The Coming World of Smaller Banks

Frank Partnoy wrote a fascinating opinion piece in Financial Times last week about the coming world of smaller banks. The article has prompted no small amount of commentary. I felt obliged to add my own two cents here. In his article, Mr. Partnoy muses, “How many people does it take to operate a modern bank and how much should such a bank’s shares be worth?”, and suggests that improvements in technology will drive down the number of FTEs needed to provide banking services. No kidding! Other blogs suggest that getting smaller is all about shedding the branch network and its associated cost structure, then life would be wonderful for banks. Experience with branch closures suggests a good amount of customers would be lost along with those branches in the vast majority of cases. Branch networks need rationalizing. The industry simply doesn’t need them all. But, trimming the branch ranks won’t solve bank’s profit woes alone. Others insist it’s about a larger issue, that of banks’ slowness to invest in labor saving technology. Indeed, examples of inefficient legacy systems abound in financial services. Celent will soon publish a paper comparing efficiency ratios between banks and credit unions. It may be no surprise to suggest a major factor in the comparatively favorable efficiency ratios of credit unions is a function of their considerably greater use of technology. But, I don’t think that tells the whole story either. I think there is another element at work that helps explain credit unions, PayPal, Google, FaceBook and their relatively high efficiency when compared to banks. In my research among financial institutions with highly evolved branch networks, I observed extraordinary diversity among approaches alongside some common elements. Interestingly, the common elements weren’t all about technology usage. Instead they were cultural. In my view, it may take some significant cultural changes for banks to thrive going forward. Here’s a sampling of common elements among financial institutions with highly evolved branch networks:

• Exceptionalism. The most obvious trait among management of highly evolved branch networks is that their hearts are involved. More than a business strategy or IT project, these financial institutions are on a mission to out perform. With a bit of swagger, even branch managers would greet this humble Celent analyst with stories of customer delight. They are different—and they know it.
• A long-term vision. The most understandable cultural element involved a long-term vision for the branch as well as its role among an increasingly multichannel environment. Most financial institutions’ planning horizons are relatively short. FIs with highly evolved branch networks tended to think longer-term by definition, given the size and complexity of branch evolution.
• Courage. Beyond having a long-term vision, these financial institutions had courage to invest significantly while assuming financial and operational risk. In a large number of cases, elements of branch channel evolution were planned and executed without a tidy, comfortable business case. A certain amount of courage was necessary to proceed.
• Culture of continual improvement. Branch channel evolution is a journey, not a destination. Highly evolved financial institutions got that way through an often lengthy series of incremental improvements. Some work, and others don’t. These leaders inspire a culture of continual improvement and are willing to fail along the way if it ultimately produces a superior result.
• Affirmation and employee empowerment. Several senior managers cited the need to eliminate barriers to customer service. Branch staff need to have all the tools possible to serve customers. One way to do this is to empower branch staff to make more decisions. This approach carries risk and invites mistakes. A culture of affirmation is one way to help staff step out of their comfort zones. At Metro Bank, for example, branch staff have been known to invite customers to have coffee on them at a shop next door if the branch gets crowded. On occasion, they’ve even bought customers lunch. Could this get abused? Sure, but Metro Bank staff is too busy delighting astonished customers. In response, management affirms this kind of spending because it engenders high levels of customer satisfaction.

Does this sound like your financial institution?