Unmaking the Myths: Fact Checking Community Banking
By Achim Griesel and Dr. Sean Payant
Banking, and specifically community banking, is essential to the overall health of our country. By design, it serves as the backbone for our financial system and communities, while playing a crucial role in helping individuals, businesses, and governments thrive.
In this highly competitive environment, community banks must continuously adapt to the changing landscape and competitive pressures. The key to success is to challenge and shatter the traditional banking myths that have been prevalent for years. Let’s explore five such myths and why they need to be shattered.
1. The Efficiency Ratio
Myth: Managing expenses is the best way to improve overall efficiency.
Fact: Increasing overall revenue is much more impactful.
The efficiency ratio is an important metric for financial institutions (FIs) to track as it measures how efficiently FIs are using resources to generate revenue. It is often thought the best way to improve the efficiency ratio is to manage expenses by embracing technology, controlling costs, and determining appropriate staffing levels. But, managing expenses is a very finite opportunity. The unlimited opportunity for FIs to improve their efficiency ratio is not on the expense side. It is on the revenue side as illustrated in Figure 1 by comparing high performing banks to others. Institutions should focus on growing revenue, as this will have a much bigger impact on profitability. There are two ways to accomplish this effectively: (1) growing core customers, and (2) growing share of wallet. The bigger, more strategic option is in growing core customers because this also enables your FI to exponentially grow share of wallet.
2. Growing Core Deposits
Myth: A rising rate environment is the time when institutions need to focus on core deposits and relationships.
Fact: Growing core deposits and relationships should be an always-on, strategic initiative.
With the recent rate increases and the decline in deposits since mid-2022, bankers are once again focusing on core deposits and core relationship growth. Large banks are promoting cash rewards that triple prior offers, and they are marketing at a frequency that is 3-4 times that of prior years. Why? In order to acquire new core relationships. FIs see the current environment as a prime time to grow low-cost core funding. However, this is far from the truth. The truth is, it is always a good time to focus on growing core relationships and core deposits regardless of the economic environment. By doing so, FIs position themselves well for any rate and non-interest income environment.
3. Deposit Market Share
Myth: Deposit growth is a function of deposit market share.
Fact: Deposit growth is a function of household and business market share.
FIs often focus on deposit market share as a measure of growth, but this is not always the best indicator. Instead, it’s important to focus on household and business market share. Essentially, what percentage of the FI’s footprint are they serving? Deposit market share is very much driven by larger deposits that often come at a higher cost. It is also distorted by branch locations, or lack thereof, for digital banks. Household and business market share is a much better indicator of the ability to attract and retain consumers and businesses, and it provides a clearer picture of overall growth and success.
4. Staffing Challenges
Myth: It isn’t possible to hire or retain employees in the current environment.
Fact: Retention and recruitment is a function of an FI’s investment in and focus on developing better leaders and coaches.
Staffing and human capital challenges have been one of the most prominent issues for FIs since the pandemic. Finding talented employees continues to be difficult, and retaining talented employees is a must. While the combination of these factors results in staffing challenges, the solution lies in an FI’s approach to its leadership and coaching strategy. By investing in the development of leaders and creating a strong coaching culture, FIs can ensure their staff is well equipped to deal with the challenges of the industry, while also feeling valued by the institution. The result is a decrease in turnover, improved knowledge, and stronger alignment with the brand; this ultimately creates improvements in customer satisfaction and improved overall performance.
5. Sales Culture
Myth: Having a “sales culture” is the only way to drive results.
Fact: Aspiring to have an escalated service culture will result in increased product and service usage.
FIs often aspire to have a “sales culture,” but this is generally not the best approach. The key to success is to have an escalated service culture, where the focus is on providing products and services to make people’s lives better. By focusing on providing excellent customer service, FIs can build stronger relationships with consumers, increase overall satisfaction, and create a positive image for the institution. A result will be increased sales and improved overall performance.
By challenging and shattering these traditional myths or approaches to banking, FIs can create a more efficient and effective approach to their operations, which will lead to increased profitability, meaningful growth, and measurable success. By focusing on the right metrics, investing in the development of leaders, and creating a strong service culture, FIs can ensure that they are well positioned to succeed in this highly competitive industry.
Achim Griesel is president and Dr. Sean Payant is chief strategy officer at Haberfeld, a data-driven consulting firm specializing in core relationships and profitability growth for community financial institutions.