As a thought experiment, imagine if one evening Amazon CEO Jeff Bezos had one too many cocktails and errantly gave an order to purchase your bank. Imagine further that, a bit embarrassed from this mishap, Bezos sent an Amazon strategy officer to figure out what exactly the company had bought and how to make “lemonade” out of a legacy investment. Let’s dive into what a US bank acquisition can look like.
The following fictional memo and bank mergers and acquisitions case study describes what the team at Cornerstone Advisors imagines would transpire. The framework to assess the acquired bank is based upon Bezos’ famous 2016 shareholder letter that outlines Amazon’s core business philosophy.
May 2019
To: Jeff Bezos – CEO
From: Jared Muckfixer – Corporate Development
The following memo outlines my assessment and recommendations concerning our bank acquisition of Acme Bank, a $5 billion institution located in Metropolis, USA. Acme has doubled its size in the past five years with acquisitions of smaller community banks. From what I have learned about bank performance ratios, earnings are solid at a 1.27% return on assets or “ROA.”
In order to assess this corporate investment, I reviewed Acme according to four principles outlined in Mr. Bezos’ “Day 1 defense kit” that forces our company to maintain the energy and rigor of a startup.
While the Acme team knows parts of the business well, this bank operates primarily with a Day 2 “stasis” mindset. I anticipate great resistance to the changes I am recommending:
Acme Bank has a mission of “Helping Clients Succeed Today and Tomorrow,” but this financial organization is mostly steeped in discussions regarding products, competitors and quarterly production. There are no visible managerial processes tied to customer experience and learning. I cannot obtain working documentation regarding today’s customer experience, and no single member of the executive team can speak authoritatively regarding the bank’s digital channel.
The bank is collecting basic data with its Net Promoter process, but the only one knowledgeable about this data is Ms. Jane Quiet, an assistant vice president in the Marketing Department. Interestingly, the average number of products utilized by Acme Bank’s households has stagnated at 2.6 for the past 11 years, yet no analysis has been initiated to determine why customer share-of-wallet is not improving.
Unlike Amazon, Acme Bank’s culture is run primarily by “proxy” – i.e., internal processes that have somehow become ends in themselves. Most departments focus primarily on the budget process, and the bank’s CFO is very proud to report that she has “locked down every dollar of spend.”
The Risk and Compliance group is rarely seen, but they are constantly distributing lengthy emails expressing grave concern about any proposed organizational changes and potential regulatory exam criticisms.
The Project Management Office appears solely focused on scheduling meetings and updating status reports, and the chief credit officer screams about excess “loan file exceptions.” I will immediately be challenging each of these processes in terms of how they create customer and economic value.
While Acme’s management team is aware of banking’s shift to digital technology and understands the threat that players like JPM Chase present, there is no formal plan to drive Acme’s digital shift, and no success metrics exist for the digital channel.
While the bank’s COO is often quoted as saying, “Information is our greatest asset,” no scalable reporting and analytic structure exists at the bank. Ninety-five percent of performance metrics relate to earnings and loan growth with no focus on customer delivery. For instance, I have run analytics showing our cost of delivery is getting destroyed by excess branch capacity. While our direct cost-per-digital-customer-interaction is 50 cents, it runs over $9.00 in our branches, and new account and loan volume in these facilities has declined steadily over the past four years.
While the bank focuses strongly on commercial lending, I am concerned that deposit funding from consumer relationships could erode more quickly than management is forecasting given external competition and innovations.
A root cause of Acme Bank’s poor go-to-market capabilities rests in the company’s decision-making and execution process. At Amazon, we like to make bold moves when 70% of desired information has been obtained. Acme managers are stuck filling the information bucket between 90% and 100% with details that easily can be worked out later. While Amazon has always emphasized a “two-pizza” limit in terms of team size, Acme regularly has huge crowds in conference rooms where issues are discussed but decisions and accountability are rarely made clear.
Mr. Bezos, you once famously said, “If you don’t understand the details of your business, you are going to fail.” Acme’s team has a great understanding of finance, credit and regulations, but they are flying blind when it comes to customer experience, operations, technology and valuable insights lying within customer data.
