Every year SNL financial publishes a survey of in-store banking trends, and they are kind enough to seek our opinion — and give us credit for a few quotes!
At most banks, in-store (supermarket) banking has not fulfilled its’ promise of “one-third the income with one-fifth the expense”. But there is a way to crack the code.
Think about the potential for small specialty branches, similar to in-store, that would allow you to pinpoint special markets. Apply these concepts to create low cost distribution at high value targets such as office campuses, hospitals, employer headquarters, densely packed urban neighborhoods, and other similar venues.
Think about the facilities design and staffing. These are not just a standard branch shrunk smaller — it needs an entirely different operating model.
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 was struck by a recent quote from the Chief Credit Officer of $210 million Pleasanton, CA-based Valley Community Bank: “The general consensus for a community bank now is you have to be over $1 billion in total assets going forward. That’s going to be the minimum you need to survive because of the amount of regulations that are coming down. Banks under that size just can’t generate enough profits due to the new overhead.”
If this were true, we’re really in for a decade of consolidation since 91% of the roughly 7,700 federally-insured financial institutions have less than $1 billion in assets! But hyperbole aside, the statement does reflect the frustration many bankers feel in dealing with the new environment.
I’m optimistic that community banks that are forward thinking can not only succeed, but thrive, in the “new normal” if they heed the market’s current wake-up call. In order to succeed, community banks need to recognize that the environment has permanently changed and conducting business as they did in the past is not a formula for success.
I talk about the issues — and potential solutions — in an article just published in BAI Banking Strategies.
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.
It’s always great to get positive feedback – the BAI Community just released their list of the top 10 blogs or discussion threads of the past quarter, as ranked by reader page views. We were gratified to have 4 of the top 10 “most read” articles. Here’s the list:
4. What’s In-Store for In-Store Banking?
Retail Banking Strategies blog by David Kerstein
6. Are U.S. Banks Overbranched?
Retail Banking Strategies blog by David Kerstein
7. Four Ways to Protect Deposit Fee Income
Retail Banking Strategies blog by David Kerstein
10. Strategic Planning: What’s Different this Year?
Retail Banking Strategies blog by David Kerstein
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