The pace of progress is quickening as we begin this, our second in the series of our history of banking as if it occurred in one week. But, it isn’t until 7:26 on Wednesday morning that the story of American banking starts to unfold. The actual date is 1741 and the problem is tight British control over the number of coins entering the Colonies. Americans are tired of relying on crop notes and barter, and decide to start banks of their own. The predictable response is a legal roadblock. The British prohibit banking and the experience sours many American Colonists on financial institutions.
This Wednesday of our banking week closes with a very significant American event, the end of the Revolutionary War. It is 14 minutes after midnight on Thursday before Alexander Hamilton establishes a federally chartered Bank of the United States over Thomas Jefferson’s strong objections. Yet the charter of the bank runs just 20 years and by Thursday evening it is dead.
In fact, when the U.S. Government needs to borrow $11 million to buy Louisiana – in our time sequence this 1803 event takes place at 9:29 on Thursday morning – no U.S. bank has enough clout to finance the deal. Fortunately, a British institution steps up to the plate. For America, Thursday turns into a very long night filled with the nightmare of the Civil War. Yet as Friday dawns, the United States enters a promising new day. The country is unified and state banks are flourishing. Though state banks in the South had weakened or disappeared, a rebirth has begun.
It is mid-day on Friday – 11:31 a.m. – when the National Bank Act of 1863 passes. The leaders on this Friday are men of integrity like Israel Lash, who launches the First National Bank of Salem (N.C.) to serve thrift-conscious Moravians, after it becomes clear that The Bank of Cape Fear’s Salem branch (Lash’s former employer) will not be part of the revival. Late this Friday morning, Alfred Austell founds one of the oldest banks in Georgia in his home. Though the Reconstruction Act absolved Austell from any obligation to redeem his former bank’s Confederate money, Austell depleted his personal fortune to exchange this money for gold, an act of faith his former customers clearly remember. As the National Bank Act strengthens federal control over banking and currency, Austell, Lash and fellow bankers are encouraged to make new beginnings.
Over the lunch hour that Friday, it appears American banking has finally gained a stability that has been very elusive during its first two days of life. At long last the nation has a uniform currency, gained primarily by taxing state-chartered bank’s notes, rendering them of insignificant value.
On Friday – the fifth day in our banking week – the nation is charged with great creative energy. Before Friday ends, Thomas Edison produces the first commercially viable electrical lamp and George Eastman markets his first box camera. Yet as Friday – and the first five days of modern banking history – draw to a close, surprisingly little has changed in the way banks operate. The Monday morning customers of Amsterdam Wisselbank would feel comfortable in the Friday evening banks of the United States.
However, there are blips on the radar screen that predict a storm of activity. For example, when transatlantic cable is laid in the 1870s – 3:43 p.m. Friday in our time line – some bankers realize they can take advantage of small price differences in New York and London markets to profit on arbitrage. This begins a much more creative time and one that evidences strategic innovations that will ignite a tremendous leap forward in the pace of change, yet one that also will elevate that risks and develop new challenges for the industry.
We will discuss those changes over the next few weeks.
A few years ago, a well known and well respected bank CEO observed that in today’s world three years of change seem to be compacted into every six months of banking history. I hardly ever disagreed with him, but in this case I believe that his compression idea is on target but a little too conservative.
After meditating on the observation, I thought it might be interesting to try to condense the history of modern banking into a single week—a mere seven days. While daunting, I think it will depict just how much has happened in a relatively short span of time. For the next few months, follow along with me as we review the 7 short days of the week and the evolution and the rapidity of that change. In this context, banking as we know it has developed within the last hour. And, in the next few minutes, banking is almost certain to be changed beyond recognition by profound technological, economic, political and cultural changes buffeting our business. Today, it is not change, but the pace of change that is unique and creates banking challenges of a new magnitude. Creative strategy becomes a necessity, but difficult to tackle.
So, to depict how history’s pace has quickened, try to measure banking events in terms of one ordinary Monday-through-Sunday week. The first day of this week – a Monday – marks the arrival of modern banking, while the latter part of Sunday represents 2009, the 400th anniversary of modern banking. We will have just gone to bed when the first four years of the next century begins – and what a beginning! For this exercise, the first minute of Monday – 12:01 a.m. – is the year 1609. It is when the Amsterdam Wisselbank opens its doors – an excellent beginning for our modern era.
Of course, many aspects of banking predate 1609 and set the stage for our four century banking week. But the banking week we have defined is more than adequate to demonstrate the accelerating pace of change. On the Monday modern banking arrived, Shakespeare was busy writing sonnets, trade was flourishing and the merchant class was on the rise. The Amsterdam Wisselbank opens with a broad charter – to accept deposits and bills of exchange, transfer payments among customer accounts, mint coins and lend money. This institution thrives for 200 years – about 4 days in our compressed time capsule.
