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The Reluctant Retail Bank

One of my favorite and most successful CEO friends was quoted as saying, "the only time I want to hear the words "retail banking" is in the following sentence: we are not in the retail banking business".

In another case, A senior bank executive once  said “Have you ever been to a football game?  Is it about the team scoring the touchdown or the band playing the fight song?  The retail bank is the band; the commercial bank is the football team.”

Retail banking is the Rodney Dangerfield of banking.  It generally gets no respect!

Most of the CEOs at our forums prefer not to discuss retail banking.  It's a necessary evil, a costly distribution network that exists primarily to handle highly valued commercial clients as well as the retail customers that are part of the banking fabric but not really that profitable.  Those retail customers expose the bank to significant regulatory risk, especially from the CFPB, and their deposits aren't valuable these days.

In recent years the business became even less attractive. Foot traffic at branches has declined precipitously, while electronic connections are proving not just more efficient but also more engaging to customers.  Unfortunately, one can't afford to close the branches and rely on emerging technology exclusively, thereby increasing retail operating costs even more.

I was fortunate enough to grow under the tutelage of Stan Bradshaw, my first Chairman, and the great Dick Kovacevich.  Both were strong retail bankers, and they taught me this business can be the crown jewel of their shareholders' investment portfolios.  Other banks, such as First Banks of Colorado, have shown how profitable and beloved these banks can be. 

I say retail banking is here to stay and a significant investment that you must make.  Ergo - it is important to find ways to optimize it.

I can count on both hands the number of banks which truly are not in the retail business.  The vast majority of banks, including those who profess to be solely in the commercial banking space, have significant commitments to the retail business.  There are many reasons for this.  First, even commercial bankers need a place to do their personal business and to exchange cash into bank deposits.  And second, rarely does a commercial bank fully fund itself.  The notable exceptions are those commercial banks that focus on the small business end of the spectrum, which is deposit-rich.  Those banks have amazing DDA as a percent of total deposits ratios.  They also have branches where the business banking customers do their business.

The typical perception is that retail banking is a hokey, simple business.  I agree it is hokey, and believe it is a cause for celebration.  But in my mind, it is anything but simple.  We assign the most junior employee to be the face of our bank.  We welcome them to the bank with open arms and expect mastery of the most voluminous policy and procedure of any bank division.  We pay them the least, but ask them to be experts on everything from retail to treasury services.  We ask them to share the preponderance of the compliance burden while giving them a laundry list of ways to get fired – for things like relatively small teller differences, for one.  We ask them to sell, but give them little reason to do so, as the upside for selling is small (typically retail bankers get minimal incentives).  And, we all-too-often consider them a cost to be displaced, not a revenue-generating investment.

I’d like to offer an alternative view of the retail business.  That view will not focus on the cost displacement aspect and the on-going necessary, painful investment in technology.  It is all about the critical role the retail bank plays in the over enterprise’s profitability, funding, brand identity and strategic execution.

  1. Profitability

    Retail banks can be very profitable, even if Durbin takes a significant bite out of your debit card fees.

    The retail bank is, by its nature, a volume business – both in employees and customers.  As such, most allocation schemes burden the retail bank with an inordinately large share of allocated expenses.  Valuable divisions like human resources, technology and operations are largely borne by retail, while other business units benefit from discounted services.  I suspect most commercial divisions would be shocked at the cost of a dedicated core system to service their customers absent retail’s significant investment.

    I have always believed that, if you do the right thing for the customer and your shareholder, you will have a successful business.  Therefore, feeing customers by tripping them isn’t a good thing to do, not just from a regulatory perspective but also from the fundamental premise that this isn’t the right thing to do.  At the same time, creating value for which the bank gets paid makes great sense to all concerned.

    The best way to get there is to start from the customer.  What gives the retail customer the greatest value?  While some segments value rate above all, the majority of customers look for value-added advice and comprehensive solutions to their financial needs, and are willing to forgo rate optimization for the overall value proposition.  This is something most retail bankers support, but very few execute on effectively. 

    We say we want to provide value and avoid product pushing, yet most incentive programs are product-specific and omit cross-selling as a major component.  Start from a clear strategy and correlate incentive compensation dollars directly to that strategy.  Then, provide meaningful incentive compensation only to those who effectively execute the strategy and you will build the path to profitable success.  Expecting revenue generation from each member of the team through value creation for customers is the way to build both profitability and brand differentiation.

    An important element in the success of the retail bank is utilizing listening skills to better customize the product suite solution to the individual customer’s needs and financial aspiration.  Training, aligned incentives and clarity of goals are essential to getting there. 
     
  2. Funding

    Retail banking is a crucial component of the funding strategy of most banks.  Let’s not ignore the loan-to-deposit ratio absent that distribution system.  It can be used to change funding mix effectively while building a more loyal and profitable customer base.  A good example of this shift took place in recent years as banks generally shifted from free to fee.  The typical results involved a meaningful decline in the number of accounts (6-10%) coupled with a significant growth in overall balances and average account balances.  Through appropriate product design and pricing many banks shed accounts that were truly unprofitable but kept the relationship, which is the ultimate goal of this transition.  Generally, the current and long-term value of the retail customer is underappreciated and underestimated.

    The retail bank is an excellent vehicle to build your franchise value through generating strong core deposit growth and anchoring the customer to the bank through compelling product solutions and value-added consultation.
     
  3. Brand development

    The retail staff accounts for the largest number of customer in-person touches.  Even as customers shift to self-service through technology, the brand gets reinforced most effectively through the human touch.  That’s where the rubber truly meets the road.  As you transition the retail bankers from order-takers to true financial consultants (what so many call “trusted advisors”) the brand transitions as well into a higher-end, greater value-added brand.

    Ask yourself – how large would your business line be absent the brand awareness caused by all those bricks, all that mortar, all those relationships, electronic services, and so on.
     
  4. Strategic execution

    The retail bank can assist other bank divisions in developing their businesses by creating referrals out of their consultative customer interactions.  Listening to customers’ financial aspirations can help create specific business opportunities for other parts of the bank in a way that supports the brand as well as the value-added proposition I’m advocating here.  

    The retail bank should not be the only feeder of new business opportunities to other bank divisions, but it can certainly become the wind beneath their wings.  Success here requires investment of time and training.  Don’t teach the retail banker how to repair the treasury management engine, only to diagnose a misfire and refer to a specialist.  Value is created when needs and solutions come together. 

    In sum, bank executives can and should evaluate their retail bankers the same way they do any other division of the bank:  

How productive is each banker re revenues and unit sales?

How effective is each banker in identifying other bank services that will suit the customer?

How stable is each banker’s customer portfolio (comparative attrition levels)?

Are you appropriately attributing revenue and cost to the retail bank?

If each banker contributes well beyond their all-in cost to the bank, there is no need to prune the workforce to reduce expenses because the revenue generated more than compensates for the expense incurred.  Effective execution will overcome the customers’ transition to non-personal channels; strong bankers will continue to add value to their customers and will not be replaced by ATMs, mobile apps or online banking.  Instead, these channels will complement the retail banker, solidify the relationship and grow value for the franchise.  

I fear that, absent this mindset shift, retail banks will continue to evaporate in our quest to reduce the burden they put on the enterprise, instead of realizing the opportunity they have to become a major contributor to bank profitability. 

And the band played on.

(Or “Touchdown!”) 

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FOOD NOTES

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