Everyone is worried about DDA and payment revenue, but some banks have a clear roadmap for success.
If your inbox looks like mine, every day I get a new round of confusing emails:
- “Free checking is dead, really dead”
- “Free checking is still very viable – at least for community banks”
- “Debit rewards? Not sustainable in the new environment”
- “Debit rewards? You still need it, just have to revamp your program”
- “Durbin will be the death of us – it’s the last nail in the coffin”
- “Durbin will revised and it won’t be so bad”
- “All of this means that customers are being driven out of the banking system, leaving us with fewer opportunities”
It’s enough to make your head spin!
But I am very encouraged.
In a few weeks I’m chairing a panel discussion at the BAI’s Payments Connect Conference – it’s called “Bankers Respond to the Industry Challenges”. As I’ve spent time talking with the panelists and discussing the solutions they are implementing, I am tremendously encouraged that there is a clear path forward for revenue improvement.
Three very different banks have agreed to participate on this panel: Comerica, Fifth Third, and BBVA Compass. Each has different target markets and different marketing strategies. Each is big enough to have explored and analyzed a wide range of issues and opportunities. Each is specific in their recommendations.
I hope you can join us. If so, please stop by and say hello. I’m expecting thoughtful but lively interaction.
I’ll leave it to the stock analysts to ponder whether Comerica paid too much (the deal is not accretive to earnings until 2013), but from a strategic perspective it is a good move:
- It leverages Comerica’s strengths. Sterling is primarily a business bank. That’s Comerica’s sweet spot, and it permits them to leverage their strong marketing and relationship management skills
- It is manageable in size and scale – Comerica is experienced at integrating banks of this size
- It improves Comerica’s distribution in key markets: their branch network in Houston will double, Dallas-Ft. Worth branches will increase 27%, and Comerica will gain entry to San Antonio (and Kerrville) where it does not have any branches
What does this mean for Texas banks?
It confirms that M&A is on the rise in 2011, and we should see many more opportunities for sellers and buyers
It creates opportunities in specific markets: 8 Sterling branches are in very close proximity to existing Comerica branches (less than a mile) and there will inevitably be some branch consolidation
It will create opportunities to target attractive customers. Risk management and pricing will convert to Comerica’s standards as soon as the deal closes, and this will mean changes in loan and deposit relationship management:
- Commercial loans: 69% of Sterling’s loans are real estate related (54% Commercial and 15% Consumer) – by comparison, 63% of Comerica’s Texas loans are C&I. Expect Comerica to reduce their exposure to real estate related loans, even those that are well performing. On the other hand, it will be a more formidable competitor in C&I.
- Deposit relationships: Sterling’s COF is 22 bp higher than Comerica’s and they are more dependent upon interest bearing accounts. Comerica may be less aggressive at maintaining deposit relationships that are price sensitive. On the other hand, the new entity will be more effective at acquiring non-interest bearing consumer and commercial deposits.
It will ultimately create a stronger competitor in Kerrville, but in the short run it will create opportunities to take share from Sterling, which is the market leader (29% share of deposits)
It will add another strong competitor to the highly competitive San Antonio market, as Comerica leverages its new distribution to build relationships.
No matter how effectively Comerica handles the conversion (and they are skilled at integrating banks like Sterling), there will be opportunities as personnel, products, pricing, risk management, and systems are integrated.
Comerica estimates that Sterling’s expenses will take a 35% haircut. Staff and customers may be nervous, unsure what this means to them – and willing to talk to a competitor just to hedge their bets. Some won’t be happy, no matter how well it is handled.
To take advantage of this opportunity it is important to have a plan. There will be a window of time when things are “unfrozen”, and represents the best time to recruit skilled staff and acquire strong new customer relationships. But the window will close: Comerica will work hard to identify and retain staff and customers. Once the full conversion occurs and uncertainty gives way to stability, the opportunity is lost.
Don’t assume that there will be disruption that works in your favor. It takes effort and discipline to capture profitable customers and top performing staff from a competitor that wants to keep them. Without a detailed plan, you risk missing the window of opportunity – and only capturing the customers and staff that Comerica was willing to lose.
