Bank of the Year: USAA

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It looks a bit like a doorbell that has yet to be installed, or perhaps the most rudimentary remote control you've ever seen.

It's a small, unadorned, blue and white device that features a single button. You can place it in your car, beside the bathroom sink, on top of the microwave, wherever you want. If you press the button once a day, $1 gets transferred from your checking account into savings. Press it a second time, and you transfer an additional $2.

The Saver Button is an experiment by USAA, meant to encourage its customers to set aside a little money each day. The idea is to make savings a habit, like brushing your teeth or washing the dishes. Rather than relying on reason — "Let me explain why saving is good for you" — the button is an attempt to engage the instinctive part of the brain. It's an appeal to the inner toddler in all of us.

"You see a button, you want to push it," Vikram Parekh, a USAA executive who is running the trial, explained.

USAA, the military-focused banking and insurance conglomerate, is testing the Saver Button with hundreds of its customers this fall. The company is tracking where users place the buttons and how often they press them.

If the experiment is deemed a success, USAA might eventually send a Saver Button to everyone who opens a bank account. And if the devices wind up in junk drawers, the failure will happen quickly and without rancor, and the folks who volunteered to test the buttons will have a quirky souvenir to keep.

"Will it work? Will it not work? I don't know," Parekh said.

USAA is fundamentally different from other large banks, and the Saver Button study illustrates two key reasons why.

First, the experiment demonstrates the company's commitment to improving the long-term financial health of its depositors. Banks often pay lip service to this concept, but USAA does far better than most of its competitors in aligning its interests with those of its customers.

Second, the Saver Button experiment is an example of USAA's nimble, failure-is-not-a-dirty-word approach to innovation. The San Antonio-based company has embraced internal processes popularized in Silicon Valley in an effort to keep up with the rapidly evolving expectations of its customers.

USAA stands out in other ways too. The $144 billion-asset company, which serves only current and former members of the military and their families, elicits unusually strong loyalty from its customers (or "members," as it likes to say). Long a pioneer of operating without a large branch network, USAA now stands on the leading edge of the digital banking revolution.

Traditionally, American Banker names a Banker of the Year, an honor that gets bestowed on a single individual. But USAA has a corporate culture that — much like the U.S. military — eschews stars and celebrates teamwork. And it has earned the more fitting distinction as our Bank of the Year for 2016.

Yes, Sir, Lieutenant

USAA was founded in 1922 by a group of 25 Army officers. Automobile sales were soaring, and military men were having trouble insuring their Model Ts and Studebakers since they moved frequently from base to base. The officers gathered at the Gunter Hotel in downtown San Antonio and formed their own insurer, which was originally called the United States Army Automobile Insurance Association.

"Nobody would insure them, and so they got together and insured each other," said Carl Liebert, USAA's chief operating officer.

The company's formal name was eventually shortened to United Services Automobile Association. Over the years USAA grew to be the nation's 22nd-largest financial holding company. Its membership ranks were expanded beyond just officers, to include all current and former members of the military, as well as their spouses and children. Today the company has 11.7 million members.

Despite all the growth, USAA has retained the same basic ownership structure — it remains privately held, which protects against the quarter-to-quarter mindset that often drives decision-making at publicly traded companies. And members continue to share in the profits. Last year USAA insurance policyholders received roughly $1 billion in dividends and other distributions.

USAA got its banking charter in 1983. And even in its early years in banking, it never operated a big branch network. Members often made transactions using the company's toll-free phone number.

A geographically untethered bank for members of the military filled a real niche — service members were still moving frequently in the 1980s, just as they did in the 1920s, so they had little reason to open accounts at locally based institutions. And USAA worked to become indispensable in the lives of its members.

An important part of the formula was, and remains, a demonstrable respect for its members. USAA's advertising carries the tag line "We know what it means to serve." At the company's sprawling headquarters, American flags are everywhere. During a recent visit, preparations were underway for events marking Oct. 13 as the birthday of the U.S. Navy.

Roughly a quarter of USAA's 29,000 employees are either former members of the military or their spouses. That list includes Chief Executive Officer Stuart Parker, a former Air Force combat pilot who says the company — having been founded by people in the military for people in the military — is on a mission to understand its members' needs and to work to meet those needs.

"We put our members first," Parker said. "They deserve nothing less than our absolute best."

USAA's new employees get trained on certain basics of the armed services, including the phonetic alphabet — Alpha, Bravo, Charlie, etc. — which they may hear during phone calls with members.

Call center representatives in San Antonio greet members by their military rank if that is how their profile says they prefer to be addressed. Inside the company, employees joke about the proverbial 80-year-old retired military officer who calls USAA just to hear someone greet him as "Lieutenant."

