“It was the best of times, it was the worst of times … ”

The classic opening line from Dickens’s “A Tale of Two Cities” seems fitting to introduce our 2009 Year in Review.  With severe economic challenges, triple-digit bank failures, mounting losses and new regulatory pressures, could the times have been any worse? However, contributors to The Raddon Report did their best to provide light in this “season of Darkness,” as they urged our readers to use this economic period as a historic opportunity to capture market share from ailing competitors and nurture existing customer relationships through differentiation.  Many have done an impeccable job at turning “Lemons into Lemonade.”

For our Year in Review, the Raddon Reporters have revisited a few points from 2009.  Please don’t hesitate to give us your final thoughts on 2009 in the comments section below.

First up …

Bill Handel:

It is time to take stock of where we currently stand in the financial services sector.  Clearly, most of the economic indicators continue to give us pause.  Consider these key statistics:

• Foreclosure filings in the U.S. totalled more than 3.1 million through November in 2009, according to RealtyTrac.
• Five of the last seven quarters have shown a decline in real Gross Domestic Product (GDP), with the most severe retraction occurring in the first quarter of 2009 (-6.4 percent annualized growth rate).
• Unemployment is currently at 10.0 percent and is likely to exceed 10 percent before it begins to recede.  For comparison sake, we experienced a 10.8 percent unemployment rate for several months back in 1982.

Despite the depressing nature of these types of statistics, there is solid evidence that we are beginning to see the emergence of recovery.  As we move into recovery, what are the lessons to learn from the past year, and what should we do to maximize our advantages as this recovery unfolds?

It is important to understand that this recovery will be slow.  There are two reasons for this.  First, we are still working our way through significant levels of housing stock, which are continuously being replenished via foreclosures. 

Second, consumers are significantly reworking their balance sheets, reducing debt and working to increase savings.  This second factor is critical to understand.  What we have experienced to this point (and will continue to experience) is something that has fundamentally altered how consumers think and how they act.  An entire generation (baby boomers) has come to realize that dependence on real estate appreciation as a replacement for saving is not a viable financial plan.  And their offspring (Gen Y) have watched this meltdown transpire and are trying to figure out how they avoid this mess in their own lives.                                               

The implication for financial service providers cannot be overstated.  It is clear the institutions that will prosper in this new environment are the ones that change their own thinking.  From my September 2009 article (“One Year Later – Where Are We? More Importantly, Where Do We Go?”), I offer six keys to consider in your planning process as we move into 2010:

1. The economic tsunami and industry implosion are creating major opportunities to grow market share.
   There has never been a greater opportunity to steal market share than today.  Focus your marketing efforts on the things that make you different; it’s your strengths, not their weaknesses, that matter.  Given the slow growth of credit that we are likely to experience, your marketing efforts should focus greatly on refinancing loans already booked elsewhere.
2. Develop strategies for the emerging segments that will have a major impact on the economy and the industry over the next five years.
   Gen Y is as large as or larger than the baby boom segment and it is a fundamentally different group in terms of its behavior.  It is critical to continue researching the needs of this group and revising your business strategies to meet their needs.
3. Revisit your online strategies and embed online delivery into product design and pricing.
   To this point, the online banking strategy has tended to be focused heavily on information dissemination and transaction facilitation.  When you are able to offer a seamless approach to account acquisition (especially with entirely new customers) then your online strategy will have arrived. 
4. Actively manage net interest income through effective deposit acquisition strategies.
   Margin compression in the last decade is due almost entirely to deposit pricing and mix.  As an industry, we moved away from a focus on core funding.  In a go-go lending arena, we were looking to fund any way we could, and we could always make up for the margin compression through increased income from the courtesy pay programs. This paradigm must change.  Refocus your efforts on core deposit acquisition, especially checking accounts, not simply due to the potential fee income, but also because it will tend to drive a more sustainable long-term core relationship.
5. Reduce your reliance on sustained growth in non-interest income, but also look for new non-interest income opportunities.
   Non-interest income has grown rapidly, but all evidence indicates that its growth will slow.  Consumers are paying more attention to their finances.  Mortgage origination, while strong currently, will drop off. However, look for new methods to drive non-interest income, especially sources that are not looked upon as punitive by the customer.  Increasing your sales of investment products to your customer base will improve your non-interest income, but the customer will not feel as though they are paying ever-increasing fees.
6. Alter your branching strategy from expansion to optimization.
   Much of our customer acquisition strategy over the past several years has been branch-based, and branches will still be the major vehicle for customer acquisition.  However, our focus as an industry has to shift from branch expansion to branch optimization.  When checking accounts were producing ever-increasing streams of non-interest income, the decision to open a new branch was significantly easier.  In this environment, we need to continually measure the performance of our branches using the metrics that can be applied to the branch manager.

