The past twelve years has been a gold rush for financial institutions.
During the past decade or so, low borrowing costs, stable deposits, vibrant lending markets and high profitability made for a Gilded Age of banking. Hitting topline goals was a given – and bonuses an enshrined right.
The joke “3x6x3” became the rule:
3% deposits, 6% loans and 3pm tee time.
Efficiency ratios were nothing but a flowery statement in the annual Schedule 10-k.
The tide has turned.
The Golden Era of Banking is Seeing its Demise Now.
Banking certainly isn’t the first industry to undergo massive change. Consider a bit of history:
Over 80% of all US workers were in agriculture by the late 1800’s. Today, that number is at 1.9% – half of which are not farmers but government and academics specialists.
During the golden age of American manufacturing (1950-60’s), 35% of all Americans were employed by manufacturing. Today it is just 8%…and dropping.
The service industry recently passed its apex of 79% of US workers, with an expected decline to 15% by 2040.
Likewise, the banking industry will experience these same service industry declines in employment, along with increases in efficiencies.
But first, let’s explore…
What factors combined to impact the banking industry?
- rising borrowing costs
- deposit flight
- underperforming assets
- collapsing lending markets
- an economy teetering on recession
The numbers just don’t add up any longer. The math no longer works.
Bank efficiency ratios are disastrous, which means market deceleration will cause very difficult decisions to reduce expenses and increase efficiencies.
During the best of times, efficiency ratios in the 70s were not unusual and even tolerated. We also noticed seemly super-efficient banks like Signature Bank (32%) were masking other problems with lack of operational investment.
It’s a double-edged sword.
The Banking Industry Must Follow the Lead of Other Industries…
The banking industry has to follow the lead of others that have traveled the same painful path.
Investments must be made to improve operational efficiencies. Getting below 40% efficiency while making significant investments in a down market will be like finding a pot of gold under your seat.
It’s not an easy journey.
But there is a secret to performing this magic double-edge sword trick: it comes from another industry.
Let’s take a look at an industry that has gone full circle on this journey.
What Banking Can Learn from the Manufacturing Sector
US manufacturing went through a gut-wrenching transformation during the 1980’s & 90’s.
It was driven by exposure to global competitors:
- extreme quality from Japan
- extreme labor cost reductions from China
- market barriers and government subsidies in Europe
…all without any political or financial support at home.
Headline news for decades gave testimony to closing factories across the country. The decline of US manufacturing gave birth to the term rust belt. It fit. Once-giant behemoths, idled by global competitors, became empty coffins. Rusty and decaying tombs.
Blue collar workers suffered. They endured rounds of lower wages, longer hours, lesser benefits, and layoffs. Those who survived and thrived learned new technologies, new skills, and new ways to improve their output value.
Today, one well-educated and trained person operates a full manufacturing process in a highly automated factory. What took hundreds of people to produce 40 years ago now takes one – and that person is very well paid.
The surviving US manufacturers became lean mean fighting machines, world-class formidable competitors. They competed with higher quality, lower costs, and innovative products.
What This Means for the Banking Industry
I want you to imagine one loan officer generating the same revenues as your whole loan department does today, only 10x more profitable.
This is where the banking industry is going.
Sound farfetched?
Not at all.
Most of you know me as an expert in banking technology. However, what you may not know is my early career was in defense manufacturing. I rose to the position of State Director for the NIST Manufacturing Extension Partnership.
As a result, I know a good deal about what it took for US manufacturers large and small to survive and thrive through those gut-wrenching global transformations. How so? Because I was there helping them transform.
Over the next few months, I will be dedicating my articles on how you and your bank may achieve:
- Extreme efficiencies
- Higher quality services
- Lower borrowing costs and 10x profitability
- And the best part – how to fund your improvements using your savings
Stay tuned! Next up I’m covering the high value and risk of HOT processes.
I founded Gilman Patrick LLC based on the belief that the banking industry is facing a major disruption. I want my clients to be the winners in what I believe is a once-in-a-lifetime opportunity. Contact me today to see how we can work together to navigate the unavoidable change that lies ahead.