Throughout the wee hours of Monday morning, growing numbers of English goldsmiths who safeguard customer deposits discover that owners never demand more than a fraction of their reserves in payment. So they gain more and more confidence about using promissory notes to lend on deposits. These goldsmiths’ paper certificates serve as currency, increase the money in circulation and fuel economic expansion. One might say that their strategic vision was to enable customers to build businesses through providing credit and thereby enhancing profitability. It is now a short step to a bank check. The first check is written at about 9:00 Monday night. This 1659 check evolves from the practices of British institutions that specialize in mortgages and legal services. Adding additional products and services has already begun.
By the end of the century –2:13 p.m. Tuesday, London has become a major financial center and the Bank of England has begun to serve as a role model for central banks. Next time we will see what Tuesday evening and part of the rest of the week brings as the pace of progress is beginning to quicken.
At the end of last year we emphasized how strategic planning is critical for the survival of banks in the future, no matter how hazy the road to the future may be currently. Let’s drill down a little further.
Thinking strategically requires creative leadership—the ability to develop, sell and cultivate an idea from inception through implementation. Executives who want to lead their institutions as they build strategic plans must add varied skills to their management repertoire, especially skills as teachers and leaders.
Dynamic change is part of any good strategic plan
Strategic planning is a job that never ends. Because the environment and competition often prompt base assumptions to change, strategies need to be revisited at least every 12 to 18 months. Even if major tenets remain constant, strategic plans still should be reassessed periodically. Questions that bankers should ask themselves touch on internal attitudes as well as the outside world:
What have we done successfully?
How has the competition reacted?
What is different in our environment?
Should we continue on our current path or make changes?
Are any failures due to poor strategy or poor execution?
Obstacles to Success
The road from strategic planning to success may not be completely smooth. But, if executives are alert to common roadblocks, they can steer around them with as few serious detours as possible. For strategic planning to succeed, a CEO must view the process as an ongoing commitment and not an exercise to satisfy regulators. Strategic planning is a process, not a sheaf of paper.
Poor communication between an institution’s management and its board can present problems. If these two groups do not have a shared vision and are pulling in different directions, strategic planning has little chance of success. The secret is to engage both groups in the earliest planning sessions. Elitism also represents another common obstacle. In an elitist planning mode, a CEO and one or two top people may complete a strategic plan without involving any of the individuals who will actually execute it. This approach is fraught with peril. First, the planners fail to get input from people who often know far more than they do about operations, customer attitudes or competing products. Second, if middle-level managers do not play a role in developing strategy, they have little personal investment in its outcome.
A putting-out-the-fire management style can create other difficulties. In this case, the institution’s CEO and board may eagerly invest time in developing a strategy, but quickly lose interest when it comes to monitoring progress and overseeing implementation. As soon as the first crisis comes along, interest is diverted and planning is forgotten. A management team does not have to go through many planning-to-oblivion cycles before it loses complete faith in the process.
Strategic planning does not and cannot forecast the future. We have already acknowledged that while the road to the future is hazy, there is hope down the road. Planning cannot predict the exact time a quake might hit your institution, or the size and duration of the tremor. Accept the fact that you will make wrong decisions as well as right ones.
While strategic planning is not infallible, it will help you learn your institution’s strengths and weaknesses and how your resources can be marshaled to survive and thrive. Strategic planning strips change of its power to frighten and immobilize management. It offers executives the power and the skills to harness the energy of change as an engine of creativity.
Last month we discussed the alarmingly similar events and reactions that occurred in the periods of 1988-1992 and 2008-2012. Yes, strategic planning is perhaps needed more today than at any time since the 1980’s; however, the challenges are daunting, and the road ahead has gotten hazier each day.
The road has gotten hazier
The good news is that for the banks and bankers who stick it out and survive over the next five years, the future does look bright because the very pressures bankers feel today will eventually and inevitably squeeze out lower performing banks enabling a return to rational pricing. It is going to take some time for this to occur, but the path appears set.
A wise banker said recently, “there is a long way to go, and the journey has just begun.” Well, just how long is that journey and just what is the future? The regulators have given us a peak into their minds. Here is some of their thinking:
The core deposit franchise will need to be nurtured and managed
An efficient, lean operation will be critical
Capital management will be essential
Sound strategies will be critical
Good financial skills and in-market knowledge will be required of Boards
Credit and Operational risks will be equally challenging
There are a litany of challenges and issues that will need attention for the future. But, any way you slice it, making money in a prolonged low-interest rate environment, providing a decent return to your shareholders, dealing with over reactive regulations and returning to good old-fashioned fundamentals are the underpinnings of success in the future.
Strategic planning is not a panacea, but it is critical to survival. As we stated before, good planning establishes objectives to achieve desired future results. Though it cannot forecast the future, strategic planning does attempt to look at future possibilities so decision makers can rationally choose between courses of action that involve risk. Strategic managers are proactive managers. They tackle questions of structure and focus so they are prepared long before seismic activity is sensed.
That is what some bankers thought when their institutions began to suffer the first shocks of a quake that started rattling the financial industry in the mid-1980s. These bankers figured that if they just hunkered down and minded their own business the tremors would subside.
Bank Failures Since 1979, Source: SNL Financial and FDIC Number of Failed Banks in 2012 is annualized based on 23 failures as of 5/1/12
Instead, many banks – and bankers – vanished. From 1988 to 1992, the U.S. banking industry witnessed more bank failures than ever before, especially in any comparable five year period.
