For two decades, TCF Financial's business was built on attracting deposits with free checking and then raking in fees from those accounts. It worked well until the Durbin Amendment's clampdown on overdraft charges and interchange fees.
Needing to replace lost revenue, CEO William Cooper abruptly shifted strategies in 2012, and built out national indirect auto-lending and equipment finance businesses.
It was calculated risk, but today TCF is once again outperforming the industry. Its third-quarter earnings jumped nearly 30% from a year earlier, while its return on equity grew by 120 basis points, to 10.5%.
As the effects of the financial crisis fade, stagnant profitability has become the elephant in the living room. The 9.19% return on equity the industry earned in the first three quarters of 2014 was down slightly from the year-earlier period and remain far below the double-digit averages of a decade ago.
"Most banks are hunting for about four points of additional return on equity to get back to the wonder days," says Jim McCormick, president of First Manhattan Consulting Group. "But they're having a tough time finding it."
Do more banks need to take Cooper's lead and overhaul their strategies? Or can they be content with smaller steps adopting the latest mobile app or closing down a branch while waiting for loan demand and rates to rebound?
Extreme makeovers might work on reality TV shows, but it's a tough sell for an industry that always has been slow to change and, moreover, got burned so badly the last time it chased returns. "I'm not sure what 'radical change' would even look like in the banking industry," says Kenny Smith, leader of Deloitte's banking and securities practice. "What we're seeing is much more evolutionary than revolutionary."
To date, much of the post-crisis response at banks has been retrenchment. The industry's cost-to-asset ratio, at 0.81%, is about half of where it was in 2007, according to Deloitte.
The bigger problem lies in a revenue-to-assets figure that has fallen by 80 basis points over the same period. Banking's core lending and payments franchises are under attack by everyone from Walmart and Apple to crowdsourcing.
Even so, some banks are seeing less of a revenue drain than the industry overall, and their experience is instructive. McKinsey & Co., which has argued that U.S. banks need a new business model, has identified five "value-creating strategies," including "back-to-basics banking," "growth-market leader," and "balance sheet-light investment specialist," whose adherents have outperformed peers in recent years.
Fee-rich wealth management offerings have helped the likes of Bank of America and Wells Fargo boost wallet share. Others are capitalizing on vertical lending niches, such as technology, health care or energy. Strong performers like Signature Bank and First Republic Bank have built compensation systems processes to attract the top 20% of bankers who McCormick says are worth more than they're paid.
Technology can be an important enabler. Already, more banks are streamlining lending and other processes to improve service. "Giving a wealth advisor the ability to meet an affluent client with an iPad and get a financial plan approved electronically is radically different from a few years ago," says Fritz Nauck, a senior partner in McKinsey's banking practice.
Behind the scenes, many are investing in solutions to track and measure the customer experience important in a world where customers lack loyalty, can change banking relationships easily and are influenced by social media sentiments. "It's hard to make basic banking products look sexier, but you can make the customer experience a whole lot better," says Deloitte's Smith.