As retail banks face mounting cost pressures, a new research study seeks to discover if it’s possible to boost profitability with thinner branch networks supplemented by electronic distribution channels. BY KENNETH CLINE Dec 3, 2012.

In an era of revenue decline and heightened cost control, there are few issues in retail banking more critical than the future of the branch network, which accounts for much of the typical large bank’s operating expenses.

The steady migration of routine transactions from the branch to electronic channels is now a well-established trend. Yet, bankers also understand that the branch remains a key channel for the acquisition of new customers as well as deepening relationships with existing customers and therefore is responsible for fundamental growth in a bank’s business. So, executives recognize that some cost-cutting or branch reconfiguration is in order but also know that the wrong kind of expense control can backfire badly.

To help bankers steer their way through this minefield of choices, BAI Research recently joined with New York City-based First Manhattan Consulting Group (FMCG) on a research study entitled “Optimizing Retail Distribution Channels: Exploring Promising Concepts.” Scheduled for completion in the second quarter of 2013, the study will seek to identify high-performance distribution strategies in an era when banks will need to combine both branch and non-branch channels into a value proposition that resonates with their targeted customer segments.

In the following interview, FMCG founder and President James M. McCormick and Ajay Nagarkatte, managing director, BAI Research, discuss some of the preliminary findings of the study and offer their own views on the future of the branch network and retail distribution strategies.

Q: Has the industry reached an inflection point where the branch will now decline and we need to have some new thinking around the distribution system?

McCormick: Back in the early 1990s, the industry was pondering whether increasingly prolific ATMs, call centers and the beginning of other forms of self-service were going to make the branch less necessary and allow banks to operate with thinner networks. Our 1994 joint study with BAI, New Paradigms in Retail Banking: The RDS Report on the Future of Retail Banking Delivery, predicted a large run-up in non-branch transactions. However, the degree to which those transactions were supplemental to the branch, as opposed to substitutes for the branch, was not fully envisioned.

During that period, the typical Top 30 bank was placing a bet that dense branch coverage would become less necessary and, indeed, for a period of over five years, on average, the top thirty banks, on an acquisition-adjusted basis, reduced their traditional branches by 2% per year. At the same time, other banks, including most of the more modest-size regional and community banks, were making an alternative bet – that person-to-person branch convenience was still critical to market share gains. Those institutions collectively grew their branches at 2% plus per year over that period.

It turned out that the winners in that round of betting were the more modest-size banks. The larger banks changed their view when they observed the distinctive success of Commerce Bank of New Jersey and a few others, who were successfully gaining share and posting attractive returns on equity while investing in organic growth with de novo branches. That triggered an onslaught of de novo investing by most of the major banks, with very mixed outcomes.

Now, in 2012, the same question is being asked in a very different environment. There are a greater number of self-service options, including, most recently, the growth of mobile. At the same time, there is greater pressure on retail profitability due to regulations and low interest rates. As a consequence, banks are revisiting the degree to which they can operate with a thinner physical network, plus other ways that they can reduce costs without losing market share.

Full article at www.bai.org/BANKINGSTRATEGIES/Branches/Thin-Is-In-for-Branch-Networks?

Jim McCormick, the president of First Manhattan Consulting Group in New York, has found that, contrary to popular belief, smaller banks actually are grabbing market share from the bigger banks, often based on customer service.

His analysis of deposit market share from consumers and small/medium-sized businesses excludes deposits in non-retail branches, such as Citigroup's one office in New York that has $50 billion in deposits, which is 1,000 times bigger than the typical branch. If those deposits were held by consumers and small businesses, the line for the teller would be winding itself several times around the block, he says.

Measured organically on an acquisition-adjusted basis, the banks below $10 billion in assets are actually gaining retail deposits from consumers and small businesses during the last seven years, going from having 35 percent of those deposits in 2004 to 39 percent last year, McCormick says. Even the subset of those banks from $1 billion in assets and below are gaining market share from the bigger banks, going from 20 percent to 23 percent of retail deposits during the same seven-year time period, he says.

"[Community banks] don't have fancy technology and they don't have their names on stadiums but they're winning in terms of growth of deposits and that's based on customer service,'' McCormick says. "The main point is that for serving the retail and small business needs of Main Street America, banks smaller than $10 billion actually have a greater market share than is widely perceived and that's been growing, which is at odds with commonly held perceptions. These banks don't have a dominant branch position and yet they're winning."

McCormick says the case for community banks surviving is that they have a better customer experience, they are gaining market share and they tend to keep things simple and straightforward.

By Theo Moumtzidis, Oct 2, 2012

New analysis calls into question the power of the so-called 'S-Curve' as something that should influence branch distribution decisions.

Although other channels are increasingly important, branches still matter to most banks as they evolve their physical networks and refine views on desired market coverage. Conventional wisdom in retail banking asserts that strong branch share in a geography is advantageous to performance. The often-cited benefit is to deposits-per-branch.

New analysis, however, suggests that other factors and competencies should rank higher in decision-making related to your branch network and your priorities for gaining profitable share. The implication for network planners is that they should be less influenced by assumptions about the impact of the S-Curve.

Full article : http://www.bai.org/BANKINGSTRATEGIES/distribution-channels/branches/branches-still-matter-should-the-s-curve?

Full speed ahead – but proceed in stages – is the best approach for financial institutions to take in building their mobile banking capacity. BY HUGH GALLAGHER Apr 16, 2012

The buzz about mobile banking is at an all-time high so maybe it’s time to take the hype down a notch. Below, we have debunked some common myths about mobile banking so that financial institutions can focus on what really matters and provide a roadmap to meet customer needs and improve their bottom line.

First Myth: We can wait. Shortly after their launch dates, first movers witnessed as many as 10% of retail customers adopting mobile banking. This implies that customers value, and will increasingly expect, mobile capabilities from their banks.

The leading banks have been offering mobile banking for several years; banks that lag will realize they can’t close this gap by being fast followers and will likely begin to lose market share. Given the complexities of developing a mobile offering, banks should start up the learning curve immediately.

With today's rates at historically low levels, banks are again forced to look for other ways to stand out.

