer. Bank in real time where and when you want to. I think banks need to look for directors that can help lead them in the future not drag them backwards. Golf may be out of the equation.