Customer Service and the Margin

By Chris Bledsoe, Banker’s Dashboard

In previous columns, we’ve talked about growth and the cost of funds as they relate to and impact net interest margin. There is another vital factor you and your bank’s management team can control in this volatile market; one that can have a significant influence on margin performance–customer service.

Let’s be honest. Every community bank in the country talks about customer service and how their bank is different. But does your bank really deliver on this promise? I mean really deliver from the board room to the lobby? High performers know that “walking the walk” and not just “talking the talk” to deliver high quality customer service can distinguish your bank from the pack.

Is customer service a priority at your bank? As a board member, you need to determine whether or not it truly is. Following are some questions you can ask to help uncover the answer.

• When was the last time you discussed service at a board meeting?

• What is supposed to happen when a customer walks into the lobby of your bank?

• To what extent is your bank relying on wholesale funding right now?

• What will be the impact to your bank if the Fed cuts or raises rates?

Believe it or not, service plays a very important role in all of the above on the road to improving your margin. Here’s how.

Focus, Focus, Focus
Times are tough out there and so much of what is happening is out of your control. The good news is that service is one thing community banks can control in order to gain a competitive advantage over the bigger banks. Why is the Ritz-Carlton known throughout the world for its high quality service?  Because the company and its people focus on service every single day. The Ritz-Carlton team understands what is expected of them and everyone places high importance on customers and their needs. If your bank wants to be known for great service, then it takes more than a mission statement; it requires an investment in time and a bank-wide dedication (that starts with the board of directors) to a way of doing things that will help your institution stand out from the rest.

More Core Deposits
In my opinion, the future roadblock to growth for community banks will be core deposits; that’s why service plays such an important role in margin performance right now. Local, regional and national banks are competing for deposits, and your bank’s exceptional service can make or break the customer’s decision where to place their money. Make sure everyone in the bank knows exactly what should happen the minute a customer walks into the lobby. Create excitement and motivation for employees with programs and incentive plans. Additionally, the board should clearly understand the bank’s position in terms of core deposit growth and reliance on wholesale funds—to ensure there is a plan in place to address issues.

Communication Is King
There is a lot of change going on in the industry right now from new regulatory requirements to the introduction of TARP funds and, unfortunately, bank failures. Your bank’s employees and customers have access to all of this information, yet likely many don’t understand how the changes may affect the bank. Don’t overlook the fact that it’s the bank’s responsibility to effectively communicate the impact of these industry events and changes to all constituents. They will form their own opinions if you don’t. Empowering your people with this level of knowledge will help them to provide better service to customers and enable them to answer the difficult questions being posed to them in the lobby each day. For example, if the Fed is predicted to cut rates, make sure everyone in the bank understands the impact it will have on deposits, loans, marketing, etc. Be aware and be prepared.

This is the right time for you to make customer service a top focus for the bank.  Improving and showcasing customer service will lead to core deposit growth. This, in turn, will ultimately make your bank more valuable, help decrease cost of funds and increase the margin, which will result in more loan growth for the bank. Talk the talk and walk the walk – begin today.

<back to January 2009 Directors Digest>