"Gifts can more than double the number of people who respond to bank offers, which, in turn, reduces the cost of acquiring these customers, according to Robert Tetenbaum, executive vice president of First Manhattan Consulting Group, which advises financial-services companies." The response rate for banks is less than 0.5% for every 100,000 offers mailed, or about half the direct-mail industry average, according to the Direct Marketing Association.

"There will come a time, if interest rates stay low, when our crystal ball would say that most banks will follow with some form of fee structure," said James McCormick, president of First Manhattan Consulting Group, which consults with financial services companies.

Mr. McCormick, the consultant, said there is a danger for banks marketing based on free services, especially when other pressures, including low interest rates and numerous regulations, may force more to raise costs.

"The level of profit pressure ... and the opportunity to have a misstep has never been higher," he said. "As a consequence we're going to really see a much more heightened level of market share shift than has historically been the case."

In the years prior to the 2008 financial crisis, was it possible for the boards of directors at U.S. banks and thrifts to determine whether their bank was heading for the cliff? First Manhattan Consulting Group believes that boards can learn from the financial crisis—indeed, it would be tragic if they did not—and improve their ability to exercise the fiduciary responsibility they have to shareholders.

The signs of trouble were evident from available regulatory data, if boards had known what to look for. We have identified several "alarm bells" that were predicting trouble ahead, but were often unappreciated. Our research found that banks with three or more alarm bells ringing between Q1 2005 to Q2 2007 incurred disastrous drops in stock price averaging 91 percent even though they were ranked highly by sell-side analysts in 2007.

Will Callender, manager of the risk management practice First Manhattan Consulting Group in New York, says bank boards and regulators are focusing more within the last few years on strategy or business model risk.

"Now there is a redoubling of effort to say: What are the risks to our strategy?’’ he says. “What are the competitive risks to our model? What are the pricing risks? Are we pricing at levels we don’t really want? What has to go really well for our strategy to succeed? How much of our success is predicated on a handful of events taking place?"

But sometimes, such questions can lead risk management staff to dump a ton of financial data on risk committees, and they need to control that, Callender cautions. He suggests a member of management, not necessarily the chief risk officer, who can "go through and provide not just the data but also the context and the importance of that information. Someone needs to say, 'Here is the issue at hand and what do we need to do about it?'"

Risk committee members also need to understand how the management structure works and how information flows up to the board, Callender adds. Committee members need to understand how the risk is being monitored, who is responsible for doing that, and what triggers something being brought to the attention of the risk committee.

There's no particular pattern in the quality of service banks provide, though it can often reflect the style and disposition of the branch manager, says Andrew Frisbie, vice president of First Manhattan Consulting Group, a New York-based firm that also conducts a variety of services, including mystery shopping, for its financial services clients.

......"Nothing's more frustrating than a long wait," he says. He points out that many retail customers view going to the bank as just one of many errands that need to be done as fast as possible during the course of an already overly-busy day. They're not ready to waste their time.

Wrong answers can be worse than none at all. Frisbie says when he asks why he should transfer all his accounts to a particular bank it's not unusual to be told, "We have the biggest profit margins in the country."

"The real question," says Andrew Frisbie, "is whether banks are willing to invest in improvement"-in other words, spend money on training.

"If you look at any time period over the last 20 years, and you divide the banks into those smaller than $5 billion versus those larger than $50 billion, the smaller banks on average achieved organic growth in deposits at double the rate of the majors," said James McCormick, president of First Manhattan Consulting Group.

The robust product management departments at larger banks are under pressure to keep innovating, to keep conceptualizing, throwing fresh curve balls to their co-workers in information technology, McCormick said, while IT departments are stretched in ways that sometimes generate frustrations on the part of customers

"The ability to simplify and streamline is a major opportunity for most" big banks.

Banks should focus on analyzing the results of their individual branches rather than just looking at the over-arching performance of the network, according to speakers at BAI Retail Delivery 2010 in Las Vegas.

"To really help pinpoint what you need to get growth for the year, and what programs you need to institute in each area, it helps to create a more targeted plan at the branch level," said Theo Moumtzidis, a managing vice president for New York-based First Manhattan Consulting Group of New York, N.Y. "For banks, creating more branch-specific analytics becomes a critical tool in the hands of the branch manager."

Moumtzidis made his comments during an October 19 presentation entitled "Evolution in Decision-Making: Moving towards Greater Frontline Analytics." He was joined by Jill Enabnit, vice president, market information and research, for Minneapolis-based U.S. Bancorp.

Moumtzidis said it has become customary for financial executives to rely on performance analytics to determine the strengths and weaknesses of their retail delivery strategy. The problem is that looking solely at the overall results of all the branches en masse, or even over a general region, can give executives a false picture of how individual branches are performing. For example, a bank’s branches on the whole might be comparatively weaker than rival banks in gathering deposits but some branches independently may be strong in that area or even out-perform competitors in the market, he said.

For regional supervisors to dole out the same guidance to all branch managers based on general indicators creates an "incorrect picture" that could lead to a poor use of resources, Moumtzidis said. It also tends to create tension between individual branch frontline employees and their higher-ups at a time when banks need to rely more than ever on branch staff to bring in much-needed deposits, he added.

Moumtzidis offered this analogy: it would be like a physician lecturing a thin, fit patient on weight control. While it’s true that obesity is a nationwide epidemic and may afflict a high proportion of the doctor’s patients, does it make sense to counsel a patient on health challenges not specific to that individual? "It’s not just about making a case, but also helping to guide the frontline on what it needs to do," he said. "Objective, fact-based individual analytics can help the frontline understand the drivers of their performance and can lead to a better dialog and well-targeted initiatives."

Moumtzidis advised banks to measure performance at the branch level across various product lines, including consumer, small business, and wealth management. In addition, looking at where individual branches and their managers excel can provide executives a keener insight of best practices and also can help bankers "deploy institutional knowledge" across their branches. For example, the manager of a branch that is out-performing its market rivals in terms of attracting wealth management clients could advise peers at other branches that are performing poorly in their market, he said. "It’s about diagnosing what’s happening at the branch, to be constructive and to help them do the most with what they’ve got," he said.

http://www.tax.cchgroup.com
Undertaking a robust stress test and communicating results in a credible manner will enable banks to increase investor confidence. Full article by Emil Matsakh, Yigit Altintas and Will Callender First Manhattan Consulting Group click here[PDF]

A fair number of banks with loan-to-core-deposit ratios well above 100% have offered special promotions on money market accounts to gather sufficient deposits to reduce that ratio to 90%, said Andrew Frisbie, a vice president at First Manhattan Consulting Group.

