What's a Small Bank to do?

Over the past few years, community and regional banks have been facing an identity crises of sorts. Long known for high touch service, they have lost market share to larger banks that have replaced labor intensive processing with less expensive web functionalities. These small banks are also threatened by niche consumer and commercial banks that give special audiences even more high touch. The question is: What's a small bank to do?

The pundits say banks are in a mess. They don't understand their customers. They're having trouble getting them to adopt online banking. And what's more, the customers don't believe much of what their bankers tell them!

Is it a surprise banks are doing well? Not too long ago a "big" bank posted a 12% gain in revenue, Q4 over Q4. Only months earlier, a well respected research organization had reported the very same big bank had received low marks in a national customer satisfaction survey. Apparently, the customers who said they were dissatisfied didn't let it get in their way of signing up for more products.

Why? Unlike other consumers, bank customers are very resistant to change. For years, research after research has disclosed that American consumers (unlike consumers in other countries) like using banks. At the same time, they think all banks are pretty much the same. Banking analysts accuse the banks of being overly aggressive, of creating the impression banking is becoming a commodity business and of not having deep relationships with their customers. But none of this finger wagging has caused a massive migration from large banks to small banks where customers are supposedly wooed with smiles and first-name treatment. No, customers stay and customers buy, and why should that be surprising when customers believe most banks are pretty much the same?

In a nutshell that's one opportunity many small and mid size banks can't seem to exploit. They don't give poorly served large bank customers anywhere to go. The fact is, large banks - the Citibanks, the Bank of Americas, the Wells Fargos, the WaMus - are doing a great job of hanging onto their customers. They've spent a lot of money to acquire them. They've improved their customer relationship interfaces, their internal business processes, and their Internet and Intranet functionalities. They've also invested in their brands, making sure they know what their customers want and then making sure they give it to them exactly the way they want it. But most importantly, big banks have proved they can act small. Bank of America and WaMu and Wells Fargo can divide into as many specialized business groups as they need to satisfy customers. And they can coat that with a winning attitude, what management consultants call nowadays, "customer advocacy." Stopping by my big bank the other night to make an ATM deposit, I was greeted by a man in a blue suit who, distressed I could find no deposit envelopes, went out of his way to snag one for me, then apologized for the inconvenience. Apologized! There was a time not long ago had I complained about such a situation, I'd have been directed to the little white phone in the lobby to talk to the ATM vendor's CRM system.

What's a small bank to do? Two things: differentiate and act its size. Most small banks show little difference among one another. When they try to differentiate, they ape the larger banks - they remodel their lobbies, put in WiFi, install a customer service greeter, drive to customers to sign documents and make a big deal about it. Most of this comes across as sizzle not steak, which only reinforces the notion that all banks are pretty much the same. They do other things as well that don't differentiate. They advertise like larger banks, claiming they are as functional and as efficient - a shaky premise at best - and they promote products by advertising rates, just like online banks, savings banks, and credit unions, reinforcing the impression their products are commodities. (Bankers will confess to selling commodities. What they can't say is that they've found a more personal way to service their commodities.)

More importantly, small and mid size banks don't act their size. They're small, and that's a benefit. The core business of banking - depository, documentation, disbursement, credit, and investment - requires trust, and trust requires relationship, and small banks are supposed to excel at relationships. Not only that, there are a number of people who prefer local banks precisely because they are local. They are available, accessible - just where you want your money - and they get involved in local issues. Do small and mid size banks promote these attributes? Of course they do. They all do. What they don't do often enough is promote them in a way that differentiates them from other banks. For instance, small banks often hire knowledgeable, local loan officers, effective networking branch managers, and well trained floor personnel. Mid and large size banks are not quite as good at retaining these veterans. However, "it's our people" is a claim any bank can and many have made. While individual customers may think Sally, Bill, or Mary are great people, to distinguish between one bank's Sally, Bill, and Mary and another, the bank's message must be concrete: Sally know escrows or Bill understands trusts or medical group cash flow or agricultural financing. Sally, Bill, and Mary then are differentiated in terms of their knowledge, creativity, and skill not a generalized attribute such as personality. Other areas (among many) in which small and mid size banks can differentiate are with a world view (a unique perspective of their economic region or community), by dedicated and targeted community relations (so that regional specialties are front and center), and through breakthrough products.

But after all is said and done, so what? To date, small and mid size banks have thrived, especially in the West, by acquiring smaller banks, expanding into new territories, and simply by sitting back and enjoying double digit population growth. Perhaps, in the future, we can expect more consolidation until all the good deals are done, more geographic expansion until all the street corners are occupied, and more product and service commoditization, until loans and CDs are sold in super-paks at WalMart. Is that the future regional and community banks are heading toward? Sometimes it seems that way, but I can't imagine a future in which small and mid size banks abandon their historic role supporting the commercial needs of growing ethnic populations. Nor a future in which small and mid size banks walk away from providing new businesses the banking tools they require to emerge and expand. Nor can I imagine a future in which small and mid size banks pass up the opportunities of providing financial support to the country's fastest growing demographics - boomers and seniors.

The question is not whether small and mid size banks will grow by acquisitions or from within. They will grow both ways, depending on market circumstances and opportunities. The question is how much they can affect that growth, how much they can seize the opportunities they want, serve the customers that will be most profitable to them, achieve the business goals they have set for themselves. In order to do that, small and mid size banks - more than large banks - will have to lay siege to the notion that all banks are pretty much the same. Large banks have already staked out their differences. But with the emergence of new technologies, new logistics, and increasing service specializations, financial services to the mid market will always be more volatile. In order to take advantage of business opportunities, small banks must define and communicate the specific values of doing business with them, and define it beyond an Internet connection, a points promotion, or a free cup of coffee. In a word, small banks must invest in branding. Branding defines perceived value. Branding differentiates. And branding engages customers directly on an emotional level.

• Branding defines perceived value, that is, the benefit customers believe they will get from a product or service. Customers brand companies. They tell companies how, when, where, and why they will buy their products and services. A bank that skillfully surveys and assesses its customers will always know whether they are offering them the values they expect.
• Branding differentiates. In defining what customers expect, the brand process defines exactly how one company is different from its competitors. This gives the branded company an edge, because it reaches out to new customers with a powerful value proposition. At the same time, it gives current customers even more reason to continue to do business.
• Branding engages customers on an emotional level. In any successful exchange, there is satisfaction. The branding process identifies what customers are looking for, what they get, and then explores every business opportunity to replicate the same benefit. Service businesses cannot replicate satisfying experiences by simply delivering a quantity. They must add a value, a quality, such as knowledge, resources, or a behavior.

As a result, banks that invest in branding will know how to retain and sell more products and services to their existing customers. With an awareness of their own unique value, banks that invest in branding will attract new and better customers at less cost. Finally, banks that invest in branding will open a window on their future, making who they are a logical prelude to what they will become.

To learn more about financial services marketing, give Fred Barson a call today.