Does Your Bank Test and Learn?
There is a simple fact that is critically undermining most strategic plans in our industry today: bankers have too many ideas and not enough money to pursue them. What’s worse is that these same organizations lack the discipline necessary to vet their messy “marketplace” of business opportunities and prioritize resources to get the most important items implemented.
Why are new ideas multiplying like rabbits? Simply because our industry’s business model before the Great Recession isn’t proving to be as fruitful as it was in the good old days. Our world is being disrupted with the explosion of mobile and remote channels, the innovations and threats of new payments solutions, the rapidly evolving ways we market to customers and the difficult new practices required to effectively manage risk. We are trying to figure out this new world as fast as we can.
Bankers who have only recently shaken off crisis fatigue are now living in a QE-twisted, margin-compressed world that has constrained revenue and made investing in the future very difficult. At the same time, bankers are anxious and know they have to get going on new strategic initiatives. When it’s time to invest resources, bankers come to difficult questions such as:
- Do we need to offer person-to-person payment services and how will this create financial value?
- Should we position ourselves in the emerging mobile wallet world or should we wait until the competitive landscape shakes out further?
- To what extent can technologies such as iPads, video and e-signatures help reinvent our retail branch environment?
- How will our commercial cash management services need to be delivered with portal and mobile technologies to compete with the country’s largest banks?
In an insightful 2009 Harvard Business Review piece, management expert Thomas Davenport concluded: “Every day, managers in your organization take steps to implement new ideas without having any real evidence to back them up. They fiddle with offerings, try out distribution approaches, and alter how work gets done, usually acting on little more than gut feel.” Davenport adds a hurtful blow: “So-called experiments aren’t worthy of the name, because they lack investigative rigor. It’s likely that the resulting guesses will be wrong and, worst of all, that very little will have been learned in the process.”
How can banks address this weakness? With significant competitive threats, limited discretionary resources and higher levels of uncertainty, bankers need to more seriously adopt what is known as a “TEST AND LEARN” approach that has been successfully used within consumer product, pharmaceutical and credit card companies for some time.
Test and learn basically involves putting a bit more formality and discipline into trying new ideas and rolling them out on a small scale to new markets, customers or employees before major investments and organizational change are approved. It forces bankers to focus more on data and business impact than the constant chaos approach to change management. The test and learn process can therefore be simplified into three stages: “developing the hypothesis,” “testing the hypothesis” and “taking action.”
Credit card innovator Capital One made the test and learn approach famous with its rapid-fire introduction, modification and termination of various card products. Some of the large retail banks like Wells Fargo and PNC have also adopted more rigorous approaches to testing ideas empirically, but most banks are still electing unorganized chaos as their primary means of resource allocation.
Making it Work
While there are sophisticated approaches and complicated software tools available in the market today, most bankers cannot afford nor do they need such grandeur. Instead, GonzoBankers can work to create a test and learn mindset inside their organizations and integrate it into their planning and execution processes. The chart below illustrates where test and learn can fit in.
In the bank’s strategic planning process, some initiatives will arise where the goal and outcome are fairly straightforward such as, “We need to expand mortgage originators in our newly acquired South County Market and initiate a complementary marketing plan.” Other initiatives, however, lack the same certainty and should first be implemented as smaller scale, test and learn initiatives. Examples could include:
- Experimenting with a new “branch of the future” prototype;
- Entering a new niche lending area or targeting a higher risk credit segment; and
- Deploying new mobile lending capabilities.
Like any other initiative, test and learn ideas should run through the bank’s standard project management and budgeting processes, but they should require an extra level of data collection and analysis in order to earn a “GO” vote from senior management to scale up the investment.
For GonzoBankers hoping to reduce the chaos a bit and create a better hit rate on strategic initiatives, here are a few recommendations for this more rigorous approach:
1. Embrace the Test and Learn language and mindset at the senior level. In planning meetings bank executives should call out ideas and proposed initiatives that should require some degree of testing and pilot activity before big resources are implemented. This requirement allows for potential initiatives in the organization to “earn” the right to scale up with data and insight. A retail banking executive recently quoted Jim Collins to me regarding this mindset: “Sometimes it’s better to fire bullets than shoot cannon balls.”
2. Create a simple common template for Test and Learn initiatives. This can be a one or two page document that forces executives and their project resources to formally spell out a hypothesis for the test, what data will be collected, how it will be analyzed and what results are achieved. Creating this type of visibility at the executive level will spur more meaningful strategic discussion and better accuracy in where to allocate resources.
3. Encourage a “control group” if at all possible. In fact-based testing, a control group is used to make sure the intended variables are truly responsible for results. For instance, just measuring sales growth in a new branch format may wrongly encourage managers to conclude it was a success when an outside factor (i.e., placement in a high growth market or a “bank transfer” event) could have influenced results. By comparing results to a control group of branches, the executives would have a better picture of the true impact.
4. Track your organization’s tests and learnings on a consolidated report. This type of report can easily be administered as part of the strategic planning or project management process. In fact, the project management (PMO) leader can be a great resource to oversee this simple reporting process. A consolidated report can keep executives focused on what’s working and what needs modification inside the organization as well as how fast or slow management is trying out new things and creating new knowledge. The ongoing report will call attention to this important activity. Here’s a simple example of what such a report could look like.
Acme Bank – Test and Learn Status Report
| Name of Test and Hypothesis | Owner | Date Initiated | Status | Key Learnings |
|---|---|---|---|---|
| Tech Branch – Can we operate a more efficient tech branch and still maintain sales momentum and customer satisfaction? | Jill | Nov 12 | Complete | First six months of operation indicate customers have embraced advanced function ATMs for deposits and TCR and instant issue technology have allowed for a 1.25 FTE savings compared to branch model. New checking account volume is running only 68% of control group. |
| Mobile P2P – Will our mobile banking users quickly adopt person to person payments and increase their engagement with our institution? | Terry | Jan 13 | Test ends Jun 13 | Early roll-out showing limited adoption from mobile users. Marketing promotions are targeted to this base in April. |
| 120% LTV auto loans Can we offer 120% LTV auto loans and earn a higher risk-adjust return than our current originations? | Bob | Jun 12 | Test ends Jun 13 | New, higher-risk offering has generated $14 million in the 100%-120% LTV range. Delinquencies are only 7% higher than control group of loans originated with below 100% LTV at the same time. Credit score migration of the higher risk group has not been inferior to control group. |
Over the next few years, bankers will think up potential initiatives that could consume 200%-300% of the organization’s resources available for investment. By replacing pure chaos with a Test and Learn mindset and forcing a more formal business case and project management processes inside the organization, bank executives will be able to more effectively allocate precious resources to areas with the greatest impact and scale up “small bets” over time versus betting it all up front on a gamble. As marketing expert Brendan Le Grange concludes, “Business decisions should not be made on hypothesis alone.”
So start your scientific method, make your small bets and get out there testing and learning, GonzoBankers.
Author’s note: shout out to Stacy Novotny at United Federal in St. Joseph Michigan for the Jim Collins quote on bullets and cannon balls.
Ready to cut the chaos?
Cornerstone Advisors applies a unique, phased methodology to help financial institutions develop strong strategic plans aimed at profitable, predictable futures.
Contact us today if it’s time to take chaos out of your strategic planning process.
