David R. Evanson
Present Value: Essays on Community Banking, Winter, 2005
In banking, there is perhaps no discipline more misunderstood than marketing. Some regard marketing as the savior of the industry. Others consider it mere overhead.
After all, banking existed and prospered for quite some time on the principles of finance and finance alone. Net-interest margin was surely a function of the ability to manage the cash flows arising out of the assets and liabilities on a bank’s balance sheet and to mediate the interests of borrowers and lenders.
This point of view is every bit as musty as it sounds. It was perhaps true during the Colonial era and during the early stages of the Industrial Revolution, when banks were focused primarily on financing a merchant and entrepreneurial class. But once the American economy evolved to the point that it was regularly producing consumers -– sometime after the Civil War –- banking became very much a consumer enterprise requiring modern marketing thought.
EARLY MARKETING STRATEGIES
It would be shortsighted to suggest that bankers of the late 19th and early 20th centuries did not recognize this. Indeed, bankers of this time were avid marketers and engaged in all of the fundamental aspects of marketing long before it became a popular business discipline. There is a mountain of evidence demonstrating that marketing has been ingrained in the culture of banking since bankers had to actively compete for the hearts, minds and dollars of individual consumers.
Between the late 1980s and the mid-1990s, bank marketing was brought to the forefront by the changing regulatory landscape -– most notably interstate banking. In the face of this onslaught, business as usual simply wasn’t going to cut it anymore. Enter the primacy, or at least the recognition, of marketing. Happily, advances in technology made marketing a more effective endeavor that could be utilized not only by the money center banks but also by regional and community banks.
Let’s take a brief look at how marketing was deeply ingrained in the psyche of American bankers, almost like a recessive gene, whose defining characteristic becomes prominent in the face of overwhelming need.
Consider the following critique of an advertisement. “The idea conveyed by the lion and the massive chain border of the design is, of course, that of strength, and the design and the copy are appropriately tied up by the reference to the institutions’ stability.” When was the critique made? Madison Avenue circa 1995? Hardly. These words appeared in a 1908 issue of Bankers Magazine and clearly demonstrate an appreciation for the subtleties of marketing communications, image advertising, competitive positioning, and the inherent challenges of selling an intangible service.
To look at bank marketing during the late 19th and early 20th centuries is to see a business discipline on the brink of populist acceptance. Not only was the American economy producing more consumers, but it was also producing consumers in all manner of substrata, each requiring a careful, well-thought-out approach in order to derive profits. In response, banking quickly shook off its mantle and evolved into a distinctly consumer-driven enterprise. If transported back in time, a modern-day marketer could see the roots of his profession beginning to take shape. These include market segmentation, workforce organization, information management, and proactive efforts to shape the quality of the consumer’s experience. Such efforts were all designed to stimulate the collection of deposits and increase profitability.
One aspect of segmentation focused on age. For example, at the end of the 19th century and in the early 20th century, banks actively focused on cultivating children as customers. Figure #XXX , which appeared in Dollars Through the Doors by Richard N. Germain, shows the absorption of school banking programs after their introduction in the 1890s.
Increase in School Banking Programs 1890 to 1930
Year Programs Depositors US Population Ages 5-19
Depositors as a percent of U.S. population
1890 220 24,525 21.1 million 0.12%
1910 1,168 203,458 27.9 million 0.73%
1920 2,736 462,651 31.5 million 1.47%
1930 14,610 4,597,731 36.2 million 12.71%
Sources: Annals of the American Academy of Political and Social Sciences, July 1892; Report of the Commissioner of Education; American Bankers Association.
Any modern-day institution or industry would be proud of this rate of absorption. But more importantly, it reflects the aggressive mindset among bankers that the country’s youngest consumers would one day be its most influential.
A banker named Charles Garfield, who organized school banking for the city of Grand Rapids, Mich., summarized the underlying thinking: “As soon as children reach the age when they leave school, they take up their school savings and transfer it to the regular savings department and if they go into business they stay with us in the commercial department. If we shut our eyes to the indirect values that come to the bank it would be a losing proposition.”
Another market segmentation tactic focused on women. In 1870, the Second National Bank of New York opened what is believed to be the first women’s department in a bank in the United States. The underlying and strategic thinking was that although women did not enjoy as high an incidence of employment, they did exert a significant amount of influence on family finances and therefore constituted an important market. The tone of segmenting the market and selling directly to women is summed up in this promotional copy, which was written on the occasion of the opening of a new women’s department at the First National Bank of Chicago in 1882:
“The Department for Ladies of the First National Bank is devoted exclusively to their use and to the care of their accounts. The Bank, located at the Northwest corner of Monroe and Dearborn streets, is convenient to the shopping district and affords a pleasant place where they may rest, attend to correspondence, transact their business, or meet their friends. A maid is constantly in attendance, and telephone service is at hand. New bills and silver are paid out at the window. There is no charge for the care of accounts in this department. Deposits may be made by mail if more convenient. A most cordial invitation is extended to the ladies, as our guests, to use this department and its conveniences, whether or not an account is kept at the bank.”
In many ways, the attributes used to promote the women’s department of the 1880s are similar to those that some bank branches use to entice new customers in 2005.
During the late 19th century, many banks catered exclusively to members of a single nationality, an example of market segmentation known as “nationality banking.” For instance, the German-American Savings Bank that was founded in Los Angeles in 1890 was preceded by the German National Bank in Lincoln, Neb., in 1886. The generically named Japanese Bank opened in Oakland, Calif., in 1907, while the Scandinavian-American Bank opened in Portland, Ore., that same year. Finally, the Bank of Italy, the forerunner to Bank of America, opened in San Francisco in 1904.
The many other aspects of marketing — advertising, workforce organization, sales promotion and quality assurance — though nascent in nature, were evident in American banks at the turn of the century.
MANAGING THE DATA
The 1920s saw the birth of a marketing concept that has evolved into the seminal marketing concept of today: Marketing Customer Information Files, known simply as MCIFs. Consider the following statement made by the president of the National Bank of Commerce in St. Louis. It appeared in an article by W.B. Weisenburger, entitled “Making Salesmen out of Bank Employees,” which was published in a 1925 issue of Bankers Magazine: “Running a department store of finance, we found it highly necessary that when a customer came in, he be given an opportunity to patronize all departments. In other words, we had to practice the finesse that department stores do in supplying all the wants of a customer. After analyzing the situation carefully, we installed, as a preliminary toward the correction of this situation, a central file by reason of which we were not only to arrive instantly at those customers who did not patronize more than one department, but also secured an immediate cross section of their standing, connections and ability to make use of other financial facilities we had to offer.”
Thus data warehousing was begun. Still, it was a cumbersome business. Consider how a search would be made using the Findex system, which was the popular technology of the day: Customer cards in the system contained a number of holes, each associated with a customer characteristic. When a customer exhibited a certain characteristic, the corresponding hole on the card was elongated. Later, when a database query was made, rods were inserted into the filing cabinets, which resembled library catalog cards. The cabinets were then turned upside down, and the cards with the desired characteristics –- the ones with the elongated holes — hung lower than the other cards and could be easily collected for further analysis.
For community and regional banks, data gathering and management didn’t evolve too much over the next 50 years. Money center banks were able to utilize computer-based information technology and, as a result, move electrons rather than paper files. But this was because these larger banks could hire dedicated “data-processing” staffs to develop custom applications.
The development of packaged software applications changed the landscape for community and regional banks. Rather than developing a custom application for one bank, a software developer could create an application and amortize the cost over several institutions by licensing it to multiple users.
Despite the ability to capture and utilize data more efficiently with information technology, there were still challenges associated with deriving marketing value from it. Specifically, the deployment of information technology was tantamount to backward integration. As a result, data inside of regional banks and community banks tended to exist in silos. It was not uncommon for bank employees to literally access different terminals inside the bank to determine if a depositor had more than one relationship with the bank.
While information technology suggested enormous possibilities, it was data-warehousing technology that enabled marketers at community and regional banks to capitalize on this potential. Specifically, data warehouses could take disparate feeds from the bank –- trust, commercial lending, consumer banking, wealth management, brokerage and insurance –- scrub the data, and enable useful analysis that could have a material impact on how and how well the bank conducted its marketing.
The ability to do this happened none too soon. With the enactment of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which was later clarified in 1997, community and regional banks found themselves awash in competition.
According to Chris Brocha, director of marketing for John H. Harlan Company, a NYSE-listed software firm that provides solutions to financial institutions, “When a huge regional comes into your area, they can easily pay up for deposits. How does a smaller institution compete against this?”
What they don’t do and what they can’t do, says Brocha, is try to outspend and outshout their new competitors. Not if they want to survive. “Before interstate banking, most banks were mass marketers,” he says. “But imagine the waste of simply spending more on print and radio advertising to retain market share, when in fact the most fertile market a bank has is its existing customer franchise.”
A NEW MODEL FOR BANKING
This is where the MCIF technology and, more importantly, the marriage of marketing and ALCOs (Asset and Liability Committees) come in. If the roots of banking prospered almost solely on astute asset and liability management, modern banking and modern bankers will prosper on a new model that fuses marketing and ALCO. Specifically, if ALCO is the science of banking and marketing is the art of banking, then technology, in its current and future state, is what links the two.
According to Brocha, with an advanced MCIF application, marketers can respond proactively to changes in the bank’s balance sheet. “I can sit with the chief executive officer of the bank to see the funding gap that will occur in six months. Whereas before I might try to meet this with new deposits from new customers, using an MCIF application, we could generate promotions and precisely target them to current customers most likely to accept new deposit products based on their profile, past behavior or stage in THE life cycle.” From a cost perspective, the efficiency of the latter process is dramatically higher than blindly trolling for new customers in the immediate geographic marketplace.
MCIF technology does more than help with internal cross selling and database marketing. It gives a bank a Rosetta stone for deciphering the external marketplace and the opportunities it possesses to achieve its ALCO objectives.
Customer profiling is a MCIF 101 experience in which the bank compares the market it is serving with the overall marketplace. Without a doubt, there is wisdom in the notion of getting more customers of the type deemed most profitable to the bank. But this approach can be limiting as well: It can diminish the bank’s desire to look for and find other niches that might also be profitable. With a comparative customer profile -– markets currently served by the bank versus markets within its geography — a bank can identify where there is the greatest room for growth on a segment-by-segment basis.
It is precisely this ability to meet the objectives of ALCO with the mentality of a scientist — rather than a salesman — that has resulted in one of the most important changes in regional and community banking: the inclusion of marketing personnel on the asset/liability committee.
David Krieman, director of marketing for Glenview State Bank in Glenview, Ill., which has seven branches and $1 billion in assets, is a case in point. After attending the American Bankers Association marketing curriculum, Krieman made the push to be on the ALCO. “As competition heated up with interstate banking, we could no longer simply churn out campaign after campaign. We needed to understand the balance sheet and what the ALCO strategy hoped to accomplish.” Krieman says he did not have to push too hard because the bank’s chief executive officer was a technophile.
But it wasn’t always that way. Previously, when Kreiman had asked why he wasn’t part of the senior management team, he was told marketing was not a senior-level position. “The orientation of the institution toward marketing is always defined by the leadership or ownership of the bank. Some banks are operationally driven and some are marketing driven.” Either model is capable of delivering above-average profits, he says, but in today’s environment, a marketing orientation may achieve primacy for community and regional banks because so much of the operations are outsourced. “That leaves you with the primary tool of finding and retaining customers,” Krieman says.
Despite the benefits that technology can confer on the marketing process — and ultimately on meeting the bank’s ALCO objectives — adoption has not been universal. In fact, it’s more in a state of flux. Although the majority of community and regional banks are thinking about MCIF applications, others are pushing ahead and expanding their MCIF technology into Customer Relationship Management (CRM) applications.
While the value of MCIF technology lies with the information stored in a data warehouse, access to this information is limited to the few individuals in the bank who have decision-making authority. By contrast, CRM technology moves this information closer to the boundaries of commerce, where customer interaction occurs. The ability of tellers, branch managers, and loan and trust officers to have knowledge of a customer’s entire relationship, and to react accordingly, has important long-term implications for owner/operators, shareholders, employees and customers.
Taken in total, CRM and its support infrastructure, MCIF, enable community and regional banks to effectively compete against superregional and money center banks that enter their territory. This is fundamental to the interests of all shareholders, because institutions that cannot compete will be run over, not acquired, or certainly not acquired at a premium. Those banks that remain independent must be able to match wits with their larger brethren in the front lines — not just strategically but tactically as well.
This latter idea goes well beyond software. Bankers -– or for that matter any businessperson -– would be sorely deluding themselves by believing that a concept as vital and central as Customer Relationship Management was the sole province of a piece of software. Customer Relationship Management, in the truest sense of the word, comes from the leadership and senior management of the bank. The high incidence of failure in CRM rollouts is not a failure of technology but of culture. It often represents the unwillingness of senior management to make the changes required for an automated CRM solution to work.
Bankers of the 1920s understood that interaction with the customer was the most important moment in banking. They knew that the success of the enterprise rested upon this. S.C. Stallwood, vice president of Northern Trust Company, demonstrated this mindset in his comments in the March 1923 edition of Bankers Monthly. “The friendly attitude toward customers is far more important in a bank than in a merchandizing establishment. A customer may sometimes purchase merchandise of merit from an indifferent salesperson, but he will seldom or never recognize the merit of bank service if it is rendered by uninformed, unenthusiastic or unhappy men and women.”
This quote underscores a truism that has always been known in the banking industry: Customer service is crucial. Still, its importance can be obscured by the razzle-dazzle of today’s marketing technology.
Likewise, the value of marketing has long been recognized. But the question that community and regional bankers face today is this: Given all the tools at their disposal to engage in proactive and effective marketing, will they push their institution to take the first step or stay the course?