“We’re primarily a Commercial Bank that also does some Retail. Why do we need a retail strategy?”
Here’s why:
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It’s a big revenue opportunity. Think of it as The Law-of-Large Numbers – you may be primarily focused on commercial accounts but 80% of your customers are Retail. If you have only 10,000 customers but can increase revenue by a modest $2 per month, that’s $240K incremental earnings per year.
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There’s a big opportunity to reduce expenses. The typical bank has 60-70% of its expense base tied up in distribution and servicing. Think you don’t have opportunities there? Time and again we’ve seen found 15-20% improvement in productivity. You just need a few selected “wins” to really impact the bottom line.
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You can use Retail to leverage your Commercial strategy. Most banks fail at this. The branches do their thing, and Commercial Lenders/Relationship Managers do theirs. But you can significantly improve your effectiveness by developing and implementing a coordinated strategy where Retail’s daily activities pro-actively support and further your Commercial strategy.
Big revenue opportunity. Big expense opportunity. Big opportunity to use Retail to pro-actively support your Commercial strategy.
Contact us – we’ll show you how to quickly and efficiently identify and capture the opportunities that make sense for your institution.
I was reading the in-flight magazine on Southwest Airlines recently and came across an article titled Last Tech, a salute to the best bygone gadgets. It was stuff like typewriters (remember before computers?), payphones (who can find one?), photo film (we’ve all gone digital), and — stop the presses — checkbooks!
Who writes checks anymore? Ninety one percent of consumers have checks but they only account for 14% of payments. According to a recent Federal Reserve study, 39% of consumers expect to decrease their check writing activity in favor of other payment means, especially on-line bill payment.
In the UK, which invented what we know as the modern check in 1681, the number of checks written has declined to the point that the Payments Council has decided to completely eliminate the check clearing system in 2018. Sweden and Norway have already discontinued paper checks. We’re headed in the same direction, just not by formal mandate. In the US, the number of checks written now is only 21% of the number in 2002.
Here’s what you should be thinking about:
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Why do you still have “checking accounts” instead of consumer and business cash management accounts? The basic consumer and business transaction account needs a new model, not just because most consumers and small businesses don’t write checks any more but because the economics have changed significantly with new regulation. Isn’t this the time to take a hard look at your consumer and business deposit products to insure they meet customer needs and will be profitable in the new environment?
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Why do you still staff your teller lines the same way when teller activity in most branches is not sufficient to support fully dedicated tellers? Labor is our single biggest cost, and yet most banks cling to outmoded management models despite dramatic changes in the quantity and type of branch activity. Shouldn’t you be reviewing your branch staffing models, teller line automation, and branch front line skills?
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Why do you still organize deposit operations back offices along basically the same model despite the fact that the type of activity has changed, and the skills needed to manage future payment streams are different than what was needed in the past? Shouldn’t you be re-thinking the way you manage your deposit back office?
- Why do you still design branches around transaction activity (teller, drive-up, etc.) despite the fact that branches are changing from transaction points to sales and service centers? A few banks have started implementing new bank models with great success. Shouldn’t you be looking at this for the next branch you build, or for existing facilities you remodel?
Despite all the changes in the way customers use bank branches, and the talk about “death of branches”, the reality is they aren’t going away. Yes, consumers and businesses are writing fewer checks, and that means teller transactions are down. Yes, our customers are rapidly increasing their use of mobile and other electronic channels. But the branch network is still the key distribution channel, preferred by 68% of consumers and small business.
But branches will change:
- Branches will be designed differently. They’ll be smaller, and fit into typical retail footprints. There will be fewer free standing branches (less need for large branches with drive-ups).
- Branches will be staffed differently. There will be greater utilization of universal staff who can handle sales, service and transactions — we won’t need as many tellers.
- Branch managers will need improved market management skills. With fewer teller transactions, branches will be more like sales centers, and this means greater micro-market knowledge and calling skills to improve trade area sales penetration.
