Strategically Speaking

From Survival to Profitability … The next mega-trend in banking

  

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 Author: Brad Dahlman, bdahlman@profitstars.com

Congratulations!  If you are a banker and reading this article then you have survived the worst economic downturn since the great depression.  You must have been doing some things right during this challenging period.  Most signs now point to the end of the downturn and a return to modest growth and reduced unemployment numbers.   It is time to come out of “the bunker” and move forward.

There have been many mega-trends in the financial services industry over the past 20 years.   In the 1980’s we focused on asset growth.  The 1990’s were focused on cross sell ratio, increasing “share of wallet”. In the early 2000’s the focus was on check imaging, remote & mobile banking and over the past three years we have focused on survival.  As the survival mode ends, we are now entering a new mega-trend centered on profitability; growing the bottom line and building capital.

The recession and regulatory changes have (and will) cause us to re-examine our business model and find ways to increase capital by enhancing profitability.  Now we are presented with an opportunity to re-focus our organizations on generating profit.  These profits are essential to satisfy shareholders and strengthen a weak capital position found within many financial institutions today.

How to create a profitability culture…
There is an old adage that says you can’t achieve improvement without measurement.  If this rings true, profitability measurement would improve profitability! The steps are simple enough:

• Gain a better understanding of our current profitability;
• Set profitability goals;
• Develop strategies to improve profitability; and,
• Monitor profitability results.

By focusing on these things we can create a profitability culture within our organizations and improve profitability results.  Many banks today do this at the “total bank” level, but getting more granular by branch, product and customer is essential in truly understanding the drivers of profitability.

Some community banks today lack the tools to understand and manage profitability.  A study performed by Aite Group illustrates this point.  The vast majority of tier 3 and 4 banks (community banks with less than $5 billion in assets) do not have profitability solutions.  This puts them at a strategic disadvantage from larger institutions that have profitability systems and a much better understanding of profit drivers.Here’s a simple quiz to assist you in determining if your institution is geared up to effectively manage your profitability.  How many of following questions can you answer with a “yes”?

• Do you know which of your customers are most profitable?
• Do you have a tool to model pricing changes?
• Do you segment and manage relationships based on profitability?
• Are officers/branch managers rewarded for improvements in profitability?
• If profitability changes dramatically do you know why?

Empowering your employees with the tools necessary to understand and improve profits will assist in the recapitalization of your institution’s balance sheet, and give you the competitive edge in today’s challenging environment.

Economic Outlook – Time to dust off that crystal ball

  

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 Author: Pat True, rtrue@profitstars.com

Forest Gump definitely would recognize the current US economy because it so closely resembles his box of chocolates.  You never quite know what to expect each day when you try to gauge the business outlook.  Some industries, like transportation appear to be making their way back from historically low levels while others are still limping along.  For some sectors its business as usual while others, such as energy and auto manufacturing, are engaged in the process of totally re-inventing themselves.  The same can be said of the American work force.  Unemployment rates continue to hover above 9% and consumer confidence charts look like the blueprint for your average roller coaster.  The questions for those of us in banking are – How will all of this impact our business during the current year, and will we see a return to loan growth?

As many businesses begin a stage of measured growth to pre-recession levels, demand for bank loans is likely to follow.  Much has been written in the press about the credit crunch as one reason for the slowdown of bank lending, but little has been noted about the fact that loan demand has been low to nonexistent during the past three years.  For banks ranging in size from $100M to $1B, Commercial & Industrial loans on the books declined by more than 8.5% during 2010.  That trend is not likely to continue.  Key industries within the US are poised to experience more significant growth as 2011 continues.  Moreover, these industries are the tried and true banking clients including farm equipment, auto parts, aircraft parts, building material, machine tool and others.  Most of these are capital intensive business sectors that require investment in equipment as well as working capital financing – especially as annual growth rates exceed 5%.  These are also industries that help create opportunity for smaller satellite firms as well as for the labor force.  Here is a brief list of some of the more promising industry growth forecast courtesy of *First Research:

The big question for the next twelve months is - Will it be enough?  At best, the current US economy is a mixed bag.  Labor markets appear to be mending, but the return to an unemployment rate south of 6% is likely to take several years.  In the short term, higher fuel and food prices are likely to curb consumer spending and slow the recovery.  Ongoing crises overseas are also likely to impact the rate of expansion here in the US.  Still though, I’m optimistic on the economy because of the opportunities it presents.  We have a chance to change everything from how we work to how we make cars to how we create energy.  Those changes themselves will create new industries and new jobs that will lead both the US and the global economy forward.

*Data taken from March 11, 2011 report provided by First Research, a division of Hoovers, Inc.   Hoovers is a Dunn and Bradstreet Company.

Lessons for bankers from the Army Ranger Handbook

  

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 Author: Dave Foss, dfoss@profitstars.com

I recently attended a meeting of the Association for Financial Technology (AFT) that featured some outstanding speakers and included executives from many of the companies that provide technology and services to the banking industry.  The roster of speakers included such diverse personalities as Matt Eversmann, a real-life hero from Black Hawk Down, Rich Oliver, executive vice president of the Federal Reserve Bank of Atlanta and Brett King, author of Bank 2.0 and a global banking advisor.  I left the conference with several important takeaways that all of us in the financial services industry should consider.

