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Chief Investment Officer
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.
• 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.
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