As the soap opera about whether Jamie Dimon will or will not continue to hold the chairman’s role at JPMorgan Chase (JPM) continues, and while there is ongoing discussion of whether banks are too big to fail, what’s missing from the conversation is much sense of the real problem at big banks—a problem that partly drives the bizarre risk-taking in the first place. That problem is losing too many high-value customers. I was reminded of this when a friend who currently does business and personal banking with Comerica asked for a recommendation because he intends to move his accounts.
Alone at a Christmas party given by First Republic Bank (FRC) for its clients a couple of years ago (my wife hates such events), I decided to do an informal, unscientific study of who was there and their banking experience. Total number of invited guests (about 1,000) included pretty much what you would expect for the Silicon Valley—lawyers, entrepreneurs, VCs, some doctors, scientists. I asked everyone I met that night three questions. First, how long they had been with First Republic? For the most part the answer was not very long, many just some months, and few more than two years. Second, where had they previously banked? Invariably the answer was Wells Fargo (WFC) or Bank of America (BAC). And third, why had they left? Mostly it was small, irritating junk fees (for example, charging for an incoming wire) and the bank not having any branch phone numbers so clients could talk to people who knew them and their circumstances.
Doing a back-of-the-envelope calculation and conservatively assuming an average individual net worth of $10 million (this is low given that many people were on their second or third going-public startup), $10 billion in net worth was in the room that night. They were people who need investment advice, financial services for themselves and their businesses, trust services, and so forth—enough to start a decent and profitable bank just with this clientele. To make matters worse, not one person told me that, as they closed their accounts at their previous bank, anyone had contacted them to try to keep their business.
As the large, poorly run banks lose retail and business customers by the boatload—profitable customers at that—they need to do all sorts of weird and risky things to figure out how to make the money they used to make by providing straightforward banking services.
Not First Republic. After being bought by Merrill Lynch and then owned by the Bank of America following the financial meltdown, First Republic is back out on its own and publicly traded. Named No. 4 on the ABA Banking Journal’s list of top performing big banks in 2012 and No. 5 on Forbes’s 2013 listing of the best banks in America, First Republic has a truly tiny number of nonperforming loans and enviable returns on assets and equity. The bank provides a phone number for each branch and business cards for every branch employee (many of whom are long-tenured), so customers have people to call for help, free use of any ATM in the world (it rebates fees charged by others for accounts with a fairly small minimum balance), and few to none of the aggravating fees others charge. In other words, First Republic actually acts as if it cares about its customers and their experience.
This story illustrates a simple, but oft-forgotten message: If you take care of your customers, you won’t lose them, and you can therefore be profitable without any sort of financial or strategic gymnastics. This is a lesson delivered long ago by Bain’s Frederick F. Reichheld in his book, The Loyalty Effect. Sadly, it is a lesson lost on the many big banks that have forgotten the essence of banking.