The reasons were complex. Massive change hammered the industry. New banking laws and regulations altered how financial institutions could do business and increased base-line costs. For banks that were already on shaky financial footing, new capital requirements dictated cutbacks and/or injections of hard-to-find investment dollars. The debut of interstate banking intensified price-cutting campaigns to win market share, and margins began to shrink.
Sound familiar? It’s de ja vu all over again! “Same events, different time.” The earthquakes returned in 2008, and the financial world began to come undone once again.
For survivors of repeated quakes, reality has arrived. If we hope to retain our jobs and help our institutions withstand external pressures, we had better prepare for life in an earthquake zone. Strategic Planning is needed today more than any time since the 1980’s. Through strategic efforts, banks can intelligently re-engineer their institutions to gain the resilience and strength needed to absorb shocks – and even expand – in our unstable economy.
Strategic Planning is extremely challenging in this environment, since it requires looking at the future and making assumptions. Today, about the only given is that more massive change lies ahead. Yet, an outline is emerging of the future that banks will face. Over the next four or five months, we will comment on dealing with specific trends.
The plan is never finished. Strategic Planning is a process that never ends. Banks should revisit their strategies every 12 to 18 months. Bankers should ask these questions to reassess internal attitudes and the outside world:
What have we done successfully?
How has the competition reacted?
What is different in our environment?
Should we continue on current path or make changes?
Are any failures due to poor strategies or poor execution?
For strategic planning to succeed, management and the Board must view the process as an ongoing commitment—not an exercise to satisfy regulators.
Management and Board must reach consensus. Poor communication between a bank’s management and its board can present hurdles. If these two groups do not have a shared vision, strategic planning has little chance to succeed. Therefore, it is crucial to engage both groups in the planning sessions.
Many voices must speak. A CEO and one or two people may complete a strategic plan without involving any of those who execute it. The plan will be impractical, and managers will have no personal investment in its success. Banks should search for ways to let employees share in the rewards and risks inherent in the development of strategic plans. This may mean rewarding performance using bonuses or incentives, stock plans and other alternatives to pure salary.
Strategic Planning Cannot Predict the Future
Follow-through is essential. A frenetic management style can create difficulties. The CEO and board may eagerly develop a strategy, but lose interest when it comes to monitoring progress and overseeing implementation. As soon as the first crisis comes along, they forget about the planning.
Power to harness change creatively.Strategic planning cannot predict the future. You cannot predict exactly when a quake might hit your institution—or its size and duration. With strategic planning, you can make wrong decisions as well as right ones. But strategic planning will help you learn your institution’s strengths and weaknesses and discover how your resources can be marshaled to help your bank survive and thrive. Strategic planning strips change of its power to frighten and immobilize bankers. It offers executives the power to harness change creatively.
Two of the current challenges in banking are 1) Gaining Efficiencies, and 2) Utilizing Technology to improve delivery channels. Some strategies are more complicated than others in terms of how to address these two challenges. However, some are more straightforward than you might think.
Tom Brown has made an interesting appraisal of the need for a big branch network in today’s banking world: “Did you see earlier this month that, to cut costs, a couple of banks in the Midwest announced they’re shutting down some of their under-performing branches? Good for them. I’m just surprised more banks aren’t doing the same thing.One of the more pressing—and least-talked-about—issues facing the banking industry is the question of what the heck banks are going to do to contain the costs of their sprawling distribution systems, particularly their branches. Even before the passage of Dodd-Frank added new financial burdens to the industry, branch networks were set to become a serious money pit. First, alternative delivery channels, from ATMs to on-line banking, are cheaper and more convenient for customers. (The newest innovation set to go mainstream, remote deposit capture, will dispose of the final rationale for many more bank customers to ever visit their branches at all.) As it is, in-branch transactions have been declining for years. By many measures, the numbers are truly tiny. For example, the typical branch generates just 20 new demand deposit accounts per month. Yet the industry remains wildly overbuilt, thanks to the branch-building boom that took place during the middle of the last decade. Many of these newer branches (along with marginal legacy branches) are burning cash. This can’t go on forever.
The economics of bank branches vary broadly and can change depending in the level of interest rates, but a good rule of thumb is that a branch needs to have $40 million in deposits to be profitable. If that’s so, a huge number of the country’s bank branches are money losers as it is—and many more will be once interest rates start to rise from their ultra-low levels and savers pull their deposits to seek higher yields elsewhere. Some banks have done what they could to bring branch costs down—by cutting staff, for instance. But in many cases, that won’t be enough. Managements who think they can magically make their most marginal branches profitable are kidding themselves.
Yet despite the challenges branches face, the bankers I talk to seem to be dealing with the problem by basically not thinking about it. Too many apparently believe it will go away by itself. Which is why I think it’s great that Independent Bank Corp. and Old National are proactively recognizing that they have a problem, and are doing something about it. For further discussion about this issue, click here and give me your contact information on the form that pops up.
New technology (and poor prior branch-opening decisions) are making branch banking in its current form untenable. The sooner banks tackle the problem, the better.”