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PCBB Banc Investment Daily October 09, 2013
Banc Investment Daily
October 09, 2013

All Warfare is Based on Deception

Most community bankers we know have read at least part of The Art of War by Sun Tzu. This famous military general and tactician taught us such things as to "keep your friends close and your enemies closer"; that "the supreme art of war is to subdue the enemy without fighting" and that "excellence consists of breaking the enemy's resistance without fighting." His teachings are still used today in business, sports and warfare, so he must have known what he was talking about.
Yesterday, we highlighted the recent move by competitors to surreptitiously gain information from community bankers. The goal is to capture more customers, collect income and generally inflict casualties on community banks. Today, we look at some common strategies and tactics used by these "frenemies" so you can better prepare and respond.
First of all, it is important to know these competitors are actively seeking an edge, and getting your information from you is very important. It can start with something that seems as benign as simply running your asset liability model for you. Yet, doing so gives the competitor your entire loan and deposit listing. This gives them the structure of your loans, including such data as the amount of each loan, the types of prepayments you use, origination dates, loan sectors, pricing and even down to the address and zip code. Given that data, and a little bit of analytical analysis, you can find out who the borrower is with about five minutes of work on the Internet. Then, when the time is right, the competitor can approach the largest clients on the list that generate the most value for the bank and refinance them away.
Another way these "frenemies" move to establish a relationship with your bank is by offering what appear to be pseudo-correspondent banking services. These are but a sideline to the normal banking services they offer directly to customers in your market. Once a relationship is established, these banks focus on the data in order to dig in and see what sort of loans you offer, how you structure things and where your customer concentrations may reside. Worse yet, they may even offer a loan pricing or relationship profitability model, through which some banks unknowingly load up very proprietary information about all of their customers. In doing so, these banks are effectively serving their information up to these competitors on a silver platter.
If you are still thinking, "Well, that is interesting, but it hasn't happened to me yet," we have some news for you to consider. You already know competition is fierce and both large and regional banks are trying to capture every single customer that surfaces. Like you, we see and hear this all the time from community bankers and observe it in the loan pricing levels that surface out there. What you may not have realized, however, is how quietly effective these competitors have already been.
Consider FDIC data comparing loan balances for the industry from 2Q 2012 vs. 2Q 2013. During that period, institutions with assets <$100mm have seen net loan totals drop nearly 10%. That is huge, but it isn't the whole story. Consider as well that institutions with assets $100mm to $1B have been running in place and are virtually flat during this same time (+0.2%). Meanwhile, institutions with assets $1B to $10B have grown loans by 4.1%, and those with assets $10B+ have increased them by nearly 5.0%. Make no mistake, there are only so many customers to be had and competition is stiff.
Things are moving quickly and community banks cannot accept the status quo. These are extremely good and organized competitors, actively targeting your bank franchise. Their analytics have also improved, so they can comb through your data much faster and they absolutely want your customers. Protect your franchise - don't share your data with competitors.
As you know from your readership of this publication, we care deeply about community banks and we always have. We never compete with you and we want you to win this fight. We can help, but the first step is to break free and stop using competitors altogether. Sure, they may be nice people, but they are also competitors that are targeting your bank. It just doesn't make sense to give competitors your client information, detailed insight of your operations or ongoing feedback.
It is also 5x to 16x harder to capture a new client than to keep an existing one, so don't let competitors see anything you are doing and protect what you have worked so hard to build. In short, stop buying things from (or sharing information with) any banks that take deposits from consumers/businesses or originate loans to them directly, because they are your competition.