In an ever-changing and dynamic marketplace, financial institutions must increasingly rely on peer data and competitive benchmarking to make strategic business decisions.
Where do you stand amid your competitors? How do you measure up against their best practices? Is the information you currently have detailed enough to create actionable plans? By gathering custom peer data and benchmarking it against key performance metrics, you can evaluate what the stakes are in your market and how to gain a competitive advantage.
Before you start evolving the way you use peer data, let’s talk about how competitor benchmarking works, what it looks like in action and what to do with the results.
Historic versus current use of peer data
Traditionally, financial institutions use peer data from a purely historical point of view — using it to compare themselves against peers when marketing or secret shopping, during annual meetings, and when making compensation decisions. Additionally, peer data is often used in conjunction with regulatory examinations.
While these use cases are helpful and important, they miss the true value of benchmarking. The true value is in creating strategic plans, making forward-looking decisions and delivering business results.
Of course, if you’re not looking at the right peer data, it’s hard to realize this value. Typically, financial institutions see their competition as very local. That’s changing as our world becomes ever more digital.
It’s not just about who your regulatory peer group is, or even about your asset size. You also must think about who your peers are when considering your lines of business. In looking at peer data, seek financial institutions that have a similar business model or balance sheet composition. Some institutions are primarily agriculture lenders. Some are more commercial and industrial, or retail. Institutions must start comparing themselves to peers that are in their lines of business and markets.
Ultimately, your peer group is multi-faceted and takes into consideration your market, lines of business, asset size and regulator peer group in order to ensure you’re comparing against the right data and are able to make strategic decisions that have a positive impact on your institution’s future success. Depending on the evaluation reason, your peer group may change.
Best practices for using peer data
We touched on strategic planning as being a primary use of modern benchmarking, but you can also use peer data for digital benchmarking, to grow profitability, to perform risk assessments, to create product strategies and even to attract and retain talent.
Let’s dive into each of these use cases.
Strategic planning: Benchmarking can help you create strategic classifications that can guide your lending strategies, funding strategies, off-balance sheet strategies and more. Strategic comparisons generate performance exceptions or conclusions that, when you address them, are more likely to impact performance.
Make sure to understand who you are benchmarking against and to, determine what your ideal key performance indicators are (e.g., measure as a percent to peer), compare the highest performer in your self-directed peer group to study their best practices and highlight areas to focus on to create growth and efficiencies. Where do the differences exist, and how do they affect your performance compared to the high performer?
Digital and technology: When looking at your digital investment, the question many institutions ask is, “What is everyone else doing?” But you can’t stop there. There are more questions you need to consider. What digital solutions align with your financial institution’s strategy? What digital solutions are available to your institution? What is baseline, and what will provide a competitive advantage? What are others on your same core system doing? What fintech partners should you consider that are compatible?
In the marketplace today, there are thousands of financial and customer technology systems that institutions can potentially leverage. The marketplace is huge and overwhelming. Yet it also means there’s a solution you can rely on for whatever you determine your biggest needs are.
When thinking about how you peer benchmark in this area and what to consider in this tech universe, find out who is using similar strategy to yours, what digital and technology investments they made and what was their return.
Beyond client-facing technologies, peer benchmarking can help you decide on how to deploy capital for better operational efficiencies. Let your operations team be the drivers of what is needed based on peer analysis. Their pain points, needs and what they hear from clients should help you determine what your overall needs are and how to strategically meet them, including how technology fits into the picture.
Profitability/growth enhancement: The ultimate goal of benchmarking is to get your organization comfortable with data-driven decision making. High-performing teams move away from nonanalytical approaches that are scenario-based, case-by-case or reactionary and toward being able to use facts, metrics and data to guide strategic business decisions that align with your goals, objectives and initiatives. You want to ensure that people at every level can have conversations that start with data, and that they can develop their data skills through practice and application.
When looking at profitability and enhancing growth, you want to be able to look at your strategic peer group and determine why something has happened. For example, say your non-interest income is trailing. You want to drill down to look at contributing factors. Is it wealth management, service charge income or secondary mortgage loan origination? Then look at what your peers are doing with non-interest income that you’re not that’s leading to more success, and where you can put capital resources to get better results. If you’re actually doing better than peers, you can flip that around and analyze what’s causing your success and how you can build on it.
Risk assessments: Regulators used to look at financial institutions from a compliance-based perspective. In the new regulatory environment, the focus is more risk-based. Benchmarking becomes an important tool here because it provides a basis for risk evaluation and estimation and decisions about risk control. It can help you determine where your peers are seeing risk, where you’re seeing risk and where you may see risk. Information can include current, historical and forwarding-looking (trending) data and analysis.
Talent attraction and retention: Benchmarking can also shine when it comes to staffing levels, compensation and efficiency ratios. It helps you consider a competitor’s lines of business and the specialized talent required for those lines so you can make more strategic decisions.
This is one area where competitive benchmarking should be supplemented with networking. Data such as compensation data can be skewed by a variety of factors and doesn’t take into account lagging indicators, so ensuring your HR employees are networking can help you form strategic partnerships that can work together with benchmarking to provide a fuller picture and guide decision making.
How to get started with competitor benchmarking
Financial institutions are already using peer data, but what is the true nature of your internal data? In other words, what data are you comparing to the peer data, and how good is it? Disparate systems cause problems in getting the data you need to make analyzations. When you have many different software systems gathering data, but they aren’t connected, it creates data silos and prevents you from gaining a true 360-degree view of client data and information. That means you could be measuring the wrong data. So before getting deep into more complicated modeling, you must ensure your internal information is centralized and clean.
Our other recommendation is to create a culture of continual improvement. This is a constant ebb and flow, not a one-and-done activity. You must decide what your KPIs are, how you will measure against or to them, and then how you will act on the intelligence. This can be difficult. But the way you get started is first knowing your organization’s objectives and prioritizing them. Any decision made needs to start with core goals. Start by asking what goals you want to improve and then, when you are making decisions, begin with the most important goal(s).
Second, find and use relevant benchmarking data. Identify the priority you want to solve and the decision you’re going to make. Find and present relevant data. Analyze only the data that relates to your objective. Also, consider your ability to collect and analyze the data needed. Do you have the time, talent and resources? You want to leverage the most cost-effective and value-driven resources available to provide intelligence.
One CEO we worked with was taking an entire week to analyze data and prepare reports for the board of directors. This wasn’t sustainable or a good use of time. Instead of purchasing an expensive system and licenses and going through the process of implementation and adoption, the institution hired a data firm to intake the data and produce the needed reports. It was much more cost-effective, and it resulted in valuable intelligence.
Other institutions we work with find, after performing a gap analysis, they aren’t fully leveraging their current systems and that some benchmarking challenges could be solved by turning on more features or upgrading to the latest version of the system.
Get started with Wipfli
As specialists in strategic planning, and with longstanding experience in the financial institutions industry, Wipfli can help you better leverage benchmarking to make strategic business decisions. Whether you need assistance with strategic planning, centralizing data, selecting new software, creating your peer group or more, we can help. Click here to learn more.
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