Between the dominant national banks in America and the hundreds of fintech startups aimed at disrupting our industry, there lies a group of resilient mid-size financial institutions. At Cornerstone Advisors, we like to call them “troublemakers” because they grow and make money when the industry pundits predicted they shouldn’t exist by now.
Cornerstone Research Director Ron Shevlin calls them “eruptors” because they have brought competitive change from inside their organizations rather than being swallowed up by a national bank or made irrelevant by an innovator. While big banks continue to gain market share and startups continue to bring potential innovations, the mid-size troublemakers have a unique opportunity by becoming the most agile players in our industry.
Recent management literature from folks like McKinsey and IBM has focused on how companies can become more nimble and responsive to changes in their industries. Accenture has urged banks to embrace an “outside-in strategy to reinvent customer experience in the age of digital banking.” These management gurus are encouraging executives to embrace a great paradox in business today: every company has effectively become a technology company, yet people remain the greatest challenge. Companies that get the organization right will perform the best.
Here’s a simple way to visualize where an agile bank could play between fintech startups and behemoth banks:
| Fintech Disrupters | Agile Banks | Behemoth Banks |
|---|---|---|
| Start-up | Nimble | Risk Averse |
| Creative | Collaborative | Efficient |
| Chaotic | Responsive | Bureaucratic |
| No Boundaries | Quick Decisions | Siloed |
| Unpredictable | Resilient | Reliable |
Now ask yourself: how nimble, collaborative and quick to make decisions is my bank today?
Agile banks have the opportunity to gain the scale necessary to stay in the game while building the skills necessary to keep growing the business and remain close to the customer. Since the financial crisis we have seen many agile banks make all kinds of trouble. For example, Signature Bank in New York built an entire organization around the trusted relationship manager and grew assets from $4 billion in 2005 to $33 billion today. First Republic Bank in San Francisco regained its independence in a private buyout from Bank of America in 2010 and has grown from $22 billion to $59 billion while being named the top private wealth manager in the country. There are similar stories at smaller-size players, like Happy State Bank in Texas, which grew from only $400 million to $3 billion in the past decade. All of these growth stories occurred during a very fragile time for the national economy and financial industry.
At the same time, not all mid-size financial institutions are achieving the same levels of competitive agility. In fact, one of the biggest risks that mid-size banks have today is that they recruit so many big bank executives to run the place they end up instituting the artery-clogging practices of organizations 100 times their size. In a really cool study of agile companies across industries, McKinsey identified the top five unique traits that executives of agile companies value:
Most banks today aren’t growing and moving fast enough because they have mongo deficiencies in these five key disciplines.
In terms of role clarity, banks need to ensure that a strong crew of middle managers are driving performance and adaptation in the organization. It can’t all be done at the executive level, and it’s important that every product, delivery channel and major process in the organization has a formal owner with high accountabilities. In terms of top-down innovation, executive teams need to do a better job of picking the one or two areas of change that will have the greatest impact on future performance and force the organization to work together to achieve these innovations quickly. For instance, when First Republic bank decided it was going to be a national leader in private wealth management, the entire organization mobilized around achieving that strategy.
Think about how much bankers can improve their habits around “capturing external ideas.” This habit is practiced every five minutes in Silicon Valley, yet banks too often move in a plodding fashion because they fail to get out and learn from other bankers and technologists. Banks have huge opportunities to embrace stronger process capabilities and operational discipline. As every volume of the Cornerstone Performance Report has proven, the difference between high performers and median performers in any process is between 30% and 50%. Strong operational discipline helps banks fund investments in growth and innovation with efficiency gains.
How can bank executives make their organizations more agile? When Cornerstone analyzes what works and what doesn’t within our client base, we find three key areas that drive better execution:
Build internal commitments that are written in blood. Agile banks simply don’t have time to create the political environments of the big banks. While not everyone needs to agree with each other in an agile bank, it needs to be very clear what “critical commitments” that executives and managers owe to each other. In effect, the organization becomes very transparent when the CIO has a critical commitment to deliver the data warehouse by the first quarter and the chief credit officer will have non-qualified mortgage (QM) products on the street by Q2. In agile banks, every line of business and support area clearly defines “excellence” with key performance indicators (KPIs) visible to the whole organization and clearly defined milestone commitments that they will hit at specified deadlines. As one executive at a high-performing bank once told me, “We’re successful because people know they actually have to do what they say they are going to do around here.”
Learn fast by focusing externally. Agile bankers are smart because they are sooo lazy. They have no interest in reinventing the wheel and instead constantly reach out to peers and experts to figure out how others addressed emerging challenges. Agile bankers are good at building a rolodex of “rebels” in the industry who try stuff early and have a track record of innovation. For instance, a bank payments manager recently avoided a great deal of trouble in rolling out EMV by embracing the lessons learned by three bankers who had done it ahead of him. Want to determine if an executive is “agile”? Ask him or her to name three peer banks that have best practices their organization should embrace. See how much they are really looking outside the four walls of the organization.
Develop “authoritative” knowledge at all levels. To put it bluntly, agile banks are successful because they have a lot of people who know specific stuff. As credit, payments and funding become commoditized in our industry, wise executives are realizing that deep knowledge around niches, customers, products and processes is the only way to create out-sized shareholder value. Banks can become more agile when they identify who needs to go deep developing knowledge in critical areas. Here’s an example: banks today should be developing towering knowledge in areas such as mobile payments, social media, business analytics and paperless mortgages. Yet how many executive teams feel comfortable with their levels of knowledge in these areas and have a game plan to deepen their brainpower further? It’s time to take knowledge development from accidental to intentional.
To really break out with performance, bank executives have no choice but to replace that friendly and loyal manager who doesn’t actually know much and executes too slowly. Executives who dig into the most successful business lines or support areas in their banks will find lurking managers with deep knowledge who are damn good at balancing the different facets of their jobs.
Over the next decade, mid-size banks have a tremendous opportunity to kick up some real dust in the face of national banks. The key will be to build enough scale and operational excellence to stay in the game while being a smart adaptor of new ideas and offerings from the fintech world. While our industry is full of articles promising that digital technology will bring forth this change, bank executives must realize that their own organizational DNA will be the most important code to crack. Agile banks won’t be bureaucracies or benevolent dictatorships—they will be chock-full of managers who meet their internal commitments, always look outward to learn, and build deep authoritative knowledge in areas that matter. Ask yourself: “Who are our best agile managers and how can we build more?”Any initiative that involves process re-engineering, strategic planning and profitability improvement begins with measurement and peer comparisons.
Cornerstone Advisors’ Performance Solutions can show you how your institution’s people resources, processes and technology infrastructure compare with competitors.
Contact Cornerstone today to learn more.
Steve – Thanks for the article. I enjoyed it a great deal.
Getting the right blend of cultural readiness, technology innovation/adoption, human capital development and alignment, and operational excellence (ability to scale) is a never ending challenge for any organization, and I feel is particularly challenging for most banks. I agree that middle managers have a critical role to play, and that external networking and internal collaboration/chemistry are keys to success.
Good stuff, and thanks again.
Dan Heiling