As if things weren’t interesting enough, last year was filled with rising foreclosures, slow economic growth, and falling consumer confidence.  Bank earnings tumbled industry wide.  Credit union earnings declined as well. 

And it’s CLEARLY not getting any better.   Thus far we have seen the largest failure in banking history (WaMu), the demise of once venerable Wachovia, the collapse of Indymac, the absorption of Fannie Mae and Freddie Mac by the government, Merrill Lynch gobbled up by B of A, and the bankruptcy filing of Lehman Brothers, to name a few of the shocks to the financial marketplace.  A $700 billion industry bailout was passed by Congress.  There are predictions of 100 or 200 bank failures or forced mergers in the next year or two alone.  The last time we saw numbers like this was in 1989, when we experienced 206 bank failures.  On the credit union side, the number of mergers and acquisitions, both forced and voluntary, is expected to grow dramatically in 2009 and beyond.

So, what is behind the trouble?  As we travel the country working directly with financial institutions, the same litany of woes is heard regardless of the region or institution size:

• Loan losses have accelerated, and now infect the automobile and credit card portfolios in addition to the real estate portfolio.
• Margin compression is an ongoing concern.  What can I do to grow my margins?
• Non-interest income growth has been strong over the past several years, but we are now experiencing a slowdown in the growth of this vital earnings component.
• I need greater efficiencies in order to survive on slimmer margins, but I also need more branch placements to meet the convenience needs of my customers.
• Delivery technologies, such as ATMs, online banking, and mobile banking, are critical for my positioning in the marketplace, but they also drive up my operational expenses.
• I can grow my deposits and loans if I am willing to use rate, but that has margin implications.  The real problem that I face is that I cannot grow either consumer or business households quickly enough.

These concerns are all valid.  The proof is in the numbers.  Between year-end 2000 and year-end 2007, the number of banks in the nation declined by 14%, and the number of credit unions declined by a whopping 21%.  These trends are both expected to accelerate.  As of year-end 2007, the average ROA for FDIC-insured banks had fallen to 0.82%, from 1.00% in 2006.  Credit unions showed similar types of declines.

How do you counteract these trends?

There are a number of short-term tactical actions that financial institutions are employing to lift earnings.  Layoffs abound in the banking industry.  Many financial institutions are delaying or even canceling branch expansion plans.  Some seek to grow non-interest income by raising fees and hoping that customers won’t notice.  All these can help in the short term, but in the long term a whole new set of issues is likely to arise that will cause the same types of industry pressures.

There are organizations able to avoid this type of cyclical fluctuation in performance.  What are the characteristics of these high performers?  In analyzing such institutions across the U.S., we have come to understand that high performance is independent of size.  Larger organizations may have an advantage as far as economies of scale in operations and in marketing, but there are many smaller organizations that are able to achieve high performance.

High performance is also independent of industry type.  Just as there are many high-performing banks, there are also many high-performing credit unions.  High performance is also independent of region or market size.  There are many high-performing organizations that operate in high-density urban or metro markets, but many also operate in more rural environments.  Interestingly, high performers tend to have strong performance in all economic periods and interest rate cycles.

So what do high performers do?  We have isolated five key characteristics:

1.  High performers have developed a strategy that is consistently applied.

High-performing institutions develop a strategic vision for the organization, and all tactical actions are evaluated against this vision.  Nearly all organizations go through an annual strategic planning process.  The difference with high-performers is that the process is not a three-day event.  It is a 24/7 guide to all that they do. 

As an example, which of the four “models” below defines your organization? 

• The traditional branch distribution model is the most common model employed in the financial services industry, requiring significant investment in branches and ATM deployment.
• The price-based competitive model is a less frequently employed model, with a very visible example in ING. 
• The service-quality model is a common aspiration in many organizations, but in fact few are able to achieve this.  It is important to remember that the service-quality model requires more than friendly employees.  It also requires high-quality products.  An example of this type of competitor is USAA.  How many banks or credit unions offer remote deposit capture services to consumers, as USAA does?
• Then, there is the hybrid model.  Institutions employing this model try to combine aspects of the other three models, with Umpqua Bank often cited as an example. 

Many organizations try to be all things to all people – that is, they build significant branch infrastructures while trying to offer the best price in the market as well as the highest quality in products and services.  These are all admirable goals, but it is indeed rare, if not impossible, to achieve all of these goals consistently. 

The goal of a high-performance organization is to select the model that best utilizes its core competencies and fits the needs of the market it serves.  All future strategic and tactical decisions should then be based upon this model.  One of the clearest benefits of this approach is that it helps an organization avoid the dreaded disease of “me-too-ism,” which translates to “if my competitor down the street is doing something, I’d better do it too.”

2.  High performers understand the needs and attitudes of customers and the marketplace.

A second characteristic of high performers is their continual market reconnaissance.  They are constantly listening to the concerns of customers, both through informal discussions with customers, as well as more formal research and focus group analysis. 

