The Four Layers in the Cube of Bank Strategy

Better Bank Strategic Planning

Bank strategy can be thought of as a multi-layer cube. In this article, we present the four horizontal layers and then follow this article up with the vertical layers to round out the outstanding of the basic framework that can be used to set any bank’s strategic plan. The reality is that many banks fail to plan their strategic plan and don’t think through their framework. Here, we provide a successful and proven set of layers that allows banks to start from a vision and produce the tactical tentacles of strategy that makes execution clearer.


Bank Strategy – An Above Average Return on Non-Debt Capital


Every bank strategic plan starts with a bank vision and articulation of what makes the Bank competitively different so that it generates both a return above its cost of capital and “alpha” or the difference from the average industry performance. Taking a long-term horizon, preferably ten years or more, bankers need to proactively decide what businesses they want to be in, through what channels and in what competitive position to achieve an above average, long-term return. 


Layers of Bank Strategy


It merits to consider our definition of return – we are talking non-debt capital as a denominator, a fact that is somewhat controversial. It is in widely held agreement that you don’t owe your debt holders an above average return. You owe them the return of their principal and interest – nothing more. However, to run a successful bank, you need to produce a return that, in aggregate, is above both your cost of capital and above your peers. If it is not above both, that is an indication that a stakeholder’s investment is better elsewhere such as another bank or even another industry.


However, when we talk about non-debt capital, we are talking about more than just equity. We include human capital for example. That is, your bank needs to provide a fair return to them to include monetary and non-monetary compensation. For a bank to continue to attract above average talent, it needs to provide a combination of pay, flexibility, and culture better than the alternatives.


Also, stakeholder capital also needs to include customers, vendors, and regulators. Few would argue that customers need a fair return on their investment when you consider their investment is their attention and the opportunity that they provide your bank to earn a monetary return.


A Return for Vendors and Regulators?


Few bankers think of providing a fair return to your vendors and regulators, but it stands to reason that to be an above average performer you need to take these stakeholders into account as well. Quality vendors are not unlimited and even if they were your bank should make sure that at least there are earning a fair and sustainable return so that they can at least continue the relationship. Banks that continue to squeeze every penny from a contract or require a substantial amount of maintenance will find that vendors may seek another client instead or at least find other ways to cut back on the cost and service of that relationship.


Similarly, a bank’s strategic plan needs to take into account not only how it can have a regulatory compliant business model, but how it can communicate that model to their respective examiners and how best to leverage their regulators to get the most out of their oversight. It is odd to think of providing a proper “return” to regulators, but at some level, a bank should proactively decide the level of capital required to achieve a desired regulatory rating.


Department Strategy


Once a bank vision and strategic plan are articulated, loans, deposits and service lines can now further break down the strategy into more detail. This part of the plan can be more limited in time horizon so long as the department strategy takes the long-term bank strategy into account and breaks down the milestones into achievable goals.


For example, a Bank strategy might be to employ technology to reduce cost and speed transaction while going after markets that are above average in profitability. Commercial Banking may name what industries the bank should have a leadership position in and what generic technology the Bank will employ (f.e. an automated loan processing platform) to accomplish the Bank-wide plan.


Below is a diagram that expands on each layer and highlights the Retail business line. 


Bank Strategy


Discipline Level Strategy


To prevent banks from operating in pure silos, a good strategic plan should have a layer of discipline strategy which is the articulation of the bank and department strategy across functional lines. Each department might have groups such as management, compliance, technology, strategic planning and similar contained within them so that there needs to be a coordinated strategy across the discipline for each department.


For example, technology may articulate a bank strategy to improve operational efficiency by moving more into the cloud and by more artificial intelligence where appropriate. Each department’s strategy may discuss the goals and how these new systems will be executed.


Operational Level Strategy


Like a military operation, an operational strategy then takes the department strategy, filters it through the discipline level strategy and lays a strategic path on a grass roots level. This is the last mile connection from the regional, branch or product level to the customer. This is the part of the strategic plan that lays the framework, and the starting point for the tactical aspects of strategy as this layer provides the practical framework for execution.


For example, from the department and discipline layer, we have speed and segmentation as a directive using a cloud based loan processing platform targeted at specific segments such as, say, health care. The operational level now talks about the specific segments of healthcare, any particular geographies, the priority of introductions plus the marketing, training, and support required.


The diagram above shows the expansion of the operational layer for the Retail Department.


Putting This into Action


These horizontal layers of the bank strategic cube are the foundation of building a long-term, fully articulated strategy. For larger banks, the substance of these layers will be detailed while for smaller banks the departmental, discipline and operational layers of the plan will be simpler.


Plans fail or are delayed in execution not because they are too complex, but often because they are too simple. Thinking about your plan in these four layers helps strategic owners better connect vision with execution and provides a framework for taking into account all stakeholders. This methodology also has the byproduct of being more encompassing, therefore, requiring input from a wide range of employees, shareholders, vendors, regulator, and customers. The net result is a well thought out framework that helps move the organization away from silos and provides for more coordinated action.