Chief Investment Officer
Commercial Loan Automation
trends in retail banking
The star of Retail Banking is on the ascent . As deposit gathering and fee income as a tool for margin management become more important, so does Retail Banking. This week's article talks to recent trends in the business that, I believe, are harbingers of things to come. Some require strategic thinking for the medium-term future (for example, declining paper transactions and the advent of small-ticket debit cards transactions and Remote Deposit Capture). Others can be implemented tomorrow (for example, Minimum Performance Standards). As always, I'd be most grateful for additional trends, both strategic and tactical, that you have spotted.
PS Liat 's London Restaurants article received rave reviews. She is now working on her France review, as well as a Chocolate Shop selections around the world, the result of years of painful research (with her mom), clambering from one chocolate maker to another, sampling countless truffles and other chocolate creations. She has just started as a freshman at University of Chicago, so there might be a slight delay in her contributions, but they are worth the wait! Be on the lookout for her wisdom on BirdDroppings on www.anatbird.com. Meanwhile, read my thoughts on great Chinese restaurants in San Francisco.
Trends in Retail Banking
The business of retail banking continues to evolve, and industry front-runners are setting the pace and redefining the benchmarks as we speak. It is interesting and educational to observe how the "hot" trends are reshaping the business both tactically and strategically.
The future of the branch?
The early predictions of the death of the branch were greatly exaggerated, as we all found out in the late 90s and the early 2000s. However, recent trends bring rise to the question of branch viability and functionality yet again. Check 21 adoption rates have been slower than expected in some quarters, but the overall impact has been significant. Fewer checks are presented at the branch daily, and electronic transactions have surpassed paper ones last year, while the gap is widening. Recent payments innovations, most notably Remote Deposit Capture, are contributing to the acceleration of electronic transactions, as are the consumer behavior changes toward smaller debit card transactions. The effect of all these changes is one: fewer transactions at the branch. The implications are profound: should branch staffing continue to be comprised primarily of transaction handlers (tellers)? Are de novo branches the right way to go given these changes? What about internet banks in support of branch networks a-la Emigrant? These are all questions that forward looking bankers need to ask themselves, since the trend is staring us in the face. If we want to avoid the fate of the railroads, dealing with this mega-trend in our business is paramount.
Has the sales pendulum swung too far?
Our industry has failed consistently to effectively execute a sound sales process in our retail outlets. Anyone who has visited Nordstrom's or Abercrombie and Fitch knows this is true, with some notable exceptions. At the same time, we continue to press toward a strong (and unforgiving) sales culture, thereby alienating (and often losing) our best service people, those who refuse to be held to sales goals yet have a strong customer following. In many banks this refusal means termination. While I'm in support of non-negotiable expectations, especially in sales, I also know that 70-75% of all existing sales in both commercial and retail banking come from existing customers. This implies to me that there is room and need for hand-holders, so long as they not only hold the customer's hand but also realize more fully their potential through improved sales to their "book of business" (even if we don't call their existing customers a "book".
I fear that, in our zeal to show our people that we really mean it when we say "sales are non-negotiable, we throw the baby out with the bath-water by eliminating the space for the hand holder. I'm talking about those tellers and bankers who will not bring themselves to actively prospect, but who are beloved by their customers. You know who they are. These are the folks for whom a customer waits 30 minutes just so they can be served by these specific bankers or tellers. We should make room in our banks for BOTH positions: the strong sales person and the hand holder, with the understanding that both are held to sales goals, yet the source of the sales might vary, as might the style of interaction. In my past lives I found that among our very best sales people were the veterans who took great care of their customers and yet were not afraid to ask for additional business when they felt it was in the customer's best interest. Those bankers and tellers (and loan officers) are as valuable to the bottom line as are those sales stars we all reward so handsomely.
Retail banks will be well served to make room and recognize both sales styles. Clear sales expectations are necessary and important; defining the path to their achievement should be less rigid.
Establishing minimum performance standards.
All teams have a range of performers, from Michael Jordan to those who already retired on the job. What we as managers dislike to face is the fact that everyone knows who is who, including who are the slugs we all carry on our backs day in and day out. One approach to addressing the issue of lack of contribution is setting in place minimum performance expectations. Those are expected from EVERY team member, and are minimum expectations for each person to keep his or her job. They should be set low enough to be achievable by all, but not meeting them should result in termination. I like MPS because they put all of us on the same moral level, because they are FAIR. It isn't fair to let some team members get away with zero contributions while others are expected to carry their weight and more. Fairness is important not only to motivation and to achieving results, but also to the moral fiber of an organization. I believe setting MPS, a practice that has found its way to man y of the leading retail banks, is appropriate, fair and is not a negative activity.
