Tell me why: in Richard Davis's book, relevance is key to top performance at U.S. Bank. So is proper support

U.S. Bank has 2,315 branch banking offices in 24 states, more than 51,000 employees, and more than $190 billion in assets. In the "Who comes first--the customer, the employee, or the shareholder?" conflict, U.S. Bank seems pretty intent on its 11 million customers. That's a lot of people to keep happy within risk management parameters, and the bank's Five Star Service Guarantee (service delivery standards, convenience, quality products, employee empowerment, and execution) has a plethora of systems and programs in place to help. Richard K. Davis, U.S. Bancorp's vice chair, Commercial and Consumer Banking, doesn't mind when customers collect on that guarantee.

RMAJ: You delivered a keynote address in July at RMA's 2004 Retail Risk Management Conference. What is the most important point you felt you made?

RKD: Do you remember the TV program Bonanza? That show depicted a town that had a general store, a bank, a saloon, a jail, and not much else. On a handshake, a banker promised to keep a customer's extra money safe and asked if he could lend it temporarily to someone else. Bank holdups were fairly common, customers defaulted on loans then as they do today, and stagecoaches were waylaid.

So bankers started out as risk managers. The most important point I made at the conference was that, at the end of the day, it's no more complex now than it was in the mid-1800s or the days of Bonanza. Sure, risks are now recognized separately as credit, market, liquidity, legal, regulatory, and so forth. And advances over the decades have allowed risk managers to make more decisions today than we might have back in Bonanza days. Today's customer may not be as well known and may have a few credit flaws, but our tools can help us see past the flaws to determine whether we can expect to see the money paid back. But the bottom line is that managing risk well is nonnegotiable, and using risk to safe and profitable advantage has always been the goal. Effective risk management enables us to differentiate from competitors our superior ability to be a risk manager and trusted advisor.

RMAJ: The "unbanked"--people out there with no banking relationships--have become a focus of a growing number of institutions, which may offer a debit card or special checking account to draw against direct-deposit paychecks. How do the unbanked figure into U.S. Bank's risk/reward matrix?

RKD: Our "Checking That Pays" program, which rewards customers with cash back each time they use their debit card, is one of several programs we have to provide ways to encourage their faith in U.S. Bank and a good reason for them to take the time necessary to open and maintain an account.

Capital One may have the most sophisticated risk modeling technique of any card company, and I believe we have the same level of sophistication for our checking accounts. We're not looking for a profitable relationship based on pelting risky customers with fees; rather, we foresee a profitable relationship over the long term through a growing relationship. Before we had this capacity, we would have had to turn down a number of people who show the potential to be good, long-term customers.

But there's another side to your question. A year ago, as a board member of one of the banking associations, I had the opportunity to discuss issues of importance on Capitol Hill with other retail bank leaders and bank regulators. We reminded the regulators that we don't think there is any such thing as "unbanked" any more. That term used to mean people in America without access to a bank or those who did not know where to go for financial services. We've proven that, except in certain areas within big cities, there are very few people who cannot access bank services. There are check-cashing agencies located across from banks, and some people are choosing not to use a bank. We told the OCC that banks don't deserve to be portrayed as those responsible for the unbanked. However, we all need to find more ways--through CRA efforts and other means--to be even more accessible to those who want to bank. We simply need to work better with the government to create incentives for banks to do business in less attractive and riskier areas.

RMAJ: What do you think it takes to be a good retail risk manager today?

RKD: That's easy. To be successful, a good risk manager has to evaluate both the expense and revenue pictures. From one perspective, risk managers are perfect if they do nothing because then they take no risks. But to be successful, a risk manager needs to be able to prove that the benefits of a certain initiative are greater than the risks and say, "The situation may change, but let's try it, and I'll monitor things to ensure that we react quickly if that balance changes."

The best risk managers are people from the line side of the organization who move to the risk side and are helped by very bright data people to ascertain the risk/reward balance and change complex formulas into actionable steps. By coming from the line side, they know for whom they're managing the risk.

In the old days, the audit department was a bunch of men with black suits and black briefcases, who came in and could nearly shut a bank down while looking for something wrong. Today, the audit department has people who used to run a business line and they tell the business line, "I like what you're doing here. There may be a risk here that's worth taking because the data suggests the reward is greater, so keep your eves open." It's now a collaborative effort, and today's risk manager is a businessperson first--watching the risk more than others, perhaps, but watching both sides of the risk/reward equation.

RMAJ: Tell us a little about your background in banking, including significant moments or periods that you feel best contributed to the experience and knowledge you bring to the job today.

RKD: I earned my degree after seven years at night school while working as a bank teller at Security Pacific National Bank in California. During that time, I went from teller to proof operator, eventually moving through most of the branch jobs. So when I talk about risks and opportunities with branch people, I have a repository of stories to share.

