“The Best Strategic Thinker in Financial Services”


strategy-7-19-19.pngThe country’s most advanced bank is run by the industry’s smartest CEO.

Co-founder Richard Fairbank is a relentless strategist who has guided Capital One Financial Corp. on an amazing, 25-year journey that began as a novel approach to designing and marketing credit cards.

Today, Capital One—the 8th largest U.S. commercial bank with $373.2 billion in assets—has transformed itself into a highly advanced fintech company with national aspirations.

The driving force behind this protean evolution has been the 68-year-old Fairbank, an intensely private man who rarely gives interviews to the press. One investor who has known him for years—Tom Brown, CEO of the hedge fund Second Curve Capital—says that Fairbank “has become reclusive, even with me.”

Brown has invested in Capital One on and off over the years, including now. He has tremendous respect for Fairbank’s acumen and considers him to be “by far, the best strategic thinker in financial services.”

I interviewed Fairbank once, in 2006, for Bank Director magazine. It was clear even then that he approaches strategy like Sun Tzu approaches war. “A strategy must begin by identifying where the market is going,” Fairbank said. “What’s the endgame and how is the company going to win?”

Fairbank said most companies are too timid in their strategic planning, and think that “it’s a bold move to change 10 percent from where they are.” Instead, he said companies should focus on how their markets are changing, how fast they’re changing, and when that transformation will be complete.

The goal is to anticipate disruptive change, rather than chase it.

“It creates a much greater sense of urgency and allows the company to make bold moves from a position of strength,” he said.

This aggressive approach to strategy can be seen throughout the company’s history, beginning in 1988 when Fairbank and a former colleague, Nigel Morris, convinced Richmond, Virginia-based Signet Financial Corp. to start a credit card division using a new, data-driven methodology. The unit grew so big so fast that it dwarfed Signet itself and was spun off in 1994 as Capital One.

The company’s evolution since then has been driven by a series of strategic acquisitions, beginning in 2005 when it bought Hibernia Corp., a regional bank headquartered in New Orleans. Back then, Capital One relied on Wall Street for its funding, and Fairbank worried that a major economic event could abruptly turn off the spigot. He sought the safety of insured deposits, which led not only to the Hibernia deal but additional regional bank acquisitions in 2006 and 2008.

Brown says those strategic moves probably insured the company’s survival when the capital markets froze up during the financial crisis. “If they hadn’t bought those banks, there are some people like myself who don’t think Capital One would be around today,” he says.

As Capital One’s credit card business continued to grow, Fairbank wanted to apply its successful data-driven strategy to other consumer loan products that were beginning to consolidate nationally. Over the last 20 years, it has become one of the largest auto lenders in the country. It has also developed a significant commercial lending business with specialties like multifamily real estate and health care.

Capital One is in the midst of another transformation, to a national digital consumer bank. The company acquired the digital banking platform ING Direct in 2011 for $9 billion and rebranded it Capital One 360. Office locations have fallen from 1,000 in 2010 to around 500, according to Sandler O’Neill, as the company refocuses its consumer banking strategy on digital.

When Fairbank assembled his regional banking franchise in the early 2000s, the U.S. deposit market was highly fragmented. In recent years, the deposit market has begun to consolidate and Capital One is well positioned to take advantage of that with its digital platform.

Today, technology is the big driver behind Capital One’s transformation. The company has moved much of its data and software development to the cloud and rebuilt its core technology platform. Indeed, it could be described as a technology company that offers financial services, including insured deposit products.

“We’ve seen enormous change in our culture and our society, but the change that took place at Capital One’s first 25 years will pale in comparison to the quarter-century that’s about to unfold,” Fairbank wrote in his 2018 shareholders letter. “And we are well positioned to thrive as technology changes everything.”

At Capital One, driving change is Fairbank’s primary job.

The Secret to a Low Efficiency Ratio


efficiency-5-31-19.pngOne of the most important metrics in banking is the efficiency ratio, which is generally viewed as a measurement of how carefully a bank spends money. Following this definition to its logical conclusion, the more parsimonious the bank, the lower its efficiency ratio should be.

But this common understanding fails to capture the true nature of what the efficiency ratio actually measures. It is in reality a fraction that expresses the interrelationship between the two most dynamic forces within any business organization: the growth of revenue and expenses.

Looked at this way, the efficiency ratio is actually a measurement of effective spending—how much revenue does every dollar of spending produce. And embedded within the efficiency ratio is a simple but extraordinarily important concept that is the key to high profitability—positive operating leverage.

