How a community bank built its strategy from an ROA / ROE analysis

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Despite banks’ emphasis on the importance of digital transformation, “strategic transformation” may be more beneficial for a large percentage of banks and credit unions. The importance of digital for the industry is not in question, but the vast majority of traditional institutions are caught between the biggest banks with their mega budgets, on the one hand, and a growing number of new exclusively digital competitors. , on the other hand. .

New thinking may be the most powerful antidote to this high-stakes competitive threat.

Many bright minds in the industry are grappling with this challenge, looking for a way out of the pack and, most importantly, to fortify themselves against the twin threats just described.

Second Generation Community Banker Jay Tuli, President of Massachusetts Leading bank, was familiar with several financial institutions that had built strong brands and had great success in taking a niche approach to banking. One is Live Oak Bank, of Charlotte, now the largest SBA lender in the country. Another is the Signature Bank of New York, which has grown to $ 74 billion since it opened in 2001, with the primary focus of serving the multi-family homeowner market as well as law firms and, more recently, payments based. on the blockchain.

The success of these and other institutions caught Tuli’s attention as he pondered how to further grow 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 the bank’s president and CEO.

What are we doing really well?

Something else helped merge the thinking of young Harvard Business School graduate Tuli as he took on more responsibility in the family bank. While browsing through performance data from Massachusetts banks covered by a report by Financial management consulting group, he was struck by the fact that of the top five banks in the state, by return on assets or return on equity, the most specialized in something. One focused on franchise loans, another on the affluent, and others were SBA lenders or credit card specialists.

“They are all doing something really, really good,” said Tuli. The financial brand. But coming down to the bottom of the list, he noticed that institutions tend to be the ones that are “everything for everyone” – perhaps offering acceptable products and services, but little stands out.

After digesting all this information, Tuli became a strong supporter of the concept of niche banking. Leader Bank was already a major mortgage lender at the time. But the management of the bank decided to double that strength and also focus on a few other strengths rather than stretching.

Because of this decision, they refuse to do a lot of things that other community banks do. “We don’t offer credit cards, we don’t do trust services or wealth management, we don’t provide auto loans or student loans,” says Tuli. “We want to be better in just a few areas.”

Niche Banking is profitable:

At the end of 2020, Leader Bank was # 1 among all Massachusetts banks and savings banks with an ROE of 33.28% and ROA of 3.80%

Tuli argues that when a financial institution tries to be everything for everyone, it prepares to be chosen by specialists. Specialists in cards, mortgages and auto loans have long been around, but the advent of fintechs and the digital age has amplified this threat.

( Read more: How a small bank’s big bet on digital only is paid)


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A banking upheaval is underway

Not so long ago, consumer banking preferences were primarily based on geography. “The main driver was proximity to a branch because everything had to happen in the branch,” says Tuli. “Banks are differentiated by their location. They even put it in their name. But over the past decade digital banking has changed things so geography doesn’t matter as much. “

“There is an upheaval taking place in the banking sector. What matters most to customers now is “How do your products meet my specific needs?” “
– Jay Tuli, Leader Bank

“There is an upheaval in the banking industry,” says Tuli. “What matters most to customers now is” How do your products meet my specific needs? As Tuli explains: People are more likely to think this way: ‘I’m a student; I’m a young saver; I need a car loan; I need a student loan. as a result, they are likely to identify more with a supplier that does what they need really well compared to “the bank in their backyard”.

Some readers may recall that Capital One was originally a card specialist – a niche player – but, through acquisitions, has grown into a full-service bank. So isn’t there value in a large-scale banking approach?

There are, and Tuli talks about it below. But first, read how Leader Bank adapted the concept of niche banking to its own situation.

( Read more: Google Banking: great opportunity or great risk for community institutions? )

Advantage in details

On the loan side, residential mortgage credit is Leader Bank’s niche. His success there provided the resources to spur growth in other areas.

Unlike many community institutions, business banking services have become a huge source of deposits for Leader Bank. This results from another application of a niche approach.

“On the deposit side, we made a radical change a few years ago,” explains Tuli. “Rather than trying to do banking, we decided to focus on just four areas. Of course, if a customer outside of those four countries wants to open an account, ”he adds,“ we’re not going to say no. But we’re not going to target all businesses.

The four verticals are:

  • Law firms
  • Municipalities
  • Property managers and owners
  • Doctors, dentists and health care companies.

In a word:

The key to a successful niche strategy is having the people, products, and technology that are unique to the market you are targeting. This is how you differentiate yourself.

The real niche value lies in small differences, emphasizes Tuli.

“Let’s say I’m a law firm that does real estate closings. It means I’m really busy at the end of the week. If a bank caters to this niche, it can keep its technical room open until 7 p.m. on Friday. It’s a fine detail, he says, but those details are worth paying for and they are worth it for a client to move a relationship. “The more weeds and details you get, the more you start to differentiate yourself from other banks.”

Read more:

The challenge of retail banking

Beyond the mortgage business, Tuli admits that it is difficult for a community institution to compete with the big banks in retail banking.

Unlike meeting the specialized needs of real estate law firms in their market, where Leader Bank has a distinct advantage over Bank of America, a market segment such as recent college graduates is a whole different story. These young consumers want a truly elegant mobile banking experience, and BofA is going to win this game, observes Tuli. College graduates are a huge market in the United States and the giant bank will invest $ 1 billion to try to get it right.

The executive believes that the answer to the success of consumer banking services for community institutions is to adopt an integrated approach to products where the whole relationship counts. In a way, this strategy combines elements of niche banking and generalist.

For example, as a mortgage specialist, Leader Bank offers unique products to consumers. However, if you want them, you need to open a bank account with Leader. “We recover a lot of consumer accounts this way,” says Tuli.

A better way:

If you are just offering a standalone credit card, how are you going to win against Capital One? But if the card is integrated with other products, it is more difficult for competitors to choose you.

How to repel FinTechs

An integrated product approach also contributes to fintech / neobank competition, argues Tuli. Most of them compete on the basis of a specific product, such as student loans. Right now they don’t have much to integrate, but that will eventually change.

So how can community institutions compete when this happens?

By doing a lot more with their technology, that’s Tuli’s answer.

“In a way, you could say that banks should to be fintechs, “ he declares. After all, a large chunk of their budget is already spent on technology, he points out. The specifics of using dollars need to be reoriented to some extent, but Tuli believes that a key element of change at many banks and credit unions is simply mindset. “What are fintechs doing?” he says. “They are hyper focused on specific target segments.” And they create solutions that address specific problems.

Leader Bank has done the same not only for its mortgage business, but also for its targeted verticals. For example, two software programs created by the bank under the direction of Tuli automate the often manual functions of rent collection and rent deposit of landlords.

In-house construction technology is still unusual for community institutions, but Tuli believes that is another thing that gives the bank an edge.

“It gave us a lot of confidence, so when we look inside the bank and say, ‘Okay, we have this problem, how do we fix it? », Declares Tuli. “We ask, ‘Is there a product that we can buy? If not, can we build it? It is definitely a weapon in our arsenal.

The answer isn’t always to build in-house by no means. With fewer people entering branches, for example, the bank needed a way to digitally convey the type of face-to-face referral a new customer would get at a branch. In this case, “building it” was not the best option and they turned to Digital integration to replicate the getting started – digitally guide new customers through the sign-up process.

This has enabled Leader Bank to speed up the process of transforming its seven branches from transaction centers into brand centers.


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