Banks that need to reduce their ratios should think carefully about how aggressive to be in acquiring deposits, Frisbie said. Their front-line employees typically offer the higher-yielding products to practically everyone, he said, so that, in meeting the company's ratio goal, they raise the cost of most of the deposit portfolio.

Striking the right balance is difficult. Even Frisbie cautioned that bankers risk upsetting customers who could provide long-standing relationships.

"Banks want to continue acquiring core transactional relationships that bring along with it money markets and" certificates of deposit "because, in the long run, that's where the majority of the retail bank's earnings power comes from," Frisbie said.

Just as focus is the key to strategy, it's also the key to employee incentives, according to consultant Gordon J. Goetzmann.

If employees and managers are trying to meet too many different demands at once, they are more likely to end up missing the big picture and just "spend all their time checking boxes," said Goetzmann, who is an executive vice president with New York-based First Manhattan Consulting Group. Rather than casting a wide net that attempts to encompass dozens of matrices, banks should focus their employee incentives and performance measurement on the handful of activities that correlate closest to the institution's day to day activities, he said.

"In my experience, performance measurement ends up being a whole subset of different considerations," Goetzmann said. "People focus on the measurement 'du jour' and eventually it becomes an amalgamation of tactical priorities, current and past."

In fact, one such "value-added" offering could be "overdraft insurance," said Andrew Frisbie, a vice president at First Manhattan Consulting Group.

For example, a monthly up-front fee could be charged that lets customers make a certain number of overdrafts that would be covered by the bank, Frisbie said.

"Fraud is still rampant," comments Paul Sussman, VP with First Manhattan Consulting in New York. "The majority of businesses over $1 million in revenue are going to be exposed to payment fraud, and almost every bank is being hit by fraud today."

"Traditional check fraud is the easiest form of fraud," says FMCG's Sussman. "There's still check kiting, check washing and the availability of good laser printers. ... Add to that the common issuer practice of zero liability for consumers who are victims of card theft and, as Sussman says, "Credit card fraud is pretty locked down in some ways."

First Manhattan Consulting Group (New York) VP Paul Sussman says the merger integration is presenting the new entity with the perfect opportunity to achieve this holistic customer view, especially given each bank's history in customer relations. "You have Wachovia's ability to maintain great customer service coupled with Wells Fargo's ability to source new business to its customers," he remarks. "And this is on top of the cost savings and risk management advantages they'll get from having integrated customer data."

..."If they're exceeding their anticipated savings at this point, then they've probably been very effective at consolidation," notes FMCG’s Sussman.

Industry participants are considering new advanced practices for pricing of contingent liquidity. Eleven page article authored by Emil Matsakh, Managing Vice President, Yigit Altintas, Vice President and William Callender, Managing Vice President

Bankers are looking beyond demographic data such as age or wealth, said David Tetenbaum, a managing vice president at First Manhattan Consulting Group in New York, in an interview. Some older people may not have saved a cent, and lot of wealthy people prefer to keep their cash in brokerage accounts versus checking accounts - meaning mass marketing efforts to each of those demographic groups probably would be wasted.

Consequently, FMCG periodically conducts consumer research and combines its results with data provided by the credit bureau Experian Information Solutions Inc. to develop profiles. The firm identified the two that are most desirable for banks.

One is "self-directed diversifiers," those who prefer to use online banking, mobile banking or other alternative delivery channels, and who have high balances in checking accounts in addition to off-site brokerage accounts. The other is "conservative branch" customers, people with high deposit balances who prefer to use branches.

Tad LeBlond, another FMCG managing vice president, said banks can market products suited to those personalities, such as premium checking for the self-directed diversified, certificates of deposit for the conservative branch customer and free checking to the insecure debt dependent.

Other products - such as budgeting tools and reward programs for retail customers and online cash flow forecasting tools for businesses - are getting spruced up to grab prospects' attention.

Direct mail can be helpful in raising deposits, but only if used in a segmented, targeted manner, according to Robert Tetenbaum, executive vice president for New York-based First Manhattan Consulting Group. He said banks that "test and deploy advanced segmentation and tailored offers are having great success" engaging new consumer and small business customers.

"Facing high costs for online customer acquisition, unsure performance from print and TV advertising and little new business coming from branch walk-ins, more banks are turning to direct mail to attract consumer and small business deposits," Tetenbaum said. He underscored the necessity of this by noting that deposits have become "the main driver of shareholder value right now" in the wake of troubled credit markets.

Gordon Goetzmann, an executive vice president at First Manhattan Consulting Group, said even firms perceived to be in better shape may face customer defections, depending on how well they integrate recent acquisitions.

Goetzmann says major customer runoff may not be immediate; rather, he expects significant runoff to occur in the next three to five years, as the Federal Deposit Insurance Corp. closes more and more institutions, with acquirers integrating their banking operations ? and the growing pains that come in the process.

"Usually, runoffs are masked during the first year after a deal is announced, but once accounts are actually switched over and overlapping branches are closed, then there's a lot more runoff," he said. "Some acquirers beat the odds on that, while others royally mess it up."

Over the past couple of months First Manhattan Consulting has noticed that more customers are becoming dissatisfied with the relationship they have with their institution, he said. "The source of the dissatisfaction is people getting nickled and dimed and being underhanded by a lot of the bank's polices."

While analysts have been focusing on tangible common equity as a percentage of tangible assets as a gauge of whether a bank has enough capital, the Fed was using risk-weighted assets as the denominator. That gives banks with a big mortgage portfolio an advantage, said Emil Matsakh, co-head of risk practice at First Manhattan Consulting Group.

The Fed requires a 'buffer' between the regulatory capital requirement and the actual capital levels at banks. But it doesn't use the same 'buffer' for all banks, as analysts might have done. And the Fed's disclosure indicates that it might have used stronger loan growth assumptions than analysts have, Matsakh said.

