Bank performance benchmarking matures as a strategic tool

A version of this article first appeared in the February BAI Executive Report: How banks best measure performance. Read more within to discover how data, especially peer-based benchmarking, increasingly helps a dynamic financial services industry understand the marketplace and act.

Virtually every customer interaction, back-office operation and employee record handled in a financial institution leaves a data trail.

Hardly digital debris, that data paired with today’s analytic capabilities allows for more meaningful insights than even a few years ago. And that’s where benchmarking can elevate industry intelligence and its practical application.

At its most basic, benchmarking compares the performance metrics of one financial institution against another, particularly those operating in the same market, or having a similar profile.

“We find great value in benchmarking,” says Josh Miller, head of consumer acquisition, marketing and product development at $190 billion, Cleveland-based KeyBank.

For instance, Miller says, a couple of years ago, a minority of new account acquisitions were for interest-bearing checking. Benchmarking validated that “we were under market [performance] and had a tremendous opportunity.”

Conversely, he adds, a precise reading on market share of a particular product can dispel anecdotal opinions that you’re lagging.

“By understanding competitors’ performance metrics, we gain essential context for assessing our own progress and challenges,” agrees David Tuyo II, president and CEO of the $1.2 billion University Credit Union in Los Angeles. “I think you have to start by selecting a study that aligns with your strategy, otherwise you can get lost in benchmark quicksand.”

A range of capabilities

Because data is available on how institutions stack up across a product portfolio, institutions can design studies to zero in on performance of specific operations, products, channels, or branches – with further narrowing by market or type of institution.

For instance, if an institution wants to deepen its product penetration per customer, the “onboarding” period, or the first 90 days after a new customer establishes an account relationship, is valuable. “That’s when the bulk of [other] products and services are purchased,” explains Mark Riddle, director, research and content delivery, at BAI. A study that examines new-customer relationships at peer institutions during that crucial period, especially a comparison that further narrows by type of initial product, channel and customer demographics could identify the strengths or weaknesses of onboarding cross-selling.

But while benchmarking allows a view into what competitors are doing, banks and credit unions don’t typically aim to exactly match other institutions’ performance. Late-game pivots can be costly, misaligned with other stakeholder expectations within your bank and against strategy. The intention is instead focused on improvement to better achieve an institution’s own goals.

At Frost Bank, strategic goals typically revolve around organic growth and customer and employee experience, “so the studies we’re looking at help us keep a pulse on the metrics tied to these priorities,” says Alex Duncan, vice president and market research analytics supervisor at the nearly $50 billion, San Antonio, Texas, bank.

Yet banks and credit unions must also stay open minded to benchmarking results.

Prasanna Kumar, associate director, investment banking, at research and technology firm Acuity Knowledge Partners, draws from this example: “If a peer is closing in on certain geographies or localities, this gives the insight to review if [an institution] should continue to operate in the specific geography or discontinue.”

In addition to assessing current performance against competitors, benchmarking can indicate emerging trends, either at an institution-wide level or focused on the individual business unit or a branch-to-branch snapshot.

At the national level, for instance, “When we identify trends across the entire industry, such as a steady increase in mobile banking adoption or a shift in consumer lending preferences, it provides a signal that changes in member behavior or broader economic forces may be affecting our institution,” UCU’s Tuyo adds.

In the recent rising cost of funds environment, benchmark studies adopted by many of the 100-plus community banks that Carey Ransom partnered with focused on learning how the banks compare on efficiency ratios, says the managing director at the financial services investing fund BankTech Ventures.

And, at a local level, a community bank might pick up on an early warning to monitor its commercial real estate (CRE) loan portfolio if delinquency rates at banks with similar CRE concentration in the market are ticking up, says Stephen Curry, CEO of financial services consultancy Endurance Advisory Partners. “Coupling the market-level indicators with your own bank’s loan portfolio … can point to the need for a thorough portfolio review,” he says.

A regulatory emphasis on benchmarking

For certain, even as data access grows and banking strategists warm to its necessity in surviving and thriving in a competitive landscape, benchmarking is not new.

Banks and credit unions to varying degrees have been required to submit quarterly results to regulators and those reports often lean on benchmarking for valuable data on financial performance and operational efficiencies, says Robert Zondag, partner at consulting firm Wipfli.

