As a thought experiment, imagine if one evening Amazon CEO Jeff Bezos had one too many cocktails and errantly gave an order to purchase your bank. Imagine further that, a bit embarrassed from this mishap, Bezos sent an Amazon strategy officer to figure out what exactly the company had bought and how to make “lemonade” out of a legacy investment. Let’s dive into what a US bank acquisition can look like.
The following fictional memo and bank mergers and acquisitions case study describes what the team at Cornerstone Advisors imagines would transpire. The framework to assess the acquired bank is based upon Bezos’ famous 2016 shareholder letter that outlines Amazon’s core business philosophy.
May 2019
To: Jeff Bezos – CEO
From: Jared Muckfixer – Corporate Development
The following memo outlines my assessment and recommendations concerning our bank acquisition of Acme Bank, a $5 billion institution located in Metropolis, USA. Acme has doubled its size in the past five years with acquisitions of smaller community banks. From what I have learned about bank performance ratios, earnings are solid at a 1.27% return on assets or “ROA.”
In order to assess this corporate investment, I reviewed Acme according to four principles outlined in Mr. Bezos’ “Day 1 defense kit” that forces our company to maintain the energy and rigor of a startup.
While the Acme team knows parts of the business well, this bank operates primarily with a Day 2 “stasis” mindset. I anticipate great resistance to the changes I am recommending:
Guiding Principle 1: True Customer Obsession
Acme Bank has a mission of “Helping Clients Succeed Today and Tomorrow,” but this financial organization is mostly steeped in discussions regarding products, competitors and quarterly production. There are no visible managerial processes tied to customer experience and learning. I cannot obtain working documentation regarding today’s customer experience, and no single member of the executive team can speak authoritatively regarding the bank’s digital channel.
The bank is collecting basic data with its Net Promoter process, but the only one knowledgeable about this data is Ms. Jane Quiet, an assistant vice president in the Marketing Department. Interestingly, the average number of products utilized by Acme Bank’s households has stagnated at 2.6 for the past 11 years, yet no analysis has been initiated to determine why customer share-of-wallet is not improving.
Transformation Recommendations:
- Replace current retail banking executive with chief experience officer with stronger know-how to scale a digital business.
- Define a “target customer experience” for our first go-live sprint within 120 days. Assign a small team and supply development talent to assist.
- Implement a formal customer feedback and learning process, adding an experienced data scientist to the Marketing team in the next two weeks. Require weekly status reports to the Executive team.
Guiding Principle 2: Resist Proxies
Unlike Amazon, Acme Bank’s culture is run primarily by “proxy” – i.e., internal processes that have somehow become ends in themselves. Most departments focus primarily on the budget process, and the bank’s CFO is very proud to report that she has “locked down every dollar of spend.”
The Risk and Compliance group is rarely seen, but they are constantly distributing lengthy emails expressing grave concern about any proposed organizational changes and potential regulatory exam criticisms.
The Project Management Office appears solely focused on scheduling meetings and updating status reports, and the chief credit officer screams about excess “loan file exceptions.” I will immediately be challenging each of these processes in terms of how they create customer and economic value.
Transformation Recommendations:
- Implement an R&D approval process with CEO/COO that escalates ideas above operating budget – require Objectives and Key Results (OKRs) for each project.
- Require Enterprise Risk team to quantify potential revenue losses or increased operating costs that will accompany their proposed risk controls.
Guiding Principle 3: Embrace External Trends
While Acme’s management team is aware of banking’s shift to digital technology and understands the threat that players like JPM Chase present, there is no formal plan to drive Acme’s digital shift, and no success metrics exist for the digital channel.
While the bank’s COO is often quoted as saying, “Information is our greatest asset,” no scalable reporting and analytic structure exists at the bank. Ninety-five percent of performance metrics relate to earnings and loan growth with no focus on customer delivery. For instance, I have run analytics showing our cost of delivery is getting destroyed by excess branch capacity. While our direct cost-per-digital-customer-interaction is 50 cents, it runs over $9.00 in our branches, and new account and loan volume in these facilities has declined steadily over the past four years.
While the bank focuses strongly on commercial lending, I am concerned that deposit funding from consumer relationships could erode more quickly than management is forecasting given external competition and innovations.
Transformation Recommendations:
- Reduce physical branches in two waves: close eight of our 53 branches in 120 days and 12 more over the next year. After restructuring charges, reallocate the $20 million of reduced expenses evenly between new investments in digital delivery and marketing, analytics and robotic process automation, and expansion of the contact center and IT staff areas. We have to reshape Acme Bank quickly for the future.
- Assume control of our digital user interface and use our vendors solely for back-end transaction services. Develop new customer experiences to drive deposit growth.
- Develop a small business solution offering that is 100% digital and deploy algorithmic credit decisioning (code name BusiBot) for all loans under $500,000.
Guiding Principle 4: High-Velocity Decision-Making
A root cause of Acme Bank’s poor go-to-market capabilities rests in the company’s decision-making and execution process. At Amazon, we like to make bold moves when 70% of desired information has been obtained. Acme managers are stuck filling the information bucket between 90% and 100% with details that easily can be worked out later. While Amazon has always emphasized a “two-pizza” limit in terms of team size, Acme regularly has huge crowds in conference rooms where issues are discussed but decisions and accountability are rarely made clear.
Transformation Recommendations:
- Disband all current committees except for ALM, Credit and ERM, which add value given the implicit risk of this business.
- Decentralize Steering Committee and PMO processes into agile teams with defined resources. Deploy stable two-pizza agile teams centered in our business and retail customer segments – assigning design, analytic and development talent to each team.
- Deploy an agile team solely focused on building a scalable IT infrastructure with application programming interface services from all systems of record to all user interface/workflow developments.
Mr. Bezos, you once famously said, “If you don’t understand the details of your business, you are going to fail.” Acme’s team has a great understanding of finance, credit and regulations, but they are flying blind when it comes to customer experience, operations, technology and valuable insights lying within customer data.
As we process the bank merger and acquisition in addition to rebranding Acme Bank into Amazon Bank, you can count on me to quickly remedy this situation.
–JM