In the banking business, what you don’t know will hurt you!
70% of the bank CEOs we surveyed said they knew their competition and what they were doing.
When asked if they knew about BlueBird or Simply (formerly Bank Simply) only 20% knew what we were talking about.
In this same survey over 85% of the bank CEOs told us about the most important aspects for gaining customers today was technology and branding.
We agree that these are important but not nearly as important as one item rarely mentioned by those surveyed, which was showing value to the customer for banking with their bank.
Unfortunately too many CEOs want to compete on pricing, not value.
- The landscape of financial services competition has not changed much, over the last several years, right?
- Today the competition is in access, online banking, payment processing, mobile banking, ATM, etc., just like “studies” say, right?
- It is all about technology now, right?
- It’s not about what we offer; it is about the channels in which we provide our offerings, right?
- My competitors are still other banks, credit unions, brokerage firms, and mortgage bankers, right?
If you are a CEO and you believe that the above describes your competition issues, you need to spend a couple of hours doing Internet searches regarding financial services. The landscape is changing and it is time for banks to get back to providing services that will be beneficial to customers and profitable for the bank.
These non-bank financial companies have taken over $700 billion in deposits from banks.
Before we talk about some of the new competitors lets look at some non-bank financial companies that have been around for several years and how they have secured customers from banks. These non-bank financial companies have taken over $700 billion in deposits from banks.
While this is only 6.5% of the total US deposits, it was less than 1% only ten years ago. These companies decided to diversify into banking to reduce their borrowing costs and they are becoming more aggressive in offering financial services to customers in their banking operations.
Many of these companies have either already entered into other financial services products and services or they have plans to do so soon.
|Non-Bank||$ In Billions||Non-Bank||$ In Billions|
|Morgan Stanley||$82||Barclays CC||$10|
|Ally Bank||$48||Raymond James||$9|
|GE Capitol||$31||Mutual of Omaha||$5|
Now let’s look at the fairly new competitors that are focusing on the unbanked and the under-banked.
PayPal is becoming the choice for banking services for many, especially younger customers. Check cashing stores have found a way to attract depositors by providing re-loadable debit cards. Payroll can be directly deposited to the check cashing company allowing them to automatically reload the debit card. Wal-Mart and American Express have paired to bring Bluebird, a bank account that provides online banking, debit card and other services with no fees. Simply, formerly known as Bank Simply, is a model very similar to Bluebird. Payday lenders may appear to be predatory, but the number of people using this service increases every year and the clientele for this service is not just low income or poverty level people.
Billions of Dollars in Banking Revenue Lost Due to Ignorance
Let’s consider some of the revenue that has been lost by banks to other types of financial companies:
- Collection Agencies – There are over 4,100 collection agencies in the US. Growth is expected to exceed 26%. In 2010 there was $150 billion submitted for collection of which there was an estimated $40 billion collected. Many banks submit their own past due loans to collection agencies for collection. Consider collection agencies receive 20-50% of what they collect, their estimated annual revenues are $8-20 billion.
- Check Cashing Stores – There are over 13,000 stores in the US. It is estimated that they cash in excess of $100 billion in checks per year, of which 80-90% are payroll checks. The estimated number of people using check-cashing stores is 30 million. Revenues exceed $2.0 billion per year.
- Wal-Mart – The numbers for Wal-Mart are not included in the numbers above for check cashing stores. Wal-Mart has over 3,600 stores in the US providing similar services as check cashing stores including; check cashing, money orders, wire transfers, and other financial services. Wal-Mart does not disclose their numbers for this business separate from their total earnings.
- Payday Lenders – As of 2011 there were over 23,000 payday lenders in the US. Although the business has received a bad reputation there is an opportunity for banks to provide a similar service at reasonable rates and still significantly increase revenues.