But first, let’s look at how the efficiency ratio works. It’s an easy calculation. The numerator, which is the top half of the fraction, is expenses. And the denominator, which sits below it, is revenue. A bank that reports $50 of expenses and $100 of revenue in a quarter has an efficiency ratio of 50 percent, which is the benchmark for most banks (although most fall short).

However, not all 50 percent efficiency ratios are created equal.

Consider two examples. Bank Cheapskate reports $40 of expenses and $100 of revenue in its most recent quarter, for an efficiency ratio of 40 percent. Coming in 10 percentage points under the benchmark rate of 50 percent, Bank Cheapskate performs admirably.

Bank Topline reports $50 in expenses and $125 in revenue in its most recent quarter. This performance also results in an efficiency ratio of 40 percent, equivalent to Bank Cheapskate’s ratio. Again, an impressive performance.

While the two ratios are the same, it is unlikely that most institutional investors will value them equally. The important distinction is how they got there.

The argument in favor of Bank Cheapskate’s approach is simple and compelling. Being a low-cost producer is a tremendous competitive advantage in an industry like banking, which has seen a long-term decline in its net interest margin. It allows to a bank to keep deposits costs low in a tight funding market, or back away from an underpriced and poorly structured credit in a competitive loan market. It gives the bank’s management team optionality.

The case for Bank Topline’s approach is probably more appealing. Investors appreciate the efficiency of a low-cost producer, but I think they would place greater value on the business development skills of a growth bank. In my experience, most investors prefer a growth story over an expense story. Bank Topline spends more money than Bank Cheapskate, but it delivers more of what investors value most—revenue growth.

To be clear, the choice between revenue and expenses isn’t binary—this is where positive operating leverage comes in.

Positive operating leverage occurs when revenue growth exceeds expense growth. Costs increase, but revenue increases at a faster rate. This is the secret to profitability in banking, and the best management teams practice it.

A real-life example is Phoenix-based Western Alliance Bancorp. The bank’s operating efficiency ratio in 2018 was an exemplary 41.9 percent. The management team there places great importance on efficiency, although the bank’s expenses did rise last year. But this increase was more than offset by strong revenue growth, which exceeded expense growth by approximately 250 percent. This is a good example of positive operating leverage and it’s the real story behind the bank’s low efficiency ratio.

The greater the operating leverage, the lower the efficiency ratio because the ratio is relational. It is not solely a cost-driven metric. At Western Alliance and other banks that focus on creating positive operating leverage, it’s not just how much you spend—it’s how many dollars of revenue each dollar of expense creates.

To understand the real significance of a bank’s efficiency ratio, you have to look at the story behind the numbers.

Why Checking Products Matter More Than Ever


checking-4-17-19.pngThe battle is on among all banks to acquire new customers and their low-cost deposits. The key to winning the battle for low-cost deposits is owning the primary banking relationship and, in particular, the consumer checking account relationship.

The checking account is the central way consumers identify “their bank.” It is the only banking product that consumers use daily to navigate the intersection of their life and their money.

If this navigation is smooth, your bank is in the best position to collect even more deposits, loans and fee income.

Banks that understand this best have been successful at capturing primary banking relationships, which in recent years have been the four biggest U.S. banks. They are the ones investing the most to continue this trend and defend their success.

If you’re a community bank or even a regional one, a recent AT Kearney survey detailed the ways you are being attacked.

  • The four biggest banks (Bank of America Corp., JPMorgan Chase & Co., Citigroup and Wells Fargo & Co.) have 40 percent of the U.S. consumers’ primary banking relationships. Superregional banks have 19 percent. The remaining 41 percent is split between other institution types, with credit unions at 14 percent, community banks at 12 percent, regional banks at 8 percent and relatively new direct banks like Marcus and Ally already at 5 percent.
  • The four biggest banks are collectively budgeting more than $30 billion in technology investments, about one-third of which is on digital banking around the checking account.
  • Digital channels drive 35 percent of primary banking relationship moves, while branches only drive 26 percent. The Big Four banks are capturing 41 percent of consumers that do switch their primary relationship. Superregional banks are capturing 28 percent. This leaves 31 percent for everyone else, and the new digital-only banks have 11 percent of that remainder.

Big Banks Rule
The reality is the biggest banks have the upper hand. The resources they are investing in digital platforms to maintain and increase market share can’t be replicated by community or regional banks.

But let’s not confuse the upper hand with the winning hand. Community and regional banks can fight back, because there is a chink in the armor of big banks.

While the digital experience provided by the four biggest banks may be superior, a review of the actual product benefits their consumer checking accounts provide isn’t that impressive. They are as ordinary as the checking accounts at most other banks.

