Compete with Goliath? It's no fable. The little guy can take on the big bank and win. But don't to fight the giant on his own terms. Instead, differentiate your financial institution. The most effective way to achieve this is through superior service quality.

• Author: Bennett, Rex
• Position: Competition - Cover story

Let's look at the issue of bank competitiveness. Imagine that you're a community bank with under $1 billion in assets. Within your market area, you have a large, national, multibillion-dollar competitor--a Chase, a Bank of America or a Wells Fargo & Co.

How do you compete with this behemoth?

Even though large, multibillion-dollar banks have size and resource advantages over community banks, the situation is not as one-sided as it might appear. By following a few basic precepts, a community bank can successfully play David--that is, compete with and even outperform--a Goliath bank.

The critical questions

The keys to beating Goliath lie in the answers to four critical questions.

1. Why should a current or potential customer do business with your bank rather than one of your competitors-particularly if that competitor is a giant banks?

2. What differentiates your bank?

3. What advantages or value does your bank provide that the big guys don't?

4. And most importantly, how can your bank better help the customers (individuals or firms) achieve their financial goals?

The answers to these questions are the key to a community bank's ability to achieve and sustain competitive advantage and superior performance. Studies repeatedly show that differentiation drives profitability; yet few banks can effectively demonstrate how they are differentiated, if at all.

If bank products and bank service are perceived as homogeneous, then these products become commodities, with price as the primary competitive variable. And direct price competition erodes profitability. The better a bank can meet the needs of its customer and prospective customer base, the less that bank has to compete directly on price and, thus, the greater its profitability.

The weak spot of large banks

Certainly, large multibillion dollar banks have certain advantages over community banks. Examples include resources, specialization of personnel, geographic coverage, and most importantly, economies of scale in marketing and operations gained by the standardization of operating procedures across large numbers of customers and geographic areas. But from a community bank perspective, this standardization is also the large bank's Achilles' heel. Standardization means that large banks must have essentially the same deposit and loan products and policies in Sarasota, Fla., as in New York or Lincoln, Neb., or Madison, Wisc. This homogeneity of products/services across different target and geographic markets provides an opportunity for community banks to develop effective competitive strategies aimed at their specific locality and markets.

Why do customers leave?

Let's examine the issue of customer loss. The average U.S. bank, including community banks, has a customer loss ratio of about 15 percent (this includes loss of share of wallet; that is, losing a portion of a customer's business to another financial institution). [American Bankers Association, Bank Marketing Survey Report; ABA Retail Banking Survey Report, TARP Research, Arlington, Va.; Rex Bennett research, 2003 and later years]

Why do customers leave one financial institution for another...