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BirdsEye View

self imposed obsolescence

What are the regulators looking for? From recent Forums here's what I gather:

  • Credit (recent appraisals; universal/global cash flow)
  • Liquidity (secondary, tertiary, specific scenarios)
  • Wire transfers - any unauthorized, unfunded transfer; need to follow the Fed's guidelines
  • internal audit - ensure the scope is adequate including IT, BSA, credit review etc.
  • Audit committee - ensure independence
  • Appraisals - refresh (3 months is what some say they are looking for)
  • Flood (it's never off the table)
  • Fair lending (back on with vigor)

Deb Becht, HR Director of Broadway Bank, sent this in response to my husband's email to our son regarding finances. I received quite a few similar messages... "Years ago when my daughter was soon to get her driver's license and a car, my husband and I developed a "car contract" outlining our expectations, what her expenses would be regarding the car, what non-negotiable violations would cause her to lose privileges, etc. Her response when we handed it to her (after she rolled her eyes and said none of her friends' parents were doing this) was to ask, "So, should I read this before I sign it?"! We received dozens of similar comments; I'm glad Dick's words hit home for so many of you.

On a personal note, the family had a great week's vacation in Hawaii, and has dispersed again. Gil is off to Europe on his senior trip with 5 buddies, and mom and dad are meeting them in London to give them a hot shower and a square meal.

Article synopsis: Shrinking your way into glory doesn't work

Self Imposed Obsolescence?

Dick Kovacevich had a clear philosophy when he took over Norwest and, subsequently, Wells Fargo: Money Moves. This means that customers move their money from borrowing instruments to investments, and so on. It also means that a bank should capture as much of that money as possibly by offering a wide range of products to meet every possible customer need. Consequently, Wells Fargo has 86 product lines that are actively marketed to its many customer bases, and it also has one of the most enviable cross-sell ratios in the business.

In contrast to this strategy, I have observed SuperCommunity Banks exiting en masse (with some exceptions) many key businesses in the financial services industry, such as:

  • Mortgage origination
  • Mortgage servicing
  • Credit cards
  • SBA lending
  • Indirect auto lending
  • Merchant cards

There are legitimate reasons for this exodus. Banks believe that some businesses are too scale-sensitive, and therefore smaller banks have a difficult time making money at them(e.g. credit cards), or too volatile to absorb earnings and capital hits (e.g. mortgage servicing), or simply too unprofitable due to intense competition (auto loans) or inherent razor-thin margins.

The reasoning behind every individual decision to exit a financial services line of business is probably sound in most, if not all, cases. Yet the unintended consequence is that SuperCommunity and Community Banks continue to shrink their business base and reduce their product offerings. They increase their dependency on net interest margins, which have been in a secular decline trend in the past twenty years, and cut off fee income producing businesses which could help them diversify their sources of income.

"Sticking to your knitting" and "doing what you know best" are both noble goals and effective strategies. However, in our business, leveraging customer relationships is the greatest opportunity we all have. It reduces "next product" acquisition cost and increases customer retention. In other words, cross-selling customers increases the dollar volume of their profitability and the tenure of that income, which creates a greater NPV to the company and improves earnings predictability and stability.

Further, narrowing one's product line inherently increases the enterprise risk, since diversification, the most basic risk reduction tool, isn't happening.

I understand that a bank's strategic position should dictate its product line, and that Wells Fargo is a very large bank. Nonetheless, I fear that, in our quest to offer only profitable products, we end up narrowing our product line again and again, instead of figuring out how to make money by selling other financial services. For example, wealth Management has been the bane and the salvation of many community banks. Some find it exceedingly unprofitable, and others enjoy a major contribution to the bottom line. The difference, in my opinion, is management. There are other factors to be considered, such as the tenure of the business, investment performance etc. etc., but ultimately strong management can make lemonade out of lemons and vice versa.

The point of this article is simple: don't abdicate the business to our larger brethren and mono-line competitors. Use your current platform and core competencies to expand into related product offerings, and figure out how to offer them profitably. The long-term effect of this strategic investment will be meaningfully positive to your current income and franchise value.