Their checking lineups, terms and conditions are complicated with significant product overlap. They mask this weakness with an allure in the marketing and digital delivery of these ordinary benefits.

When smaller banks discuss growing consumer retail accounts, they talk more about acquisition pricing and marketing strategy, and not enough about first improving and simplifying products and lineups. Many banks start by spending on the promotion of unappealing, undifferentiated checking products at the lowest price in a confusing lineup. This isn’t a winning battle plan.

Smaller banks should first make their lineup simple for consumers to understand. The best practice here is a good, better, best methodology, which we have previously discussed in my article, Use Good/Better/Best for Checking Success.

While doing this, why not offer checking products as good, modern and different as you can afford?

Nontraditional Benefits Work
Recent research by Cornerstone Advisors, titled “Reinventing Checking Accounts,” shows how positively consumers respond to switching to checking accounts that include nontraditional benefits like cell phone insurance, roadside assistance and pharmacy/vision discounts alongside traditional benefits.

These nontraditional benefits are central to consumers’ lives away from the bank but can be captured in their checking account.

There’s no debating the importance of acquiring new checking relationships in gathering low-cost deposits. While the biggest banks dominate currently, are investing heavily in technology and paying handsome incentives to attract even more new customers, smaller banks can attack where these big banks are vulnerable.

Don’t fight them toe-to-toe with a complex lineup of look-a-like checking products. That’s a losing battle. Instead, focus on the appeal of a simple lineup and products that competing banks don’t offer. That’s a battle worth fighting, and one that can be won.

Who Will Lead the Bank Industry Into the Future?


leadership-2-1-19.pngLeadership is a central aspect of banking. Not only do bank executives lead their institutions, but directors who sit on bank boards tend to be leading members of their communities.

Indeed, it’s no coincidence that the biggest and tallest buildings in many cities and towns across the country are named after banks.

That’s why leadership was one underlying theme of this year’s Bank Director’s Acquire or Be Acquired Conference held at the JW Marriott in Phoenix, Arizona.

It was the 25th anniversary of the conference, one of the marquee events in the banking industry each year.

The conference opened with a video tracing the major events in banking since 1994—a period of deregulation, consolidation and innovation.

In that time, the population of banks has been cut in half, Great Depression-era regulations have rolled back and the internet and iPhone have made it possible for three-quarters of deposit transactions at some banks to be completed from the comforts of bank customers’ own homes.

It was only fitting then to bookend the conference with some of the greatest leaders in the banking industry throughout this tumultuous time.

The first day concluded with the annual L. William Seidman CEO Panel, featuring Michael “Mick” Blodnick, the chief executive officer of Glacier Bancorp from 1998-2016, and Joe Turner, the CEO of Great Southern Bancorp since 2000.

The banks run by Blodnick and Turner have created more value than nearly all other publicly traded banks in the United States. Glacier ranks first in all-time total shareholder return—dividends plus share price appreciation—while Great Southern ranks fifth on the list.

As Blodnick and Turner explained on stage, there is no one right way to grow. Blodnick did so at Glacier through a series of 30 mergers and acquisitions, building one of the leading branch networks throughout the Rocky Mountain region.

Turner took a different approach at Great Southern. He and his father, who had run the bank from 1974 to 2000, focused instead on organic growth. They built a leading footprint in the Southwest corner of Missouri, and then, in the financial crisis, completed five FDIC-assisted transactions to spread their footprint into cities up the Missouri and Mississippi rivers.

One consequence of this approach was it enabled Great Southern to consistently decrease its outstanding share count by upwards of 40 percent since originally going public, as it never had to issue shares to buy other banks.

Asked what one thing he wanted to share with the audience, Turner talked about the importance of ignoring shortsighted stock analysts. Despite Great Southern’s extraordinary returns through the years, it has rarely if ever been “buy” rated by the analyst community.

Why not? When the economy is great and other banks are growing at a rapid clip, Great Southern tempers its growth to avoid making imprudent loans. Then when times are tough, and a pall is cast over all stocks, Great Southern surges ahead.
Blodnick’s advice focused on M&A. For sellers, the goal should never be to get the last nickel, he explained. Rather, the goal should be to establish a partnership that will maximize value over time.

The conference also had a parallel track of sessions, FinXTech, focused on technology.

These sessions were often standing-room only. It was an obvious indication about what the future leaders of banking are focused on now.

Don MacDonald, the chief marketing officer of MX Technologies, took a particularly broad approach to the subject. Although his session ostensibly focused on harnessing data to increase growth and returns, he put the topic into historical perspective.

