Risk

How Your Bank Will Evolve

To survive in the post-financial-crisis world, commercial banks have to diversify their risks, boost profit margins, and innovate in their legacy b...
Scott BergquistNovember 6, 2012

Your business is moving fast, accommodating new ways to serve customers, decrease costs, and stay ahead of competitors. It is only reasonable to expect your business bank to do the same. Up until now, that wasn’t the case. But all commercial banks now need to evolve or risk being left behind.

While some banks are showing themselves to be better at change than others, the banks that evolve will create a focused, exceptional experience for clients, and that is a great thing for CFOs and their finance staffs. Banks are making several changes that financial executives should begin to anticipate:

Targeted products.  In October Citigroup’s CEO abruptly resigned. Buried in the speculation about whether his exit was voluntary or involuntary was the fact that Citi is a remnant of banking’s past. The bank’s 1980s vision was to create a one-stop, global financial “supermarket” that could handle everything from savings accounts to insurance to investment banking. However, in today’s complex financial markets, selling a wide range of products multiplies risk and does not yield synergies across business units. The architect of Citi’s vision, Sandy Weill, famously called for the bank’s breakup this past summer.

As part of the path to differentiation and risk management, banks and nonbank financial institutions are aiming at true product or service differentiation, which generates premium profit margins. But that’s difficult to do with the largely commoditized service offerings of a typical commercial bank. So, banks will instead target a specific industry niche, company life-stage, or geography to deliver domain knowledge and specialized product innovation, for example. All of that will translate into risk management and pricing advantages for the financial institution, but most important, tangible value to the client.

Managing expectations. Quality of experience is defined by expectations. One of my marketing professors in business school provoked the class by defending McDonald’s as a “quality experience” due to its ability to exactly meet our expectations: cheap, fast, and not inedible food. In their attempt to focus, banks are segmenting their offerings and managing customer expectations accordingly. We’re one example: we segment our client base according to revenue size, and use that breakdown as a proxy for specific product needs and relationship complexity. That guides our coverage strategy. A prerevenue, development-stage start-up will value venture capital and strategic investor relationships ahead of a sophisticated global treasury platform, for example.

Similarly, not all of Silicon Valley Bank’s client accounts need or want high-touch, senior-banker attention. Early-stage companies with little infrastructure and 24×7 work lives, for example, overwhelmingly choose a self-service model, since online tools can quickly address their needs. Alternatively, a $100 million revenue company with offices in multiple countries demands a thorough review of banking needs and a custom solution that can only be effectively delivered in person.

Outsourcing nonvalue-add businesses. The pace of technology adoption has plagued banks for a generation, primarily because many banking platforms were built in-house using capital committed by bank executives, which inflated the resistance to new solutions. But that is changing.

Like the most competitive businesses in any sector today, the best banks are buying or renting infrastructure and software. In the past, these financial institutions held to a firm “build versus buy” strategy, defended on the merits of better control and customization. This argument left the building, though, with the departing, imperial chief information officer, who kept score based on the number of full-time employees (FTEs) in IT and his ability to influence sales by controlling IT project queues.

Today, bank IT is increasingly about vendor management, rather than people and projects. The benefit of this change is best-of-breed applications for internal and external audiences, plus a refocus of senior management’s attention on the value-add side of the business. I had a colleague who used to quip that “clients pay us for liquidity and availability, not to analyze financial statements or comply with [Anti-Money Laundering and Bank Secrecy Act] regulations.” Accordingly, you’ll see banks adapting to this approach invest more financial and human capital in engineering high-value credit and cash-management solutions instead of back-office tasks. Evidence of this will include a declining ratio of support-to-sales FTEs and increasing revenue per FTE for the entire institution. Corporate clients should expect to see increasing attention and better solutions.

Legacy businesses open up. Leading companies in any sector innovate without limit. They are willing and able to develop a new product, service, or process that will be better than the market standard, even when the market standard is their own. Simply put, these market leaders cannibalize their business before someone else does. I can’t think of a better example of this than Apple and its product development teams that hold no previous products sacred.

In contrast, banks have defended their legacy businesses too long, and the competition is coming hard. The best example is the closed system of the payments world. In that system, all in-or-out paths are touched by a financial institution, providing banks an exchange fee in both directions. Fat and happy in their clubhouse, banks have failed to notice (or dismissed) the entrepreneur clamoring outside with his sights set on this multibillion-dollar business.

So, banks will have to decide whether to stubbornly defend the Alamo or align with these new financial-technology companies whose solutions can effectively disintermediate them. A significant amount of venture capital has flowed into the financial-services sector over the past five years to build these companies. However banks choose to respond, the innovation disrupting the status quo in payments is yet another change that commercial-bank clients will soon be able to celebrate.

Scott Bergquist is the central U.S. division manager for Silicon Valley Bank, overseeing business development and client relationship activities with 2,000 companies and managing more than $1 billion in committed capital. He specializes in financing solutions for high-growth technology and life-science companies.