- Banks will implement tighter cross-channel integration with hub branches and call centers, especially for expert support and customer advisory functions. Leading banks are already experimenting with video conferencing and similar technologies.
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Successful financial institutions will have more robust front-line relationship management technology to enable staff to deliver better customer service, stronger profitable cross-sell, and achieve greater share of wallet.
What should you be doing now? The most successful financial institutions – large and small — are already working on their staffing, market management, and front line technology. Are you reviewing your teller staffing models? Have you already begun training universal branch staff? Have you upgraded your front line relationship management technology?
During any period of change, some wait for the fog to lift and the path to become clear, while others start testing new pathways forward. In many respects, the path is clear — we just don’t know how fast these changes will happen. Now is the time to start preparing for the changes you know are coming.
What was on the mind of our audience at the BAI Retail Delivery Conference? Here’s a summary of the questions from the audience, and the answers from the panelists (Jay Freeman of Wells Fargo, Ric Carey of Umpqua Bank, and Jeff Talpas of BBVA Compass):
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Will the Branch of the Future result in big changes coming rapidly, or will change be gradual? There was general agreement that the pace of change will continue at about the current rate
- whether you consider that gradual or rapid is in the eye of the beholder. The key take-away is that change is coming, and we need to experiment with solutions and prepare for a changed world.The panelists cautioned that it is not “one size fits all”. For example, the smaller, automated, neighborhood stores work well in downtown Portland or Seattle. But in more rural communities, the traditional branch concept is not changing or at least not changing rapidly.
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How do you see the role of in-store branches vs. traditional branches?
Only Wells Fargo had any significant experience with in-store. There was a lack of excitement among our panelist for this format.
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With the new economic times and regulatory expense, how long on average does it take to bring a de-novo to profitability?
Umpqua reported that their new Neighborhood Store format was profitable at 11 months. It takes less than 8 weeks to build at a cost of about $400,000.
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It is understood that creating more branches is the basic means to book more customers and increase deposits, but should they always be profit centers?
Enthusiastic “yes” from all the panelists, with the caveat that certain non-controllable expenses should not be included in the formula.
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How do you develop distribution organizations that are prepared, and have the skills, to support the changing role of the branch? Given the evolving role of the branch, how have your hiring practices and training initiatives changed?
Start hiring and training for the changes you know are coming. Our hiring has changed over the years, and continues to change as our industry changes. (See the last page of the presentation for more detail)
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How are Umpqua’s neighborhood stores staffed?
Smaller number of staff with more of a sales and service orientation. These are community centers, with events, exhibits, and coffee bars to make them a destination. They serve smaller markets
- often just a few blocks in an urban area. These are not principally transaction sites, although they have transaction capability. -
What do you think about customer acceptance of teller automation, i.e. self checkout like grocery stores, video, virtual teller, etc.?
Umpqua is experimenting with all of these concepts now. They use their Innovation Lab to test new ideas
- many of them technological, and many not. Through a partnership with Cisco, they are testing video conferencing and are expanding utilization in their branches.In a related discussion, BBVA Compass described their mobile application with geo-location capability (take a picture on your smartphone camera or the street and the application will automatically recognize where you are and locate the nearest branch, ATM, etc.). They also described their new CRM application, which will bring to their US branches the very sophisticated capabilities already in use at BBVA in Spain.
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Everything I read tells me that Millennials do not want to use a physical branch. The branch may not be dead, but it will be soon unless we find a way to entice the Millennials to come in?
“Millennials” are not homogeneous. Jay Freeman and Ric Carey were emphatic on this point. As they stated, “It’s a fallacy to think none of them want to use branches. You’d be surprised to find out how many do not want self service, or do not have the degree of computer literacy you normally think of with this age group. Plus, many of them will change as they grow older, have families, and mature. Just look at your own behavior and needs now, compared to when you were in your late teens and early 20′s.”
The panelists agreed — avoid the trap of thinking about customers as numbers or statistics, but rather look at what they want, how they behave as individuals.
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