Community banks will have to make better use of existing resources to survive.
To bolster profits and returns, bankers must find ways to reduce fixed costs in areas such as branching and personnel. Increased use of technology, including more cooperation with fintech firms, could help as well.
That was the message from three community bankers — Jay Pelham, president of TotalBank in Miami; Deborah Cole, president and CEO of Citizens Savings Bank in Nashville, Tenn.; and Scott Goodman, president of Enterprise Bank in St. Louis — in discussions during American Banker’s Retail Banking conference.
Below is part 2 of an edited conversation on the challenges facing small banks today. (Read part 1 here.)
There’s a lot of fintech out there aiming to enhance the customer experience. Your thoughts?
JAY PELHAM: I think of analogies to department stores and retail where Macy’s and Nordstrom have areas where you can pick up your online orders. I think you will need to have all the technology tools available, but I think it will not be your primary delivery channel. The first thing I’m asked when we’re trying to onboard a new client is [the location of] the nearest branch even if they may never go into it.
DEBORAH COLE: It is amazing that they want to know where the branch is. But we have to be cautious about how much money we put into bricks and mortar in terms of monumental-type things. You have to have something available.
PELHAM: Even with the millennial generation, there is some percentage that wants to go sit across from someone and know who they’re dealing with when they get that condo. That way they know who to talk to when things go wrong with the home purchase.
SCOTT GOODMAN: We look at tech as an opportunity rather than a threat. There is a lot of innovation and creativity going on that would have a much more difficult time happening at a bank. It is extremely hard and takes a large investment. The fact is that fintech firms don’t have the compliance burden right now. They’ve got the funding, and the right amount of creativity will provide partnership opportunities. Banks still have the capital and the relationships. I think opportunity will come out of that.
PELHAM: I shop on Amazon, but I still go to stores where I can see and touch the shirt rather than click on it on a website. I think there’s a role for both.
There’s a growing realization that branch networks must be right-sized. Using the retailer analogy, department chains are also closing hundreds of stores.
PELHAM: It is not just about having the right number in your footprint. If I had a blank sheet of paper I would not open any branch that is as large as any that I currently have. They would probably be about the size of this stage. Sometimes you’re stuck with legacy locations that have 10 teller windows and huge parking lots. You just don’t need that anymore.
COLE: As we have looked at expanding, we have opened what I call boutique branches. They’re very small, and we put enough technology in them to make sure that millennials are curious enough to come in. We’re not going to go out and build a 4,000-square-foot branch anymore. That’s just not going to be the delivery channel we need as a community bank.
What does staffing look like in smaller branches?
COLE: I have one branch with just two people in it. That’s what we like to see in our satellite branches.
PELHAM: We average about 3.7 full-time employees in a branch. It is hard to run one with less than three people because of vacations and [daily breaks]. The big topic now is [local automobile] traffic and the transportation infrastructure that we don’t have. We have tried to encourage our commercial lenders to work from locations other than our headquarters.
COLE: We have to be very flexible with our people. I need to be able to move them around quickly. And I don’t need my credit person working out of the main office anymore.
PELHAM: You also need to find ways to get employees involved with processes. We just re-evaluated all of our checking account products. Do we have the right minimum balances and fees? Instead of just sending some project people to work on it, we got a dozen front-line people together and assigned them competitors [to check on fees and waivers]. They helped shape the new fee structure for all of our accounts. When you do that the employees feel engaged, and there’s ownership. It allows them to explain to customers that they did a competitive analysis [when discussing a higher fee].
What would you do differently if you were starting up a bank today?
PELHAM: I would probably look at the footprint, and I might have three to five strategic locations. They would all be very small. I would integrate technology, from a design standpoint, from the very beginning. At the executive offices downtown, there is a touchscreen at the desk that used to have a person that can connect you to someone in another part of the building. … I would implement technology like that from day one so you could run an office with one or two people. I would have flexible space, too, because you never know if it’s the mortgage person or the business lender that would need to be based there.
I would start with the person first. If I went to Miami Beach, I would find the right person for that market first and that would determine the location I would do. I’d have spread-out zones, small [branches] manned with few people, and a lot of technology.
GOODMAN: I think the brokered firms have this model right, where the branch supports the digital channels. … We’re not branch heavy because we’re focused on commercial. But in the ones we’re opening now, to fill in some gaps, we have interactive [IT management suites] that are centrally managed. You can talk face to face with someone, but they’re not in that branch. They’re supported by two universal bankers where you can have that personal interaction. The transactional activity is primarily handled online or through the ITMS.
COLE: I think human capital is so critical, having the right person and the right quantity in place. It is important to get individuals who are moving with technology. Embrace change and technology. … In opening new branches, you need to make sure can adjust the formation.
PELHAM: I am exploring subdividing some of my current offices now and either leasing out the space I don’t need or giving it away for free to a real estate firm so at least I’ve got people who are buying and selling houses coming in and out of the space right beside me.
How do you view the changing skill-set of your branch staff?
COLE: There’s so much you must know from a regulatory standpoint. When we look at people, we put the technology piece in there first. Then we also want to know if that person is capable of grasping and explaining the regulations. … It is a different skill-set for employees today compared to even 10 years ago.
PELHAM: As part of the revamping we did in 2015 we got rid of the title of teller altogether. Everyone in our branch is a relationship banker. Everyone is cross-trained. That works most of the time, but sometimes you have some challenges with someone who has been with the industry for some time who feels that working with the cash drawer is beneath them. They feel demoted so you must be sensitive to how you manage that.
GOODMAN: We have transitioned from training at each branch to centralized training. I think that is critical if you’re going to have the flexibility of universal bankers they all have to be trained in the same way. That allows you the flexibility to put them in alternative branches.
COLE: We stopped using the title teller, also. We call them financial service representatives.
How are you changing incentives?
GOODMAN: My answer would be slowly. For so long our branches were about service. Know the client. Take care of them well. Sales weren’t really part of the vernacular. Our branches were primarily servicing our commercial clients. Our commercial bankers were heavily incented to grow and to sell. But that’s changing and evolving. We’re having conversations about accountability. We implemented Salesforce [customer relationship management software] a while back, so now we have the visibility to see what they’re doing. We’re easing them into conversations about introducing the client to other opportunities, and we’re tracking those as referrals. Those go into how they’re reviewed, and there’s a bonus percentage that they are eligible for.
PELHAM: We use a variety of different incentives. … Because of one of the big banks, cross-sell is now a dirty word, so we call it relationship building. We’re using technology to better understand [the differences among the branches in terms of products]. We have formal outreach activities, and we look at the branch as a P&L. There’s a team-based incentive for each branch, and there are individual incentives. Those individual incentives are called our [key performance indicator] plan and virtually any person in a branch can receive an incentive for referring a mortgage or a business loan. [A portion of the employee’s incentive is also tied to the bank’s performance.] There’s an overall team component there.
What will be critical to maintaining community bank viability in the future?
PELHAM: I think the most important thing is going to be the talent. Everything else is a tool or a vehicle. You can have lousy technology in a mediocre branch, but if you’ve got the best person there you will do fine. If you have a lousy manager, it won’t make a difference if you have the best technology and a great location.
COLE: I agree with that. You have to make the customer understand that, behind the technology, we have the individuals who are still community-bank-oriented and do care about those customers.
GOODMAN: You must have a compelling value proposition. Your people have to know what that is, and they have to be able to communicate that to your clients, whether that’s service or product. Whatever it is for your organization, it has to be well defined and well communicated.