 

Eric Wittekiend:

Looking back at my interview with the chairman and CEO of First County Bank last year, I think Richard Taber’s comments are worth repeating:

“Fasten your seatbelts … it’s going to be bumpy ride. We are really fortunate we didn’t stray far from our mission – we stayed on course and didn’t venture into the sub-prime arena. For a while we were questioning our mission, wondering if perhaps ‘vanilla banking’ as we know it was a thing of the past. Now we think vanilla tastes pretty good. Don’t stray far from your mission, and enjoy the ride!” (“Plain Vanilla Banking with First County Bank,” January 2009)

I would also encourage our readers to continue to look for “Opportunities in Market Turmoil.”  Institutions will continue to consolidate, causing lots of consumers and businesses to change banks.  Make sure your organization is in a constant state of readiness to leverage these opportunities to gain market share.

 

Pat Bator:

With mounting regulation and the TARP stigma still alive, let us not forget two significant points from 2009:

“ … Yankee Doodle particularly embraced the last provision (dollar-for-dollar reduction of the TARP spending authority) of Congressman Hensarling’s bill.  This is due to fact that currently, funds repaid to TARP are returned to the general pool to be used by the administration and the Treasury to promote other economic, social and political agendas.” (“Yankee Doodle Dandy’s State of the Union,” July 2009)

“ … Perhaps the administration and some legislators are advocates of a ‘European-like’ banking model.  If this is the case, the coming new laws and ensuing regulations will further cull the ranks of banks, savings institutions and credit unions.  As an advocate of Adam Smith’s free trade model (one that espouses that the trade of goods and services between or within countries should flow unhindered by government-imposed restrictions, regulations and quotas), such a master plan offends my sensibilities.  This author much prefers a financial system that accommodates both small and large institutions, and those that are in between.  My critics/detractors would suggest that such a view is no doubt held by one who is entering his dotage and is quite archaic given the new paradigms of a global economy and financial market.”  However, if there is a plan to legislate firms out of business, then “There Ought to Be a (Expletive) Law!”, (August 2009).

 

Paul Leavell:

I would encourage financial institutions to remember these four points:

       

1. “As you think about relationship pricing, keep in mind that the considerations concerning product, culture, pricing and technology are really the easy part.  Building your program is difficult:  It needs to reward your customers and at the same time be agile enough to shift with a changing economy and your institution’s goals.  It can help you manage your client relationships in a way that gives something to them while they contribute something back to your institution in return. And if you build it the right way, you may even be able to make it look simple.”  (“Relationship Pricing,” October 2009)

2. “This recession will not last forever. The negative sentiment toward the big players is not going to last forever. Now is the time to focus on growing market share.  Many institutions are entrenching right now. Some must; but many are not required to. If you have the choice, go forward.  Reach out to the market and draw in some of the available share. Make sure your products are attractive and designed to serve those customers.  Ensure your sales staff understands the magnitude of the opportunity when a new customer is sitting in front of them.” (“The Silver Lining in this Perfect Storm,” July 2009)

3. “Recently delinquent customers and those who are about to become delinquent generally fall into the polite category, because nothing beats getting there first … Shorten your queue management window. If your internal behavior scores allow 10 to 30 days to go by before you first contact never-previously-delinquent customers, shorten it to five days … In addition to calling earlier, adjust your behavior models – using factors like changes in credit score, line utilization, deposited unemployment checks, increased NSF activity and declining deposit balances – to identify customers who are about to become delinquent.  An early-warning system can help you identify these households sooner.  Develop a strategy to contact non-delinquent but over-limit customers … Consider “early-out” collection-agency arrangements if volume begins to rise too high. (“Polite as Possible, Tough as Necessary,” May 2009)

4. “An institution that does not offer incentives has neither a true sales NOR a true service culture … The value of incentives is getting that marginal sale and strengthening the relationship with the customer. But it is actually more than just selling: it is keeping the staff focused on the customer.  Customer satisfaction metrics should be part of an incentive program to ensure that the employees are keeping the customer first in mind … You do not want any opportunity for a sale to slip to another institution.  If your staff does not offer a product to a particular customer, some other institution likely will. Incentives help ensure those opportunities are spotted.” (“Ready for the Hard Sell,” April 2009)

Marcus Rothaar:

I guess the points most worthy of republication relate to these topics: 

 

1. Deposit pricing
   

   “With slimmer margins, banks must pay particular attention to pricing decisions and continually evaluate the product mix to ensure it is bringing in the right kind of money. What’s the wrong kind of money, you ask? Any dollars that are brought in as a result of irrational pricing.” (“Back to Basics,” February 2009)

   “During times when your institution is desperate to grow deposit balances, it’s easy to turn to aggressive pricing to achieve your growth goals. The problem, of course, is that your profitability goals end up getting sacrificed. We want the best of both worlds, which is where a rational, or scientific, pricing strategy comes into play.” (“Pricing Rationally in Irrational Times,” April 2009.

