Your Bank’s Goals Could Be Confusing Your Customers

Setting Bank Goals

Every bank has a goal or a set of goals but unfortunately some of these goals are not known. Worst yet, some of these goals are stated but are not their true goals. Getting clarity in what your bank is trying to accomplish is the first step to achieving superior performance. A majority of banks have set a goal on profitability but is that really the most effective goal? What happens when you are one of those many banks that have a goal of profitability yet teach their employees how to lower profitability? 


Many Measures


We asked dozens of banks what their goals are for 2016. By far the most common response was some derivation of profit – net income, return on equity, return on assets or earnings per share. This is understandable. Next, there was a group of banks that gave us one or more metrics that were related to profitability – net interest margin, efficiency, fee income and credit quality were the most common.


However, there were a handful of banks that took a different approach and gave us the following answers:


“How many customers we help achieve their goals.”


“Our goal is to complete the integration of our latest acquisition.”


“We measure how much impact we have had on our clients and customers.”


“We strive to help our community grow.”


“Our goal is to increase our Net Promoter Score.”


“We have a set of objectives and our goal is to achieve high scores against each objective.”


“We look to help our employees reach their fullest potential.”


Focusing On What Matters Not What Is Obvious


As can be seen above, each type of goal is very different. If you dismiss the notion of some of the non-financial goals above, consider that there is evidence (that we will publish in the future) that shows that banks that focus on non-financial goals are actually more effective at achieving financial results than banks that focus on just profit.


If you doubt this point, consider the goal of running faster. In order to run faster, one of the least effective goals you could have is “shorten 100-yard dash time.” That goal is not instructive in itself so if you don’t know anything about running it leaves you with a nebulous objective. If that was your goal, you would be forced with coming up with other sub-goals (or risk failing). “Getting better running shoes,” “integrate cadence breathing,” “shorten stride length,” and “increase training hours” are all more direct goals that, if achieved, are highly correlated to increasing speed.


Sometimes profit is a byproduct of achieving your goals. Having a pure profit goal tends to send a very “me-centric” vision to employees and customers.


Having The Wrong Goals


While having a pure goal of profit may not be the most effective, having the wrong goals can hurt you. Consider all the banks that have a net interest margin goal. Statistically, the correlation to profit is negative as can be seen by the chart below. That means that if your goal is to produce the widest net interest margin possible within your risk spectrum, then that goal is likely to result in LOWER profit. This is evidenced by the negative 0.02 correlation when regressing bank’s net interest margin and return on assets (you get similar results if you look at ROE, EPS or net income). 


Net interest margin vs. return on assets

A bank that does not adjust for risk often ends up taking on loans with a higher cost and higher credit variability thereby hurting profit, not helping. In short, these banks leave themselves open to being adversely selected. Thus, having the wrong goal would make you less likely to achieve your desired measure of success.

The other offshoot of this is if your bank is just focused on NIM, it could be alienating your highest quality customers that can achieve better pricing at other banks.


Conflicting Goals And Alignment


By far the largest problem our industry has when it comes to goals is having objectives that are out of alignment. We want to serve the community, make a profit, make our customers happy and maintain high credit quality. While there is nothing wrong with having prioritized goals, it is rare that a bank puts a framework in place for how to deal with conflict.


Fees are the classic example. Overdraft fees, upfront loan fees, cash management charges and similar are the largest cause of customer complaints. If your goal is profit, then fee waiving should be at a minimum. However, if your goal is customer satisfaction or customer success, then in most cases, your bank should be prepared to waive fees. As a result of this structure, these goals could be in conflict.


Putting It Into Action


Next week, we will expand on utilizing profit goals and then discuss how some banks run into problems prioritizing goals. In the meantime, banks that makes sure they have the right goals, have a clear view of what goals that should receive their focus and provide a framework to employees for making decisions, will have a clear advantage against banks that don’t bring a modicum of rigor to their goal setting process.