So, who do bankers work for?

It’s annual meeting time for most publicly traded companies so much of the financial news these days contains reporting on the annual shareholder gatherings. We read and hear about the concerns of this important constituency and how the classes of other constituents are interacting hopefully for the benefit of the overall business.

Looking at those we serve

There are probably dozens of constituencies and stakeholders that we could list. But it seems to me that four are the most important: Shareholders, Customers, Employees, and the Banking Public.

Without shareholders, there’s no one putting up the money to conduct a business. Without customers and employees, there’s no one producing or consuming a service. And without the banking public, there’s no needed activity of gathering deposits or making loans.

I’ve previously noted how surprised I often am at the strongly held conviction of many bank officers that stockholder returns—the profitability of the business—trump the interests of all the other constituents.

That’s important, of course, but how much of the truly awful reputation risk we’ve endured as an industry in recent years is due to an unhealthy emphasis on shareholder return? 

How much have we contributed to the ridicule and ill will we’ve all felt by our apparent “enthusiasm” for profit at all costs?

Is there some central lesson we should be taking from the recent past and the present, towards a smarter future?

How should we serve “the banking public”?

There’s no question that bankers have a long-term repair job to do. The process has been underway for a while but it’s not easy gaining traction on some of these issues that have now developed into political problems of national significance and impact.

But I’m also regularly reminded that we have done only an incomplete job of understanding the basic needs of our banking public.

We all understand that the federal government has a “seat at the table” in overseeing the affairs of banking depositories due to its role in providing deposit insurance.

But the real reason is more basic than deposit insurance. It’s the need for a modern-day money supply to work properly and efficiently to promote the economic well being of our economic system.

This requires a healthy banking system and at its root, healthy banks.

Consider how simplistic some of our actions and attitudes are. We talk about customer service in terms that are almost totally self-referential. It doesn’t seem to occur to many of us that our opinion of the meaning of “good service” isn’t really important. It’s what the customer thinks that makes or breaks our business.

We also tend to talk about our customers in terms of our own asset size.

Are we big or small? Should that make a difference? Does that remain a reasonable metric?

The shorthand of the day is “community banking.” We either are or we are not one of those kinds of banks, this thinking goes, as if that were the primary determinant of our behaviors.

Definitions should be dusted off now and then and reconsidered. New York City is a huge place with over 8.5 million inhabitants but the city itself recognizes over 300 neighborhoods within its overall size. A single market?  A single “community”? Hardly.

Customer service versus business models

How does “customer service” play out today?

Just think in terms of lending. There are four major ways that I would define “service” from the perspective of the customer:

1. Do the customers obtain the credit they and their businesses need?

2. Are the terms reasonable and appropriate given the level of credit risk and the competitive environment?

3. Can we identify or determine any intangible qualities such as advice, counsel, or information that create value as opposed to dealing with one of our competitors?

4. Are we conscious of our responsibilities to our communities? (And if we quickly answer “yes,” can we cogently list just what those responsibilities are?)

The latter two points are the ones that ultimately provide the customer’s reason for banking with us as opposed to the bank down the street.

Now let’s consider business models. Here are the touted reasons often given that the largest banks’ business models are superior to the smaller ones: cheaper funding costs; better risk diversification due to size, geography, and breadth of product offerings; and the ability to operate at a size and scale to the specific benefit of the customer.

Yet take careful note that none of the four points listed in my section about “service metrics” are even remotely determined by a bank’s size.

What are you really about?

I’ve been thinking a great deal about current attitudes in the industry and have reached a conclusion:

Community bankers who define themselves by size alone are completely missing the point. It’s attitude that makes the difference.

It’s having a sense of responsibility for the best interests of each of the defined constituents of our business that will determine our success.

Many of our principal constituencies are inherently in conflict but it’s the finesse with which we reconcile these tensions and conflicts that will determine whether we ultimately prosper.

What do we bring to the table today?

Now, this column is called “Talking Credit.” Let’s do so for a minute, specifically.

Commercial lending is becoming an increasingly impersonal business. Is this good or bad?  If it’s anything less than good from the borrower’s perspective, what are we doing about the various components to improve the outcome? 

Many years ago, the railroads didn’t fully understand that they were in the transportation business so they lost a big segment of their customer base. How might this analogy suggest a different course of action for bankers today?  Could we, for example, be overlooking the value to the customer of our advice and information?

If we are properly used by our borrowers, they leverage up their businesses in part based on our experience, product knowledge, and community information.

If we’re smart, our customers become to us individual nodes of competitive intelligence as well as evergreen sources of business and business referrals.

Strange as it may seem at first blush, this doesn’t have much to do with size, leading me to conclude that we’re missing some very important perspectives.

It’s remarkable that we all live under the same sky but our horizons can be so different.