If you look at the sensitivity in a bank’s budget, $1 of investment in a new line of business usually doesn’t break even for two to three years. $1 invested in finding a new customer usually returns about 9%, while $1 invested in a new product is usually above 20%. This all compares to about a 40%+ return invested in improving processes (loan, branch, cash management, etc.) and about an 80% plus return spent on reducing customer churn, increasing lifetime value and/or helping cross-sell.
Tag: Strategic Planning
Bank strategy is a year-round endeavor and the act of strategic planning has never been more important. A good bank strategy will set your institution apart from other banks and help it generate an above-average return on capital. More than a regulatory checkbox, a budgeting process, a fantasy or a regurgitation of someone else’s plan, the right strategic plan will provide a roadmap to create franchise value. If strategic planning is important to you, we have a tool for you.
The Strategist’s Deck
Quick, what is the single most important item to focus on for your bank’s strategic success? What are the tactics that need to be done today to ensure that success? After that, what is your next strategic priority? Would most of your team answer the same way? In strategic planning circles, it is called “working both ends of your plan,” and it highlights a weakness in many bank’s strategic processes. The average community bank spends 276 hours per year on putting together an update to their strategic plan, but the question is what value it adds to franchise value.
Last week’s article on branch transformation generated more questions than usual with many bankers asking what an “optimized” branch network looks like in the omnichannel model. While we are not confident that most community banks can achieve that model and would be better off focusing on a mobile-first architecture, most banks are in the process of trying. In this article, we review what a new branch delivery portfolio might look like, looking at both the economics and engagement of each location tactic.
As your bank heads into strategic planning this year, it is likely that one of the first, and most important, questions to answer is - What level of growth should the bank set as a target for next year? While seemingly a simple question, the answer trips up many bankers. In fact, some bankers get it wrong by 180 degrees. In this article, we look at some factors to think about when deciding your growth targets.
Getting Asset Growth Directionally Correct
Banks have a variety of options to deliver their products and services – branches, call centers, mobile, third-parties, social media, etc. “Omnichannel” has been a popular buzzword for a while with the prevailing concept that banks need to provide all channels as customers want to choose which channel works best for them. We think this is the wrong way of looking at the challenge and that banks need to take a more active role in the long-term planning of their portfolio of channel delivery options.
As September rolls around, it is time to start updating next year’s strategic and tactical plans plus put a preliminary budget together. For us, marketing in 2018 looks a lot like 2017 with some notable changes. Like this year, next year will continue the trend of more digital advertisement. This means more social media spend, more mobile allocation and more video production. Email and content will remain front and center, and we will be expanding our search term and search engine optimization.
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.
In some of our presentations, we show a five-year performance chart (below). No matter what time period we choose, there are always more banks that underperform than over perform. Further, banks consistently produce under their cost of capital. For example, at present, return on equity performance is about 9.3% or the average bank. However, for the average bank, their cost of capital is between 9% and 12% depending on the bank’s equity liquidity. Why is that? One answer is that banks have the wrong strategic horizon.
Contrary to popular belief, risk isn’t something to avoid. Risk is not even an element to minimize. This is counterintuitive as most bankers are taught to avoid and minimize risk. For that matter, most regulators, board members, and investors also reinforce this notion. Take for instance the dozen of credit parameters like maximum loan-to-value (LTV) that are hard and fast rules regardless of the quality or trend of the collateral value and absent of any analysis on pricing.