Most bankers don’t spend a lot of time with start-up companies. The need for bankers’ loan decisions to be right 99% of the time tends to not mix well with most start-ups’ risky and voracious appetite for capital.
Outside of a few bankers in Seattle, Silicon Valley, and a few other places, the clear exception is the banking innovation and financial technology (fintech) communities. We all get together at great conferences like Banking Innovation and Finovate, and I always learn from bankers, large vendors and entrepreneurs alike.
The best start-ups have lessons that a lot of bankers would do well to learn:
1. Start with the customer
Start-ups that take off and grow are usually designed around a specific set of customers, whose needs and preferences are deeply understood. Most banks want to be all things to all people, so they end up being nothing much too far too many. Of course, there are some interesting exceptions. For some really thought-provoking ideas read about niche banking from Tribed, whose CEO Jeff Stephens I had the pleasure of meeting at a recent conference.
2. Know your value proposition
Great start-ups understand what problems they solve for their customers. They know their pain points how their solutions add value. Many banks are still oriented around selling products that may or may not solve any specific problems. Worse, customers have an even harder time perceiving value from the myriad of add-on fees that too often are not linked to any value-creating activities.
3. Iterate regularly
By their very nature, start-ups that survive and thrive stay close to their customers and make regular iterations of their offerings to better tailor it to what their customers want (and not necessarily what they say they want). While bank customers don’t want change simply for change’s sake, well-considered tweaks for well-defined reasons increase satisfaction and loyalty.
4. Keep it lean
I worked many years for a CEO whose simple mantra was “grow revenue faster than expenses and great things happen”. My review so far of banks’ 1Q earnings shows a continuation of a fair number of banks growing expenses faster than revenue, some of them with efficiency ratios (non-interest expense as a percent of revenues) in excess of 65-70% and even higher. This is not sustainable. If the revenue challenges cannot be met, expenses will have to be cut to maintain EPS growth. Otherwise, merger mania may indeed by imminent, as I have previously posted.
In the start-up world, the dot-com boom rally cry of “get big fast” has largely been replaced by lean and mean infrastructures. Instagram– which just sold itself to Facebook for a billion dollars– has barely a dozen employees.
5. Protect your capital
Entrepreneurs know that capital is precious and they have to allocate it wisely. Signing that expensive lease on a fancy new office suite may mean that you can’t make that critical server upgrade or hire that new business development manager.
Bankers should know that capital is precious too, but I see evidence to the contrary so often that I wonder sometimes. The financial meltdown revealed huge leverage ratios and loan books filled with poorly underwritten loans that quickly depleted capital reserves.
Today’s slow growth environment is causing bankers to be tempted to forget this lesson in the quest for loan growth. Which is why I always say that bankers need to think like private fixed income investors.