DCG Ecommerce Solutions

For at least 15 years now, chief executives at acquisitive financial institutions have periodically declared moratoriums on further deals, typically explaining that they needed to take time to digest their most recent prizes and also demonstrate core revenue growth. Promised efficiencies often are delivered; promised growth often is not. Inevitably, it seems, players wind up involved in more mergers and acquisitions. The exercise seems to vacillate between hypocrisy and futility. Can anything be done?

The defeatist view is that banking companies, especially the larger ones, simply cannot achieve strong core revenue growth in most circumstances. But one subject does warrant further investigation, and that is the art of acquiring profitable new customer relationships. While it makes perfect sense to emphasize the retention and expansion of established relationships, there's also a need to bring new people into the fold. Customer acquisition is one of the most difficult challenges, yet it is not clear that it has received all of the attention it deserves, given the upside for those who master the art and the obvious consequences for those who don't.

One question that senior managers should ask themselves is whether their institution has the strategies, marketing tools and organizational culture needed to outdo rivals in customer acquisition. Hundreds of new branches are being built in major U.S. markets right now. But without the outstanding employee hustle of, say, Fifth Third Bancorp, many of these outlets may go begging for the new customers needed to justify their existence. And high-performing cultures often take years to build, raising further doubts about ambitious institutions that are just awakening to the challenge of becoming a true financial services retailer.

Another question is whether the institution has developed differentiated strengths and is fully capitalizing on them in customer acquisition. With deposit growth, for example, there is powerful pressure to lure customers with higher interest rates. Certain conditions must be met, however, before a rate-driven growth strategy will pay off.

One basis for offering higher rates is a hyper-efficient operating profile, which offsets a thinner net interest margin. Another basis is an outstanding loan prospecting and underwriting ability, which permits higher-cost funds to be profitably deployed into higher-yielding assets. A third is great skill at customer relationship management and its companion, cross-selling, so that clients initially acquired on the basis of price are quickly brought into a larger and more profitable interaction with the provider. The point is that without some type of advantage to draw upon, growth initiatives will be average at best.

The necessity of being able to leverage bedrock strengths raises the larger question of what the institution really stands for. The mega-banks especially seem to be wrestling with this question. They know they need to grow, are committed and have enormous resources. But they still face the challenge of focusing key competencies in a way that makes a difference in customer-facing activities.

The fallback position is to accept the look-alike tendencies in this over-populated industry and simply try to out-execute competitors on the basics. The strategy here is to grow "naturally," through word-of-mouth referrals, capitalizing on traffic in the branches and expanding established relationships with responsive service. This approach seemingly takes forever, but community banks, in fact, are winning with right it now. Some major banks are taking service to heart, but it's still early in the game for them.

The very best institutions in financial services do a great job of generating organic growth, plus they know how to extend their formula into the companies they acquire. They understand that the ultimate acquisition is a profitable customer relationship. Companies that can't get a handle on customer acquisition will never reach the top tier of performance, standalone or otherwise.

Mr. Klinkerman is editor-in-chief of Banking Strategies.
Copyright © 2003 by Banking Strategies, published by BAI.