The Engines of Growth in Banking: Reallocating Resources to the Functions that Produce Results
“Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”
—Peter Drucker, The Practice of Management, 1954
1954. That’s the year the legendary business consultant Peter Drucker drew a line on the business P&L and called out only marketing and innovation as generating results. Everything else is cost. In sixty-plus years, nothing has changed the stark truth of Drucker’s statement. Yet, if you look at the trajectory of how businesses allocate their resources, it often seems that Drucker’s truism has been stood on its head.
In many industries—and banks and financial institutions are no exception—resource allocations are often heavily weighted to everything but marketing and innovation. Certainly, in periods when banks look to enhance operating margins, marketing and innovation are frequently first on the block when it comes to cutting costs. The reason is often culture. Marketing and innovation have higher risk of failure than many activities in a bank.
Inventing new products and service models or crafting new ways of communicating with customers exposes people to the judgement of the market. The verdict often comes quickly, is measurable and can be reported as having positively bent the trend line on sales and revenue. Or not. It is sizable cultural risk for many leaders.
Investing in the Engines of Growth
At Brand+Lever, we believe that now is an ideal time for banks to shake the culture of incremental innovation and put sufficient resources behind marketing. Bank profitability is at record levels—almost $165 billion in 2017, according to the FDIC, even after the short-term accounting hit because of the recently passed changes in federal tax law. A significant share of those profits was paid out as dividends to shareholders—$121+ billion in 2017, which eclipsed the previous one-year record of $110 billion in 2007 (just before the 2008 financial crisis).
Yet, the long-term dividend to shareholders might be even greater if those profits were reinvested in business model and service innovation. The argument for doing so is as follows:
- Consumer attitudes about transactional banking are changing at a pace that could make the existing brick-and-mortar, “something for everyone” business model obsolete within 10 years. Has your bank fully aired all the implications of changes in how people pay each other, get paid and source loans?
- Emerging AI-assisted chatbots like Bank of America’s Erica, Capitol One’s Eno, and firms like LivePerson and Personetics are pushing technology from hands-free digital assistants that automate simple transactions into sophisticated financial advisory services that could replace bankers.
The ROI on Creativity
Consumer demand for highly personalized service and the emergence of predictive chatbots that can more efficiently “assist and advise” are intersecting in ways that can create a more intimate relationship between banks and customers. Data analytics and predictive modeling allow banks to anticipate customer needs and recommend strategies and products before the customer even conceives of the need! In doing so, these innovations powerfully advance the business purpose of creating tomorrow’s customers.
They also underscore the importance of creativity (innovation and marketing) in creating customers. A few years ago, McKinsey looked at the correlation between creativity and key financial metrics. Their proxy for creativity was the number, consistency and breadth of marketing excellence awards won by firms. When McKinsey looked at the financial results of companies with top quartile creativity scores, they found the companies performed better than peer firms on three key measures:
- 67 percent had above-average organic revenue growth.
- 70 percent had above-average total return to shareholders (TRS).
- 74 percent had above-average net enterprise value or NEV/forward EBITDA.
The McKinsey data provides a proof point for Drucker’s argument that the “creative arts” of marketing and innovation produce results—market-leading results for those firms who are the most creative!
The Brand+Lever Challenge
The culture of creativity is often not strong in banks. We are a risk-adverse industry. But the reality is many banks are seeing their market share eroded by innovative business models, brands, marketing messages and radical new customer experience platforms. The status quo simply will not hold and revenue growth, return to shareholders and increases in net enterprise value are at risk for those banks unwilling to accelerate change.
Brand+Lever offers a half-day workshop for banks to explore how to reallocate resources to innovation and marketing, in ways that drive growth without risking failure. Our workshop is built around three core questions:
- What are the higher-order values that motivate customer purchase decisions today, and how might they be changing as we project 3-5 years into the future?
- What business model and operating innovations will be required to respond to changing consumer purchase behaviors and to create a distinctive service experience?
- How do we invest our innovation and marketing resources wisely, and what is the expected return on those resource allocations?