The question MacDonald was trying to answer was: How do we know if the banking industry has reached a genuine inflection point, after which the rules of the game, so to speak, have changed?

The answer to this question, MacDonald said, can be found in developing a framework for assessing change. That framework should include multiple forces in an industry, such as regulations, customer expectations and technology.

It’s only when multiple major forces experience change at or around the same time that a true strategic inflection point has been reached, explained MacDonald.

Has banking reached such a point?

MacDonald didn’t answer that question, but given the environment banks operate in right now with the growth of digital distribution channels and the ever-evolving regulatory regime, one would be excused for coming to that conclusion.

Given these two tracks—the general sessions focusing on banking and the FinXTech sessions focusing on technology—it was fitting that the final day of the conference was opened by John B. McCoy, the former CEO of Bank One, from 1984-99.
McCoy hails from the notoriously innovative McCoy banking dynasty, preceded by his father and grandfather. Bank One was one of the earliest adopters of credit cards, drive-through windows and ATMs, among other things.

Furthermore, it was McCoy’s approach to acquisitions at Bank One, where he completed more than 100 deals, that helped to inform Blodnick’s approach at Glacier. Known as the “uncommon partnership,” the approach focused on buying banks, but allowing them to retain their autonomy.

The decentralized aspect of the uncommon partnership left decision-making at the local level—within the acquired banks. It allowed Bank One and Glacier to have their cake and eat it too—growing through M&A, but leaving the leadership of the individual institutions where it belongs: In their local communities. This resulted in lower customer attrition, the scourge of most deals.

One overarching lesson from Acquire or Be Acquired is that banking is about facilitating the growth of communities, and the best people to spearhead this are the ones with the most on the line—the leaders of those communities.

Pat Summitt’s Model on Talent Development


talent-1-16-19.pngWith unemployment at its lowest point since 1969, the competition for top talent is as fierce as it has been in years.

While many experienced banking professionals know well that the industry offers challenges, rewards and opportunities, many millennials and Gen Z’ers remain reluctant to pursue a career in banking.

The high-performing banks of the future will be those that can translate those benefits to attract, develop, reward and retain top talent. There are two places your bank can start this process.

Banks already provide strong salaries, bonus opportunities, health-care coverage and retirement plans. The challenge the industry now faces is how to make the banking industry more attractive to today’s generation of younger recruits.

What a bank should consider includes flexible work hours, the ability to work remotely and cross-training. If the bank can demonstrate a track record and policy of promoting from within, the job opportunity will be even more attractive to a potential hire.
Another recruiting tool we have often used successfully, particularly for younger individuals, is a deferred compensation program designed to help pay down student loans, with vesting provisions that encourage continued employment at the bank.

But once you acquire top talent, how do you develop them as future leaders?

First, an ongoing coaching and mentoring program is critical.

Pat Summitt, the legendary University of Tennessee women’s basketball coach who won more games than any other NCAA Division I women’s coach, recruited talented players.

Once they joined the team, she delivered an individualized plan to improve each player’s weaker areas. She also provided regular feedback and monitoring. This method of coaching and mentoring led to 1,098 career victories and Hall of Fame success as a coach and leader. So, how can Summitt’s approach help your bank?

When developing the bank’s future senior management, the board and the CEO should ensure they agree on both the long-term strategic plan and the necessary skills to execute that plan.

They should then identify the internal candidates best suited to develop and provide them with opportunities for growth. It is important the bank develop a culture of honest assessment of strengths and weaknesses, and provide ongoing mentoring and feedback.

Even with top talent, it is unlikely that Summitt would have achieved the success she did had she provided her players with feedback only once a year.

In addition to an ongoing assessment and coaching program, the bank should discuss a career path for potential leaders, and the company should provide the necessary training and cross training, when feasible, to allow promising employees to learn each facet of the bank’s operations. Thorough training programs can be very attractive in recruitment and are invaluable to the development of a leader.

Once the bank has invested in developing up-and-coming leaders, rewarding them appropriately and incenting them to remain with your bank is critical. No doubt, your competitors will recognize the strong leaders you are developing and actively recruit your talent, requiring your bank to maintain not just competitive salaries, but methods of keeping your compensation programs unique and desirable.

An example is a nonqualified deferred compensation plan that pays in-service distributions at the end of certain periods, such as three- or five-year time frames. This type of plan typically would include performance-based compensation tied to specified goals.

Additional amounts can be credited to the deferred compensation account and distributed at the end of a longer period (such as 10 years), providing even more incentive to stay with the bank.

If the individual terminates before the applicable distribution period(s), undistributed funds can be allocated to hire a talented replacement or credited back to the bank’s income.