I remember how offended I felt when people didn't explain to me how things work and how excited I was when managers took me under their wings and showed an interest in me. I also remember what it's like to cash a check that comes back four days later as "closed account." In the days following such an experience, you're hesitant to cash any checks and would probably ask your own mother or father for identification. But that's another good thing about having a risk manager come from the line. You realize that while not everyone is honest, risk parameters must take into account the fact that most people are honest.

At some point during those seven years I was put in management training, and by the time I graduated from college, I was an operations manager--that is, a branch risk manager. I was good at it only because I came to the position through experience, not theory.

As far as defining moments go, I like to tell people about the time when I had a branch manager who insisted that life insurance be sold with every mortgage, home equity, or auto loan. He didn't care how we did it; we just had to make sure it was there. Some people I knew would quote a loan at a higher rate, covertly including the insurance, which bordered on being unethical. Later, when I was a branch manager, a young woman carrying her baby came to me, asking whether her home equity loan was insured. Her husband had been electrocuted while at the top of a telephone pole. I looked at their file, praying there would be insurance--and there was.

It turns out that the person who had sold her the insurance was a friend of mine at another branch. I thought I'd make his day by relating the story. When I did, he had no recollection of her or her husband or whether he had even told them about insurance. He only knew he had been mandated to include it somehow. That didn't change the outcome for the young woman, but it did affect the way I felt about the relationship--or lack of relationship--my friend had with this couple. So when dealing with risk, it's important to have all the facts and make sure that all parties know what's going on. It would have been so much better if this young woman had told me she remembered being counseled by her banker that it would be a good thing for the family to have insurance. It's important to sell products to people who need them, rather than shove products at people just to sell them. So we don't offer incentives for or promote cross-sell. To me, cross-sell is a relationship outcome over a course of years.

Another defining moment when I was a branch manager involves nay operations manager, who had been with the bank for 20 years. One afternoon, she came to me looking deathly pale. She said, "You know our armored carrier guy who picks up our cash every afternoon?" I replied that I did, and she said, "Well, he just came and picked up the bags of money." I told her that was good, and she then said, "Well, then the real armored carrier guy came five minutes later." I realized at that moment why she had looked so pale. As it turns out, the first man who had picked up the cash that day had been fired from the armored carrier the week before. The armored carrier company had notified the bank, and she was supposed to have known he was no longer on the route. Eyewitnesses to the event commented that they thought it strange to see a man driving away in a red Pontiac sports car with bags and bags of money. Unfortunately, I had to fire her. I share that story to demonstrate that we can never let our guard down. I don't care how good you are or how much experience you have, and you can imagine how hard it is to maintain a balance between that and being pleasant and helpful to the next customer who walks in the door.

RMAJ: What type of experience do you look for in new hires?

RKD: Over the past few years, we've had great success hiring retail-experienced people from other industries or even people who like working with other people. It's easier to teach banking to nonbankers than to teach people skills to technocrats. Risk management skills are experiential--you can't really learn them from a book. In cases where a newly hired person does not demonstrate a day-to-day understanding of risk and does not build risk management skills, the bank gives up more than the new sales and business the employee brings in, and we have to let that employee go.

I do believe that if you have a smart person in the right job, supported by the right people, that employee can do anything--at any level. Our new recruiting program is "We hire people who like people." In accordance with our Service Guarantee, it's simply a necessity for us to have people who like people. But banking is more than liking people, of course, and it's not always possible during the hiring process to correctly gauge whether the candidate possesses all the necessary qualities--intuition, experience, education, and just being able to respond appropriately to various circumstances. Daily contact with people requires natural skills in psychology and group sociology. Bank employees must have the ability to treat people with respect while also exercising caution. So if within the first 90 days of employment we see that we've hired someone who doesn't fit that bill, we have provisions that enable us to let that person go.

RMAJ: A number of bankers have worried about inexperience on the part of today's lending officers. Do you think this is a problem?

RKD: I do not. We're a very regulated industry that attracts very smart people. Banking is an art, it's legalities, it's operations, it's technology, and more. We probably hold the strongest industry suit of people who understand risk management and are prudent. Of course, if you hire a marketing director from, say, a fast-food franchise, and put that person in charge of running a huge part of the bank, without proper guidance that person may just follow his or her gut--deny or overlook the data and roll out a host of new products and services that will end tip costing the bank a lot of money. That person is an example for those who say that skills from other industries aren't transferable to banking and that experience in banking is necessary. At our bank, we're not looking for grandstanders from other industries. We are looking for intelligence, and when interviewing, we want to learn how the person makes decisions and how they react to information about areas they don't have any experience in.

RMAJ: U.S. Bancorp has a service council of 70 officers representing every line of business that meets monthly to monitor and strengthen its Five Star Service Guarantee to its customers. When was the Five Star Service Guarantee first introduced? What are some typical things that come up at the service council meetings? How do you even run a meeting of 70 people?

RKD: Each monthly meeting has a focus--for example, customer problem resolution. Five teams concentrating on key competencies meet weekly to prepare for that agenda. So not all 70 people are reporting on their activities at once. But let me tell you how that council came to be.

