How Is Your Bank Different?

Lending Differentiation

We recently found ourselves 30 minutes early for a bank visit, so we googled the nearest coffee shop.  A Starbucks and a privately owned shop called Kaleidoscope Café was within a five-minute drive.  We drove to Kaleidoscope because we prefer to frequent local establishments and after we had parked we had to walk by Starbucks on our way to Kaleidoscope.  Starbucks was crowded, and there was a long queue at the register.  When we walked into Kaleidoscope, we noticed a substantial contrast.  First, the space was larger, cleaner and brighter with more outside seating when compared to the competing Starbucks. However, there were only four customers.  We ordered two large drip coffees.  The barista explained that they only served one size.  “Are you kidding?” my colleague asked.  But it was no joke.  We paid our $5.25 and got our two tiny cups of coffee.  We did not mind paying the premium over Starbucks for our coffee, and would gladly pay more, but we were offended that we couldn’t choose our size.  While the quality of the coffee was good, there wasn’t enough value to justify the price. As a result, we won’t come back because Kaleidoscope is not serving what we want.


Application To Banking


What does this have to do with banking - a tremendous amount.  We drove to our next appointment with a bank that is just under $500mm in assets, in a middle-sized urban market that competes against every local community, and many national banks, as well as the occasional insurance company and credit union.  The banker pointed out that the bank prefers not to compete on price – charging a little more for the service that it offers, and this is indeed reflected in the bank’s net interest margin relative to industry and state averages. 


However, further into our discussion, the banker went on to lament three challenging areas. The first, was the lack of technology spending limited the bank’s online capabilities, which in turn was hampering DDA growth and new account opening from younger business customers. The second issue was that loan pricing from other local banks “did not make sense” which unfortunately translated to the $500mm bank we were visiting losing out to the competition on larger and better quality credits. Third, with interest rates expected to increase, the competition was making life miserable by offering seven and ten-year fixed rates both on new loans and to the bank’s existing customers.


It was clear that this bank could not effectively differentiate itself from the “Starbucks” of banks. Generic national and super-regional banks can offer the same coffee, in any size, for a lower price.  If this bank competes on price, the “Starbucks” banks will clearly dominate.  If the bank cannot offer a superior product, then the customer will seek out the competition. 


 What should this bank do to differentiate itself?


Outside of investing in your bank’s brand, there are four direct ways that banks can differentiate itself against the “Starbucks” banks.  


  1. Focus on an industry, product or geography – Starbucks may be able to sell a cheaper cup of coffee anywhere in the country. However, banks must be able to understand its focused industry, product or geography better than a “Starbucks” bank. Maybe it is hiring experts in medical practices or distribution centers, or maybe it is specializing in a product such as multi-family rehab. Or, maybe it is understanding real estate values better than anyone in your market (plotting cap rates, sales comps and value drivers based on zip code and usage).  It is difficult to charge more for the same loan or deposit (as it is for the same cup of coffee) unless additional value is created relative to other bank competitors.  Banking and industry expertise can be that additional value for which customers are willing to pay.
  2. Produce Valued Content – Starbucks is nationwide, and cannot connect with the community the way a local competitor can.  Make sure that that connection is meaningful and tangible.  Banks should publish their research in blogs, newsletters, and emails (their understanding of the local market, recent transactions, local economic factors or real estate trends).  Banks can also organize conferences, luncheons or podcasts where your bankers team up with accountants, economists, industry experts or lawyers to educate your customers and prospects.  Forums create a perfect opportunity for bankers to interview local leaders in business or politics that are of interest to your customers and prospects.  Even write a book.  The book may incorporate the local history and the bank’s local expertise in an industry or product.  The book will not make it on the New York Times best sellers list, but giving away free copies to local business owners and bank commercial prospects will engender lasting relationships and forge new clients.
  3. Develop essential software – Give away an app, online function or calculator that allows local business to automate processing or create efficiencies.  You can also buy software in bulk to hand out to your business clients or prospects such as what some banks do for tax preparation, a CRM system or applications for social media monitoring. Banks have also created calculators to help clients with loan pricing and some (like us) have created a simple tool that takes real estate inputs and calculates debt service coverage ratio plus the leverage ratio (the most important credit parameters for underwriting). Leveraging an existing or newly-created software tool that can help your local customers conduct their business more efficiently will make your bank a strategic partner, not just another financial institution.
  4. Focus on services that your customers need – There is no reason that this customer bank cannot offer online commercial account opening that is fully customizable and integrated with their systems. The solutions exist, but the cost is significant.  However, the cost of not offering the solution is much higher.  Finally, as interest rates are expected to rise, many “Starbucks” banks are starting to market fixed-rate loans of seven, ten and even 20 years to their best commercial clients.  Not having a solution in this area is akin to trying to sell that tiny cup of coffee for a premium when Starbucks is offering the Venti at a lower price.  Offer the products that your customers want and charge a premium for it (your customers are most probably willing to pay a premium for what they want).  Charging a premium for what the customer does not want cannot be a winning strategy. 




The differentiation strategies above require some sacrifice or knowledge, but most do not require a cultural transformation.  Your bank cannot allow itself to be a Kaleidoscope Café when more competition is turning into Starbucks.  Your bank must be different than your competition, and that difference must be valuable to your customers.  Most importantly, not having the exact product or service demanded in the market, and offered by your competition, is a potential strategy flaw.  We have witnessed all four of the differentiation strategies above used by other banks across the country to significant levels of success.