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BirdsEye View

 I’m sure you’re all inundated with scary statistics about the demise of our market position.  We’re not large enough to compete with the universal banks, who are eating our lunch, and not small enough to compete with micro banks who lack pricing discipline.

Here is what you’re hearing:

• Customers have less brand loyalty and are less inclined to aggregate their business with a single provider
  
  
• At the same time, customers expect much more from their banks, including unprecedented transparency and accessibility
  
  
• Larger banks use sophisticated segmentation techniques to capture greater share of our choicest customers
  
  
• Fintechs better understand our space and are better at simplifying their product and customer experience
  
  
• Our traditional competitive advantages have become less relevant

And here is the evidence (from 2015-2018):

• Regional bank share shrunk from 36% to 29% of account holders
  
  
• The largest banks own 24% of US branches but took in 50% of all new deposits in 2019.  Community banks have 50% of the branches but captured only 20% of deposit growth.  Big banks deposit growth outpaced smaller banks (6% growth vs a drop of 12.3% among the smallest banks in the country, $100 and under)
  
  
• 10% say they prefer a digital bank as their primary financial institutions
  
  
• Digital banks’ share grew from 4% to 6%
  
  
• Marcus started in 2016.  Now they have 5 million customers and $50B in deposit while it was intended to generate loans.  They lost $1.3B, because they’re focusing on growth.
  
  
• 60% of US retailers now support ApplePay.  Apple connects with 39% of US population, and through Goldman can access the Apple card.
  
  
• Only 18% of customers say they prefer regional banks
  
  
• Generally, customers express preference for community banks and credit unions, but they are still losing share
  
  
• 60% of merchants now accept ApplePay.

There is plenty more evidence, and you’ve seen it.

The market requirements haven’t changed.  Organic growth is still king, and it’s proving to be most challenging, especially with respect to deposits.  Sales effectiveness has been hammered by the Wells Fargo debacle, and few banks dared to reignite the process once the OCC and other regulatory agencies found that the problem was bank-specific and not systemic.

Many CEOs believe the retail mass market business is essentially lost, as digital offerings continue to grow in attractiveness and simplicity, appealing to larger segments than ever before.  They believe this segment will fall by the wayside as many banks discontinued businesses such as mortgages, consumer loans, credit cards, small-ticket leasing etc.  

Technology has become the bane of our existence, replacing regulatory pressures.  We are anchored to inflexible and non-differentiated outsourced technology, shored up by costly manual workarounds and overall human effort to meet customer needs despite the aging technology.

So, is it time to give up?  ABSOLUTELY NOT!  Is it time to run scared and make meaningful changes?  ABSOLUTELY YES!

The first prerequisite to change is CEO and board sponsorship and strong endorsement.  Change requires selling, as most people intensely dislike change.  It’s taxing for every employee, and therefore CEO communication – repeated and frequent – are important to facilitate success.

The other issue with bank transformation is it’s massive, and therefore daunting.  It is overwhelming.  So many things need to change; where to start?

The first step is to build an inventory of the major processes, systems and departments that need change.  

For example:

• Modernize lending
• Streamline deposit operations
• Change core systems to a plug-and-play alternative
• Data management: integrity, marketing, servicing, sales
• Real time payments, fraud detection, customer transaction information
• Innovation
• Improve customer experience

Current bank organization and processes are a relic of the past, revolving around historic precedent, line-of-business optimization and bank operations convenience.  Future survival and prosperity imperatives entail a fundamental change in this thinking toward a true customer-centric approach.  Our current organization is around functions – deposits, loans, call center etc. - and businesses – retail, commercial, wealth, leasing etc.  The customer can’t access the entire bank easily, and technology is a major impediment to doing so.  Further, we can’t bring state-of-the-art functionality and experiences to the customer because of our antiquated technology, processes, organizational structure and thinking.

The issue isn’t simply technological.  It goes well beyond that to the core of our value proposition.  Improving your phone bank experience or dressing up your website won’t be enough to retain or attract customers in the planning time horizon.  What’s required is a change of thinking and the definition of success.  

As long as each line-of-business can achieve their goals and “win” without helping other LOBs succeed, we will not be able to effectively compete in the new digital world.  Our competitive advantage lies in our ability to bring the entire bank to bear on each customer through every channel, human being the most important one.  

The prevailing wisdom about future success revolves around omni-channel technology and digital optimization.  This is a necessary but not sufficient condition.  End-to-end banking is a wonderful foundation for future success, but it is not enough.  Forced collaboration through mutually dependent goals is an important element in future differentiation beyond technology for regional and community banks.  Universal banks can afford to ignore this imperative, or handle it through technological linkages.  In our space, we should and must rely on our people to execute on the value proposition of a single bank, rather than a portfolio of businesses, where technology is the enabler, not the driver.

Andy Grove said, “Only The Paranoid Survive”.  My view is, “Only the most effective adaptors survive”.  Darwin and the Galapagos islands are at the core of this conclusion.  Life in constant fear is no fun.  Life in constant search for better solutions across all businesses, large and small, is both fun and a winning strategy.