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This article appears in the May issue of Collections & Credit Risk.
Technology advancements through the years, from ATMs to 24-hour telephone options to online and mobile services, have helped many banks boost productivity and stay competitive. Community banks, smaller and often faced with razor-thin technology budgets, have tended to fall back on personal service to stay ahead.
But nowadays, deep into a recession, community banks know they cannot overlook technology and the role it plays in lowering prices.
"While our customers still come to the bank, they don't come nearly as often as they used to and part of the reason for that is automation," says Charlie Funk, president and chief executive officer at MidWestOne Financial Group in Iowa City, Iowa. "On one hand, we don't like that because we like to see our customers and interact with them personally. On the other hand, if we didn't offer them opportunities to bank with us remotely, we wouldn't have their business."
Jeff Judy at Jeff Judy & Associates, a banking consulting firm based in Bloomington, Minn., says, "An awful lot of customers are focused on pricing in today's highly competitive market. The more efficient you are, the better able you are to be competitive on the pricing side."
But pricing is only part of what brings clients to a bank. With everyone seemingly short on time, products and services need to be offered in as many different formats as possible if community banks want to remain relevant for customers.
Kent Jehle, vice president and chief financial officer at MidWestOne, says technological conveniences are especially important to the bank's business customers that use many of the bank's services to prepare financial projections.
"If our business customers can look up their account balances and determine their cash position themselves versus calling the bank and dealing with one of the assistants in the business banking area, there's an element of efficiency that they appreciate and utilize either during working hours or after hours," he says.
Credit scoring is one important area that needs sound human judgment, Judy says. He cites the subprime fallout and as a classic example of how automated scoring missed underlying problems. Scoring tools are not commonly designed to weigh factors such as economic conditions.
"The subprime model never bothered to take food and fuel prices into account," he says. "People were approved for credit because their scores are very high today but the trouble is six months later they were out of a job and unable to pay their bills."
Banks were basing lending decisions on automatically produced credit scores, thus extending loans to borrowers at the same time many customers had lost their ability to pay a dime.
At the business level, scoring may show if organizations are on time with bill payments but they do not consider the borrower's money management skills, which often are telling in terms of how committed that entrepreneur is to making their venture succeed.
"You might not have a very good score but you may have a business owner who is heavily dedicated to the business," Judy says. "That business owner is going to cut costs wherever they can, review product and maybe even lay people off. They are going to do whatever it takes to survive."
The traditional scoring model cannot measure the human heart, he says. In the business world, the desire to succeed often outweighs financial results and only a human can determine the breadth of that commitment.
Many community banks that got away from personal service are renewing their focus on it while maintaining efficiencies by moving away from a computer making the decision based largely or solely on the credit score. Instead, many favor a system that calls upon a real person if the score falls within a certain margin.
If the cutoff score is 650, for example, and the customer's individual rating ranks within 25 points on either side of that number, it could be directed to an employee to make the final borrowing decision.
"The logic is, if the score is 675 or above, we're going to say 'yes' anyway, so let's just say 'yes' and get on with life," Judy says. "If it's below 625, we're going to say 'no' anyway, so let's just say 'no.' However, if it's between 625 and 675, it's close enough to that 650 that there may be outside factors that the computer couldn't consider."
Judy believes banks will use credit scores as just another tool in the entire borrowing equation and not the main tool as this approach starts to take off.
"Instead of being a key component of the decision, scoring is going to become more of the starting point for the decision," he says. "The score will be the recommendation: a high score will mean that we're more prone to saying 'yes' and with a low score we're more prone to saying 'no,' and we'll start to see more emphasis on the human aspect."
But both individuals and business customers still seek face-to-face contact to discuss their specific situations.
"Clearly, technology does not replace that. Technology is there to make it convenient for the customer once they have opened those banking relationships," says Mark Stenson, president at Stenson Management Consulting in Marshall, Minn. "It doesn't replace the need for a banker to serve as a trusted advisor and help the customer determine appropriate products and services. There's no way a computer can do that."
To illustrate, MidWestOne Financial's Funk uses a real estate loan application as an example: customers may apply for the financing online but at some point they will be prompted to contact a real person.
"When you talk to the person that represents the bank, the customer experience becomes very important," he says. "We work really hard to give our people the skills to give the customer a good experience."
Thanks to their size and business model, community banks outwardly would seem better positioned to continue providing good, one-on-one service. But Stenson argues that this depends on the organization.
"Simply being a community bank doesn't by default enable you to provide better service than a big bank," he says.
While community banks may be better structured to address the human needs of banking, they still need to implement the processes and systems that make it possible, he says.
Jehle adds that MidWestOne addresses this by assigning individual representatives to their customers, rather than using 800 numbers that are directed to a central location.
"The value that we add to our franchise is how we relate to our customers and how we serve them," he says. "You know whom to call, you call the office directly, so you know your banker and you know that they will take care of you. We work hard to make sure that the relationship works properly and is maintained over time."
In the community-banking arena, one of the big challenges organizations face is finding and retaining those with the skills to conduct proper risk assessment, especially in rural locations where those with higher-level qualifications are at a premium in some sectors.
"The small, rural communities have trouble finding dentists and physicians, superintendents for schools and hospital administrators," Stenson says. "They struggle just as much at finding talented bankers."
While filling positions at the front counter, even in loan processing, is easy by comparison, it is not as easy to find management talent.
Bank mergers, even at the smaller level, also contribute to the issue of determining a customer's needs and background from a geographical perspective.
Iowa State Bank and MidWestOne completed a merger in 2007, doubling the company in size. "Now instead of being in one primary geographic community, we are in 20 communities throughout eastern Iowa," Funk says. "If our underwriters are in Iowa City and the loan request is coming from Burlington, which is 55 miles away, you probably lose a little in the translation."
This further emphasizes the need, he adds, for the bank's underwriters to listen to their customers in the field.
So, the moral to the story for smaller banks is to find the right balance between machine (technology) and man. In other words: never give up on personal service. CCR
