Windows of Opportunity

A friend of mine recently said, “Alex, I’ve come to believe that timing may well be the most important thing in determining business success.” Another more broadly observed, “Life is mostly attitudes and timing.” However you say it, timingu00e2u20ac”in terms of understanding the problem, developing a solution, and acting on itu00e2u20ac”has never been more important.

Planning to win

Ironically, amid this whole environment driven by the need to act quicklyu00e2u20ac”whether it be to keep customers, introduce new services, or to buy or sell banksu00e2u20ac”the necessity for well-informed and carefully considered planning has never been greater.

Old-fashioned strategic planning simply will not prepare the bank to win in a dramatically changing environment. Today, winning banks throughout the country are rethinking their strengths and weaknesses, their opportunities and threats, and most important, their future directions. Bringing together high-performance information, competitive intelligence, and new business models has become a priority as traditional interest margins narrow month by month and more effective competition is clearly on the horizon.

The reality is that the very nature of competition is starting to move at warp speed, and some banks won’t fully understand the implications until their ability to respond effectively is limited. Acting to win versus responding

to survive are two very different competitive positions. The following three factors will play critical roles in determining who will have the competitive momentum to succeed:

• Internet banking. How fast will customers adopt Internet banking; which customers will use it; what products, etc.?
• Customer relationship management (CRM). How effective will institutions be in retaining good customers, expanding those relationships, and attracting new customers as a result of investing hundreds of millions of dollars in CRM?
• Response time. How much time will banks that take a wait-and-see approach have to play catch-up if the profitable customers are already leaving?

Customer relationship management

Every bank I have known, of whatever size, prides itself on providing good-quality customer service. Ask the question, “What’s your greatest strength?” and the answer is either “Good-quality customer service,” or “We know our customers,” or a combination of both. Obviously these are hallmarks of every successful business.

The challenge is that the benchmarks for good-quality customer service and knowing your customer are changing dramatically. In track parlance, the four-minute milers are about to become commonplaceu00e2u20ac”and these banks will be running in virtually every race.

Just what is CRM? The Gartner Group provides one of the most comprehensive definitions.

CRM is a business strategy aimed at understanding and anticipating the needs of an enterprise’s current and potential customers. From a technological perspective, CRM involves capturing customer data from across the enterprise, consolidating all internally and externally acquired customer-related data in a central database, analyzing the consolidated data, distributing the results of that analysis to various customer touch points, and using this information when dealing with customers via any touch point.

CRM is not optional; rather it is an essential initiative for all banks that want to retain their profitable customers, expand those relationships, or attract new profitable customers.

The CRM investment in analysis, planning, and implementation, including software and training plus ongoing support and enhancements, is relatively smallu00e2u20ac”a fraction of the cost of an average branch or the loss of even a small number of good customers. The benefits are significant and bankwide. The goal is to organize and focus the bank on retaining its most valuable assetsu00e2u20ac”profitable customersu00e2u20ac”and to achieve revenue growth in the face of highly focused competitors that are spending millions on CRM.

Keep in mind that all major financial service organizations, including banks, brokerages, insurance companies, asset management companies, and niche providers, are successfully implementing CRM in their organizations. Most important, remember that most of your profitable customers, with the possible exception of those who are continually overdrawn, are easily identified targets and very likely already are customers of your competitors for at least one financial service.

Internet banking

Internet banking is closely linked to CRM. The best way to view Internet banking is as a delivery channel. Some might say it is just one more delivery channel, but my guess is that Internet banking will transform the way all financial services are made available and delivered. This powerful model will provide traditional banking services with links to insurance, brokerage, asset management, and financial planning.

Not only will Internet banking reduce many financial services to a “point and click,” but the pricing and profits of all financial service providers will be dramatically affected. Internet banking will tend to drive down both interest margins and fee income on traditional bank products such as deposits, loans, and checking accounts. And while bill paying may become an extra cost, it may be justified as the cost of retaining good customers, because some institutions will provide it free.

The basic question is simply this: Will all your good customers leave if you don’t offer Internet banking? Obviously, no. Will some of your good customers leave to get the service elsewhere? Clearly, yes. Here are some guidelines you may want to consider.

