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Jim Young chats with Jeff Marsico, EVP at The Kafafian Group and writer of the blog, Jeff for Banks, on the importance of defining who your customers are and building a strategy to target them.
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Jim Young: Hi and welcome to the Purposeful Banker. The podcast brought to you by Precision Lender, where we discuss the big topics on the minds of today's best bankers. I'm your host, Jim Young, Director of Communications at Precision Lender. Today I'm joined by Jeff Marsico, Jeff is the Executive Vice President of The Kafafian Group and they're a finance strategy and operations consulting firm that works with community financial institutions across the country. Jeff is also near and dear to my heart because he is the author of the blog, Jeff for Banks, which I highly recommend. In fact, it was two of Jeff's recent posts that compelled us to reach out to him.
The first was titled, "Bankers, Ask What Customers Want, Then Do That." The second was called, "BS, Focus on Execution First." And they're going to be the focus of our conversation today. Jeff, thanks for coming on the show.
Jeff Marsico: Hey, Jim. Thanks for having me, great to be here.
Jim Young: So before we dive into your posts, can you tell our listeners a little bit about The Kafafian Group and also about your background in banking and what motivates you to blog about it.
Jeff Marsico: Yeah, well I appreciate that. The Kafafian Group is a community financial institution consultancy. We would consider ourself a small consulting firm, if you look at the Mackenzies, Bains, etc of the world, but for a community banking consultancy, we're nice and sizable. We're based in Pennsylvania. Our product that differentiates us from many consultants out there, is that we do profitability outsourcing. We are basically the outsourced management accounting department for community financial institutions, so they can measure their profitability of lines of businesses, products, and customers. Not a lot of community financial institutions have those management accountants on staff, so we do that. That also gives us great insights into where banks do or don't make money, spread trends, profit trends by product, which helps us in our other lines of business namely strategic planning and process improvement engagements.
We also do some general advisory and we do financial advisory. In the M&A market, we're sort of an alternative to some of the larger financial advisory firms out there. We take a more consultant's approach into determining if banks can bridge a strategy gap before they decide to do something like a self side M&A. So we have a niche financial advisory business, so that's about The Kafafian Group.
Myself, I go back to banking way back in the mid 1980's when I was tape librarian and microfiche creator, the chemicals have impacted me by the way, back when they had those large reel to reel tapes with IBM mainframe machines and very cold rooms. That was my first job in banking which helped a little bit with paying for college, then I took a little bit of reprieve after a few years of doing that and went into the United States Navy. I was actually in Naval Intelligence which is totally different than banking. I was in the first Gulf War, I'd like to say, one that lasted just a few months.
When I got out of the Navy, I went back to banking. That included doing things like being a branch manager, so I've been in the trenches in terms of branch management and also internal consulting and helping my then 12 billion dollar bank acquire a 4 billion dollar bank, so I helped with the merger integration there which was sort of that bridge to the consulting business and what is now The Kafafian Group. That's my background and the background of the firm and I appreciate you giving me a chance to say that.
Jim Young: So and I'm curious then what ... They're aren't a whole lot of people doing blogs about banking, what motivates you to produce, Jeff for Banks?
Jeff Marsico: Well, yeah the first reason I appreciate that, the first reason is a little bit of narcissism, is-
Jim Young: Of course.
Jeff Marsico: There are micro issues in banking that I wanted to dig a little deeper in. I didn't want to be a platitude or bromide type consultant. I wanted to enhance my base of knowledge and blogging about specific micro issues in banking forced me to do research to find out what is, so I did that and I wrote about it. And I also wanted to improve my writing skills, so way back in 2010 when I started the blog, it was a little bit of self interest that was involved, but it's grown and a lot of folks are readers now and I appreciate it. I feel a little bit of responsibility towards it and it still helps expand my knowledge base. And it all helps me engage with people that I would not have otherwise known.
Jim Young: Okay, well let's go to that first post. Again, it's called "Ask What Customers Want, Then Do That." I'll be honest, Jeff, that sounds ... to be blunt, that sounds kind of pretty obviously, but you felt compelled to put that down in virtual ink on the blog. Why was this a message you felt bankers needed to hear?
Jeff Marsico: I think that culturally, we tend to manage our bank and manage our balance sheet based on what's within our risk appetite, or how, or what we would perceive as hurdles to doing it. So for example, if you look at a bank that wants to focus on small businesses, yet would be unwilling to do small micro lines of credit, or collateral that is not real estate based lending, are you really into the small business market because if you wait til the business is mature enough, til they own a building and you could do a 75% loan to value commercial real estate loan, are you really a small business banker? Because there's so many unmet needs and in came other financial intermediaries like Cabbage and Ondeck to fill a need. It was filled by credit cards, but Cabbage and Ondeck are probably taking a little bit of that small business funding away from credit cards.