In fact, data collected by regulators is publicly available at sites like NCUA and the FDIC. At a minimum, this starter data can be captured to reveal the metrics of institutions in certain geographic localities, and data from other sources can be layered on top of it, adds Zondag.

Measuring performance by many means

Just as there are a range of benchmarking metrics, there’s also a gamut of expertise and resources banks and credit unions tap to conduct studies, to analyze results and produce forecasting reports.

Even smaller-market operators see value in such a granular takeaway. One example is the $33.4 million SLO Credit Union, which during the recent interest rate run-up tracked rates that its local peers were offering. As is the case with many well-considered benchmark studies, view this data as one tool in the box. SLO didn’t simply adjust rates to competitive levels, but performed additional research, specifically liquidity shock tests, says Dane Smith, CFO of the San Luis Obispo, Calif., credit union. “We gained insights on how our cash flow would change with the increased rate environment and made sure we set our deposit rates to stave off deposit run-off early on,” he says.

Some, particularly larger institutions, may employ a data scientist or have an analytics team able to write full code to perform analysis, says Stephen Greer, strategist and industry consultant, at SAS. Findings from those studies can be disseminated in easy-to-interpret visuals to executives and business unit managers for institutions that contract with these firms. At other institutions managers are trained to use “low code” platforms, which allow metrics to be dragged, dropped or manipulated on a dashboard, creating informative visuals pertaining to that particular unit.

Regardless of the final delivery mechanism, the rising importance of data, benchmarking and real-time analysis is clear.

Tuyo’s UCU hired coaches to teach data literacy to its internal training staff who in turn ran learning sessions for managers, and UCU also uses third-party consultants to provide any needed expertise.

Artificial Intelligence, or AI, promises to super-charge benchmarking capabilities. “AI will be able to continuously digest larger and larger data sets over time. These systems are also improving with being able to detect more distinct patterns based on the data,” says Jim Pendergast, general manager at altLINE by The Southern Bank.

There is also a case to be made for improving the industry on the whole via stronger benchmarking.

In addition to the balance sheet metrics collected by regulators, sources like bank and credit union trade associations, consulting firms and core processing providers often sell metrics on a wide variety of factors. And, some metrics are sold on a subscription basis, enabling institutions to track changes in near real-time. Customer satisfaction levels, shares of deposits captured digitally, levels of investment and success in fraud prevention, employee engagement and attrition levels are just a few of the metrics available.

Often, “there’s a give data to get data” arrangement, says SAS’s Greer.

It’s important to remember that metrics are valuable only if the methodology is understood by study designers. For instance, if an institution uses a study as part of an effort to increase efficiencies in its mortgage processing, it could compare metrics on the length of time from mortgage application to approval at various institutions. “But get clarity on what’s meant by ‘approval’,” advises Mike Rempel, senior director at  Cornerstone Advisors. “Some institutions might report actual closings as approvals, for instance, while others count it as when the borrower receives word they are approved,” he says.

Similarly, it’s important to understand how the banks and credit unions selected for comparison are structured. For example, a bank may be of a similar size and in the same geographic market as another bank, but one focuses primarily on commercial clients while the other serves retail customers nearly exclusively.

Tackling branch questions

As banks and credit unions strive for improved intelligence for a healthy, targeted branch mix within an omnichannel ecosystem, benchmarking has played a vital role. No doubt, real estate is a big investment, as is personnel and technology.

With 343 offices in eight states under his watch, Chris Nichols, director of capital markets at the $65 billion Winter Park, Florida-based SouthState Bank, says a common question for big branch networks that benchmarking can illuminate is perennially: “What does a profitable branch in a specific market look like?”

Answers emerge by using metrics from regulators on a branch’s size and its loan and deposit market share, which indicate an office’s profitability. Additionally, Nichols explains, engaging with benchmarking consultants for metrics on customer retention, where customers are drawn from, the amount of daily foot traffic, and the length of time customers spend in a branch can be layered on to the regulator metrics to tease out reasons for differing branch profit levels.

“Sometimes benchmarking leads to an epiphany,” Nichols says. “For instance, a study could indicate that customers who actually live closer to a branch of your own bank are driving another 10 minutes out of their way to a competitor’s office.”

“In cases like that,” Nichols stresses. “It can be worthwhile to send marketing messages to those customers, touting the nearby location and range of services at your own office.”

Marilyn Kennedy Melia is a contributor to BAI.