The Bankwatch

Tracking the consumer evolution of financial services

After the 2008 tipping point, banks need genuine breakout strategies, not incremental improvement

This is a must read for anyone interested in banks and banking.

The coming world of smaller banks | Frank Partnoy – ft.com

How many people does it take to operate a modern bank and how much should such a bank’s shares be worth?

With that simple question Frank kicks of the article by reciting the seemingly dramatic reductions in banking staff.  Yet he points out the markets reacted by driving down stock prices of banks.  Then comes the killer point (emphasis mine)

Bank analysts cite several reasons for share price declines, including litigation exposure, declining investor and consumer confidence and a faltering economy. But one overarching factor, which also explains the increase in lay-offs, is the declining importance of banks.

Banks are supposed to play only a limited function in the economy. Historically they just match lenders and borrowers. Most banking activity – lending, underwriting, mergers, sales, trading and wealth management – revolves around the allocation of capital. But over time, banks have expanded into riskier and more complex activities, including structured finance, derivatives trading and regulatory arbitrage, which can allocate capital in distorted ways. But even distorted capital allocation is still capital allocation; for better and worse, that is essentially what banks do.

He goes on to compare technology companies such as Google, and Apple, and even refers to hedge funds all of whom attack problems strategically and not by throwing people at the problem.

He concludes by noting that whereas companies are broadly in business for the benefit of shareholders, banks have lost that and are in business for the benefit of employees.  Ouch. 

… although banks are supposed to be exemplars of capitalism, during the previous two decades, bank employees have consistently won the labour-capital battle. As banks expanded, employees extracted most of the gains, like professional athletes demanding their teams’ profits and leaving owners with paltry returns, or even losses.

The year 2008 was a tipping point for banks, exemplified by the sight of those bank leaders paraded before Barney Frank and Congress like errant schoolboys.  There has not been a better time for banks to get radical and break out of the current mould which results in all banks looking identical. 

Potential examples:

Thought experiment:  As a top tier full service bank, do we need …

  • a brokerage – typically the least loyal of banking groups, there is less correlation between banking customers and brokerage than one might expect
  • a derivative trading desk – if you need to hedge then purchase from someone else.  Why carry the employee overhead and counterparty risk?
  • technology system developers & project management – yes … eliminate all system development, and project management.  Retain only the staff that are needed to maintain the current systems (perhaps 25% of current technology team).  Concurrently hire some new developers all under age 30 and many under 25.  Begin with a small team and work out from there.  They will build new systems using modern languages because that is what they know.  They will be able to connect to the old systems but will treat them as the black boxes they are and  graduate functionality and smart decisioning algorithms to the new front end.  Remember you cannot get there (modern internet platforms) from here (legacy and disparate systems).  Time to cut the cord.
  • branches – the largest use of employees.  Time to get serious about banking online and move certain functions online.  Why open any bank accounts in branches.  It is a 1 hour exercise and one of the most labour intensive activities.  There are ways to manage AML activities online and automate those functions.
  • loans officers – eliminate loans in branches and route to credit card division?  Automate personal lending and manage online only?
  • ABM machines – enormously expensive and labour intensive to run.  Could be outsourced.
  • flagship head office branches – today you can fire a missile through most and be unlikely to hit anyone except the bored staff.

Relevance to Bankwatch:

The message here is that incremental reductions of 10% here and 15% there are patchwork solutions designed to reduce expense run rate, and assume the remaining staff will pick up any slack.  Once you get over the pride hurdle of managing a full service bank that must have all the same departments that the competition does, frees up thinking to dramatically reduce run rates and shift towards a leaner more agile institution. 

Coupled with that must be a resolve to shift to modern adaptable technology platforms. I am aware of one bank that is thankfully rolling out a new upgrade to its commercial banking online platform this month (buzzwords removed to protect the innocent).  The big news is that this is a shift from a DOS based platform to windows .. wow! 

Banks for too long have been locked into large platform providers that have had a business model of aggregating providers over the last 15 years rather than providing simple break out web based systems that just work … online.  Give me a few Ruby developers over a monolithic bank technology division any day.

Written by Colin Henderson

August 11, 2011 at 08:47

Posted in Uncategorized

3 Responses

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  1. […] The smart ones will seek to optimise customer and product acquisition using modern technology not building more old style branches.  Bank of America which came through the crisis the worse for wear is insisting it will not go to the market for additional capital, but rather is focussed on Project New BAC.  I will be surprised if that project is not something significant and some new thinking along these lines I proposed here. […]

  2. […] pick up on one of my favourites that I covered here recently. Finally, banks could move non core operations into industry utilities – a particular opportunity […]

  3. […] pick up on one of my favourites that I covered here recently. Finally, banks could move non core operations into industry utilities – a particular opportunity […]


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