Beware the Experts

Spend any time listening to the conventional wisdom in the banking business, and you won’t know whether to laugh or cry. I was reminded of this last month after reading the transcript of a conference call, hosted by Prudential Securities, that purported to dissect the long-term trends facing the banking industry. The featured speakers were an all-star lineup; they included a former national regulator, the head of a leading bank trade group, and a partner at McKinsey & Co.

Big shots, all. Presumably, they had plenty of interesting things to say, right?

Unhappily, no. While some panelists did offer terrific insights, others provided nothing but warmed-over banalities and misstatements of fact. How is it that such smart, well-paid people regularly say such dumb things? My guess: It’s myopia combined with laziness. There is, unfortunately, a certain breed of banking “expert” out there who has become so insulated from the banking business that he’s simply unaware of what’s going on in the real world anymore.
One Pru panelist, McKinsey partner Roger Kline, is typical of the breed. Look at some of the comments Kline made, and you’ll see what I mean:

Received Bit of Wisdom No. 1: “Within five years, five or six institutions will control perhaps 70% of the balances in the U.S. financial system.” This prediction is–what’s the word I’m looking for?–ludicrous. Rather than dominate the industry, the mega-institutions that emerged from the consolidation wave of the 1990s have turned out to be megabillion-dollar clunkers. Deposits have flown out their doors as the banks closed branches, imposed 800 numbers for “small” customers, and botched integrations. By now, the big uglies are among the least competitive players in the industry. In their place, smaller, regional banking companies are thriving (and grabbing share!) precisely because they provide what the monoliths can’t: consistently superior customer service. As long as there are Fifth Thirds, Commerce Bancorps, and TCF Financials around, the big national banks aren’t going to dominate anything. Lesson: Size doesn’t matter in the financial services business.

RBOW No. 2: “There’s going to be an ongoing battle between banks and nonbanks over retail payments.” No, there won’t be. That battle, if it ever happened, is over; the banks won. There was a lot of talk during the Internet bubble, of course, about the coming rise of e-payments, m-payments, and other “new economy” payment systems that would take banks out of the payment loop. There was only one problem with those new schemes: Consumers wanted nothing to do with them. Lesson: The demand deposit account is alive and well, and will stay that way for awhile.

RBOW No. 3: “The very best banks, in terms of growth, achieve roughly 7% annual growth on a same-store basis.” You only need to spend a little time looking through company filings to know that that’s hogwash. Plenty of banks around the country, many of which are in mature, “slow-growth” markets, consistently report same-store sales gains that rival the country’s top growth retailers. At Charter One in Cleveland, same-store deposits are growing by 20% annually. And GreenPoint Financial in New York is growing its same-store deposits by 13% annually. The Lesson: High-growth companies can thrive in mature industries, even–especially!–in the banking industry.

RBOW No. 4: “Managements will try to explicitly manage their institutions’ long-term cultures for better long-term performance.” Kline has this backwards. Great corporate cultures produce great CEOs, not the other way around. And besides, how is today’s big-bank CEO–who’s running an institution that’s really several institutions cobbled together on the fly during the acquisition binge of the 1990s–supposed to “manage culture”? He can’t! Why, most big banks have gone through so many deals lately that they don’t even have a culture to manage anymore! Kline is correct, though, that the right culture, properly nurtured, is a key competitive tool. That sort of environment, though, is most likely found at smaller, entrepreneurial institutions such as Houston’s Southwest Bank of Texas, or UCBH Holdings of San Francisco. Which is one reason they’re beating the pants off the big guys.

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