Asset Based Lending
Chief Investment Officer
Commercial Loan Automation
BirdsEye Viewhas the banking industry achieved cultural irrelevance?
Peter Drucker said, “When talented people work very hard and produce consistently inadequate results, it is evidence of the obsolescence of your business model.” I am confident every reader of this column will concur that we are working harder than ever in this business, yet we continue to lose market share and market capitalization. Does this mean that banks have finally reached cultural irrelevance?
Consider this hypothesis: our industry has worked for years to maximize the efficiency of its customer interaction. We strive to optimize the transaction time, equating speed and accuracy with the customers’ value proposition. As a result, we have managed to train our customers to expect mostly that from us – speed and accuracy. This crisis of diminished expectations has rendered our strengths, which we worked for decades to perfect, very difficult to market effectively and parlay into customer loyalty and share of wallet.
When an industry behaves consistently enough for long enough, it produces the consequences that we have all experienced. For example:
- Margins collapse. We have been experiencing margin compression for years, anticipating further pressures on the margin, and working hard to create other sources of non- interest income to compensate for the shrinkage.
- Crises in attracting and keeping talent. Our best and brightest move on to bigger and better industries, looking for more challenging and rewarding work. While our compensation is competitive, our industry has not been able to successfully attract the choicest candidates out of top schools and fast growing industries.
- Inability to introduce new products quickly and successfully. Since the CMA account introduction in 1979 there has been little major innovation in our business. Further, it took most banks 20 years to be able to produce a similar account. We have not been able to launch new, breakthrough products that sweep market share and provide customers with compelling value. The most recent innovation – the 5 minute loan – wasn’t invented by us and we are scrambling to get there with caring degrees of success. Same for mobile financial services (just check on Mint, Venmo, Cash etc.).
- A rise in new entrants that collapse industry boundaries – the monolines have been eating our lunch for years in certain product categories, most notably credit cards. Some are parlaying their knowledge garnered through marketing a single product extremely successfully to other segments of our business. Others, like Capital One, use the profits generated through that business to build a complementary banking franchise. Today, Lending Club and others in the small business and consumer lending business, as well as money moving and information producing Fintech companies, continue to take bites from our banking pie. They also garner so much capital from the markets that they have superior R&D resources, a further threat to our relevance. We attempt to compete with these players through relationship building, but only few execute on that promise effectively.
- The loss of most valuable customers (MVCs) – We continue to bemoan the fact that investment houses, RIAs and other boutiques are capturing our MVCs. While many of us plan and execute specific defense tactics to maintain the relationships, we often-times now witness keeping the customer but not their wealth. Instead, true to our transaction efficiency positioning, we keep the customer’s transaction business, but lose the most lucrative asset accumulation and management part and the credit component to others.
- The inability to attract younger future customers – Many of us are concerned about aging customer bases. Our product line offers new, younger clients basic transaction services, but we do not grow our business with them effectively, losing many of them along the way to more adaptable providers who offer a customer experience better suited to the younger buyer.
Is this an inevitable doom and gloom scenario for our business? Heck no! But it does mean that, as an industry, we need to change the customer experience and value proposition, and reconfigure our competitive advantage. Pure efficiency almost assures that we’ll become transaction mortuaries, keeping the least profitable part of the customer business, and leaving the relationship building to other providers.
Breakthrough performance by selected players can turn the tide for our industry by changing their positioning in the customer’s mind from a transaction factory to a trusted, broad-based financial advisor/supermarket. Some banks have done so successfully, albeit in narrow segments. City National of LA, Signature NY and Republic Bank of San Francisco are notable examples with strong product and geography focus. It is a challenging transformation, and a promising one. Some of us are well on our way, and the winners will capture major benefits from being first in this race.