Putting Your House in Order - Banking Strategy Analysed
Professor Anthony Hourihan puts forth his views on the nature of modern banking strategy, the importantce of Basel II preperation and the pros and cons of pursuing a merger approach to growth.
Definitely Basel II and the opportunities that data management and data warehousing bring to banks. Here in the Middle East I’m also seeing an increasing awareness of the importance of ‘critical success factors’. At the moment we’re seeing that banks everywhere are unable to sustain the delivery of premium value. In this region it is clear that the market is overbanked, and that too many banks are product focused rather than customer focused.
Many banks think mergers are the solution, but globally some two thirds of mergers are failures! The truth is that most banks just don’t understand how to grow. They confuse bigger with better, when actually there’s no correlation between size and profitability. The key is not how big you are but how you got there. If you get bigger through attracting the wrong customers then you’re increasing risk and you’re pursuing the wrong strategy. Consider this statistic: the average bank in the West has just two products per customers. Why not increase that to four instead of looking to grow through a takeover?
I believe there are five factors that make a merger a success. Firstly, it must be done for the right reason as part of a clear strategy. Secondly, it must involve the right partner and offer beneficial synergies. Critically, the partner must have the same view of the business post-merger. Thirdly it must obviously be at the right price. Fourthly it must involve the right integration plan, with a clear pattern of cross-selling or geographic fit. Lastly it must involve the right processes in the actual merger, with the right people putting it together.
Mergers aside, can you explain what you meant earlier by ‘critical success factors’ for banks?
Banks need to achieve a strategic focus. For instance, they need to decide after analysis which segments of the market to attack and which to leave alone. Don’t fight for unprofitabled customers – hence the importance of data analysis. They also need to align their distribution channels towards preferred customer segments. This alignment could, for instance, mean a multi-channel model including the Internet and branches. Clearly there needs to be a focus on superior customer service, as the only sustainable advantage is service. Banks also need to manage costs and eliminate wasteful overheads, as cost/income ratios are often too high. I think the key word here is ‘manage’. Importantly, banks must create a ‘learning’ organisation to train people to use IT effectively. And, finally, they need to measure the right things and measure them accurately. Bankers still stick to financials when measuring. Instead, they should be asking: ‘Are we a learning organisation?’
I believe that strategy formulation is 10% of success and implementation 90%. IT is both a huge threat and a huge opportunity. It’s a threat to inefficient banks who, after a century of protection and regulation, can no longer hide behind size or geography. What is certain is that no industry has as much data on customers as this one. However, data is not information until it’s managed properly.
I actually believe that superior customer service is the best way of anaesthetising increased costs in a commoditised industry. The majority of the middle class will pay more for significantly better service, and banks need to understand this. So far, they’ve largely been responsive rather than proactive – in other words, the customer has to ask the bank for service before getting any.
Few banks today can really change their culture to be customer-centric. Staff just won’t deliver superior service to customers until senior management delivers superior service to the staff. And that’s where we get problems with IT, with manufacturer solutions not fitting. IT can’t provide the right checks and balances without the right mindset in the bank’s management.
Most people work on the 80:20 rule – 80% of your business comes from 20% of your customers. But if you analyse further, you realise that 150% of your profit comes from your top 20% of customers. You need to analyse that curve – who contributes, who gives you business and who loses you money. Then it’s just a matter of pricing for the top and bottom percentiles of customer, offering loyalty only to those you actually want to be loyal.
Take me as an example. At present, banks just seem to want to manage my assets, but I’d like one to manage my liabilities too. This game is all about microsegmentation of the market.
It’s possible to develop a very serious financial services industry here, but we’ll need to see infrastructural and regulatory changes to deal with bad debts and so on. There are a huge number of deposits here – the lifeblood of a healthy banking sector – and there are sophisticated opportunities here. The market is highly fragmented though. I think some careful mergers would be worthwhile, although on the whole I favour organic growth rather than acquisitions.
Transparency and good corporate governance are essential. Dubai has great advantages as it’s already in people’s minds as a modern city state, and I believe it can match in banking what it has achieved in tourism. Saudi Arabia should never have allowed Kuala Lumpur to become the centre of Islamic banking. The Gulf really needs to be the innovation centre for Islamic banking. I believe that every bank should be able to offer an Shariah-compliant version of every banking product. Outside the region this is rarely even raised as an issue, so the opportunity to get ahead is here right now.
The most dangerous errors an ambitious bank can make:
Professor Anthony Hourihan is an academic and a management consultant, Professor Anthony Hourihan has wide experience of providing executive education and consulting services to leading international financial institutions. Whilst teaching in the MBA and Advanced Management Programme at Harvard Business School, he also researches his personal speciality: competitive strategy in the financial services sector.