The Old Wisdom and the New

Banking has been around a long, long time. Wouldn’t you think we could count on some eternal truths?

I was thinking about this in the context of what it takes to grow a bank these days. We finally seem to have discovered what works and what doesn’t. Or have we?

The Old Wisdom

Branches are a thing of the past. The future is one of many ATMs, pervasive PCs, but few branches. Banking will be centralized and all communication, electronic.

The New Wisdom

Branches are the most effective way to grow customers. Washington Mutual opens 28 branches in one day. Bank of America budgets $1.2 billion to open 550 new branches by the end of 2005, then acquires Fleet’s 1,400 branches overnight. Where banks are prospering, branches and branch planning abound.

The Old Wisdom

If it moves, price it.

The New Wisdom

Banking is no different from other forms of retailing. Loss leaders work. The most rapidly growing retail banks have gained market share and profitability by getting customers in the door with free checking, free bill pay, free ATM use. Banks are building their bases with free and low-cost services, offering high-margin, premium products that customers choose to buy.

The Old Wisdom

Lend to commercial businesses. You can always buy the deposits you need to fund the loans.

The New Wisdom

Lend to consumers. Almost none of the outperforming banks achieved their success by primarily focusing on the commercial market. CFOs have grown sophisticated, shopping loans widely and using nontraditional credit facilities wherever they can. At the same time, banks’ own credit standards have made it difficult to achieve top-line growth by aggressively courting new commercial business.

The Old Wisdom

“Yeah, we pay incentives. Their incentive is, they keep their job!”

The New Wisdom

Money talks. Incentives for employees with customer contact are essential for growth. Washington Mutual pays tellers $2 for a checking account, offers 10 basis points for a home equity loan, and has enterprising tellers earning $50,000 or more.

Yesterday’s wisdom is today’s folly. When dispensing today’s wisdom, it’s prudent to remember what that implies.