For all the focus in banking on the importance of digital transformation, “strategic transformation” may be of greater benefit to a large percentage of banks and credit unions. The importance of digital for the industry is not up for question, but the vast majority of traditional institutions are caught between the largest banks with their mega budgets, on the one hand, and a growing number of new, digital-only competitors on the other.
Fresh thinking may be the most powerful antidote for this high-stakes competitive threat.
Many bright minds in the industry are wrestling with this challenge, seeking a way to break out of the pack and, importantly, to fortify themselves against the twin threats just described.
Second-generation community banker Jay Tuli, President of Massachusetts-based Leader Bank, was well aware of several financial institutions that had built strong brands and become highly successful by taking a niche approach to banking. One is Live Oak Bank, out of Charlotte, now the largest SBA lender in the country. Another is New York City’s Signature Bank, which has grown to $74 billion since opening in 2001, with a primary focus on serving the multi-family landlord market as well as law firms, and, more recently, blockchain-based payments.
The success of these and other institutions caught Tuli’s attention as he considered how to further the growth of Leader Bank, a successful residential mortgage lender. The $2.4 billion bank is an offshoot of a mortgage company founded by Tuli’s father, Sushil Tuli, who is chairman and CEO of the bank.
What Do We Do Really Well?
Something else helped coalesce the thinking of the younger Tuli, a Harvard Business School graduate, as he took on more responsibility at the family bank. While perusing performance data on Massachusetts banks covered in a report from Financial Management Consulting Group, he was struck by the fact that of the top five or so banks in the state, by return on assets or return on equity, most specialized in something. One focused on franchise lending, another on the mass affluent, and others were SBA lenders or credit card specialists.
“They all do something really, really well,” Tuli tells The Financial Brand. But going down towards the bottom of the list, he noticed that the institutions tend to be ones that are “all things to all people” — offering acceptable products and service, perhaps, but little that stands out.
After digesting all this information, Tuli became a strong believer in the niche-banking concept. Leader Bank was already a big mortgage lender at the time. But the bank’s leadership decided to double-down on this strength and also to concentrate on a few other strengths rather than stretch itself thin.
Because of that decision, they decline to do many things other community banks do. “We don’t offer credit cards, we don’t do trust services or wealth management, we don’t make auto loans or student loans,” Tuli says. “We want to be better at only a few things.”
Niche Banking is Profitable:
At yearend 2020, Leader Bank was No. 1 among all Massachusetts banks and savings banks with an ROE of 33.28% and ROA of 3.80%
Tuli maintains that when a financial institution tries to be all things to all people, it sets itself up to picked off by specialists. There have long been card, mortgage and auto loan specialists, but the arrival of fintechs and the digital age has amplified this threat.
A Banking Shakeout Is Underway
Not that long ago, consumer banking preferences were based primarily on geography. “The primary driver was proximity to a branch because everything had to happen in the branch,” Tuli states. “Banks differentiated themselves by their location. They even put it in their name. But in the last ten years, digital banking has changed things so that geography doesn’t matter as much.”
“There is a shakeout going on in banking. What matters more to customers now is, ‘How do your products fit my specific needs?'”
— Jay Tuli, Leader Bank
“There is a shakeout going on in banking,” Tuli maintains. “What matters more to customers now, is ‘How do your products fit my specific needs?'” The focus of an increasing number of consumers has moved from “location to persona.” As Tuli explains: People are more likely to think along this line: “I’m a student; I’m a young saver; I need an auto loan; I need a student loan.” As a result they are likely to identify more with a provider that does what they need really well versus “the bank in their backyard.”
Some readers may recall that Capital One was originally a card specialist — a niche player — but through acquisitions became a full-service bank. So isn’t there value in a broad-based approach to banking?
There is, and Tuli talks about that further on. First, though, read how Leader Bank has adapted the niche banking concept to its own situation.
Advantage in the Details
On the lending side, residential mortgage lending is Leader Bank’s niche. Its success there has provided the resources to drive growth in other areas.
In contrast to many community institutions, business banking has become a huge source of deposits for Leader Bank. This resulted from another application of a niche approach.
“On the deposit side we made a radical shift a couple years ago,” Tuli explains. “Rather than just trying to bank any business, we decided to focus only on four industries. Of course if a customer outside those four wants to open an account, we’re not going to say no,” he adds. “But we’re not going to target all businesses.”
The four verticals are:
- Law firms
- Property managers and landlords
- Doctors, dentists and healthcare businesses.
In a Nutshell:
The key to a successful niche strategy is to have the people, products and technology that are unique to the market you’re targeting. That’s how you differentiate.
The real niche value is in small differences, Tuli points out.
“Say I’m a law firm that does real estate closings. That means I’m really busy at the end of the week. If a bank caters to this niche, they can keep their wire room open until 7:00 p.m. on Fridays.” It’s a fine detail, he says, but those details are worth paying for and they’re worth it for a client to move a relationship. “The more in the weeds and details you get, the more you start to differentiate from any other bank.”
The Challenge of Retail Banking
Beyond the mortgage business, Tuli admits that, it’s tough for a community institution to compete with the big banks in retail banking.
In contrast to serving the specialized needs of real estate-focused law firms in their market, where Leader Bank has a distinct edge over the likes of Bank of America, a market segment such as recent college graduates is another story altogether. These young consumers want a really slick mobile banking experience, and BofA is going to win that matchup, Tuli says. College grads represent a huge market across the U.S. and the giant bank will invest a billion dollars trying to get it right.
The exec believes the answer to success in consumer banking for community institutions is to adopt an integrated approach to products where the whole relationship matters. In a way this strategy combines elements of niche banking and generalist.
For example, as a mortgage specialist, Leader Bank offers some unique products for consumers. However, the deal is, if you want them, you have to open a bank account with Leader. “We pick up a lot of consumer accounts that way,” says Tuli.
A Better Way:
If you just offer a standalone credit card, how are you going to win against Capital One? But if the card is integrated with other products, it’s harder for competitors to pick you off.
How to Fend Off the Fintechs
An integrated product approach also helps with fintech/neobank competition, Tuli maintains. Most of them are competing based on one specific product, such as student loans. At present they don’t have much to integrate, but that situation will change eventually.
So how can community institutions compete when that happens?
By doing a lot more with their technology, is Tuli’s answer.
“In a way, you could argue banks ought to be fintechs,” he states. After all, a big part of their budget already goes for technology, he points out. The specifics of what the dollars are used for needs to be redirected to some extent, but Tuli believes a key part of the change at many banks and credit unions is simply the mindset. “What are the fintechs doing?” he says. “They’re hyper-focused on specific target segments.” And they build solutions that address specific pain points.
Leader Bank has done the same for not only its mortgage business but for its targeted verticals. One example is two software programs the bank created under Tuli’s direction that automate the often manual rent collection and rent deposit functions of landlords.
Building technology in-house is still unusual for community institutions, but Tuli believes it’s another thing that gives the bank an edge.
“It’s given us a lot of confidence, so that when we look inside the bank and say, ‘Okay, we have this problem, how can we solve it?'” says Tuli. “We ask, ‘Is there a product out there that we can buy? If not, can we build it? That’s definitely a weapon in our arsenal.”
The answer isn’t always to build in-house by any means. With fewer people coming into branches, for example, the bank needed a way to convey digitally the kind of face-to-face orientation a new customer would get at a branch. In that instance “building it” wasn’t the best option and they turned to Digital Onboarding to replicate the handholding — digitally guiding new customers through the whole enrollment process.
That has enabled Leader Bank to speed the process of transforming its seven branches from transaction centers into brand centers.