October 04, 2010

Inside-The-Box Bank Management + The Best Employees + World Class Technology + New Regulatory Scrutiny = A Business Model Destined to Fail. Sorry for the gloom and doom, folks, but when did you ever know me to act like a PR guy. I'm an analyst, consultant and "plumber." No one ever hired me to show-off their successes. They hired me to "stop the leaks." Right now, I see leaks in the future of banking, and I'm not the only one. Every bank lobbyist in DC is sweating the future because they failed to protect their constituency. Every fancy restaurant in DC is wondering what happened to the big spenders. The successful "lobbyists" these days represent Joe and Jane Public and they eat at McDonalds. Consumers will benefit at the expense of banks because the business model doesn't stand a chance of winning. Not enough income, higher expenses, too many freebies. Following is an analysis of the current model's algorithm:

Inside-The-Box Bank Management — Look at how many times certain bank CEOs were glorified by the American Banker with celebrity photos for their humongous successes prior to 2008. Today, those photos qualify as the mug shots of the banking crunch. The CEOs didn't play by the book, but in this new era of banking conventional methods are going to have a very tough time making a decent set of earnings. And I'm certainly not advocating crooked banking or packaged investments or opaqueness to make a buck. It's just that it will take a special talent to run a high-profit, by-the-book bank going forward. Ask yourself, why did the Chase CEO survive, or as his book says, last man standing, while the other too-big-to-fail CEOs were axed? Answer: he was smarter than the others. How many more like him are there? Answer: not many.

The Best Employees — They cost too much across the board — salary, ordinary benefits, extraordinary banking benefits, sick leave, holidays, retirement plans, superb health care that didn't need President Obama's healthcare reform plan, pleasant work surroundings, and managers who never cracked a whip. And if employees deliver the goods, they enjoy the best benefit of all — respect and job security. Banks can no longer afford excellence provided by professional employees. A tightwad bank CEO, who had more name recognition in the press than Lindsay Lohan has on police blotters, once told me he hires any high school graduate at minimum wage who fills out an app and hopes she'll quit before her six-month guaranteed raise comes due. His bank made money. Unfortunately, somewhere back in time the idea of customer service made all the difference in the world, but no one took the time to figure out how to pay for it. In banking, there's no charge for customer service. Call an airline today and see how much customer service you can get.

World Class Technology — There's only one problem with the top technology solutions in banking — their users. There's a widespread feeling in banking that negotiating technology fees to the bone with their vendors creates heroic bankers. The real problem is not the price of technology; it's the paltry, or overly simplistic, use of technology by pedestrian bank employees. Bankers know the price of everything but the value of nothing. The banking crunch is proof. Bankers should have paid attention to the early warnings of their risk management solutions. But they were too busy processing transactions to put another bad loan on the books in order to earn the up-front fees for next quarter's earnings call. Bank tech vendors will have to offer two versions of their technology — the plain vanilla el cheapo and the luxury version for upscale bankers. Of course vendors won't label them that way but price tag will tell the story.

New Regulatory Scrutiny — I never met a bank examiner I didn't like. He had the right set of rules and he used them. But examiners are like cops; they "arrested" (wrote up offenses of their "clients") but they don't prosecute. Now the prosecutors will be looking for violations before they even occur, because Congress made it the vogue thing to do. Look for more heroes, the likes of Harry Markopolos, to emerge in the regulatory ranks. I never met a banker who liked a bank examiner, but now it's going to really cost him to hate the examiner.

Now here's the irony. Banks have been spending a mint to process transactions for their customers, and yet, they don't get paid for that work. Ask ADP, for example, what they charge to prepare a company's payroll and you'll discover it's serious money. No one gets it free. So I have never been able to figure out why an equivalent service such as bookkeeping for every check written should be gratis. In my own case, I use every service any bank has to offer. My bank labels me Wealth Management Banking. My Data Processing Cost Analyst model knows what every bank transaction costs and it's been tested by banks and vendors. So I priced my account relationship with my bank. I hope they don't read this blog because they are getting the short end of the stick. The total IT cost alone to process all my monthly transactions is $14.53. And please don't challenge my pricing models. More than 100 banks as well as vendors tested my rates and accepted the reasonableness of them. Add the back office costs (employees) to that and it comes to at least $40.53. The bank charges me $16.00 per month. I've never paid a penalty fee. I have never paid an ATM fee. I never paid for checks. I pay my credit card balances every month. My bank never calls me since they have every service they offer. I never talk to their people because they are superb bookkeepers. I never ask for anything outside the scope of what is pure norm. I don't even take their lollipop at the drive-up. They need every penny they can earn. I'm just as greedy as the next guy so I hope my bank never changes. But I wouldn't buy their stock. Every other bank in Dallas calls me because apparently they want the same deal. As they used to say in my Boston Irish neighborhood when all else failed, Saints preserve us and the banking industry.

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