"Given the regulatory environment," bankers and accountants "might not want to be aggressive" in applying the new rules to mark up securities, said Emil Matsakh, a co-head of the risk practice at First Manhattan Consulting Group. Sandler O'Neill's Longino agreed: "Accounting firms will take the most conservative approach" in fair value accounting.

Yet deposit growth has been gravely threatened over the last year. After expanding by 4% to 6% in each of the previous 10 years, U.S. retail deposit growth in the United States fell to less than 2% last year, according to First Manhattan Consulting Group.

"The pie you're competing for is finite, and that pie is not growing as fast as it used to," said Theo Moumtzidis, a managing vice president at First Manhattan.

That is probably because consumers are using their savings to meet expenses and loan obligations they previously funded through leverage, he said.

The shrinking pie has resulted in fierce competition for retail customers, often through aggressive rate pricing.

...continues

One troubling development is the rise of online banks. Mr. Moumtzidis said that if they keep expanding at their current rate of 30% to 50% a year, they will soon capture half the industry's typical growth of 4% to 6% a year. "That's huge."

"We're going to see [sellers] that say, 'OK, enough. Our share price was down 60%, and now we're only down 20%. We've had enough; let's get out of here," predicts Jim McCormick, president of First Manhattan Consulting Group in New York. "And the buyers could get some very attractive deals."

Where have the funds gone?

In a schematic sense, how have funds flowed over recent months? Basically, Gordon Goetzmann, executive vice president, First Manhattan Consulting Group, N.Y., sees big banks that didn't have "subprime issues" as gaining deposits from the fleeing customers of those that did. His data, published early in December predicted that the top-ten banks would control at least 45% of deposits by Dec. 31.

James M. McCormick, president of First Manhattan Consulting Group, runs a firm that has conducted thousands of "mystery shops" and interviews with front-line employees at retail banks. He told the gathering that during their visits, his researchers always ask bank employees a simple question: "As a customer, why should I choose your bank over the competition?" And two-thirds of the time, McCormick noted, the employees have no answer to that question; they either say nothing or, in his words, "make something up on the fly."

The executives seemed uneasy, if unsurprised, by McCormick's report. I was stunned. How can any business expect to outperform the competition when its own employees can't explain - simply and convincingly - what makes them different from, and superior to, the competition?

"The trick of it is finding the right customer and marrying them up with the right need proactively or letting them know you can take care of it," says Gordon Goetzmann, managing vice president at First Manhattan Consulting Group, a consulting firm in New York City. "It's guiding them to the right person to help them actually close that sale, whether it's a person in the branch, in the contact center or some other referral."

While matching customer needs with products "is pretty easy to do," Goetzmann adds, it's also "where most banks fall short. They hold cross-sell out there as the Holy Grail and as the means to an end."

...More focused campaigns also make direct mail more effective. When a regional bank recently launched a direct-mail campaign covering all deposit products, it found that just focusing on a group with a higher average balance increased its response rate to 4%, up from 3%, according to First Manhattan. The difference was merely mailing to a customer group with an average balance of $12,000, rather than $10,000.

"When banks are designing reward programs, they need to make sure that they don't suffer from unintended consequences," said James McCormick, the president of First Manhattan Consulting Group in New York.

One danger lies in overselling the ease with which rewards can be obtained and leaving customers feeling misled, Mr. McCormick said.

"Banks enjoy a very precious position as the most trusted of financial service providers. They shouldn't undertake any actions that compromise that trust."

According to First Manhattan Consulting Group, "direct" banking deposits in the United States have grown from about $65 billion in 2004 to $200 billion in 2007, or 35% to 60% per year, compared with 3% to 4% per year in total retail deposits.

James McCormick, the firm's president, said he would have expected the overall rate of growth in direct deposits to moderate if capital markets were not so fickle. Normally, he said, institutions enter the market, ramp up quickly, and meet their funding needs. For example, a finance company with $30 billion of assets might target $6 billion in consumer deposits to change its funding mix.

"They price up at the higher end of the rate structure, and grow very rapidly for a while, because they're growing from a base of zero," he said. "When they get to $6 billion, they change their approach" because "they're only looking for growth in proportion to the growth rate" of the overall company.

But this year, "with the financial crisis and the concern over liquidity coming into play," that pattern has not determined the trend. For those seeking deposits through the direct channel, Mr. McCormick said, "it is inappropriate to assume that direct banking is a total commodity," where a Web site, FDIC insurance, and a high interest rate is sufficient.

Effective call centers are also important, for example. "A lot of customers will explore options on the Internet but" want to ask someone on the phone basic questions before opening an account, Mr. McCormick said.

A fundamental question for companies is whether the costs of building a direct deposit-gathering platform, and the advertising and high rates needed to attract account holders, are less than those in wholesale markets, Mr. McCormick said.

"Before liquidity was so valuable, that calculation" would not justify a direct platform for those "that had access to wholesale funds and a strong debt rating," he said. But "at times like these, being short on liquidity is sometimes the end of the game."

U.S. Bancorp lacks presence in what are commonly considered some of the nation's most attractive -- and most competitive -- banking markets: the Northeast, the Southeast and Texas. Mr. Cecere said the company is "not bound by any particular geography" when it thinks about acquisitions.

That suits some observers fine. James M. McCormick, the president of First Manhattan Consulting Group, said, "We find no evidence between so-called attractive banking markets and total return to shareholders."

"In many geographies, smaller banks already are gaining share on larger ones, so that would seem to counter the notion that the big banks will be able to deploy a significant degree of pricing power," James McCormick, the president of First Manhattan Consulting Group of New York, said in an interview this week. "In a lot of markets, community banks still have a powerful position. ...Overall, on the consumer side, banks smaller than the top 30 institutions still have about 50% of market share."

Mr. McCormick said his recent analysis of market trends shows that if bankers start "getting more aggressive on fees, you could end up shooting yourself in the foot by losing deposits."

He also said lawmakers are increasingly sensitive about any hidden or lofty fees that could be viewed as unfair.

How to identify opportunities in mortgage-related investments. 

