Fast Track Advisors LLC

Wal-Mart: Are Community Banks Next?

Is Wal-Mart getting ready to do to community banks what they did to community hardware, toy and clothing stores? It appears that way. Wal-Mart currently offers only check-cashing and money order services, but why should the world's most aggressive low-cost provider stop there? They are currently bidding to buy a full-service Utah community bank.

If that succeeds, then how about a bank for its 2.1 million employees with mandatory payroll deposit? Later, those leased bank locations in the over 2,500 U.S. Wal-Mart stores could become Bank of Wal-Mart banks. Overnight, Wal-Mart could become one of the largest retail financial service providers in the US.

Wal-Mart is already a full-fledged bank in Canada and offers credit cards. In the US, Wal-Mart currently partners with SunTrust and other banks to offer services such as money transfers, bill payments, check cashing and pre-paid debit cards. The revenue Wal-Mart  earns is not the point, but eventually they will drop the cloak of partnership and unleash the trusted Wal-Mart brand. Last week, they opened their 1,000^th “Money Center” (not an actual bank, but their banking services "department") and announced its plans to add 500 more in the near future.

The good news is that consumers might get a better deal from the Bank of Wal-Mart, especially those lower and middle-class households being poorly served by their local community or national banks. Plus, there are no small manufacturers to squeeze. But the mere size of Wal-Mart gives them financial economies of scale that your local bankers cannot provide. Say "goodbye" to local banks sponsoring local non-profits and local higher-paying banking jobs (loan officers, operations managers, presidents, etc. – tellers are already paid Wal-Mart-like salaries). Their ATM network will be bigger than your bank's. Eventually, many branches near Wal-Marts will close.

This outcome is inevitable. Politicians will rant, lobbyists will lobby, but eventually, Wal-Mart Bank will become a reality. As banks, still reeling from the "Great Depression" continue to cut services and charge for previously-free services like checking, they are simply opening the door wider for Wal-Mart.

After founding the bank, what is stopping Wal-Mart Asset Management from selling and managing mutual funds? There is certainly excess fees and poor performance to be rung out of that industry as well.

Is your bank or financial services firm prepared to compete with Wal-Mart? The smart ones are. The others will be road kill under the Wal-Mart steamroller, just like their earlier retail brethren.

Management by deck

There are many companies today whose main output is no longer developing products and services that meet the needs of their customers. The main role of many formerly-proud American businesses today is the business of developing PowerPoint presentations. I call it "management by deck."

No matter the level of the PowerPoint-ing exec, excepting the CEO who is the ultimate recipient of many of these efforts, many entire enterprises exist to develop decks rather than serve customers. Initially, teams of individuals put together the first draft deck. Their manager then micro-manages the refinement of the deck. I have seen millions of dollars of payroll burned up in developing and reviewing a single deck up the organization chart, even when existing non-PowerPoint reports contained the info more succinctly. But it isn't as pretty. Each recipient manager has their own deck rules that must be obeyed. These rules include format, length, colors, and approved fonts. Woe-be-tied the manager whose presentation does not fit the prescribed format. No longer is the quality of the information of paramount importance. It is purely form over substance. America has the greatest work force of deck developers in the world. It is good to know that as substantive strategic thinkers and real innovators are growing overseas, the PowerPoint presentations of the remaining US employees will continue to be the best in the world.

Managing Dysfunctional Teams

Most organizations, or managers, don’t set out to build poorly-performing teams. When a team is not functioning as it was originally conceived, the team members are often analyzed and dynamics of the team reviewed to uncover the problems.

However, the problem is often not with the team members per se, but with the manager who commissioned the team and how he or she manages and interacts with the group. One recent team I observed was staffed with quality can-do people; each member of the team having a very responsible position reporting to the group manager. However, this group manager had several aspects to his management style that caused the team to fail early on. They included:

·       The habit of setting some of his direct reports against each other in order to drive performance. In fact, this technique caused creation of favorites that changed weekly or monthly, and once some of these competing employees were in the same group, they continued to focus on their relationship with the manager as opposed to caring about the group outcome.

·       Alternating micro-managing and hands-off managing of the group. The manager, in his interactions with the group, regularly alternated between micro-managing every activity (word-smithing decks, sitting in on minor meetings, asking about minor milestones) and going totally hands-off. These extremes seemed to run in two-week cycles, causing the group to become paralyzed. They felt they couldn’t take the smallest step without the manager’s review, yet they were unwilling to reach for larger objectives because they received no feedback.

·       Constantly re-prioritizing the team’s objectives. When the manager reviewed the schedule, he constantly moved priorities around. However, when the new priorities received the focus of the group or the member assigned, older priorities became “gotchas” where team members were chastised in front of other group members when not completed.

Managers don’t set out to build dysfunctional teams. However, managing a team is different from managing individual performers. Management styles that motivate and drive high-performers may cause total failure when those employees are forced to work as a team.

A simple math lesson

Let's do a little math on off-shoring, the practice of moving jobs currently located in the US to cheaper locations. One investment bank refuses to use the word "off-shoring;" they prefer the euphemism "wage arbitrage!"

In 2006, the investment bank in question had announced it was moving 2,000 operations jobs off-shore over the next 5 years, primarily to India. This represents almost all their domestic operations positions. In India, the average comparable worker is younger, better educated and works harder. I have a lot of respect for these people. Generally, I have found them equal or better than the people they replace in terms of raw ability.

However; did I mention the jobs being moved were located in New York City, a high-cost environment for this company to work in? The average position being "arbitraged" paid $200,000 in total compensation; the replacement positions in India averaged just $20,000. The savings to the investment bank; $360 million per year when the transition was complete.

To sum up: In five years, 2,000 high-paying jobs lost, 2,000 families disrupted, $160 million lost from the federal treasury, $40 million lost taxes for the state and city, and 2,000 residences in the tri-state area abandoned, putting downward pressure on prices and property taxes. Furthermore, the damage eventually resulted in increased unemployment, crime and relocation costs. Then factor in the other jobs lost as the firms that supported the domestic operations have to follow their customers to India. Plus, add in the lost local jobs that were supported by the consumer spending of these families.

Hundreds of millions, if not billions, in annual tax revenues were lost so that the bank can make an additional $360 million, on which, by the way, it will pay no taxes due to the increased profits being invested in a series of trading partnerships. This additional savings was then leverage 30:1 to allow additional purchases of mortgage-backed securities.

Who will make up the tax shortfall? Only the few remaining employed. Don't expect a "Thank you" card from the Managing Directors.

Financial services are one of the few businesses left where the US has a competitive advantage due to its free, open and broad capital markets. Eventually, these benefits will accrue to a select few, while the majority of the work is done offshore. Sound familiar?

By the way, the investment bank discussed in the blog is no longer in existence. Coincidence? Many of the risk management jobs were also moved to India!

Will the last operations professional in New York City area please shut down the mainframes and servers? They won't be needed here anymore either.