Well Gonzomongers, the industry’s first quarter numbers have just been released and it looks like another period of record earnings – strong asset quality, mongo capital and tight expense control. But hold on, you dancing pinstriped fools! It looks like there’s a dubious footnote in the fine print of the latest FDIC Quarterly:
“In contrast to the improvement in expenses, the industry’s revenues were stagnant in the first quarter. Net operating revenue actually declined in the quarter by $400 million or .3%.”
Is there any greater challenge in this hyper-commoditized industry?
As we’ve mentioned several times in previous GonzoBanker columns, our industry has seen many revenue “gifts” fall on our laps in the past five years:
But these gifts are going sayonara, adios, auf wiedersehen, and an uncomfortable “sameness” is emerging in the competitive landscape. Banks are finding themselves stuck in an execution slugfest because their strategies are almost indistinguishable from one another. Too many bank strategic plans go something like this:
These are all respectable “blocking and tackling” strategies, but they do little to differentiate the bank competitively. In this constant quarter-to-quarter hustle, banks can lose sight of developing meaningful long-term strategies. As management guru Michael Porter observes about these situations, “Hyper-competition is a self-inflicted wound.”
The question all bank management teams must ask themselves right now is, “Do we have the stomach and patience to do something different?” Banks can do okay as commodity players, but they are likely to struggle with earnings growth, P/E levels and stock price appreciation.
Banks hoping for more have to acknowledge that there’s no short-term way to fix the revenue growth challenge. If there was, we would have all jumped on it and be killing each other right now with cutthroat pricing. However, there is a long-term fix:
…do something different
Purge that voice deep in the brain stem that says, “I’m a banker… I’m too boring to innovate.”
Let go of those fatalistic thoughts that your bank “isn’t a big enough player to do anything innovative.”
Drop the lame excuse that “we can’t get budget approval” and find a way to make it happen.
In the midst of a painful commodity brawl, we need to draw inspiration from…
|a) the military pilot from Yale whose term paper got little attention from his professor…:||b) the Seattle dude who decided to warp the rules around the greatest commodity product of all…||c) the guy who got rejected by Philips and Real Networks before his product got the attention of Apple Computers…|
If there’s any lesson we bankers can take from these famous innovations, it’s that execution and hustle are nice, but they are no match for knowledge and creativity. In developing future strategies, banks have to recognize that deep knowledge about something specific is still their best competitive weapon. We even see the knowledge advantage play out in our own industry.
During the commodity wars of the past few years, just look at the growth that EverBank put on the board with its foreign-currency deposit niche:
Did this bank just get lucky? No way! It was started by Frank Trotter, who first studied this niche idea while an executive at Mark Twain Bank in St. Louis. The formula here is very clear: Everbank possess unique product knowledge a hell of a lot deeper than its competitors.
Want to talk about really dirty fingernails? How about deep knowledge of the taxi cab business?
When Medallion Financial, a financier of taxi medallions, lost all of its warehouse funding after 9/11, the owners jumped in to charter their own bank. After only a year in existence, Medallion Bank turned in a 2.2 percent ROA in 2004 with a net interest margin north of 7 percent – hardly a commodity!
Bankers may find these niche stories interesting, but still feel that such wild strategies would never be pursued at their bank. It’s never easy to get an organization to think about intangible new business opportunities. Here’s a few tips to bring to your bank:
1. Recognize that innovation is bottom up, not top down
Sometimes banks believe that innovation gets hardwired by executives in the board room, maybe even assisted by (oh god) consultants and a few reams of professional market research. The truth is that great innovations bubble up from those individuals with specific front-line operating knowledge and the perspective to spot an unfilled market opportunity. Take the example of a dude from M&I Bancorp named Scott Happ who was running the mortgage banking operation in the late 1990s. With his team, Happ cobbled together one of the first and most pragmatic online mortgage lending applications. The success of this application was so strong that Happ’s team then began to market it to other banks – and so a new source of revenue for M&I known as Mortgagebot.com was born. A few years later, it was spun off independently with M&I still owning a major chunk. No one in M&I’s executive suites planned for Mortgagebot to happen, but M&I’s environment allowed it to bubble up.
2. Understand that simple innovations can make big differences
Banks often think that high-profile, revolutionary strategies must be pursued for any true innovation to occur, but this is untrue. My partner Terence Roche and I once worked for a mid-size bank that serviced mortgage loans as cost effectively as behemoths like Countrywide. When we dug deeper on how, we found that this bank’s operations and I.T. staff had developed a number of creative innovations that drove this productivity. They had customized a one-step refinance process in their servicing system. Also, they had moved all payment processing to bar coding technology and literally used the office receptionist to process payments. They focused only on servicing assets in their core Midwest markets to increase the portfolio‘s homogeneity. Each piece of creativity led to lower and lower costs.
3. Fund investments in innovation with cold, hard efficiency gains
In the years ahead, banks will need to pursue a disciplined strategy in which cost is aggressively driven out of commodity businesses to fund investments in new products, processes and business lines. This is where benchmarking, process improvement, technology and training come in big time. Here’s a great example for inspiration: Dun and Bradstreet CEO Allan Loren increased his company’s value by a whopping 300 percent in the past four years by pursuing a strategy of “financial flexibility.” For each dollar of cost taken out of D&B’s operation, 60 percent went back into new investments, while 20 percent went to shareholders and 20 percent paid for the reengineering efforts. This type of model needs to be employed more aggressively at banks.
4. Find your “skunks” and give them the R&D budget
In 1943, a small group of aeronautical engineers from Lockheed created an entirely new jet, the P-80, in only 143 days. Since that time companies in all industries have been inspired by the idea of “skunk work” teams that tap some of the best and brightest, separate them from the daily grind and give them the autonomy to make something happen. IBM has recently seen success with its Emerging Business Opportunity program (EBO) in which new innovation ideas are given small R&D budgets and the full-time attention of an experienced executive to attempt to grow entirely new businesses. IBM has a formal process to solicit new business opportunities through the company. In the first quarter of ’05, it gathered 150 ideas, examined 20 more closely and decided to move forward with 11 of the projects.
5. Acknowledge the odds of failure
I often see banks dip their toe in with an innovative idea, only to lose all faith in new businesses when the first venture does not come to fruition. I think it’s the credit officer in us all that simply wants to slam to the mat anything that does not “cash flow.” Unfortunately, we bankers probably give up too quickly. Every measured experiment creates new knowledge and potentially new opportunities. New ventures are about playing the odds, maybe one in three will work and one in 10 will be a home run. But your odds are basically shot if you give up after the first try. Thomas Edison’s words should haunt us: “I have not failed. I’ve just found 10,000 ways that won’t work.”
My intent is not to gloss over the sheer perspiration and risk that accompany new strategies and innovations, but to emphasize the fact that we tend to short-change this focus on banking. So whether it’s going deep on treasury services or figuring out a radical new approach to consumer loyalty programs or digging into the world of Health Savings Accounts (stay tuned for Terence Roche’s masterful piece next week), here’s a Memorial Day toast to addressing our industry’s revenue growth challenges with a renewed focus on innovation.
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