On the business or commercial side of the bank the competition is coming from companies that used to be collection agencies. They have enhanced their businesses to include:
- Accounts receivable billing, payment processing and reporting
- Lines of credit to finance these receivables
- Collection services
- Accounts payable processing
- Limited bookkeeping services
- Treasury management services
- Excess cash investment vehicles
So while other non-bank companies are providing services banks used to provide, the banks are looking for new products and better delivery channels to deliver fewer products and services. These same banks are again chasing commercial loans, along with all their competitor banks and driving loan yields and quality down.
Did you know that many banks spend more on their Human Resources area than they do for Product Development people?
Yes, people are important but most of the HR work can be outsourced and is not within the bank’s core competency. During our significant number of visits to community banks we have seen many do not have a product development area. They rely on the marketing staff or front office staff to bring management ideas for new products. Most of these ideas come about because some competitor is already providing the product or service.
As a CEO do you believe you know your competition and know your customers? ( know them better than anyone else). Ask yourself these questions before you answer:
- Does your competition seem the same to you?
- Do you concern yourself with competition that is just coming over the horizon?
- What prompts you to make changes to your bank?
- You create a strategy to attract a certain type of customer, but have you mined your customer data to determine if you have been successful?
- Who are your core customers versus the customers in your strategy?
- What services do you no longer support because there are other competitors who do it better?
- How often do you look at the services of other financial services providers, not just other banks?
- Do you have an R&D process or do you just follow the crowd?
So what should the community bank CEO do to compete?
Answer: Time to develop the “Competitive War Plan”
You must take control of the direction of the bank. This requires the Board and the senior management team to develop a competition “war” plan. We use this term instead of strategic planning because we believe that the bank’s senior leadership needs to get real serious about fighting the competition.
You don’t need to focus on your mission statement or values; you need to focus on the competition. It is a time to think outside the box and differently than your competitors. To get the most benefit from this planning process it is best to bring in professional help that can contribute knowledge about the changing landscape as well encourage “outside the box” thinking.
During the planning session the members of the planning group must pay close attention to these 7 steps:
- Document the core competencies of the bank. It is important to dig deep into this discussion and not just list the obvious competencies.
- Review all the areas of the bank, individually, to ensure there is a clear understanding of what they are providing for the bank. This process needs to include all front and back office functions.
- Gather all the information possible about the bank competition and the other financial services competition, including those that are only on the fringe of financial services.
- Have the IT manager provide details about what the technology capabilities are within your bank, whether you are currently using them or not.
- Review the prior strategic plans versus what actually occurred. This will require significant data mining, but it is important to develop metrics for the old strategies and the new ones developed from this planning session. It is imperative that you determine the financial benefit achieved by the prior strategies.
- Develop a strategic plan that will put you ahead of all the competitors. Develop a plan that incorporates current and former core competencies, will take advantage of the current resources throughout the bank, and will be focused on developing products and services that will increase fee income and value for your customers.
- Once the plan is developed it is imperative that one senior officer is responsible for implementation, monitoring the success and presenting results to the Board monthly. The monitoring should not be just financial results; there will be many other metrics to measure.
This planning methodology can seem very daunting and time consuming. It may be both of these but the benefits will be significant. The benefits will be improved financial results, customer satisfaction, employee morale and a bank that is on the strong growth path. However, if this process is poorly executed, it could sour the Board and senior management to the point that the bank becomes discouraged. The bank may lose competitive focus and perform poorly for customers. One way to ensure success is to utilize outside independent resources that understand what true competitors are doing and who have the ability to facilitate all the tasks in the planning and implementation process. They will also know how to develop the various metrics required for tracking and measuring the progress of the implementation.
In today’s banking environment, economic and political climate, how your bank competes is more critical than ever before. The art of war for banks requires a lean workforce with emphasis on access and technology. Survival depends on the CEO and the Board of Directors working together so that excellence in customer service is evident in daily performance and in financial results. One thing that the majority of studies do agree upon is that banking profits and customer satisfaction are closely tied to the bank’s ability to differentiate itself.
Are you confident that your bank is doing all that it can in this regard?