Your Peer Group Analysis is Making You Worse

Ditch the Peer Group Analysis

It is likely every quarter you look at a set of peer group metrics and compare your bank. “Bank ABC produced a 16% ROE. How are they doing it,” you ask. Your CFO responds that they are doing it by booking more C&I loans. You then commit the organization to booking more C&I loans. Do you see what happened there? Your strategy is to copy a competitor. It is done thousands of times per day by banks, as we tend to mimic deposit/loan pricing, branches, marketing and positioning.


That’s not going to work.  A good strategy is never to do the same thing, but better.  Banks carry the same products, in the same way and with nearly identical brands. Why? Because we were all taught to look at our peers, use the same metrics and figure out what successful banks are doing. The result is what we call the “grand convergence.” Almost every bank is nearly identical from the rest.


Of course, there are banks that are different. The funny part is that most are outperforming. If you feel banking is a grind, it is likely that you lack a cohesive strategy to differentiate yourself in a sustainable fashion. Your bank might be about superior service and you likely do a great job at pulling it off, but great service isn’t a strategy because your competition is doing the same thing.


If your plan is to go head to head with your peers, the probabilities point to the fact that you will be extremely average at best.  In an effort to compete, you will swap employees, customers, pricing position, tactics, marketing, metrics and style. Over time, you will converge and any competitive advantage you had, will be lost. Looking at a peer group every quarter reinforces that thought process and likely makes your bank average.  Being like your peers isn’t a strategy. In fact, it is the exact opposite of one.


Ignore Your Peers


Set your own course. It really doesn’t matter what they do; only what you do. While we are all for benchmarking, benchmark against things that make you different, not the same. Superior returns are a byproduct of a successful execution of a profitable strategy. Measure those items that make your bank unique.


You must have a unique value proposition and offer something different than other banks. Find your value proposition. What set of customers are you choosing to serve, everyone? Forget it, as that is a surest way to mediocrity.


You need to find a customer category, understand their unique needs and offer them something different than they are getting now. If you don’t want to go after a particular category, be really good at a set of profitable products few banks offer. Maybe you want to be really good at serving the financial needs of car dealers or restaurants. Maybe you want to excel at providing energy loans or maybe you want to specialize in escrow services for crowdfunding companies. Whatever you choose, start small, test and then expand.


Your competitors are likely just as smart and just as driven as you. If you are trying to get more loans, cheaper deposits or more relationships you are going to find that banking isn’t fun. You may survive for another couple years, but it will be harder and harder to produce average returns as consolidation will accrue to those that have a better operating model and a better strategy.


Whatever you choose, if your goal is to be above average you need to do things that are not average. As banks, we need to stop thinking banking is a zero sum game and start thinking about how we can be different from each other, and in doing so, expand the market. We are blessed with guaranteed funding, high barriers to entry and the ability to employ 8x leverage. This is a recipe for success if we can find the right strategy. The problem is you won’t find it in your peer group.