Comprehensive article by Emil Matsakh, Managing Vice President, and Will Callender, Managing Vice President

James M. McCormick, the president of First Manhattan Consulting Group in New York, said that on a scale of 1 to 10 (with 10 being "total destruction of trust") the subprime and credit industry crises impact on banks rates a 3, because most consumers understand that it was nonbank financial industry employees who "bent the rules."

Still, Mr. McCormick said, "If banks persist in becoming even more aggressive in overdraft and other nuisance fees, they will be putting their trusted positions at risk to a greater degree than the mortgage phenomenon.

He believes that this is because the fees can make consumers "really angry."

Mr. McCormick said many of the banks that were the most aggressive in offering free checking accounts have become the most aggressive in charging overdraft and other fees.

"In the early days of free checking, many were gaining share and now many of those banks are losing share," he said.

Robert M. Tetenbaum, an executive vice president and the co-head of the marketing services practice at First Manhattan Consulting Group, said that a big reason consumers view banks differently is that they look at their banks for different things. "It all comes back to product," he said.

He explained that "When I'm giving an institution money, imbedded in that is trust."When I'm asking for a loan, my trust is hoping that they're going to give me a fair deal."

Brokerage customers, by contrast, trust that their firms will protect their principal while providing a fair risk-reward return, Mr. Tetenbaum said.

Deposit growth--checking accounts, savings, money market funds, and CDs--has averaged from 5% to 6% in most markets annually since 2000 with a few dramatic blips up and down along the way, says Gordon J. Goetzmann, managing vice-president, First Manhattan Consulting Group, New York. On average, the typical mid-sized bank relies on wholesale funding for 10% of its balance sheet assets. Growth of core deposits is generally tied to rate of inflation, net new formation of households, and net business growth, Goetzmann points out, making for regional variation.

For retail banks, payments strategy must center on the checking account.

Entire article by Gordon Goetzmann, Executive Vice President and Paul Sussman, Senior Engagement Manager

James M. McCormick, the president of First Manhattan Consulting Group, refers to this period as a time when small banking companies made a bet that even though the Internet had arrived, branches would still serve an important purpose and were crucial to any bank's success. It was the opposite of what large companies were doing: cutting back on branches and focusing on online capabilities. "Banks now have enough experience in how well they've done, and some are going to say, 'Well, we tend to do this pretty well, and we tend to get a good return on investment, so we're going to keep on doing it,' " he said.

Simple demographics would indicate that marketing to the both people would be effective. But this method is just not sophisticated enough, considering people's complexities around managing money, says David Tetenbaum, the managing VP at First Manhattan Consulting Group. "[Financial Personalities] is very different than the conventional approach, which has historically been demographically based and is more of a blunt instrument," he says.

We believe it’s possible to broadly define a generic risk-management process that can be applied effectively to a broad range of manageable risks. The overall approach is based on the three following principles. First, top management (not staff) should be the ones to drive the process. Second, top management should require that support materials be relevant and succinctly address all key risk issues. Third, top management should ensure that prior risk-management-related decisions are reviewed for practicability and effectiveness...

Entire article by Alden Toevs, Executive Vice President and Emil Matsakh, Managing Vice President

"When you're trying to get your sales force to behave in a way that delivers more revenue, you have to give them training, incentive systems and case studies, and the what-to-say-in-this-situation help to make it work," says Jim McCormick, president of First Manhattan Consulting Group.

Banks need to go beyond typical head count reductions in their drive to cut costs. Three areas to look at: shared services functions, future investments and compliance-related activities. The good news is that the inverted yield curve won’t last forever. The bad news is that even when the yield returns to "normal," banks will still find profitability under pressure.

Entire article by Gordon Goetzmann, Executive Vice President

One metric stands out as being highly correlated to growth in a bank’s shareholder value: same-store deposit growth. Banks that consistently generate strong same-store deposit growth in their mature branches tend to generate strong growth in other relevant measures, as well, from overall organic revenue growth, to earnings per share growth, to total shareholder return. What’s more, the number is also a good predictor of success in de novo branching.

Entire article by James McCormick, President

... James McCormick, president of First Manhattan Consulting Group, which has sent employees into banks posing as customers for years, says some banks offer new ways to make switching easier than in the past.

First Manhattan Consulting Group found that only 20% of institutions that try to grow by adding branches were consistently successful at it.

Building a brand new bank office is very different from minding the store at a well established branch, said Gordon Goetzmann, Executive Vice President . "It’s all hand on deck to bring in new customers. The Banks that are the best at starting new branches know what makes them different & are able to tell potential customers about it" Unless you can succinctly answer that question, you have potential problems."

"What is different about Dallas-Fort Worth is the mix of institutions opening new branches here, says Andrew Frisbie of First Manhattan Consulting"- "you’ve got all kinds of people – big banks, small banks entrenched players and new entrants who are coming in here" Frisbie said.

…The latest study by US-based consultancy First Manhattan Consulting Group (FMCG), Beating the Odds in Bank Acquisitions: Avoiding Value Destruction in Branch Consolidations, challenges many of the assumptions surrounding bank mergers and questions whether, in many cases, branch closures are a good idea at all.

By examining closely the economics of a number of bank deals in recent years, FMCG took a detailed look at the impact of consolidating and converting branches as part of its in-market acquisitions.

An analysis our firm performed shows that the majority of branch consolidations result in a negative net present value, because customer attrition turns out to be much higher than typically assumed.

Consequently, banks need to implement next-generation approaches for selecting which branches to close, adopt the techniques used by institutions that beat the odds with higher retention, and integrate these perspectives into their distribution planning.

The potential savings associated with consolidating overlapping branch networks can be intoxicating. Such figures are ubiquitous in in-market deal announcements and are incorporated into valuations. However, focusing exclusively on this aspect of the income statement can lead to inappropriate decisions.

Full Article by James McCormick , President and Theo Moumtzidis, Managing Vice President.

Direct banking: should banks play offence, defense or stay on the sidelines? Jim McCormick and Gordon Goetzmann, president and managing vice-president, respectively, of First Manhattan Consulting Group, give their views on one of the definitive trends to hit the retail banking market over the past decade Could this 'disruptive' direct banking model put 30 percent of banks' stock price at risk? What should your strategy be as more competitors offer high rates via this approach? The answer will be different depending on your bank's situation.

