Asset Based Lending
Chief Investment Officer
Commercial Loan Automation
BirdsEye Viewout of the box thinking, outside our industry
In response to my last article, my friend Ben Crabtree shared with me an interesting analysis he and his then-colleague, Jay Tejera, have done on efficiency ratios: a two point improvement in the efficiency ratio creates a 25 bp pricing advantage, which can me very meaningful in garnering market share. These are powerful numbers that every banker should consider. I don't think you can cut your way into glory, but an efficiency advantage iundeed can be converted into a marketplace advantage.
On a recent trip I read an interesting article in USA Today that recapped innovation in the airline industry over the past 25 years. I found it provocative and instructive to look in the rear-view mirror and realize how much change, both technogolical and managerial, has taken place, and how well customers adapted to it (with some agonizing, to be sure). I believe the insights embedded in these changes should be taken to heart in our own industry.
Out of the Box Thinking, Outside Our Industry
As a frequent traveler, I read USA Today often. Recently, in celebration of its 25th anniversary, the paper outlined 25 pivotal changes that transformed the way we travel over the past 25 years. The paper itself was a breakthrough idea, and its success rebuked the countless nay-sayers that predicted there was no room in our country for a national newspaper. Let me highlight a few of the changes they listed:
Each one of these innovations was a true breakthrough in its time, defying industry taboos and predictions of dismal failure. Each one redefined the business in some way, creating opportunities for both customers and shareholders. While some had to do mostly with technological innovation, others represented a meaningful departure from the accepted wisdom which, in turn, changed what the common wisdom was.
For example, e-ticketing reminds me of e-banking; it's an improvement that was driven by technological advancement and enabling. It changed the way we book air travel, as e-banking has changed the way we do our banking. Importantly, though, the change was not static. Continuous improvements differentiate airlines from one another and create new bonds between customers and airlines. For example, while many airlines now prompt their passengers via email to check in online, some require one click vs. many, by directly linking you to the check-in process of a specific flight; some display the weather in your city of destination, while others don't. This might seem minute to many of you, but to one who clocks over 250,000 miles a year, this is HUGE! The lesson to our industry is clear: even wide-spread capability can be differentiated, especially if the target market is well defined and their needs well-understood.
Other examples offer more dramatic change. Consider the self service kiosk, something our industry has attempted to accomplish in vain for decades. The speed of its adoption among all travelers has been staggering, as has been the concurrent reduction of ground personnel by the airlines. Why were the airlines successful where banks were not? Might it have something to do with the reluctance to compel customers to select the electronic channel by reducing the number of tellers concurrently with the kiosk introduction? Or was it that kiosks were not readily available is all branch facilities? Or did we fail to provide intense human support to ALL machines for the first year, to be followed by continuous but lower such support? The reasons could be many, but one thing is crystal clear: customers adopted revolutionary technology much faster and more broadly than anyone expected. PS: Note that ATMs, a close cousin of the kiosk, took two decades to gain acceptance, but today they are a run-of-the-mill banking vehicle. What we didn't successfully do is reduce the human cost of pure transactions that did not lead to additional sales...
Another beautiful example of ingenious innovation has been the introduction of flights without meals. True, they met with customer disgruntlement and much moaning. What they were not met with was customers switching airlines based upon meal availability. The "no meal" option became almost welcomed by some passengers, as the purchasing options were often tastier than the previously available food (I use the term loosely). Yes, there was much hue and cry, but there was little change in what customers actually did.
The Mirage Hotel put Las Vegas back on the map by offering a mega-resort environment in a town that, until that time, had only one thing to offer: gambling. Today Las Vegas has become a Mecca of good food (who would have guessed?), major shopping and, yes, gambling too. In a similar vein, the boutique hotel chain was invented, against all odds. From Ian Shrager, the famed New York Hotelier, to Bill Campton, to my good friend Jeff Records of Zaza fame, enterprising hoteliers have identified very narrow but rich segments and custom-designed hotels for them. They have done so without the advertising and buying power support of the large hotel chains, yet with great success. Similarly, the assumption that all travelers want hotels with amenities has also been debunked by the amazing growth of the limited service hotel. Hyatt is the latest to join the fray, led by Holiday Inn Express, Marriott Courtyard and many others, who offer clean hotels without a restaurant or a spa, but with nice breakfast buffets, a limited gym and, occasionally, a pool. These non-traditional hotel offerings demonstrated that slicing the market differently is a winning proposition, so long as the product offering closely matches customer needs, sensibilities and expectations.
The emergence of mall airports brings the issue of leveraging physical distribution home. Much like gas stations, banks have traditionally been fixed-cost intensive, no matter how small their branches are. Using the space as a distribution point for other services is an idea that has been tried a few times, never fully successfully, and has thus been largely abandoned. I understand there are meaningful differences between airports, gas stations and bank branches, but we can see more parallels than not. We often say that customers look at going to the branch as a nuisance visit, a necessary evil. Gas stations are no different; when was the last time you got excited about filling up your car? Yet, expanding their product offering has worked, from mini-markets to coffee houses. Learning from the success of airports, gas stations and Kinko's in expanding their expected functionality and product offering could produce valuable lessons to our business.
Yield management is another great example of opportunities banks have not leveraged. Yield management is a dirty word to many customers who discovered that their seatmate paid half as much as they did. The concept, originated by American Airlines, is now used universally by hotels, car rental companies and airlines. It allows these companies to adjust prices in real time based upon several factors affecting demand. Banks have been unable to provide relationship-based pricing because customer profitability information is generally unreliable. But what about pricing based upon overall product demand rather than individual customer profitability? While market forces generally govern pricing in both industries, airlines have managed to obscure their pricing to the point that no one can navigate those waters but the computer. At the same time, their profitability has increased as they optimize to the equation of product availability (plane seats; car or room inventory) and customer demand. I'm not recommending such practices in our business; I merely state that it is possible to change pricing practices across an entire industry without bringing everyone to bankruptcy...
Westin Hotels introduced the heavenly bed in 1999. While I strip my bed of the fluffy top, most customers love this enhancement and even buy the bedding for themselves. Other major hotel chains followed suit. The lesson for us is clear: even a seemingly undifferentiated product such as bedding CAN be differentiated and, subsequently, converted into a major marketing and brand identity asset.
I found the list of innovations fascinating. It offers many examples of bucking the trend, slaying of sacred cows (most notably, Southwest Airlines) and accepted axioms, while offering better choices to customers. I challenge our industry to do the same thing. With few exceptions (how many times will we cite Commerce and Umpqua?) we believe our own rhetoric that our products are not differentiable, that this is a commodity business, and that customers won't accept major deviation from the mean. There are many banks that have perfected execution, and some that have improved on the existing model, but, as an industry, we do not challenge the underlying assumptions of our basic premises for product offerings, distribution and profitability.
I confess I have no answers, but certainly entertain some ideas. The challenge is great, but so is the pay-off. I look forward to applauding those banks who rise to it!