We have found these flexible deferred compensation arrangements, when combined with other tools, to be helpful in recruiting, developing and keeping top talent.

An active career development program bolstered with proper financial incentives can help ensure your bank has the right leaders for the future.

Dealing With Nonbank Buyers


merger-1-16-19.pngMergers and acquisitions in the banking industry historically have been relatively straight forward, but things are beginning to change.

Typically, there’s a familiar pattern: Bank A wants to sell. Banks B, C and D bid, and the winner moves forward with a merger at the bank or holding company level.

Over the past few years, there have been more instances where the buyer is not a traditional bank. Investor groups, fintech entities, credit unions and other nontraditional bank acquirers are becoming more interested in acquiring banks. There may be specific regulatory or operational challenges when the buyer is not a traditional bank or bank holding company.

Here are some factors that sellers should keep in mind at the beginning of the process.

The acquirer and transaction will need approval from regulators. If a buyer is not already “known” to banking, regulators may scrutinize the transaction more than if a traditional bank were involved.

Individual investors may need to submit Interagency Biographical and Financial Reports, or IBFRs, and that process may be more invasive and time consuming than a person not familiar with the banking industry would expect. If the buyer is forming an entity that will eventually control the bank, then the Federal Reserve will need to approve it as a bank holding company in connection with the change in control.

Ensure the buyer is prepared for the process. The sophistication and deal experience of nontraditional buyers varies broadly. Working through the process with investor groups and credit unions is important. Regulators may expect to see a detailed business plan regarding how the buyer plans to operate the bank following the transaction.

A seller should carefully review the business plan prior to committing to a transaction to ensure it is viable and to be comfortable regulators will approve the plan. In many instances, it may be appropriate to have pre-transaction conferences with the regulators to get their preliminary indication on any strengths and weaknesses of the proposed acquirers and their business plan.

The seller’s management team may be required post-closing. Many nontraditional buyers will not have their own, full management team in place to run the organization after closing. In those situations, the buyer may have additional pressure to deliver management along with the transaction.

Sellers should ensure management is on board with the transaction and that appropriate compensation tools like change-in-control agreements and stay-bonus arrangements are in place at the start of the process. Additionally, both parties should work early in the process to lock in any post-transaction employment arrangements.

Understand and negotiate the transaction structure. In a bank-to-bank transaction, the buffet of possible deal structures is fairly limited. The menu may expand with a nontraditional buyer, if it does not already have a holding company or existing entity formed. Depending on the situation, particularly the desired tax treatment by both parties, transactions can be structured as a stock purchase or merger at either the holding company or bank level. It is important to plan the transaction structure early, as it will impact what regulatory and corporate approvals are needed to complete the transaction.

Be sure the board is aware of, and understands, alternative strategies. There is enhanced risk that it will be more difficult to obtain regulatory approval for a transaction with a nontraditional buyer, and it may take longer to close the transaction. Therefore, it is that much more important that the board understands the process. For a potential seller, the board should be aware of the alternatives, so the company can change gears and execute a different strategy if the nontraditional buyer ends up not being a viable partner.

Every potential bank deal should be approached with the realization that the process can be lengthy. When a nontraditional buyer is involved, both the buyer and seller should work closely with one another in the beginning to help ensure that it will go as smoothly as possible. Fully understanding in the beginning what the resulting entity will look like at the end of the transaction (financially, structurally and operationally) is critical to being able to properly plan the transaction and to receive regulatory approval.

Building Trust With Customers Starts Inside The Bank


customer-11-27-18.pngRecovery of trust from customers after the financial crisis is beginning to stall due to a number of recent risk- and fraud-related incidents. Following news of a leading bank’s employees’ fraudulent account activity, customer advocacy scores in a recent Forrester survey dropped six points from 2016 to 2017—a trend Forrester correlates to decreased customer loyalty. As banks seek to restore the trust with customers and loyalty, they may be overlooking the role employees play in building trust and keeping risks at bay.

Employees play a key role in the customer experience (CX) as the group that directly interacts with customers about credit card disputes, investments, and financial advice. While a dissatisfied employee can be a weak link, one that is engaged, trusting, and trusted can set the stage for higher business performance.

The potential payoff in building an employee experience that increases trust is monumental. In fact, 20 years of research by the Great Place to Work Institute, which produces the “100 Best Companies to Work For,” found that trust between managers and their reports is the primary defining characteristic of the best workplaces. This trust drives bottom-line performance, with the advocacy group Trust Across America reporting the most trustworthy companies consistently outperform the S&P 500.