So a lot of times when we decide what financial services our small businesses need, we pick and choose based on risk appetite and what we want to put on our balance sheet and in today's day and age, I don't think that's necessary. In addition, I think I led the blog off by a lot of banks culturally have an issue with saying these are our top three customer targets, these are our top two customer targets, and I think it's because the history of the bank was built around putting a branch in a certain market and trying to serve everybody in the market.
If you go back, way back in the history of commercial banking, that's actually not how it was done, commercial banking was more like merchant banking in they only banked businesses in the markets that they were in. It was almost like a membership thing, so there was extreme niching at the very beginning of commercial banking, but then we morphed into being all things banking to everybody in the communities where we have branches and now we're having difficulty culturally morphing back to say, these are our top three customer segments, so you can't ask what our customer segments want, if you don't know your customer segments are, so that was sort of the crux of the post. Identify those customers and then figure out what they want.
Jim Young: And so, how easy or hard is it for them to identify that customer? I mean I would imagine most banks would say, I would like customers who are very low in risk and high in profitability, but you know who doesn't, so how do you go about identifying them and when you have that sort of, I would imagine there'd be a fear of, look if we identify these guys, are we cutting ourselves out from other potential customers?
Jeff Marsico: Yeah, that's a very good question. I think every customer has a risk reward metric associated with it and I think you guys work that with your solutions there at Precision Lender, that there are certain hurdles that you'd like to overcome but if you remember after the financial crisis, risk based pricing sort of entered into the loan equation in 2010 and 2011 and then everybody started chasing what is known as good quality credit. I 'be never been a lender, so I'm not exactly sure what that definition is and drove down pricing spreads and therefore ROE's of those customers. I think the mix of customers where you can achieve desired risk adjusted profitability and there's a sufficient enough numbers of those types of customers and growth in that market, that it should be a viable segment to pursue. The challenge there is, if you say okay, we want to pursue the medical practices, professional practices that focus in the medical industry because this is a growing segment of the markets where we are located and we think we could serve these customers profitably.
Well then what do you tell the mortgage banker over there that is really working hard to generate sufficient profits in the mortgage lending department when you want to do professional practice banking. So what happens is, you get these meandering pursuit of all customers that you possibly can without a focus. You don't focus your personnel development budgets, you don't focus your technology investments, because now you're all things to everybody. If you're going to focus on the growth of professional practices, perhaps implementing a state of the art online cash management solution is much more important than doing end to end mortgage lending. You would prioritize in the way, but if you don't make that prioritization, than anything goes.
Jim Young: Right and that sort of leads me into your next article, and it's titled "BS, Focus on Execution First." And I'll let you figure out what BS stands for. You are firmly on the side and you have a great quote from Michael Mankins of Bain who says, "If you have a bad strategy, no amount of good execution will help." From my days of sports writing I had a coach who once said, "Four five speed doesn't really help if you're running in the wrong direction." It's sort of the same sort of thing here. I've thought about this when you're target customer because that seems like it would be the peril right is if you identify the wrong targets, doesn't matter how well you structure everything to go after them etc. You're basically if anything just speeding up, executing off that is speeding up your decline essentially.
Jeff Marsico: Yeah if you plop a branch in a residential, heavily residential market, very light on the business market, and pursue a business banking strategy, that branch banker isn't going to succeed. So, what you need to do is you need to identify your strategy. Where do you see this bank five years from now and then set your course to get there. This article you know I called out a Harvard professor maybe I'm biased against Ivy League professors because I went to state school, I don't know, you know these wonky academics sometimes put out, like to comment about strategy and sometimes it's very perplexing. I used an anecdote about you know GPS's you don't just go into your car, turn on your GPS and drive all over the place, you put in a destination first.
Having a strategy is really the definition of your destination and how you're going to prioritize your training budgets, your technology investments, where you're going to put your focus on your marketing department. There's a whole lot of focus that needs to go on in banking if community banking is going to survive into the future.
Jim Young: So you know we talk about it in terms of the wrong target, but how often do you just general with banks, how often do you see them kind of falling into that execution strategy trap in which they are all about executing without, basically all about the trees without taking a look back to see whether they're in the right forest essentially?
Jeff Marsico: Yeah when I first got into bank consulting back in the late 1990's I would say that an alarmingly high percentage of bank's strategic planning was driven around the fact that their examiners asked for this strategic plan. Strategic planning even in corporations started I think maybe in the 60's and the 70's. In banking, much later, they didn't deregulate until the 80's and they ran their banks by budgets, so there's a huge culture about thinking no more than past next year. When they first started doing strategic planning, it was in response to examiners saying, can we see your strategic plan? And it was very challenging as a moderator of strategic planning to bring focus into the issue because they just wanted to be that general bank. The everything banking to everybody in the markets that they served. So it's taken almost a generation to get to the point, to get banks to focus on where they want to go.