As we process the bank merger and acquisition in addition to rebranding Acme Bank into Amazon Bank, you can count on me to quickly remedy this situation.
–JM
This is one of the best articles I’ve read in some time. It just does such a phenomenal job of capturing the cultural differences that seem to hold most banks back from driving needed changes forward. Well done!
A great lesson for all businesses in any industry. The challenge is those in charge of those companies or organizations have been doing business the same way for so long, it is almost impossible for them to think differently about how to compete in a today’s hypercompetitive markets.
Hoorah!
Oh my my … this is the BEST “fictional” memo…ever written – every bank should wake up and take notice!!!!
Thanks so much for hitting us squarely where needed….
Well done Steve! Banks of all sizes should heed your advice.
Great lessons combined with great humor! Thank you!
Are there any job openings at Acme Bank?
Can someone send this to our regulators? All 6 or 7 of them?
As always Steve, beautiful! The only thing I would add is ACME Bank executives need to have facts as to which product/customer types create, maintain, or destroy value (Don’t assume!). For example, unknowingly increasing Wallet Share of value-destroying customers can be disastrous. The key is simply knowing the value drivers and that will enable ACME to appropriately segment and then customize all these efforts.
So overall the ideas are great and needed. One thing the writer perhaps fails to grasp is that, unlike the tech world, the financial services world is HEAVILY regulated by a host of regulators (state and federal). As a result, not all the decisions made add economic value or wow the customer. Some are dumb, some are ok, but these risk and compliance decisions are needed to make sure the bank complies with regulation. Digital banking is great, but if you have bad AML for example, digital will not matter. Jamie Dimon’s annual reports are a good place to start to understand what I am talking about.
Don’t make the tail wag the dog.
Paul, are you suggesting that Mr. Williams is unfamiliar with the concepts you mention? Steve has spent his entire career in banking (Starting with 1st Interstate in the 1980s) and I know he is intimately familiar with all of this. I’m also puzzled by your tech versus banking comments. Having spent many years in banks and even more in banking tech (I.e., Oracle, SAP, IBM, etc.) your comparison seems odd. Next, I trust you are not suggesting that compliance issues are a value driver? If so, please explain how AML creates value since it stops banks from dealing in those areas. Legality is not the issue here. Finally, don’t you think that putting compliance first would really be having the tail wag the dog?
Well done Steve.
P.S. – Paul, your point is an important one, but I assure you that the writer certainly does not fail to grasp it. Nor do a number of banks providing really good digital services, though they remain in the distinct minority.
Excellent article, really strikes at where banks of Acme’s size fall in terms of innovation. Paul brings up Dimon’s shareholder letters, but I think that’s an awfully narrow way to look at the things that he has to say. Further, consider that Acme probably couldn’t have been acquisitive, as noted in the fictional memo, if they did have – to use your example – AML shortfalls.
The numbers and accomplishments before the “but” in each section sound awfully familiar to anyone who works for a bank like Acme – but the excuses do too. We can discuss being customer focused all we’d like but a lot of banks are still focused on widget production instead of providing true assistance to customers.
I can certainly think of executives who can speak very well to what they believe the current experience to be, but are thoroughly disconnected from the experience on the ground.
Failure to leverage resources within L&D to help implement this desired culture is a big factor.
I really appreciate this article – very thought provoking. Challenging the status quo has no limits – it does not stop at the bank’s door. From my experience in banking the excuse of regulators has been the Chief Culprit of Generating Ideas. Most of the times when I ask why do we have this regulation the respond is normally to the tune of “they set the rules, I really never thought about it, we follow the rules and we dont ask questions.” I would want to believe that the regulators set rules based on their experience in the best interest of businesses and consumers which is a valid. I think what we fail to grasp is the principle of the regulations. We need to ask “what are they trying to achieve by setting this regulation?” and then respond with solutions/ideas befitting the dynamic marketplace in which we operate. We would then be able to perhaps meet regulators where they are by demonstrating how this new approach will add value rather than take away from their regulatory framework. Regulators are valuable stakeholders as well. In my opinion often times we lack the courage to challenge the regulations.