"Our members would tell you USAA is their company. I've had 60-year members put their finger in my chest — not negatively, but they'll say, 'Sonny, what are you doing with my company today?'" said Greg Pratt, a military-affairs relationship director for USAA. "They feel that the company's been good to them for so many years; they want to know that we're still taking care of it."

Customer-experience metrics back up that assertion. A recent report by Temkin Group found that USAA's members are more likely to recommend the company to a friend or relative than customers of other big banks and even credit unions.

USAA recorded a net promoter score of 62 for its banking business — higher than any other bank studied, and 30 points above the industry average. USAA's scores also were ahead of highly respected consumer brands like Apple, Amazon and Trader Joe's.

"I think a strong customer focus is ingrained in the culture of the organization," said Bruce Temkin, managing partner of Temkin Group.

USAA's culture is especially notable in light of the scandal at Wells Fargo with creating unauthorized customer accounts, Temkin added. "Banks need to be more explicit about their culture, and make sure that they align their organization around serving customers, not squeezing out every possible ounce of profit."

'Don't Goof Our Members'

Jamie Warder has the perfect résumé for a USAA executive. A West Point graduate, he spent five years as an Army tank and cavalry officer before enrolling at Harvard Business School. Then he did stints at the consulting giant McKinsey & Co., PNC Financial Services Group and Capital One Financial, before being hired to lead USAA's banking business in January 2015. He remained in that role until Nov. 22.

Warder carries himself with an informality that is at odds with any preconceptions one might have about an ex-military, Ivy League-educated banker. He brings a backpack to work. He jokes that when USAA was looking to hire a former military officer with the credentials needed to head its retail banking operation, the company had an extremely short list of candidates from which to choose.

That assertion draws a laugh, but Warder insists on self-deprecation. "I'm honestly not trying to pretend [to be] humble," he said.

On a recent fall day, USAA was holding an internal event where Warder and a few other executives offered feedback to employees who were making presentations. The bigwigs wanted to put the presenters at ease, so they decided to wear costumes. Warder dressed up as shock jock Howard Stern.

Later that day, after shedding the long black curly wig, Warder sat down in his office for an interview. Only hours earlier, the news had broken that Wells Fargo CEO John Stumpf was resigning amid the scandal there.

Warder said that before taking the job at USAA, he figured that the company's key competitive advantage was its low expense base, which stems from the fact that it does not have a big branch network. But over the last year and a half, he concluded that USAA's real secret sauce is its mission, which focuses on facilitating the financial security of members.

"Just like Wells' culture was cross-sell, our culture is member first, mission first, always," Warder said. "If you really boil the mission down, it's just, 'Don't goof our members,' just, 'Do right by our members.' "

There are lots of examples of that philosophy in action.

USAA's checking accounts do not include monthly service fees. Variable interest rates on credit cards start at a rock-bottom 7.15%.

USAA does not charge overdraft fees on debit card transactions. It's exploring the concept of real-time overdraft, which would give users the option to pay an overdraft fee before completing a specific transaction, in much the same way that out-of-network ATMs users are asked whether they want to accept a fee.

"We're not driven by more profit or more revenue," said Paul Vincent, senior vice president of bank operations and direct channels at USAA.

USAA has proven willing to invest in projects that may benefit its members even if they will not have a short-term financial payoff for USAA. An example is the company's efforts to encourage members to save more. Roughly a third of USAA's members live paycheck to paycheck, and the company is investing significant resources into figuring out how to get them to save more. The Saver Button is one experiment, but others are in the works.

Anne Arvia — who has been named the interim bank president until a permanent replacement for Warder is chosen — said that when she joined the company, she was astounded by the extent to which the corporate culture was biased in favor of helping customers. "This bias is what the success of USAA is," said Arvia, who had been USAA's senior vice president of primary banking before the interim appointment. A USAA spokesman declined to give a reason for the leadership change, saying only that Warder is no longer with the company and that his departure is unrelated to bank operations.

If the U.S. banking industry is looking for an antidote to the reputational hit it has taken from the Wells Fargo scandal, USAA's compensation scheme could provide a useful model. The company does not grant incentive pay based on a particular employee's performance; instead, everyone's bonus is based on a single score that's generated for the entire organization.

But Warder said that when it comes to doing what's in the best interest of the company's members, there is room for improvement.

Even though employees' pay is not linked to their own sales, the sales performance of individuals does get tracked internally at USAA. In the future Warder envisions USAA doing away with that tracking.

