As year-end results are finalized, many financial institutions are now budgeting for the coming year. With many banks struggling to find new revenue sources, these conversations are often focused on operational matters, including diversifying into new loan products and electronic payment applications designed to attract and retain new and existing customers. And while some boards of directors have a productive conversation regarding new products, these detail-rich discussions can result in the board overlooking the impact of the new product line on the bank’s strategic direction.
Directors, as part of their duty to maximize shareholder value, are responsible for charting the strategic course of the bank. Too strong of a focus on operational matters may have the effect of muddling the important distinction between the roles of directors and officers going forward, leaving management feeling micro-managed and directors overwhelmed by reports and data in their “second” job. Instead, a higher-level discussion may be necessary in order to ensure that the board is focused on overseeing the institution’s strategic plan, while management is charged with safely and profitably executing the new business line.
So what are the appropriate questions for directors to ask and resolve when considering a new product? The following can help ensure that the board achieves the right strategic decision for any new product or activity.
Consider management first. When evaluating a new line of business, the board should consider whether the institution has the appropriate management needed to supervise the activity in a safe and sound manner. For example, banks looking to diversify their asset portfolios into other types of lending, including C&I and SBA-guaranteed loans, may need to recruit a group of experienced lenders from another institution. But the board should first consider how the new lenders will integrate into the bank’s culture and if the bank’s credit department will have the expertise to underwrite the loans.
The addition of new loan products is perhaps the simplest example, but for new online customer applications, finding and hiring the right team to manage the related franchise and regulatory risk may be more challenging. With a new mobile banking app, the institution will face new data security and “know your customer” challenges that may exceed the skills of the current staff. In either case, understanding the personnel required to execute the new business safely will give the board an idea of not only the new activity’s cost, but also its risk.
Project the path to profitability. After considering the personnel demands of the new product line, the board should then determine the timeline for fully integrating the new activity into the bank’s core business. Depending on the scope of the institution’s current product offerings, some new business lines may be easier to integrate than others, particularly where the bank and its management have prior experience.
On the other hand, many institutions are now considering acceptance of new online payments products, recognizing these services will be essential to attracting younger customers. Even if ultimately profitable, these new applications can expose the bank’s operating system to new online threats and unfamiliar customer segments, which may result in more risk and expense than benefit for a significant period of time. Evaluating these costs and benefits, particularly within the context of the bank’s strategic plan, is a central component of the board’s role.
Determine if changes are necessary to the institution’s strategic plan. Any meaningful strategic plan includes a statement by the board of whether the bank will pursue a “buy,” “sell,” or “hold” strategy over the next three to five years. Depending on the importance, cost and risk of the new product line to the future success of the bank, the board’s discussion of the new product may change its buy, sell or hold determination. In some cases, if it appears too costly or risky to integrate an essential new product into the bank’s core business, the board of directors ought to consider whether a sale or strategic partnership with a larger institution would bring more value to their shareholders.
So while some discussion of tactics is essential to the board’s consideration of a new product line, directors should stay focused on managing the bank’s risk appetite and strategic direction during these conversations. Boards that focus on the big picture have a great vantage point for considering a new product offering—they can better evaluate the bank’s strengths and weaknesses and have a better understanding of the bank’s core business. Using this perspective, some boards may conclude that staying the course in advance of an eventual sale, rather than steering the bank into the unfamiliar waters of a new product line, may result in the best returns for the institution’s shareholders.