Are you willing to risk it?
The world of banking, in many ways, revolves around risks. Credit Risk, Interest Rate Risk, and Regulatory Risk just to name a few. A great amount of time and effort is focused on these various risks and for good reason. However, there is one major risk to all banks that is especially critical to community banks. Amazingly, this risk is pretty much ignored by 90% of community banks. This risk is known as “Reputational Risk”. Reputational Risk costs the typical community bank about 10% – 20% net income each year. The loss of this income puts increased and undue pressure on the other risks within the bank. Margins are tight enough with most community banks. Any banker who leaves this amount of money on the table because he’s too cheap to manage the risk or too lazy to care, should be committed. Reputational Risk is generally centered around two keys factors… The customer and the employee.
The Customer Reputation
We rarely come across a community bank that doesn’t claim to provide far better service than any larger competitor. Unfortunately, many of these banks believe their own claims with absolutely no proof and in our experience about 90% of them fail to live up to those claims. Just because you say it, doesn’t make it true. If you’re not tracking the claim, you’re most likely risking your customer reputation. Here are three areas to assess.
- False advertising – Take a look at your brand statement, especially the one listed on your website. Are you living up to the brand? Do you have any way to prove it? The answer to both of these questions for many banks is… No. Most just feel or think they’re living up to the brand, while having no clue of the reality. Net income doesn’t include feelings, it measures results. If you’re not conducting phone shops on a regular basis to confirm your level of service, you are at risk.
- Our worst for our best – Ever hear of new money rates? Not only do most bankers know of this “marketing” strategy, many are actually doing it. We’re not knocking special CD rates to drive in new business when needed, but we are knocking those who do this at the risk of offending their loyal customers. More banks are more worried about repricing deposits and loans than the risk of redirecting the business of loyal customers to a competitor. The best banks establish a reason to call program to inform their advocates that they will receive ten basis points over the latest CD special being offered to new customers.
- What competition? – Most community banks think they offer better service than the big banks. Our research shows that only 50% meet this standard and that’s simply ridiculous. Sadly, even fewer banks meet a customer service standard that stands out enough to overcome the many advantages our larger competitors have. To those community banks not making the customer experience a priority and not measuring that experience, we wish you well! Good luck in competing with the big banks on price, budget, and technology.
The Employee Reputation
Most community banks say they love their people. Many say they treat employees like family. That all sounds good, but does your bank have a reliable way of knowing if the feeling is mutual? Maybe the bank’s leadership and management say these things, but do the employees believe it? Your bank’s reputation with its employees is critical to the engagement level of your best people. The best employees generate the vast majority of your business and profits. The 80/20 rule applies in this case… 80% of your profits come from 20% of your people. Your best new employees are generally recruited through your engaged people. Employee reputation is critical to success and is something you don’t want to risk losing. Here are three areas of risk.
- Do as we say, not as we do – Many leaders and managers want their teams to cross-sell bank products, but just because you may be a senior executive doesn’t mean you’re exempt from the process. Are you a leader who expects one thing and does another? Once a bank or leadership earns this reputation, it’s very difficult to overcome.
- Actions not matching philosophy – If the bank’s philosophy is focused on advocacy by treating and giving your best customers the best service and pricing, then the philosophy should stay true to your best employees. Your best people deserve the best treatment. All employees are not alike and should not be treated alike. At the same time, be fair and respectful to everyone. With that in mind, the commercial lender with an $80 million book of business should certainly be treated differently than the lender who’s been with you for 5 years and has just surpassed the $7 million threshold. If not, you’ll risk losing your top producer to a competitor that appreciates her. Not getting this concept will quickly move you from the area of employee risk to the land of sheer stupidity.
- Revolving door of programs – If you’re constantly changing from one sales idea and program to the next on a monthly, quarterly, or even a yearly basis, then you’re losing credibility. Sometimes old programs and ways of doing things need to change. That’s where SCMG generally comes in. But when you start a poorly thought out, destined for failure call program which ends in three months, you’ll lose credibility. Remember that mail campaign for that new product, with that special price, for those unique customers, guaranteed to add 20% to net profits? What ever happened to that? We know you know what we’re talking about. Revolving doors increase the risk of failure each time a new program enters and exits. The best programs are never the easiest and all require a process of implementation which includes training, tracking, and recognition. There is no silver bullet.
The risk is real, don’t risk it!
Banks know risk but far too many ignore the Reputational Risk. Don’t roll the dice with your reputation. It deserves the same priority as any other risk within your bank. Those that give the same importance, effort, and diligence into managing this risk as they do the others are the same banks with ROAs above 1.0 (1.5 for Subchapter S corps) with strong demand deposit and loan growth. The risk is real and must not be ignored. Up to 20% of your net income is on the line. Don’t risk it.