He wants employees to have no reason to care whether a customer chooses a USAA product or one from a competitor, which might be offering a better deal. "I want to get to the point ... where our employees are absolutely, completely, 100% indifferent," he said. "I think we can get to the point where we don't even have to track it, we don't even talk about it."

The Tweaks Never Stop

Inside a big church hall across town from the company's headquarters, scores of USAA employees are huddling in front of dozens of large posterboards. There are baked goods to munch on. The room looks less like a corporate setting and more like a seventh-grade science fair.

This is a quarterly exercise known as "big-room planning" — an opportunity for teams of USAA employees to map out, in fine detail, how they will spend the next three months. The idea is that if everyone spends a few days planning under the same roof — not just business people, but lawyers and information technology folks too — everyone will save time later on.

USAA is adopting a so-called agile framework for developing software, and big-room planning is part of that effort. The basic goal is to act more like the nimble fintech startups that are trying to take USAA's customers.

"I think the world has changed," Warder said. "It's, 'How easy are you?,' 'How fast are you?," 'How do you compare to Amazon and Netflix?' Not how do you compare to other banks."

There is a lot of talk on USAA's campus about the need to focus on user experiences, rather than products. To that end, the company has identified 250 discrete banking "experiences" — depositing a check through a mobile phone is one example, and making a credit card payment is another. One midlevel executive gets put in charge of continually improving each experience and is given the resources to make that happen.

The goal is to create an endless process of tweaks based on the needs and preferences of users. One recent example involved making improvements to a feature inside USAA's mobile app that allows customers to temporarily block the use of specific debit cards and credit cards. Once the changes were made, the functionality was no different, but the customer experience was simpler and more straightforward.

"The notion of a project that has an end sort of goes away," said Chris Cox, USAA's vice president of digital strategy and operations. "We never stop working to improve those member experiences."

USAA's focus on innovation has allowed it to lure top digital talent away from much larger banks. In August the company hired Heather Cox, who had been the CEO of Citigroup's FinTech unit, as its chief technology and digital officer.

Emmett Higdon, director of mobile at Javelin Strategy & Research, said that USAA is competing directly with the largest U.S. banks, which are investing heavily in their mobile apps, and is more than holding its own.

He said that USAA is on par with the megabanks with respect to digital banking functionality, but has an edge in user experience. "When it comes to how satisfied their customers are with how they deliver that functionality, USAA is often head and shoulders above the top five banks," Higdon said.

But Can This Model Be Copied?

USAA has certainly had missteps. In September the company announced plans to close 17 of its 21 financial centers across the country, reversing a physical expansion that began in 2009. Executives attributed the decision to a shift in customer preferences toward digital channels.

In the mortgage business, USAA has struggled to adjust to the post-crisis environment. Before the financial meltdown, the company did not require mortgage applicants to provide full documentation, according to John Harrell, its vice president of mortgage product management. That became a problem when the Dodd-Frank Act brought a slew of new requirements.

In mortgages, "our service levels have not really been up to standard — the USAA standard," Harrell said.

USAA embarked on a process of rebuilding its mortgage business from the ground up in 2014, and Harrell said the effort is starting to pay off. "We've been on defense for two years," he said. "Now we're going on offense."

Its regulatory challenges are not limited to the mortgage business. Warder said that USAA is just like other banks that need to evolve in the face of changing regulations.

"I don't see us as being ahead of the industry," he said. "We've got problems and headaches as big as any bank our size out there. We're fighting the fight every day. We're making mistakes. We've got to get better."

But even if USAA looks like other banks in some ways, overall it is something of an odd duck — a membership-based, privately owned institution that has $77 billion in banking assets but does no commercial lending.

There is no doubt that USAA's business model is working from a financial standpoint. USAA Federal Savings Bank, which accounts for the bulk of the company's banking business, has doubled its assets over the last six and a half years. And compared with all banks with more than $10 billion in assets, it has recorded a higher return on equity for 34 consecutive quarters.

So here's the big question: Is USAA's strategy replicable?

Steven Reider, founder of the consulting firm Bancography, has his doubts. He notes that USAA relies heavily on affinity-based marketing, much like credit unions do. Other banks have tried that approach — Amalgamated Bank, which is known for its ties to unions, is reaching out to political progressives — but none have found as much success as USAA.

"I see that as nearly impossible to replicate," Reider said.

USAA's Warder argues that it is possible to find success in banking by mimicking the critical ingredient of the company's formula: the focus on its members' financial well-being.

Banks that have a reputation as places that look for ways to nickel-and-dime their customers will have a hard time overcoming those negative perceptions. Warder urges patience.

"You can't declare tonight I'm going to be, you know, the trusted bank," he said. "I think it takes time and history."

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