• Even offering Internet banking for defensive reasons only, weak as that may seem as a potential strategy, makes significantly more sense than not offering it at allu00e2u20ac”especially to the growing percentage of your profitable customers who eventually will want it in the future.
• Internet banking can be used effectively to complement the bank’s other sales and marketing channels and, at the same time, support the community-oriented reputation of the bank.
• The importance of knowledgeably using customer information becomes even more crucial now than in the past. Therein lies a partial link between CRM and Internet banking.
• The benefits associated with Internet banking should be measured in terms of long-term customer retention and maintenance of customer loyalty.
• Not every Internet banking business decision can be financially justified short termu00e2u20ac”it just doesn’t happen. The investments, however, are often relatively small and the cost of losing even a few good customers usually more than offsets the investment risk.

  The speed and degree of your commitment to Internet banking will depend on the following:

• What are the overall strategic objectives of your bank?
• How would Internet banking support your strategic objectives?
• What is the likelihood of your current customers wanting Internet banking?
• How do you select the right vendors?
• How will you manage effectively this rapidly changing channel?

The big, unanswered question is whether your current customers will actually move their business to another bank, either large or small, which has both a local market presence plus full-service Internet banking.

The law of the jungle

“The law of the jungle isn’t that the large eat the small, it’s that the fast eat the slow.”

Some banks that act quickly by making relatively low-cost investments in leading-edge approaches to sales and marketing will be the winners. Those winning banks will not only survive but they will significantly enhance shareholder value at the expense of their competition. Community banking will never be the same because this is not a “big versus small” contest but rather one that is centered on “fast versus slow.” The biggest competitive surprise may well be those community banks that win at the expense of the other community banks with which they compete directly.

Remember that some of today’s leading-edge approaches to sales and marketing in banking represent Version 1.0 in other industries. While “first to market” is the best and often the only position to be in for information and technology companies, I firmly believe that being a fast, focused, and well-organized second still counts for a lot in banking.

The banks that can move quickly due to both size and culture have the ability to win over larger and often more knowledgeable competitors. As Charles Darwin said, “It’s not the strongest of the species that survive, nor the most intelligent, but those that are the most responsive to change.”

Winning is in the execution, acting on the idea not just getting the idea, as the noted strategic thinker, Adrian Slywotzky, observed. Assume for the moment that many larger institutions are far down the road on understanding and are starting to implement sophisticated and effective CRM. Just by listening, reading trade publications, and learning from the available research, the serious community banker can compete effectively if for no other reason than having smaller size and faster speed improves response time.

Remember that “the fast eat the slow,” and in banking today, many of the leading institutions appear to be moving very fast with regard to three open windows: planning to win, customer relationship management, and Internet banking.

Pooling’s demise: what does it mean?

The Financial Accounting Standards Board (FASB) is proposing the end of the use of pooling accounting for most mergers and acquisitions. The net effect of mandated purchase accounting will be to create massive amounts of goodwill on the books of the acquirer every time an acquisition is completed at a premium to book value after some adjustments. Reported earnings will drop due to a write-off of goodwill for book purposes, not tax purposes, but cash earnings will remain basically unchanged. Tangible capital, under current accounting rules, will be significantly affected by the increased goodwill. The effective date will be clarified shortly by FASB.

What the change will really mean is this: Cash earnings will not change, accountants will produce more rules, some acquirers and selling institutions will rush to sign definitive agreements, and new bank valuation standards will emerge. Foreign purchasers of U.S. banks who already have to live with purchase accounting will think it’s a great idea, and high-multiple U.S. acquirers who have been successfully using their stock to buy banks will firmly believe that pooling should be protected by a new constitutional amendment.

The good news is that the markets, with some assistance from Wall Street analysts, will likely find a way to maintain current valuations by focusing on cash earnings. Where there is a will, there is often a way. Of interest, bankers who didn’t want to sell out in the first place are ecstatic. The accounting change just buys some more time to build the bank, or in a few instances, it puts bankers closer to retirement.

The bottom line

At the end of the day, these windows merely provide a slice of the opportunities available to banks. The challenge is to decide which to take advantage of and which to reject. And most important, timing is everything. Don’t let your board put off have a planning discussion until it’s too lateu00e2u20ac”and the open windows begin to close.