   Keeping your cost of funds in check will help you weather future storms and recoup some of the income you may lose from the Fed’s new debit card overdraft rules.  Which leads me to my second topic:

2. NSF Income
   

   “ … If your institution has taken a pass on certain fee income streams in the past as a benefit to your customers, this is also an obvious time to promote those competitive advantages to both your existing customers and your market.” (“Overdrafts: The Fees They Are a-Changin’,” October 2009)

   “For consumers, the most crippling side effect of the proposed legislation is that widespread free checking could become a thing of the past. … More than 60 percent of all free checking accounts are typically unprofitable for an institution. … the product is currently subsidized by the extreme ends – either high-balance accounts that generate significant interest spread; or accounts that generate significant fee income.  Take away or reduce the fee income contribution, and the business model simply doesn’t work and institutions can no longer afford to offer a free checking product to all customers.” (“Unintended Consequences: The FAIR Overdraft Coverage Act,” October 2009)

   While the growing sentiment of customer dissatisfaction with the banking industry, and the big banks especially, certainly contributed to The Fed’s new rule and Congress’s proposed legislation to further limit fee income, “the issue that many of the smaller community organizations face is being able to separate their institution from the negative publicity being thrust upon the larger banks … In some respect, all banks are being painted with the same brush and are guilty by association … The good news is that this is where the opportunity comes in for institutions that are able to convey their brand message and strengths to consumers, and then live up to the hype.  If you have something better to offer, you now have an audience that is willing to listen.” (“Extreme Makeover: Bank Edition,” May 2009)

3. Gen Y
   

   “What is your institution doing to get the attention of 36 percent of the U.S. population? … ensure that your products and services are aligned with the needs of this generation. … there are some institutions that are figuring this out faster than others, and they are capturing more than their fair share of the Gen Y market.” (“The Choice of the Next Generation,” July 2009)

   “Given their proclivity to technology, it should be apparent that you also need to meet this generation on their own turf. Specifically, having a cogent Web 2.0 strategy is critical to your success in both attracting and retaining a Gen Y customer.”
   “Twenty years ago, if a customer had a bad experience with a bank, they might tell their family and friends.  So in the worst case, maybe a dozen or so people would have a negative view of your institution.  Today, that same individual might post their experience on a blog or social networking site, where it is seen by an exponential number of people.  If you screw up bad enough, it becomes viral and your one mistake is seemingly broadcast across the world.”

   “The end result of all of this is that you are meeting Gen Y in the space that they prefer to communicate, and in doing so, giving them the immediate response that they have come to expect.  The rush is on to have meaningful interactions with this generation, and many of the large banks in particular have already recognized this.” (“Reaching Gen Y,” July 2009)

Bill Jordan:

One point I would reiterate from my March 2009 article, “Five Recommendations to Grow Business Relationships,” is: Getting to know your business customers is more important now than ever. Focus on the fundamentals to keep and expand your business relationships.  Understand their business model and how it might have changed over the past year.  Get to know what they use with other financial institutions.  Look beyond your credit relationships. Just because they don’t have a loan with you doesn’t mean you don’t need to understand their business. Use this process to uncover cross-sales opportunities.

Greg Ulankiewicz:

Considering the mobile phone is poised to alter the delivery channel arena more broadly than any previous advancement in this realm, I think these points are worth a second look:

“As consumers, and Gen-Yers in particular, continue to migrate towards more sophisticated methods of transacting, your institution should constantly test the waters of innovation and consumer demand to ensure you are poised and prepared to deploy the appropriate mobile technologies and services at the most opportune moments, lest you neglect to remain competitive in the marketplace.”

“As your institution takes on additional costs to deliver mobile banking technologies, it will become increasingly critical to seek optimization across your entire delivery channel portfolio.” (“It’s the End of the World As We Know It,” November 2009)

“Given that delivery channels are complementary, and households that transact more tend to be more profitable, it is important to view your channels as a portfolio of relationship-based products, not individual outlets with the aim of processing customer transactions as inexpensively as possible.”

“Develop products with a focus on delivery channel usage in order to encourage customer behavior that helps your institution control costs and/or maximize revenue.” (“Who’s Managing Your Delivery Channel Portfolio?,” August 2009)

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