Customer Focus Leads To Success

In past decades, banks aimed to be all things to all people. Customer focus was not commonly found among banks, ranging from the largest to small community banks. Geography was the primary limiting factor; community banks targeted all customers in their limited footprint, and larger banks did the same over a larger geography.

The last decade has seen the emergence of highly successful banks, both retail and commercial institutions, that have demonstrated disciplined customer focus which paid off handsomely.

Take TCF, for example. The company's target customer is "Joe Sixpack", the middle America, middle class customer. TCF has designed its distribution, product line and pricing to meet the needs and specific preferences of this segment. They do not have extensive wealth management services, since those are not particularly relevant to their target customer. They do have annuities and mutual funds sales, as those might be of interest to the its customer base. The branches are conveniently located in middle income neighborhood, aren't flashy by any means and many are supermarket branches (low cost to deliver allows the bank to offer more points of contact to the customer). TCF targets primarily the retail customer. Its distribution is planned to capture share in growing but not highly affluent retail markets. Its strategy goes for fee income off that customer base, and not for high margin expectations. TCF doesn't care that its average checking account balance is $600 (while most retail banks would lose money on such low balances). It works for them, given their cost to deliver, which is very low, and their fee structure, which is high and specifically tailored to the customer.

Charter One, on the other hand, offers more of a mass market approach to the retail customers. While there are similarities to TCF, Charter One targets large populations that seek convenience and are attracted by free checking. Their customers are less fee sensitive that the upscale consumer, and they are willing to pay the fees so long as the basic product is free. Charter One customers are very profitable to the Bank, since the product line is designed not to maximize spreads but rather fee income, and the distribution strategy is focused on efficiency and ubiquity in target markets.

For both Charter One and TCF, price and ubiquity is the driver, and branch locations and style as well as product line and pricing attest to their target customer. Accordingly, service isn't a major differentiator. Price is the lead, and presence supports it.

Commerce Bancorp, on the other hand, is also a high growth company, but its target customer isn't necessarily the blue-collar worker. Consequently, Commerce branches are very large by all standards, and especially relative to TCF and Charter One branches. Commerce buys premium real estate locations in premium markets (their Long Island strategy is a great example of this approach). They offer convenience and build their brand around that concept. Their fee income per dollar of deposits is much lower than TCF and Charter one, yet their profitability is excellent. Commerce makes their money by attracting customers with larger deposits and not overpaying for those deposits. Rates are reasonable, as are fees. Commerce aims for the upper middle income customer, and, consequently, its branches look quite different from the other two banks described above, as does their product line. The branches are large, airy and bustling yet not too crowded. Service may not be a driver but isn't neglected either. "free" elements aren't focused on checking accounts but rather on unusual differentiators such as the coin counters, which attract children and parents of children who want to teach their kids to save. The product line is broad enough to fully serve this market, and the pricing reflects this targeted approach as well.

These three retail banks are all successful, yet their target customers are widely varied. As a result, their entire approach to the customer, product line, pricing, branching strategy (location and style) as well as the importance of service and advertising, vary dramatically.

Similarly, on the commercial side, one can now find banks such as Sterling of Houston, whose average loan size is under $150,000, yet is a purely commercial bank. Branches are large and commercial in nature, the retail product line is secondary to the commercial emphasis, and average deposits are huge, since the target customer is the small business. Sterling only operates in major metropolitan areas in Texas, and targets customers that have loan needs that are well below the big banks' thresholds (typically well below $3 million in credit). The business product line is extensive and specifically designed for the owner-operated small business; this means cash management and treasury services are available and actively sold, yet they are not of the level of sophistication that GE's corporate treasurer is looking for. Sterling uses service as its primary differentiator, and its staffing levels at the customer point of contact reflect that. The Bank has more lenders than most banks its size, as well as more lenders' assistants to fully take care of the customers. As a result, the Bank can command better pricing than most, yet the customers feel they got good value due to the superior service and tailored product line Sterling offers.

Citizens Business Bank in Orange County, CA is another example of a pure business bank, yet their sweet spot is somewhat larger than Sterling's. The bank has been very successful in capturing market share from its larger and smaller competitors by excelling in service without compromising on price. Its average loan size may be larger than Sterling's, which accounts for part of the bank's better efficiency, yet the goal is similar: to be everything to the target customer, or 100% share of wallet. CVB and Sterling both approach the business segment similarly, but their delivery and product line do reflect the differences in their target market's business size and financial needs.

As our industry continues to homogenize, there are greater opportunities for banks who are willing to not only be clear about whom they wish to serve, but who are NOT in their target customer pool. Banks have historically failed to make the hard decisions about what NOT to do. Those that have has the conviction and willingness to stick to their strategic focus and effectively execute in their target segment have achieved greater success in terms of profitability, market premium and customer retention than others.