Gathering deposits through online channels is becoming more popular, but First Manhattan Consulting Group says it is not for all institutions.

James M. McCormick, the New York firm's president, and two colleagues issued a white paper this week that concludes banking companies following the pack and starting online deposit accounts could face balance-sheet trouble if they cannot generate loans quickly.

First Manhattan expects the companies already in the business to start showing signs of that pressure.

"Some direct [banking] competitors will slow their growth, because of limits on their ability to profitably invest the high-rate deposits gathered," according to the report. "We already have seen evidence of some players 'backing off' prior price leadership positions."

However, the temptation to start an online deposit channel is high, because of its low overhead and the difficult deposit-gathering environment. Mr. McCormick's team estimates that 2.5% of all U.S. consumer and small-business deposits are in online accounts.

"Direct banking may present the most serious threat to retail banking incumbents in decades," according to FMCG

Theo Moumtzidis, a managing vice president at First Manhattan Consulting Group in New York, said the nontraditional products and services banks offer should fit their overall business model.

For example, if a bank has built its brand on convenience - branches open seven days a week until midnight and call-center employees trained to provide immediate answers - it should not add specialized insurance products that front-line employees do not understand, he said.

"A bank has got to have a clear value proposition - the best rates on bankrate.com or the most convenient branches - and any additional products have got to support that value proposition," Mr. Moumtzidis said. "If not, there will be a big impact on additional service, because the bank is just making things more complicated."

Pretty well all the banks today subscribe to the mantra "satisfied staff, satisfied customers, more sales" and the importance of having precise goals.

Yet one of the interesting findings from First Manhattan Consulting Group - ANZ's favourite consultant - is that satisfied customers are not enough to generate sales. Moreover, banks cannot build strategies, or even marketing campaigns, around customer satisfaction.

Satisfied customers need to be a given but a bank's products and services must be tangibly different .

Sometime this year, Experian -- the credit score folks -- and First Manhattan Consulting Group will roll out "Financial Personlities," which they tout as "the industry's first comprehensive segmentation and scoring system for specific types of financial services, including credit card, home equity and mortgage." This isn't going to be used to evaluate you as a good or bad credit risk. It is so that marketers can identify who's likely to take out a home equity loan or a new credit card.

Financial personality scores were developed to address the absence of category-specific market segment scoring systems that could meaningfully inform initiatives ranging from line of business strategies to direct marketing campaigns," said in a statement David Tetenbaum, managing vice president of FMCG.

Roundtable interview with Jim McCormick, Mark Fitzgibbon dir of research for Sandler O'Neill, Andy Senchak, Pres Corp finance KBW & John Chirin Head of Fin Institution M&A at JP Morgan topic: business line M&A.

McCormick: Notwithstanding that, I get calls from bank CEOs that say, "Come on in here, Jim. We need some work. We've got to shift our business mix around to get our efficiency ratio up." And the first thing I say to them is, "Well, let me show you the analysis that suggests that this infatuation with a low efficiency ratio is misguided."

Simply looking at the FDIC's data "massively" overstates the big banks' New York retail presences, said James M. McCormick, president of First Manhattan Consulting Group. He thinks the problem has more to do with shoddy Wall Street analysis of FDIC numbers than with banks that "intentionally goose their data."

Remote-deposit capture is another tool that will become a major lure for small businesses, says Gordon Goetzmann, managing Vice President at First Manhattan Consulting Group.

Banks will likely make funds available sooner for companies using remote deposit. He says that small and mid-sized banks, in particular, already are easing their funds-availability polices for small businesses.

Another service he expects to increase is check-guarantee, where a business agrees to accept slightly less than the face value of a check in return for the guarantee that it will be honored at the bank, even if the person who wrote the check doesn't have the funds in his account."

McFarlane refers to research by what he terms- the best banking consultancy in the world- that further convinces him ANZ's strategy of concentrating on revenue generation while investing in customer service is right.

The consultancy is First Manhattan Consulting Group, whose research is summarized in two papers, "Drivers of bank shareholder value and implications for top management's agenda" and "Looking in the rear-view mirror? Focusing on the wrong road signs?".

First Manhattan Consulting is also the alma mater of ANZ's head of personal banking, Brian Hartzer, and personal banking was the highlight of the ANZ result.

FMCG tested more than 50 variables to develop its maxims. "Our analysis highlighted the importance of organic revenue growth as a key differentiator," the consultancy found.

Moreover, in the sample of regional American banks analysed - banks not dissimilar to full-service Australian banks - a surprisingly wide variation in performance was found.

"Our analysis implies that for regional franchise banks the market values the ability to grow attractive revenue organically more than any other driving characteristic," FMCG said. "Improvements to efficiency may be nice to have, but there are limits."

A good measure, which ANZ has adopted, is the retailer's favourite of same-store revenue growth.

"Retail franchise banking continues to be a business with high return on equity and low risk," First Manhattan Consulting said.

"We have noted in the past that even modest organic growth in retail franchise banking can warrant an implied price-earnings ratio of 20 per cent or more for this line of business, given its favourable risk-versus-return characteristics. Consequently, generating more business in existing branches is highly valuable."

First Manhattan Consulting's Gordon Goetzmann floored McFarlane a few years back when he told him what he needed to outperform was a strategy, to which he replied: "But don't all banks have a strategy?" The answer was: "No, they all do the same things and what you need is a tangible reason for customers to want to come to you instead of the others."

Gordon J. Goetzmann, a managing vice president at First Manhattan Consulting Group, said many banks hawk checking accounts and credit cards on college campuses, but very few take the time to understand Gen Y and develop a comprehensive and targeted program like Zions'. Gen Y is worth the effort, he said.

James M. McCormick, the president of First Manhattan Consulting Group of New York, said that normally about 30% of households are interest rate-sensitive but that these days the percentage could be as high as 50% because of the steep, rapid rise in rates on relatively short-term certificates of deposit.