Banking leaders may be challenged in building employee trust in part due to the risk management practices that pervade the industry. Practices put in place to limit risk often hamper employees’ creativity, ingenuity and effectiveness. By finding a balance between risk management and a culture of trust internally—in which employees are empowered to act in the best interest of the organization and customer—firms can build trust externally with customers.

The benefits to the bottom-line are also substantial. For example, work teams performing in the top quartile for employee engagement outperform those in the bottom quartile by 10 percent in customer satisfaction and 22 percent in profitability.

To solve this challenge, bank leaders should encourage those with accountability for customer interactions to look inward at how interactions, processes, and tools create a culture of trust where employees are trusted and empowered to act on behalf of customers, collaborate, decrease fraud and—ultimately—mitigate risk throughout the organization. Ask yourself these questions:

Are employees limited in how they can serve customers? Though these limitations are often viewed as a way to mitigate risk, in reality, they increase the chance customers will lose trust in your bank. Ensure your staff are experts on the lifecycle of the products they work with, and use their expertise to meet customers’ needs. Also, consider revisiting your organization’s risk assessment to identify opportunities to service customers where it doesn’t weaken your organization on the regulatory front. This empowers your bank to strike a balance between customer and risk management needs.

What silos exist in your company? Consider how your products and services are organized and how they may prevent employees from having and creating positive customer interactions. Multiple groups may be working on customer-facing solutions simultaneously or solving customer challenges inefficiently due to a lack of internal visibility. Eliminating the functional mazes they must navigate to do their work supports meeting customer needs, which, in turn, builds trust.

Are you making it easier for employees to work for your bank? The employee experience must be designed and developed holistically to empower success, supported by training that equips them to navigate challenging or unforeseen situations. Take a comprehensive view of employee technology, tools and processes. For example, transactional training may not be enough to help staff understand their role and the bank’s culture – and how they come together to impact the customer experience. Put simply, banks should invest in their employees, focusing on long-term learning experiences.

Are you building in risk abatement throughout your organization? Risk management shouldn’t only happen at the last possible opportunity – at the point of customer interaction. Rather, it should be built into every step. Give staff the autonomy to solve problems to create a culture in which employees trust leadership and each other. They will be more likely to repay you by preventing risk incidents, as they feel empowered to do the right thing by the customer and the organization.

Your bank can produce more powerful customer experiences, and ultimately mitigate risk, by removing the unnecessary steps employees must take to successfully complete their work. Creating a culture of trust with employees who are empowered to meet customer needs can help banks, in turn, reestablish trust with their customers.

This article is the second in a series on building trust in financial services from North Highland consulting. Read the first article on building customer trust through experience design and the role that digital design plays in strengthening your business model.

The Formula for Building Customer Trust


customer-11-9-18.pngDue to several recent data breaches and incidents of internal fraud at some of the world’s most recognizable financial brands, millions of consumers are impacted, loyalty is eroding, and risk is added to the bottom line. For banking leaders charged with driving the growth and managing that risk to their organizations, trust is a key to supporting both growth and financial performance.

A recent Carnegie Mellon study of customers of large banks showed those with fraudulent activity on their accounts were more likely to leave in the next six months. Following a series of internal scandals, a leading bank reported a 77 percent increase in unplanned operational expenses, a direct impact on performance.

These numbers tell a story of heightened risk in banking, but they also illuminate the critical role trust can play. Following risk incidents, every financial institution is impacted. The hard reality is trust and confidence in banks remain low across the industry, and have yet to recover to pre-financial crisis levels. In fact, 2018 Gallup polling data indicates only 30 percent of Americans have a “great deal” or “quite a lot” of confidence in banks, down from 41 percent before the crisis (2007). Risk is engrained in the banking industry’s DNA, and while recovery depends largely on a robust and adaptive risk management function, restoring trust with customers touches every area of the organization.

Banking leaders have an opportunity to rebuild trust by mobilizing their functional teams around Experience Design, or the entire experience a customer has with the bank. The benefits of taking an experience-led approach correlate directly to building trust in financial services. In fact, in the 2018 Edelman Trust Barometer, (1) user experience, (2) ease of human interaction, and (3) use of the latest technology were the top factors building trust in financial services—and all of these elements require the careful orchestration of human and digital touchpoints that Experience Design enables.

Banking services can no longer stand alone as customer decisions are being made around every interaction with the organization. There’s an opportunity for banks to differentiate and build trust by uncovering the gaps in their current experience engagement model, and designing experiences that align to customers’ needs and expectations.

To put Experience Design into action, banks must deeply understand their customers’ needs and preferences. Banks must identify the unifying experience they want to achieve through techniques such as Accelerated Service Design, which focuses on human needs and processes, as well as its systems and employees.