It is important to understand that listening does not simply mean hearing out a customer who is griping about a service charge or lack of convenience or hours.  Instead, high performers tend to be proactive listeners.  They utilize research to identify the evolving product needs of their customers and the market.  They engage in continual monitoring of marketplace demographic trends.  They research how the delivery channel patterns of their customers are changing.  This type and level of research helps them to stay on the forefront of customer needs. 

There is also one additional and important note regarding reconnaissance.  Research conducted in 2007 by RFG on more than 150 institutions indicated that nearly half of all new household relationships begun in the previous two years were originated primarily on the basis of a referral by a family member or friend.  You should know the likelihood that your customers will recommend you, and you should track this regularly. 

3.  Intelligence is delivered to all points of the organization.

Another clear characteristic of high performers is that the staff knows the customer.  While it would be nice if every customer was known on a personal level, this clearly is not realistic.  However, what can be known are the anticipated, as well as expressed, needs of the customer.  Anticipated needs can be determined on the basis of current product usage patterns, demographic profiles, and other similar factors.  For example, RFG has developed a “Next-Best” product scoring system for every household within our iNTEGRATOR MCIF system, based on demographics, current product usage, and survey research.  These scores should be used at the teller line to prompt for referrals, and at the platform as a sales aid. 

Systems to deliver intelligence need to be two-way.  Not only should staff know what products and services the customer is likely to buy, they should also know about previous interactions that other staff may have had.  These systems create a seamless interaction and will lead to higher customer satisfaction and increased cross-sales.

Here is one caveat in this regard.  While technology is a necessary part of these systems, it is a mistake to think that simply deploying the technology will create a panacea.  Staff must be trained to understand what they are selling and servicing, and they may need to be motivated to do so as well. 

4.  High performers measure their performance consistently, frequently, and across multiple points of the organization.

A fourth characteristic of high performance is the focus on performance metrics.  Most organizations have a standard set of metrics they use to measure themselves.  The difference with high performers is the measurement is conducted more frequently and broadly across the organization. The metrics also actually measure something meaningful to the persons being evaluated. 

The best illustration of this is at the branch level.  Most organizations will have some measurement of branch performance, with it most often being profitability.  The manager of the branch is often held responsible for this result, and, in most cases, this is fundamentally unfair because:

• The branch manager did not decide the type or size of branch to build, and yet inherent in branch profitability is the cost of the branch.
• Branch managers typically have little or no input in setting interest rates, yet margin income is a major determinant of branch profitability.
• Although they are often given discretion to waive fees, branch managers do not establish institution fee levels.  Nonetheless, non-interest income will be a critical component of branch profitability.

Saddling the branch manager with a branch profitability performance metric is not useful.  Instead, focus on the things that a branch manager should be controlling. RFG has developed a branch performance metric that combines the key aspects of the customer relationship.  These are:  checking penetration, core deposit balances, total household balances, cross-sales percentage, net new household growth, overall loan penetration and services per household.  Note that none of these factors is a profitability measure.  However, if the institution has done a good job of pricing its products and services, achieving high performance in these metrics will undoubtedly result in high profitability for the branch.

5.  High performers exhibit constant innovation in products and pricing.

The last characteristic of high performers is innovation.  Innovation in products creates differentiation for the organization, and in a crowded market space, differentiation is critical.  The institutions that were first with remote deposit capture services had an advantage in the commercial accounts market.  The innovators that offered the hybrid equity line/loan product had an advantage in the real estate market.

But innovation is critical for other reasons. Recent research conducted by RFG examines the loyalty of the emerging “Gen Y” or “Echo Boomer” generation, the children of Baby Boomers.  One of the most interesting findings is that this group has significantly lower institutional loyalty than their parents.  That is, they have less of an inclination to use an institution simply because they may have used them in the past.  This is understandable when you consider how the Internet has increased the availability of information regarding products and institutions. 

The implication of this is two-fold.  In the financial services industry, approximately two-thirds of product sales are passive sales while one-third are proactive sales.  That is, two-thirds of new account openings happen not because of any inherent action on the part of staff, but because the employee happened to be in the right place at the right time.  If the next generation is indeed less loyal, then passive sales are likely to decline.  Institutions will then need to be more effective in proactive selling, using proactive policies and intelligence to tailor their efforts.

At the same time, institutions should be developing the capability to bind products together in more meaningful combinations, especially pricing combinations, that will encourage increased product sales.  Relational pricing is important now; it will be critical in the future.

High performance is certainly the goal of most organizations.  But achieving high performance should not be a short-term objective.  By incorporating the five characteristics of high performance into all areas and levels of your organization, and not just into the executive management group’s objectives, you can achieve the type of performance that is consistent in all types of markets and in all economic cycles.

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