I recently asked a CRO whether he was indeed "chief risk officer." "No," he said, "I'm chief revenue officer." What a shock! But, of course, his company was not a bank. Banks staff up and assure high-level leadership for risk, not for revenue.
Is Citigroup CEO Michael Corbat focused on the top line? He's not rushing out with announcements about improving it, as he is about cost cutting. American Banker harbors a Risk Doctor, no Revenue Doctor. That can't be because "A doctor comes to help the sick, not the healthy." Bank revenues are sick.
When a bank or product line comes under profitability pressure, the knee-jerk expedient is to reduce costs and eliminate unprofitable customers, products, or (last resort!) branches. But the total profit impact of eliminating such losers is small. (Trimming the balance sheet to improve risk-adjusted return makes much more sense.)
Maybe banks' constantly increasing outsourcing reflects charter-value fractionation, and a death spiral, where more and more revenue is passed through to providers of standardized, minimum-value services.
You achieve sustainable growth only by increasing revenues. Banks either don't focus on this, or they approach it unrealistically.
This is exemplified by Bank of America's recent cancellation of announced increases in checking account fees. You can seldom increase revenue profitably just by raising prices. Before that, the same bank had announced fees for a previously free service — debit cards. That's the second most obvious, typically more foolish, way to generate more revenues. This didn't fly either, and was rescinded.
When banks do at least talk about gaining revenues, their initiatives often reflect magical or counterfactual thinking. The CMO of a megabank recently told American Banker that her bank aspired to be "a trusted advisor" to consumers, providing "advice on very important life decisions such as businesses and education … to help them make a good choice."
Customers pay in total very, very little for all kinds of financial advice, compared with what they pay for transactional, funds management, deposit and borrowing services. So, what this bank must have in mind is that after gaining affluent consumers' trust, it will offer "good choices" that entail buying the bank's own products — not advice such as "choose Cal, it's a great college" or "feature free shipping and raise your prices a bit."
Problem is that this very strategy has been pursued in infinitely varied ways for most of the last 50 years by this same bank, among others. It has never worked, and it won't work. Any more than Charles Schwab's going into banking cut any ice — though Schwab is a far more effective marketer and has built a very strong business on customer trust.
When banks acquired retail investment firms, the synergy was approximately zero. Would Wells Fargo or JPMorgan Chase do much better if they owned Merrill Lynch? They knew they wouldn't, so a greater fool had to be found. Leveraging affluent consumers' "trust" (if any) in bankers into managing these consumers' investments last worked well in the 19th century — for community bankers.
Here are a few examples of potentially more plausible revenue initiatives:
Although banks rhapsodize over wonderful opportunities to sell insurance, their attempts to sell protection actually relevant to banking services have been fiascos. Think credit protection, think force-placed homeowners policies — and meanwhile banks aren't effective in selling basic protection with mortgages and business loans. "Our banking officers just can't be made to think about these products and sell them strongly" is coupled with "we only talk to them if a banking officer has gotten them to call about insurance." And that's a bank with fervent belief in cross-sell.
Surely there are better opportunities to sell insurance. . But these require staffing, training, risk-taking. More expense to get more revenue — but this could improve the bank's efficiency ratio by generating commissions at low cost.
Another example: Mass-market customers predominantly obtain financial services inconveniently and expensively from nonbanks with high funding and location costs. Banks haven't been effective in offering them unsecured credit or even conversion of checks to available cash. At banks, "The customers we want are the mass affluent." That strategy has not brought increased bank profits and valuation. So, through nonbranch channels and with transaction-based pricing, mass-market customers make money for nonbanks.
Again, banks had to watch the exponential growth in prepaid cards for years before noticing the added consumer value of guaranteed-issue, immediately available bankcards. Just as, when money market funds began, and then Internet banking debuted, bankers couldn't imagine doing business with customers who never came into a branch to show their IDs.
This isn't even about innovation. It's about "Sorry, this is how banks do business." An increasingly outmoded way to do business.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian.