By Paul Schaus
Rather than being all things to all people, a bank should identify its greatest strength and specialize in that area.
The days of everything-banking are history. To be competitive, banks—particularly community banks without huge technology budgets, resources and scale—must banish the strategy of being all things to all people. Instead, they need to exploit a niche and stand out from the crowd.
Look at some of the most successful banks today (other than the largest of the large). They tend to excel at one thing. Environmentally conscious banks attract customers from throughout the United States. (There was talk of a bank for dog lovers called Wag Bank. It never launched, but the concept of specialty banking is solid.)
Athletes know the benefits of having a niche. An Olympic runner decides what he or she wants to be the best at—sprints, middle-distance, long-distance—and works really, really hard at becoming the best at that distance. A marathon runner—in order to run with the best—doesn’t train like a sprinter. Rather than waste time becoming a mediocre sprinter, marathon runners focus their training hours on running 26.2 miles to the best of their ability.
Are you a sprinter or a long-distance runner? Or in banking terms, do you want to excel at automobile lending? Or do you want to excel at offering outstanding customer service? Because, unless you’ve got a huge technology budget, it’s likely that by trying to do everything, you won’t do anything well.
However, if you pick one thing to do really well, you can stand out in your market. By picking a niche, you will be able to funnel your budget into that product and service—which will enable you to innovate.
Here are two reasons why you need to develop a niche banking strategy:
- Consumers shop for banks online.
You may draw some foot traffic because your branch is on a busy corner, but consumers most likely will pick their bank based on the bank’s attributes, not its specific location. If most banking is done online, proximity just isn’t as important an issue as it once was.
Think about how you search for retail products. Whether it’s a big-screen TV or a hotel room, chances are that in addition to a Google search to get a listing of potential TVs or hotel rooms, you’ll look at review sites to see what others have to say. You do your homework before you even set foot in a store or walk into the lobby of a hotel.
The same is true of banking. Rather than driving around to see which bank is closest to their home or work, consumers will search online. But they won’t do a Google search on “bank.” Instead, they will do a search on “bank with lowest overdraft fees” or “bank with best car-loan interest rates” or even “green bank.”
No one searches for “best community bank.” The vast majority of consumers have no idea what “community bank” even means. They are also not going to search for “best checking account.”
Once they find a bank that meets whatever their specific need is, they check out reviews. The proliferation of review sites—everything from Trip Advisor to Yelp to Glassdoor—is changing how consumers choose products and services and, yes, even banks.
And for the younger generation, reviews on the Internet are incredibly powerful. This is a generation that goes online for all its information. The typical 26-year-old doesn’t ask his dad where to get a car loan—he looks online and reads reviews.
When customers review your bank, what will they write? Will they describe how your bank is a decent, all-around bank or will they describe what made their interaction with your bank stand out? Chances are they’ll write specifically about their experience with your account-opening process or friendly service or quick decision on a mortgage loan.
By looking at online reviews of Simple Bank you get a clear picture of its niche.
- Niche banking allows you to compete with banks of all sizes.
Once you pick your playground—what you are really good at—you can compete against both the other community banks in your market as well as the larger banks.
To stand out from other community banks, you can’t adopt a banking niche that is a cookie-cutter imitation. Perhaps the bank in the next town over is successful at small-business lending. If it works for them, it should work for you, right?
Every bank—even those in similar markets, with similar asset sizes, and with similar organizational structures—is different. Don’t try to replicate a competing bank’s niche. Instead, determine what makes your bank unique and base your niche on your bank’s “secret sauce.”
Trying to compete against the larger banks with their huge technology budget in all areas just means that you will always fall short. A community bank simply doesn’t have the breadth and depth to appeal to the masses the way a Chase, Bank of America or Wells Fargo can. Why even try?
How to create a niche banking strategy
Creating a niche strategy requires the propensity to think outside your comfort zone and the here-and-now, and explore new ideas. As Roger Martin of the University of Toronto’s Rotman School of Management points out in the January/February 2014 issue of Harvard Business Review, “If you are entirely comfortable with your strategy, there’s a strong chance it isn’t very good.”
Now that you understand why you need a niche banking strategy, here are the steps your bank should take to define and implement that strategy.
Step 1: Get a honest-to-goodness niche
When I ask community bankers what their niche is, I often hear the same answer time and again: “Well, we’re a community bank.” That is not a niche. The vast majority of consumers don’t even know what a community bank is. And prospective customers searching for a great rate on mortgages or free checking aren’t doing a Google search for “best community bank.”
Another popular answer is that their niche is “personalized service.” While that may have been a differentiator at one time, technology has leveled the customer service playing field. Sophisticated data analytics now allow larger banks to “know” their customers as well—if not better—than some community banks.
And if customer do their banking online, what difference does it make if the teller can recognize them by name?
Find a different niche because “community bank” and “personalized service” just doesn’t cut it for today’s consumers.
Step 2: Build on your strengths
Think about a deep, specialized knowledge that your bank may have that you can exploit as a niche. Do a skill assessment of your current staff. What do they do well? Do any areas of expertise rise to the top?
Analyze your best customers—keeping in mind that your most profitable customers may not be the ones you think are profitable. You may find that fee-driven accounts with overdrafts are more profitable than those accounts with huge deposits. We worked with one bank that was shocked to discover that profits from their indirect auto lending business were much less than they estimated.
Look at the areas of your bank that are growing the fastest. Look at your market. Is it urban, suburban or rural? Are market demographics changing due to immigration or other factors?
The answers to these questions will help you define your niche.
Step 3. Don’t get carried away by what’s hot
Just because a market is “hot” doesn’t mean that it’s the right niche for your bank. Some community banks decided to jump into commercial and industrial lending because it was hot. Some of these banks are no longer in business.
Others chased small-business lending thinking that it’s the same as consumer lending. While there are definitely synergies between consumer lending and small-business lending, small-business lending is more closely related to asset-based lending. Is your bank set up to manage loans in which the collateral is cash flow, inventory and accounts receivables?
Wealth management is another area that is hot, but profitability requires scale—something that most community banks won’t be able to achieve.
Before you consider chasing a market, decide whether or not your bank can really support the business. Take a look at your infrastructure, technology, talent and processes.
Once you define your niche, separate yourself from other banks by being first to market with products and services in your area of specialty. Funnel your budget and resources into your niche and be content to be a follower in everything else.
Remember that the banks that are successful during a downturn have a niche that they can fall back on when times are hard. If you are good at everything but not outstanding at anything, your days are numbered.
Paul Schaus is the president, CEO and founder of CCG Catalyst, Phoenix, a consulting firm that helps banks perform better—from strategy to technology to operations. Email: PaulSchaus@ccg-catalyst.com. Telephone: (800) 439-8710 ext. 201.