Some in the industry worry that creating a separate position to focus on deposits might promote "silo" thinking, but Theo Moumtzidis, a managing vice president at First Manhattan Consulting Group in New York, defended the approach. He said more companies should designate someone to pursue the "big untapped opportunity" in commercial deposits.

"Traditionally, the commercial business is focused on loan generation," he said. "It's no accident that you often hear people who are commercial bankers actually call themselves commercial lenders. Deposits are an afterthought."

The deposit-gathering positions that are starting to pop up at regional and community banks will help them bring in business customers who might have been overlooked in the past - those with cash on hand and no need for a loan, Mr. Moumtzidis said.

"For commercial lenders, it's actually a big step for them to go out and gather deposits. It's a different sales process," he said. "People who are good at developing loan demand might not be good at developing deposit demand."

"The reason why it's tougher to gather deposits is, in the same time period, many banks got religion about the importance of deposits," he said. "Now there are even banks out there trying to buy deposits, offering $100 in cash for someone to come and open an account."

There's no doubt that everyone's feeling the pressure right now," said Gordon Goetzmann, a managing vice president at First Manhattan Consulting Group, a financial-industry consulting firm in New York City.

Banks could react by cutting expenses, such as for marketing and travel, Goetzmann said. As competition intensifies, banks also might have to sharpen service, which is one way they can compete without having to offer the best interest rates, he said.

There's no doubt that everyone's feeling the pressure right now," said Gordon Goetzmann, a managing vice president at First Manhattan Consulting Group, a financial-industry consulting firm in New York City.

Banks could react by cutting expenses, such as for marketing and travel, Goetzmann said. As competition intensifies, banks also might have to sharpen service, which is one way they can compete without having to offer the best interest rates, he said.

Gordon Goetzmann, co-leader of the retail practice for the New York City-based First Manhattan Consulting Group, says "better acquirers realize that you don’t get a lot of meaningful lift [in revenues] from a significant renovation," except in some certain cases where you’re expanding drive-through lanes or expanding parking for customers.

When consultant James M. McCormick thinks about innovation in banking, he thinks of distinctive service-oriented business models that lead to improved revenue growth.

Cherry Hill, N.J.-based Commerce Bancorp, for example, has extended its already extensive service hours and added branch hours on Sundays in effort to live up to its motto of being "America’s most convenient bank." Once Commerce gets customers in the door, it wants to bowl them over by providing what it calls a "wow" level of service, which is yet to be matched by many other players in retail banking, says McCormick, president of First Manhattan Consulting Group in New York City.

Commerce’s ground-breaking service approach is supported by an extensive training program — the bank runs its own "university" akin to those run by powerhouse retail brands like Disney and McDonald’s. Commerce branches rely on an open floor design, which allows for employees to more quickly and easily make eye contact and then verbal contact with customers, McCormick says.

Similarly, Seattle-based Washington Mutual Inc. has stepped out of the box by earnestly cultivating an image as the "anti-bank" bank in order to engage consumers dissatisfied with conventional offerings, McCormick says.

These service-oriented advances align with the general trend of moving from a growth strategy based on cutting costs to one built on winning over new customers, McCormick says. He adds that the select few banks that can use their innovations — in design, training and product offerings — to distinguish themselves based on the power of their service are reaping the rewards in additional customers and deposits.

Though it may be considered risky, the move by BofA is actually a sensible decision, because it allows the bank to lure deposit volume, said Theo Moumtzidis, a managing vice president of New York based First Manhattan Consulting Group.

"Up to a certain amount of money, lenders can make decisions primarily based on borrower credit reports, Moumtzidis said.

Although small business owners, as a population, tend to be conservative and borrow infrequently, he said, it is a lucrative segment for banks. "These types of (small business) customer are attractive because of their deposits".

...The available access to credit is a key driver for a small business client when choosing a bank", Moumtzidis said. By offering this line of credit , which a business can access or choose not to access without incurring penalties, BofA is luring deposits. "It’s a foot in the door" he said.

'I don't see a lot of differentiation from any of these banks,' says Gordon J. Goetzmann, co-head of the retail banking practice at First Manhattan Consulting Group in New York. 'They're all going after the same customers.'

Centralization has gradually become the prevalent model thanks to factors including mergers, advancements in technology, and management by product line, said James McCormick, the president of First Manhattan Consulting, a New York bank consulting firm. From mid-2002 to mid-2005, Synovus' deposits grew at a compound annual rate of 8.4%, and Cullen/ Frost's at 7.2%, more than double the top-150 average, according to FMCG. Mr. McCormick said that theoretically, a bank of any size bank can use a decentralized approach. The challenge is finding experienced people committed to "the long-term role of being the banker in the community" rather than climbing the corporate ladder.

Bankers are realizing that targeted mail containing segment-specific language is effective in attracting profitable deposit-rich accounts. Banks are now using this technique to generate returns of more than 450% on their investments. Banks of all sizes can purchase and quickly deploy new third-party analytics and tested messages to improve same-store deposit growth, a key driver of shareholder value. In a study by my firm, annual growth in shareholder returns averaged 26% from 1999 to 2005 for regionals in the top 20% in same-store deposit growth - but only 5% for those in the bottom 20%. The first group increased same-store deposits 9% in the average year; the other's were stagnant...

Full article by Robert M. Tetenbaum

"Obtaining a material amount of deposits requires being near the top of the list of rates offered at any given time," said James M. McCormick, president of the First Manhattan Group, a banking consultancy.

"Commerce resonates with the person who says, 'I want a bank that cares about service and my needs as a consumer'," says James McCormick, president, First Manhattan Consulting Group, New York. The consultant says price sensitivity is quite strong among about 30% of consumers, leaving many prospects for the service-oriented bank.

Customers often have a bad time with call centers: They get lost in the maze of automated menus. They linger on hold, with no clue to how long they will wait. They are bounced from agent to agent, waiting each time in the back of the queue. They are asked to repeat information already provided. They get wrong or conflicting answers. People who call in because they are interested in opening an account - sometimes with hundreds or thousands of dollars - also get poor service. They get agents who cannot describe a product's key features and sell its advantages. They are transferred to a new-account team that is poorly staffed or operates on a limited schedule. (In recent mystery shops, over 50% of our calls to open an account were put on hold for more than 10 minutes.)