To trust a financial institution with deeply personal activities such as saving for retirement or managing credit and mortgages, customers need to feel the bank has their best interests at heart. Digital alone isn’t the answer to the trust challenge. Customers still value face-to-face interactions; one recent study by Celent found 93 percent of customers “still prefer at least some interactions” at a physical branch. In fact, according to the 2018 J.D. Power U.S. Retail Banking Satisfaction Study, digital-only and physical branch-only customers reported the lowest levels of satisfaction. What’s most important is developing an approach that intentionally weaves together human and digital touchpoints in a way that is authentic, smart and relevant.

As banking leaders shape a larger strategic vision around recovery from risk incidents, they should design consumer touchpoints with the Human Experience dimensions—relevance, ease, orchestration, and empathy—at heart. Those dimensions can be brought to life with a focus on embedding the following principles:

Human-centered: Organizations must center experiences and offerings on the human needs of their customers. This includes the services delivered, the processes used to deliver them, and the alignment of the organization and leadership behind that vision.

Co-created: Bank leadership must work with employees to build the internal foundation for a better experience. When trust is at a culture’s core, it permeates throughout the organization, and is felt by customers across all touchpoints.

Holistic: Experience must be viewed from an end-to-end perspective, similar to those provided by Airbnb and Uber. These companies orchestrate digital and physical experiences that seamlessly integrate with a customer’s lifestyle. In turn, these customers value the organization for the things it enables them to do, not the product or service provided. Examine how every touchpoint is influencing the customer experience, and how to better meet customer demand with a more seamless experience.

Iterative: Experience Design is not a “one and done” effort. Customer needs and preferences are always changing, and they are not making one-time transactions. Banks need to be a trusted partner to their customers throughout their relationship.

An experience-focused approach builds trust, and in turn, customer loyalty that drives the bottom line. By taking a comprehensive view of the customer experience, banks can build the trust that’s critical to sustainable risk incident recovery.

How Bananas and Tech Firms Can Help Tackle the Talent Challenge


management-11-8-18.pngAll bank executives and directors say that recruiting, retaining and properly incentivizing top talent is a priority, but it’s the banks that truly excel at this that are able to separate themselves on the competitive playing field.

How to tackle the talent challenge was the theme of Bank Director’s 2018 Bank Compensation and Talent Conference, hosted this week at the Four Seasons Resort and Club at Las Colinas in Dallas, Texas.

The first day of the conference laid the groundwork by introducing the conventional techniques used today by human resources professionals throughout the bank industry.

On Monday morning, before the formal beginning of the conference, attendees participated in a half-day workshop, presided over by a panel of experts from Compensation Advisory Partners and Kilpatrick Townsend & Stockton LLP. The topics covered a broad range of issues, from common executive compensation challenges, to strategies for promoting diversity and inclusion, to tools that can be used to properly align pay and performance.

The second day of the conference built on this, in part through a pair of audience surveys.

In one survey, nearly a third (31 percent) of attendees said managing rising compensation and benefit costs is their top compensation challenge for 2019, more than half (56 percent) said they’ve raised wages to better compete for talent and in response to last year’s tax cut, and nearly three-quarters (70 percent) said they’ve expanded their internal training programs to develop young leaders.

These statistics were borne out with anecdotes. Beth Bauman, the head of human resources at Bank of Butterfield, an $11 billion bank based in Bermuda, talked about implementing a talent management program to help guide and groom the bank’s younger employees. And human resources officers from Cadence Bancorporation and Union Bankshares discussed the challenges of merging compensation cultures after an acquisition.

The final day of the conference delved into less conventional approaches to talent management.

The day started with an anecdote from Bank Director’s CEO, Al Dominick, about an Asian grocery store chain that figured out a new way to sell bananas. Instead of selling them in traditional, equally ripe bunches, the chain sold bananas in packages of five, with each banana at a different stage of ripeness. As a result, the bananas ripen in stages over a period of a week, not all at the same time.

The anecdote illustrates how approaching an issue in a creative way can result in an unconventional yet effective solution.

The first presenter on stage on Wednesday, Jason Mars, came not from a bank, but rather from a fintech company. Mars is the founder and CEO of Clinc, a company focused on bridging the gap between research on conversational artificial intelligence and its application for enterprises.

My No. 1 criterion for hiring is intellectual curiosity, because that’s what drives people to do really hard stuff,” said Mars. This is more important to Mars than other, more orthodox measures, like a prospective employee’s college grade point average or even their performance in the interview process.