Jim Young: I would think too that this is thinking about banks and a lot of times we run into that issue of ... We talk about it a lot of times in terms of data, in terms of the whole, you know the silos of a bank, but I would think that would make it very difficult in terms of implementing or shifting a strategy because if you are in your silo, we always use kind of the example of if your job is to bring in deposits and you just keep bringing in deposits, deposit, deposits, when you're struggling at the same time to find you know customers to lend it to, that's obviously not a good long term strategy but that particular group is executing the heck out of it what they are used to executing. You know it seems to be like that is probably a big issue is where you're executing a plan, that you're executing it well, but it's actually heightening or speeding up problems at the bank.
Jeff Marsico: Most of our community banks would rather have relationships with their customers, but you know banking is a spread based business as you know at Precision Lender and that the underwriting and processing and efficient servicing of a commercial real estate loan costs the same almost in organizational resources to do a $500,000 loan or to do a $5,000,000 loan, but the revenue is driven off of the $5,000,000. It's driven off of the balance. So you have a very successful commercial real estate lender that's driving a lot of the ROE in the bank, but the bank wants to be a relationship driven core funded commercial bank and therefore they start to creep into the commercial real estate lenders incentive plans and maybe even their ROE targets more and more deposits dollars. Well you have this very high performing and very successful commercial real estate lender that's just not buying it because their successful, but I do think that as banks evolve, they need to move everybody in that organization a little bit closer to their strategy.
Take the mortgage lender that I talked about earlier, and the bank is pursuing professional medical practices in their markets that perhaps a portion of their practice should be dedicated to doing the jumbo lending that a lot of these folks in these professional practices demand.
Jim Young: Yeah, it's an interesting ... I don't want to say conundrum, but it is not an easy thing to do and particularly when you start messing with incentives and that sort of thing and start saying, hey actually I know you're doing great at this, but we need you to start doing this instead of that. Or a little bit of this or focus on this instead of that, that takes a lot of thoughtfulness and I would say it takes an amount of maybe bravery is a little bit too strong of a word, but you know there are roadblocks to doing this sort of thing.
Jeff Marsico: Well you see for example with the commercial real estate concentration guidelines, you see a lot of banks actually being forced to do it by the regulators because they're just getting too heavily concentrated in the asset class that they've had tremendous success generating. So it's regulatory guidelines that are forcing them to take a look at their business model and trying to make adjustments. Now I think if you're running into the creed guidelines and then going into the commercial lending department of a community financial institution, you and I both know that the commercial lender is the same person. To go in and tell them I know that last year, the 15 deals that you did, 14 of them were commercial real estate deals, now we want 20 deals that you do this year and we want 18 of them to be C&I loans. That's the recipe for failure, right, so it has to be evolutionary with the staff you have in place.
Jim Young: Yeah, absolutely. Well that'll do it for us today, for this podcast. Jeff, thanks so much for coming on to share your expertise and can you just tell listeners you know if they want to find out more about The Kafafian Group, where should they go?
Jeff Marsico: Yeah, well we have a website, Kafafian Group, we're under development for a new website as I told you earlier, we're a finance and strategy people we're not very good at marketing, but our website is kafafiangroup.com K-A-F-A-F-I-A-N group dot com. I asked our fearless leader, Bob Kafafian, if we had called it the Smith group so I wouldn't have to spell it every time, but we went with the unique name and of course you could reach me at Jeff for Banks too, you could just Google "Jeff for Banks" and I'm at the top of the FCO list surprisingly.
Jim Young: I checked that before I came on for that same reason because I was going to give people the address. The address is Jeff-for-Banks.blogspot.com but you are correct. If you just Google 'Jeff for Banks" it will come up as the top choice. So thanks to our listeners for downloading yet another show. If you want to listen to more podcasts or check out more of our content, you can visit our resource page at precisionlender.com or you can just head to our home page to learn more about the company behind this content, Precision Lender. And finally if you like what you've been hearing, make sure to subscribe to the feed and iTunes, sound cloud, google player stitcher. We love to get ratings and feedback on any of those platforms. Until next time, this has been Jim Young for Jeff Marsico and you've been listening to The Purposeful Banker.
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As a Content Manager here at PrecisionLender, Maria develops the messaging, stories and content pieces for prospects and current clients – showing them the value in PrecisionLender. Her passion for serving others is evident as she leads the volunteer program here at PrecisionLender. Maria’s ability to be organized and constructive, along with her ability to be practical makes her an exceptional addition to our team.
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