1. Focus on simplicity and customer experience.  Behavioral change and user experience are powerful forces for the industry. Brett King cited examples of how one upset customer can create a revolt (funny how happy customers don’t seem to have that same drive and impact).  Disagree?  Search YouTube for “DEBTORS REVOLT BEGINS NOW!” and you’ll notice more than 500,000 people have viewed this homemade video about their bad experience with a bank.

For some customers, how they interact with their bank and banking applications are more important than the banks behind them. If not the choice of attractive check designs or “free” checking, what are the compelling reasons people select one bank over another? Certainly a friend or family member’s recommendation does carry some weight, but beyond that we are left with the experience. Mobility, a slick online application process for new account opening and a relevant rewards program could all be factors in keeping a customer.

2. Non-bankers are innovating banking. PayPal, Square, Apple and Zopa are names that you don’t tend to think about as traditional banking vendors.  They have the potential, however, to change banks’ relationships with customers and how payments are transacted.  Peer-to-peer lending might seem a little silly on the surface, but consider Zopa’s bad loan rate is currently running at a surprisingly low 0.7 percent. Studying how non-bank companies operate might provide clues on how to win in today’s environment.

3. The rate of change is faster than most ever imagined (or imaged) – now what?
Rich Oliver shared some advance findings from the Fed’s payment study. For the first time ever, credit card usage has gone down in spite of total payments going up. Debit is approaching 38 billion transactions a year. Check usage is going down dramatically, except for businesses paying other businesses.

Payment groups in the U.K. are pushing for the total elimination of checks within their payment system by 2018. However, the lack of global standards and the U.S.’s current technology infrastructure may be what ultimately drives the pace of adopting new payment technologies. There are hundred’s of thousands of POS terminals that are not capable of accepting payments from my iPhone, and no one has nailed who is going to pay for the retooling.

4. Keep a cool head in this changing and competitive market.  In closing, Matt Eversmann suggests the Ranger Handbook has some good lessons on leadership and Friedman’s book “The World is Flat” is also required reading for those interested in competing in the coming years. For those of us who expect to make a difference in the banking community, this summary seems appropriate, “…take responsibility for your actions; exercise initiative; demonstrate resourcefulness; and take advantage of opportunities on the battlefield that will lead to you to victory; accept fair criticism, and take corrective actions for your mistakes.”

Malware Delivery via your Friendly Search Engine, Compliments of the Bad Guys

  

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 Author: Ryan Spanier, ryans@gladtech.net

I’ve talked with a lot of financial institutions over the years about malware alerts, and each time the first thing they want to know is, “How did we get infected?”  They point to their state-of-the-art, up-to-date antivirus software and content filtering solution.  They have spam and email threat detection.  They even restrict personal USB flash drives in their environment.  Of course, the “dirty little secret” is that no technology solution is fool-proof.  Malware authors know exactly what they are up against, and they tailor their delivery methods to bypass your defenses.  Their number one weapon?  Your search engine.  After all, hacking through firewalls and avoiding IPS sensors seems like a lot of work, so why not just let company employees download malware applications themselves? 

Employees at institutions are generally using the Internet for business purposes; however, there are times when we may use the Internet to run errands like shopping, learning about world events, or paying online bills.  That’s where the search engine comes in.  Whenever we want to find out something new, whether it’s about world news or a new website, we turn to our friendly search engine.  Unfortunately, so do malware publishers.

The technique is called “search engine optimization (SEO) poisoning.”  Basically the algorithm search engines use to rank page results are based on somewhat public information.  There are many techniques used to take advantage of these algorithms, but in the end all it means is what you find is not always what you were looking for.  Once a user clicks on a malicious search result, they are taken through a few layers of redirection until they reach a malware-serving website.  These sites will typically try a few different strategies to install malware on the machine:

1. They are designed to look like antivirus or utility application warnings.
2. They can exploit vulnerable out-of-date applications like Adobe Acrobat or Java.
3. They are difficult to close without clicking a download area.
4. They prey on user fear.

Making matters worse, the bad guys are now targeting image searches as well, which are much harder to distinguish when searching.

So, what can users do to protect themselves?  Well, first off, stop relying on search engines for news.  I know, it sounds crazy, and there are definitely perfectly acceptable times to use them.  However, when searching for the latest news and gossip, try checking a well-known website like CNN or Fox News.  Second, if you see a pop-up claiming you are infected with malware, don’t click on it, as usually this will initiate a download.  Even worse, don’t install the application that’s downloaded either.  Most importantly, notify your Information Security team so they can check out your system.  Many users are fearful they did something wrong by browsing “non-business” websites and will try to fix the problem themselves so that they don’t tip off IT.  This is very dangerous for both the employee and the institution.  An institution’s best defense against SEO poisoning is user education.  Be sure users are aware of the threats search engine results pose, and, most importantly, that they aren’t afraid to let you know when something suspicious happens.