“Passion is another priority, and flexibility,” said Mars. “It’s about figuring out whether they will be motivated to do hard stuff because they’re passionate, curious and interested.”

And finishing out the conference was a panel of three bank CEOs from across the country, all of whom shared their respective talent and compensation strategies.

One of the more innovative philosophies came from John Holt, CEO NexBank, a rapidly growing bank based in Dallas.
A group of investors acquired control of the bank in 2004, when it had only $55 million in assets. Seven years later, a new management team was brought in to hasten its growth. One way it did so was to promise its employees a bonus equal to 100 percent of their base pay when the bank passed the $8-billion threshold, which it recently eclipsed. The strategy should serve as a retention policy as well, explained Holt, because the bonus pays out over 24 months.

NexBank also buys lunch for its employees every day, offering them a menu of multiple restaurants to order from. It pays 100 percent of their health insurance premiums. And it has added a millennial to its board of directors—the bank’s 37-year-old chief operating officer, now the CEO heir apparent.

The net result, said Holt, was the bank has fewer, better people than many of its competitors, and it faces little employee turnover, sidestepping a perennial problem in any industry.

The point is while there is no magic bullet that will solve all of a bank’s talent and compensation challenges, understanding the tried-and-true approaches to doing so, as well as the less conventional strategies used in the market today, will help banks better compete for the next generation of employees.

How Netflix and JPMorgan Can Help Your Bank Win Right Now


strategy-11-2-18.pngAs one of the best-performing stocks on Wall Street, you can bank on Netflix spending billions of dollars on even more original programming, even without a profit. Likewise, JPMorgan Chase & Co.’s consumer and community banking unit attracted a record amount of net new money in the third quarter.

How do I know this, and what’s the same about these two things?

Read their most recent earnings reports. Netflix doesn’t hide its formula for success, and JPMorgan boasts about its 24 percent earnings growth, fueled by the consumer and community banking unit, which beat analyst projections.

While we all have access to information like this, taking the time to dig into and learn about another’s business, even when not in direct competition or correlation to your own, is simply smart business, which is why I share these two points in advance of Bank Director’s annual Bank Compensation & Talent Conference.

Anecdotes like these prove critical to the development of programs like the one we host at the Four Seasons outside of Dallas, Nov. 5-7.

Allow me to explain.

Executives and board members at community banks wrestle with fast-shifting consumer trends — influenced by companies like Netflix — and increasing financial performance pressures influenced by JPMorgan’s deposit gathering strategies.

Many officers and directors recognize that investors in financial institutions prize efficiency, prudence and smart capital allocation. Others sense their small and mid-size business customers expect an experience their bank may not currently offer.

With this in mind, we aim to share current examples of how stand-out business leaders are investing in their organization’s future in order to surface the most timely and relevant information for attendees to ponder.

For instance, you’ll hear me talk about Pinnacle Financial Partners, a $22 billion bank based in Nashville. Terry Turner, the bank’s CEO, shared this in their most recent earnings report:

“Our model of hiring experienced bankers to produce outsized loan and deposit growth continues to work extremely well. Last week, we announced that we had hired 23 high-profile revenue producers across all of our markets during the third quarter, a strong predictor of our continued future growth. This compares to 39 hires in the second quarter and 22 in the first quarter. We believe our recruiting strategies are hitting on all cylinders and have resulted in accelerated hiring in our markets, which is our principal investment in future growth.”

This philosophy personally resonates, as I believe financial institutions need to (a) have the right people, (b) strategically set expectations around core concepts of how the bank makes money, approaches credit, structures loans, attracts deposits and prices its products in order to (c) perform on an appropriate and repeatable level.

Pinnacle’s recruitment efforts also align with many pieces of this year’s conference. We will talk strategically about talent and compensation strategies and structuring teams for the future, and we will also explore emerging initiatives to enhance recruiting efforts.

We will also explore big-picture concepts like:

Making Incredible Hires
While you’re courting top talent, let’s start the conversation about joining the business as well as painting the picture about how all of this works.

Embracing Moments of Transformation
With advances in technology, we will help you devise a clear vision for where your people are heading.

Creating Inclusive Environments
With culture becoming a key differentiator, we will explore what makes for a high-performing team culture in the financial sector.

As we prepare to welcome nearly 300 men and women to Dallas to talk about building teams and developing talent, pay attention to the former Federal Reserve Chairman, Alan Greenspan. He recently told CNBC’s “Squawk Box” that the United States has the “the tightest market, labor market, I’ve ever seen… concurrently, we have a very slow productivity increase.”

What does this mean for banks in the next one to three years? Hint: we’ll talk about it at #BDComp18.