Are banks too dependent on peer institution analysis?

• Position: MARKETING NEWS - Interview

ABA BANK MARKETING recently had a conversation with Thomas Thamara, the principal of FSIC Associates, North Andover, Mass., a financial industry research and consulting practice (formerly part of Harvard Business School Banking Industry Program).

You argue that the 2008 financial service industry meltdown was caused in part by the over-dependence on peer institution analysis to perform such tasks as benchmark performance and strategy development. Explain what you mean by this.

It has been a long, well established tradition and practice in the financial services industry to base corporate/business unit and marketing strategies and performance goals on what are perceived as peer institutions. Peer institutions are typically institutions of similar asset size.

Note, however, that this benchmarking does not consider the variances in each firm's asset/liability/fee income mix, variations in their sizes, competitive positions and its share versus its three largest competitors in its targeted markets of each product or service--including the quality and training of staff; mix and size of competitors; differences in risk profiles; and number of competitors in each of their targeted markets. Moreover, note that their current performances are not an assurance for their future success.

So it can be disruptive if financial institutions develop strategies based on the excessive use of peer institution benchmarking?

It's like the blind leading the blind--with everyone ending up in the ditch. However, we still hear time and again, senior management from usually enlightened financial firms, speaking of peer bank analysis as an end-all in identifying or selecting corporate or business unit marketing and product development strategies and policies.

Please note that I am not saying that there is no value to it. But what I am saying is: Do not rely on it as a key benchmark for making strategic, marketing and operational decisions.

What's wrong with it?

It has two major pitfalls. First, the averages of banks of similar size or even similar region do not by themselves indicate what good performance is. The average bank, for example, may be rather poor or mediocre, composed of a group of business units that are mediocre. Second, success of failure of a bank as a whole is determined primarily by competition in its individual markets (for example, consumer, institutional, wealth management, etc.) not at the "whole bank" level.

What are the important...