Setting behavior requirements.
Our goaling process has many issues, one of which is that, often times, goals are so far outside the person's line-of-sight that they don't know how to achieve those goals. Great retail banks, such as M&T, know that and have been setting behavior/activity goals for their retail bankers much like they do for commercial lenders. Everyone knows that a good lending team needs to be managed closely in terms of prospecting and customer calls; setting appointments; closes and pipelines. I believe the same process works for retail banking and any other sales activity, yet we shy away from translating balance sheet and income statement bank-wide or even branch-wide goals into individual daily activities that will ensure that the banker or teller achieve their goals and more.
For example, setting a goal of getting $10,000 of deposits each day is less effective than goaling calling on 10 prospects. The latter is a clear and actionable goal, while the former, which is what we're really after, is too obscure for most bankers, since they can't control how much money each customer has. What they miss is, using average account balances, they CAN control total balances sold by selling enough customers, i.e. seeing enough prospects to achieve the appropriate numbers of sales in the appropriate accounts. Behavior goals set by management can address the confusion and paralysis that sometime arise from global or financial goals.
How do you create $100 worth of net interest income?
In the wake of "Life after Free", many are struggling with the fee income equation. Customers have changed their behavior and fee income, particularly NSF and courtesy OD fee income, has peaked in many banks. Innovative banks have calculated how much net interest income each account generates, from the CD to the interest-free DDA, in an effort to appropriately goal volume growth in each of these account categories to ensure that the company's interest income from retail banking will reach or exceed their goals. All deposits, both low cost and high cost, generate NII, but the balances required from each type of account to reach $100 of NII are vastly different. Having a solid understanding of this dynamic is an important element is essential to success in today's complex interest rate environment.
Group banking has been a neglected business development approach in many banks. Most typically bundle a host of existing retail products and sell them haphazardly to various companies. More often than not, no one's neck is on the line for this initiative, as many believe that leaving it up to the branch managers will bear sufficient fruit. That has proven not to be the case, and, consequently, many of these programs have been relegated to dormant status.
As the drive for deposits intensifies and the "free" craze ebbs, "bank-at-work" is becoming relevant again. Companies who focused on the program and have attached a neck or two to its execution have met with much success, and others are hearing about it. I believe that "bank-at-work" will become in 2007 what business banking deposit gathering has been for many in 2006.
Placing brand above sales?
Banks have been involved in banking initiatives for years, but most have not been compelling, as evidenced by the brand elimination of almost all acquired banks in recent years. However, banks are getting better at understanding the value of a strong brand, especially when internet banking is concerned. Brand loyalty in other retailing organizations is another reinforcing influence of the importance of brand, as any parent to teenagers can attest (just try getting them those torn khakis from any outfit other than Abercrombie).
Some banks have refreshed their approach to branding to the point that they are staffing retail branches not only with sales people but also with those old-time, loyal employees who best represent the brand to the customer base. They are looking for a better balance between brand identity and sales effectiveness, and are reaching for brand awareness well beyond the traditional advertising and "look" to which this issue has been relegated for years.
Early withdrawal penalties
Your retail bankers will tell you that such penalties will not be accepted by the market. Yet again, they prove that our own employees can be the strongest resisters to change. Some banks have started imposing (and collecting) such penalties to rebalance the value equation between the customer and the shareholder (i.e., without such penalties the customer holds a free option and the shareholder bears all the risk). I applaud those banks that have insisted on implementing such programs and acting upon them to do whats right for both customers and shareholders instead of just one of the banks constituents.
Withdrawal symptoms as banks withhold maturing CD lists
The maturing CD list has been the purview of many an annuity salesperson. However, as my friend Andrea Nixon says, giving such lists to brokers is like shooting animals in the zoo, and I agree wholeheartedly. I know that converting CDs into annuities isnt a permanent drain on the banks deposit base. More often than not, the customer replenishes the amount within 18 months with new CDs. At the same time, who ordained that investment sales reps must be fed by the retail network?
Insisting on a certain minimum percentage of outside money for a broker to receive commission is a healthy thing that works both for the bank and for the customer. More banks than ever are withholding the maturing CD list as deposits are more dear than ever and the realization sets in that too often this list becomes a one-way street.
Incorporating some of the above trends into your own retail bank management could help you achieve those stiff 2007 balance sheet and income statement goals.