Tine to revisit niche banking? With the national economy expanding only tepidly, bankers are beating the bushes looking for more dynamic growth possibilities. The search has renewed interest in the 'niche banking' approach. Here's why.

• Author: Neckopulos, Jim
• Position: Company overview

AS THE BANKING INDUSTRY CONTINUES TO ADJUST to the financial crisis of the past three years, different business models are being formulated or revisited to identify the best opportunities for profitable growth. One model enjoying resurgence is "niche banking."

For the purposes of this article, "niche banking" is defined as:

* Focusing on a particular segment of customers.

* Having unique or well developed expertise.

* Offering select products and services.

* Using focused channels.

* Employing some combination of the above.

Specific examples of niche banking include banks that focus on customers in particular industries (e.g., Silicon Valley Bank, assets: $20 billion, Santa Clara, Calif.); provide private banking and wealth management services (First Republic Bank, assets: 522,4 billion, San Francisco; or Wintrust Financial Corp., assets: S14.4 billion, Lake Forest, Ill.); or offer unique products, such wealth management services, commercial insurance premium financing, jumbo mortgages, short-term accounts receivable financing, and certain administrative services.

Why is now a good time to pursue niche banking? This article explores some of the key reasons and critical success factors for successfully pursuing this strategy.

Key reasons for pursuing niche banking

Traditionally, niche banking, like community banking, has been pursued as an alternative to the typical large regional and national bank business model, which focus on mass markets but offer little innovation around their sales or service models. These larger, mass market bank models have generally focused on reducing operational costs, increasing process standardization and efficiency and cross-selling their customer base to grow revenues and profitability.

Niche banking provides a welcome alternative to these types of institutions. In addition, because many of these larger banks are significantly distracted by changes in the banking and financial services regulations--including compliance issues (particularly related mortgage lending)--a window of opportunity appears to exist for niche banking.

Most niche banking models have been developed to work toward providing a better customer experience. In other words, creating and organizing the bank, its selling and relationship management activities and its customer service to meet specific stated needs and preferences of well-defined, targeted customer segments. Today, there is an added impetus for pursuing a niche banking strategy: the realization that trying to meet the needs of a broad customer base is very expensive and has taken on increased complexity give recent changes and demands mandated by legislation such as Frank-Dodd.

The...