Full article by Gordon J. Goetzmann and Theo Moumtzidis

What strategy should a bank’s management follow to maximize shareholder value? To find the answer to that question, we recently looked at the valuations and shareholder returns of a relatively homogenous subset of 100 regional banks (excluding "processor" banks such as State Street and Mellon and money center banks such as Citi and J.P. Morgan Chase), and correlated that data to a slew of operating statistics, ranging from efficiency ratios to fee income. In addition, we divided the group into banks that have grown revenues and earnings primarily through organic means (the "Organics") and those that have relied more on acquisitions (the "Acquisitives"). When we were done with our analysis, we concluded that shareholder value is driven primarily by a few performance metrics, and that a key one is often not monitored regularly by banks, nor tracked or analyzed by most industry analysts.

"I see the competition for deposits as being intense no matter what the Fed does," says James McCormick, president of First Manhattan Consulting Group, which specializes in the financial-services industry.

Theo Moumtzidis, a vice president in the retail banking practice of First Manhattan Consulting Group in New York, said a school branch is not the only way to produce good will through association with a local high school. Bankers can sponsor athletic teams, speak about finances to students on their way to college, or make bank space available for school events such as car washes to raise money, Mr. Moumtzidis said.

Five years ago FMCG suggested that the industry did not respect retail franchise banking because it was seen as a mature, commodity service with low growth prospects. But we had an alternative view after calculating the service's warranted-price-to-earnings ratio, based on modern finance calculations, reflecting the business' high return on equity and low risk. Since then some retail banks have invested in improving their street-corner value proposition.

About 40% of a typical branch's customers use the drive-through once a month, said Gordon Goetzmann, the managing vice president of First Manhattan Consulting Group. Most service complaints involve speed, Mr. Goetzmann said.

James M. McCormick, the president of First Manhattan Consulting Group of New York, said his analysis of FDIC deposit data for the 12 months that ended in June shows the industrywide average same-store deposit growth was 3%-4%. He said the "top-of-the-line players" are achieving growth of 10%-20% in mature branches, which he defines as those open at least six years.

"Retail banking economics are overwhelmingly dominated by deposits," says James M. McCormick, president of First Manhattan Consulting Group in New York.

"The best banks have "good old-fashioned respect for you as a customer nonstop," Mr. Goetzmann said. "You walk into a branch and someone actually looks at you. Or they wave their hand at you while they're on the telephone when you walk in. Or a person at a desk stands up and greets you. "They are happy to see you. They are respectful of your time. That's what you expect in other retail businesses; in banking it's no different. The last thing you want to do is wait." Banking is a commodity business, he said, and banks can differentiate themselves only through service - "people, speed, and appreciation for the customer's business." "It's all conveyed through people," Mr. Goetzmann said.

When and if the floodgates open, bankers would probably find themselves overpaying for lagging franchises, according to James M. McCormick, the president of First Manhattan Consulting Group. With business conditions forcing banks to sell, due diligence is now more important than ever before, he said. "In the world of acquisitions, it’s surprising that not enough analysis is done to determine what the revenue momentum is of the candidate," said Mr. McCormick in a recent interview after the release of his Oct. 7 white paper "Shopping to Buy a Bank? Should Your Due Diligence Be More Diligent?" ...Mr. McCormick said acquirers typically fail to achieve improvements in their efficiency ratios after deals not because they don’t cut costs, but because revenue sags.

"There is an ample opportunity for banks with home-based businesses," says Gordon Goetzmann, managing vice president for First Manhattan Consulting Group. "Many of the businesses need help with better managing their cash, such as separating out payments better for tax purposes, and banks can do a lot to help them and develop strong relationships along the way."

"Corporate pursuit of "best practices" can proliferate within an institution to the point that frontline staff becomes over-burdened, confused and distracted. Bankers need to diagnose and then rectify the problem." - Gordon Goetzmann

"New FMCG analysis shows that a key reason many bank acquisitions fall short of expectations is that buyers do not uncover organic revenue growth problems at the seller. Consequently, while agreeing to a deal price, the acquirer’s management does not fully appreciate that they are implicitly signing up for a heroic turnaround of an underperforming institution." - James M. McCormick

''What you are seeing here is a number of banks looking to step up their origination of higher-yielding loans,'' said Gordon Goetzmann, of First Manhattan Consulting Group, which advises banks.

Richard Dorfman, a well regarded analyst of the GSEs at the First Manhattan Consulting Group, says: "The OFHEO is coming to the view that the competency of risk management at the Enterprises has become quite satisfactory, even though the report references the need to improve and elevate risk management."

However, as Mr Dorfman says: "One form of risk management begets another form of risk."

Tell employees what is expected of them: While a clear definition of their tasks is important, says Theo Moumtzidis, vice president for First Manhattan Consulting Group, he cautions against training people so that they are too constrained by their roles. "Give them a certain level of power, and trust them to solve problems." Give people the tools to succeed: First Manhattan Consulting Group execs say one big mistake banks make is launching services and products that even bank staffers have a difficult time describing. If the bank staff can’t explain it, they won’t be able to sell it.

The problem started when Linarducci inquired about an account balance over the phone. The senior analyst and bank mystery shopper with First Manhattan Consulting Group in New York was "up-sold" on a new savings account that promised to yield an impressive interest rate.The rep assured Linarducci the transaction would only take "a few moments" to complete and then unexpectedly transferred him to an offshore call center, where he waited on hold for 25 minutes. The language barrier made it impossible for Linarducci to be comfortable enough to authorize the new account. "The second rep kept referring to my money as rupees and I kept telling him dollars," he says. "Even though I corrected him, he kept referring to the amount I was going to transfer as rupees, not dollars. We were talking two different amounts."

"The recipe that they're serving up in their branches is resonating with folks," said Gordon Goetzmann, managing vice president at First Manhattan Consulting Group, a management consulting firm that serves financial institutions.

Goetzmann said Harbor Florida's branches, when compared with competitors in the same zip codes, readily compete with and beat larger rivals 80% of the time for new customers. He said Florida's top 10 banks have lost 14 percentage points of market share collectively to Harbor Florida and its peers over the last six years.