What Can the Banking Industry Learn from a Fake Pop Star?


5-10-13_Growth_Postcard.pngWhat does a pop star hologram drawing thousands to her concerts have to do with banking? Well, I’ll get to that in a minute.

Hatsune Miku, a non-human creation of a Japanese media company, is even better than a real singer, if you believe some of her young fans. She’s “post-human being,” according to the media company who created her.

As banking guru Brett King described it at Bank Director’s inaugural The Growth Conference in New Orleans last week, Hatsune Miku is a sign that the banking industry’s assumptions about the value of face-to-face contact may not hold true for the next generation.

Do you really think a generation that will pay to see a hologram perform will go to a bank branch to get financial advice? That was a question King posed to the audience of nearly 200 bank directors, bank officers and industry executives who attended the conference at The Ritz Carlton in the French Quarter.

Part of the theme emerging from The Growth Conference was the need for the industry to transform itself in the coming years with technological and generational changes. However, bankers, especially commercial bankers, tend to be inherently conservative. Jumping into the latest thing and throwing money at unproven ideas is not behavior typical of most bankers. Branches were supposed to have disappeared at least 20 years ago, but they haven’t, because most bankers prefer human tellers to distribution channels that rely solely on technology.  In my conversations with bank directors and bank officers at the conference, I was struck by the healthy skepticism toward technological change. One bank CEO asked me how often people are really going to want to remotely deposit checks through their smartphones. It’s a good question. As with all investments, management and boards are going to have to decide what the smartest and most appropriate technological investments are for their particular banks. Will it be remote deposit capture for commercial accounts? Maybe. Mobile check deposits for consumers? Maybe not. It depends on the bank.

“Predictions about the pace and magnitude of change are inherently very difficult, but the case for its inevitability was very well made,’’ said Michael Kubacki, the chairman and chief executive officer of Lake City Bank in Warsaw, Indiana, who attended the conference. “We need to think more about what might work for us and our clients in the future, and less about what worked in the past.”

Tied with that theme at the conference was the consistent message that community banks need to have a niche or multiple niches to help them compete with bigger banks. Bigger banks have a lower cost of funds, branches on every other corner, and an ability to invest in lots of technology.

5-10-13_Growth_Postcard_2.pngThe special niches that community banks develop will also determine the technology they need, whether it is St. Louis-based Enterprise Financial Services’ private banking business and life insurance policies for family offices, or Bethesda, Maryland-based Congressional Bank’s specialization in medical offices.

The slow growth economy and low interest rate environment have not been kind to bank income statements. Loan growth is minimal. Small businesses are still reluctant to borrow. Consumers are still deleveraging. Banks will need whatever they can do to improve their profitability in the years ahead.

“You must do an authentic self-assessment,” said Jay Sidhu, the chairman and chief executive officer of Customers Bancorp Inc., in Wyomissing, Pennsylvania, who was the keynote speaker at the conference. “You must think differently and take advantage of technology and your unique market position. You have something that big banks don’t have and you can take advantage of that. If you don’t, you’re going to be eaten up.”

Taking a Cue from World-Class Athletes—Five Keys to Top Performance in 2013


5-3-13_Fiserv.pngWhat separates a top performing financial institution from others in the field? To find an answer, bank executives can take a cue from elite athletes, who consistently identify and perfect the discrete actions that will give them a competitive edge. To better understand just what banks leading their peers in growth are doing differently compared to lower performing institutions, Fiserv conducted a study that reviewed the performance metrics of banks with assets ranging from $1 billion to $10 billion. (Editor’s Note: This study was slightly different from Bank Director’s own Growth Leaders Ranking, which surveyed all banks and thrifts and ranked top growth institutions by core income, core deposits, noninterest income and loans and leases.)

We examined revenue, non-interest income, loan and core deposit growth over a year from September 2011 to September 2012. Then, Fiserv identified what factors distinguished the leading growth institutions within this group. Across the board, Fiserv research found that strong and growing banks maintained five key attributes: a strong cost foundation, sustained lending volumes, steady non-interest income, decreased reliance on service fees and proven motivation to capture market share.

Some of what Fiserv uncovered in our analysis of this segment was surprising. The leading growth banks were distributed across the country. While the institutions tended to operate in areas with strong local economies, these banks weren’t concentrated in any one particular region. The results did not point to one particular lending product strategy, either. Forty percent of the top performers with assets ranging from $1 billion to $10 billion had well diversified loan portfolios. Most of the remaining 60 percent were fairly equally represented in a number of lending categories, suggesting there are more factors at play than one particular focus. 

So, what gives these leading growth banks such a powerful edge? Fiserv analysis revealed five factors that place elite performers in the winner’s circle:

  1. Strong cost foundation. A lower cost foundation lessens the risk required to generate revenues, and it’s one of the most significant influences on sustained profitability. Cost foundation is a unique metric calculated by adding interest expense and non-interest expense by average earning assets. The study revealed the leading growth banks not only excelled in generating revenue but were also efficient from a cost perspective in generating that revenue.
  2. It’s all about the volume. Top performing banks are simply lending more than their peers. For leading growth banks, total loans as a percentage of average earning assets was nearly 75 percent, compared to an average of 65 percent for all banks studied. But, while top performers lead with higher loan volume, it’s often done with some sacrifice to loan yield. This can be attributed to two factors: aggressive pricing and higher quality of loans.
  3. Optimized non-interest income opportunities. Leading growth banks generate more of their revenue from non-interest income opportunities than the typical bank. Core non-interest income made up nearly 24 percent of revenue for the top performers, significantly more than the 15 percent generated by their lower performing peers. This will be critical to all banks going forward as net-interest margins continue to be squeezed.
  4. Loan production fees over service charge fees. Thanks to greater regulatory scrutiny, highest performers in the study are relying less on service-charge fees to generate income. For all banks evaluated, approximately 34 percent of non-interest income came from deposit service charge fees compared to 17 percent for top performers. Instead, leading growth institutions are becoming decidedly more dependent on loan production fees, which include origination fees and gains on loan sales in the secondary market. The proportion of these fees to overall non-interest income is almost twice as much for top performers.
  5. Motivated to capture market share. Unsurprisingly, leading growth banks operated in markets that had a greater density of households and businesses (1,590 per square mile versus 715 overall). What is surprising, however, is that these high performing institutions do not have overwhelmingly strong market share. The average FDIC market share was just over 6 percent for all banks surveyed, but only 2 percent for leading growth banks. This shows that the top performers are competing fiercely in saturated markets.

In the quest to outperform and outgrow the competition, bank leaders can learn practical lessons from top athletes. Winning a gold medal is less about radical transformation and more about hyper-efficiency—finding the areas of performance where incremental and measurable improvements and adjustments can be made. To perform well in 2013, banks must be hyper-efficient. That means lending more while simultaneously finding new non-interest income opportunities, and capturing market share from the competition. Armed with a strong cost foundation and insight into opportunities of differentiation, banks can find their unique path to growth.