Until recently, U.S. Bank was known as the most acquisitive institution in the nation. We had $7 billion in assets in 1995 and almost $200 billion in 2002. We always seemed to be acquiring one or two banks at the same time, and these institutions were at or near our own size. So every Wednesday morning, a group of 70 people met to manage the progress of our mergers. I think any analyst will tell you that U.S. Bank has the reputation of being one of the best integrators in the industry. We've never had a slipup or failure, nor have we lost customers during an integration process.

When we finished with the acquisition phase of our growth, we decided to approach service as a task no less urgent than an integration. We kept most of the same 70 people to lead our progress in the service category, and we set a goal of being as good at customer satisfaction and loyalty as we had been at integration. And this was the genesis of our service council.

RMAJ: According to U.S. Bank's service guarantee, whenever the bank fails to meet a customer's expectations, the customer receives a $5 credit. How has that worked for the bank?

RKD: We cannot possibly predict the interactions each employee will have with a customer in a given day. We can't teach employees everything that might come tip, nor can we tell them what to say in every case. So when a problem does arise, each employee is asked to apologize and is given the authority to remunerate the customer.

When you empower employees with the authority to make things right, you may occasionally have an employee going off the deep end and giving too much, but for the most part they'll do it right, and they'll appreciate having the latitude to correct a situation themselves. The actual cost associated with the Five Star Service Guarantee is small--about 4% of our advertising budget.

The Five Star Service Guarantee also serves as our way of finding out how to improve quality throughout our branches. Let's say someone notices that five branches in St. Louis spent more than $1,000 in payouts. We can then immediately let that manager know there's a staffing problem that needs to be corrected, without waiting to learn that a customer has taken his or her business elsewhere because the branch isn't adequately staffed.

We tend to trust and empower our employees more than most institutions, and so our risk profile is higher. We're willing to take that risk because our employees do the right thing the vast majority of the time. New employees need to be told by more than one person, however, that they have both the right and the responsibility to compensate a customer. We monitor the payouts, and when we find out there's a branch somewhere that hasn't made a single Five Star Service Guarantee payment, we either have the most perfect branch imaginable or we have employees who do not believe in the guarantee. If they don't believe in the guarantee, they probably also don't go the extra step for customers in other ways, such as staying open a few minutes after closing to help a last-minute customer.

RMAJ: Do you consider your most important role as "instilling and maintaining commitment to quality and service "? Tell me some of the ongoing efforts for making this happen as well as some of the special programs, communications, and events you may be having this year to provide that extra jolt that keeps you ahead of the pack.

RKD: As much as I like to talk about it, the Five Star Service Guarantee is just a symbol for empowerment. So one of the best ways I know to communicate the commitment behind the guarantee is to find acts of heroism that at face value may not appear to be all that impressive. Whenever I speak to a group of employees, I cite examples of employees who have stepped outside the normal bounds and taken a risk to better serve the customer.

I was in Las Vegas in late June to talk with our 85 district managers, each of whom runs 15-20 branches in a large metro market. I was a guest speaker that evening; as you can imagine, the East Coast people were pretty sleepy, so it was going to be a challenge to keep their attention. I said, "I'd like to ask three of you in the audience to come up on stage with me." When the three came up, I said, "Ladies and gentlemen, let me introduce to you three heroes.

"The first is Carl, who runs a branch network in Phoenix, where we're growing our business. I had dinner with Carl and asked him how he was planning our growth from a handful of branches to 50 in one year through a partnership with Safeway. After hearing his thoughts about recruiting and ads, I suggested he just walk into the branches of our biggest competitors, where they have great leaders, and offer the best people a job. He called me a week later to tell me he had recruited the best manager, who was bringing her entire branch of employees and also giving him the name of seven other employees with that bank who might enjoy working with U.S. Bank." Well, everyone in the audience applauded Carl.

I then went to the next employee on stage, Mike, whom I had approached a couple weeks before to ask why the branches in his market weren't doing so well. When he told me only 51% of his managers were really committed to growth, I asked how many he had replaced in the past year. Of his 18 managers, three were new, and he admitted that 10 of the remaining managers probably weren't going to be as effective as necessary. He was reluctant to let them go, however, because he was afraid he wouldn't be able to replace them. I told Mike that if he didn't open the spot, he wouldn't find a replacement. Mike took the risk, opened the positions, and he excitedly reported back that he had 10 new managers. I said, "Ladies and gentlemen, meet our second hero, Mike, who took a chance."

Carla, the third person on stage with me, had been with another bank before coming to U.S. Bank. I generally call the new district managers to welcome them, and I asked her what she found different at U.S. Bank. She replied, "Two things. First, I can't believe how much you all trust one another. This is the first place I've worked where employees really believe they will get support from a support group. Second, I can't believe that these people don't recruit others. Instead, they rely on human resources, and what does HR know about this market?"

I turned to the audience and said, "Notice the order in which I introduced these three people. Carl and Mike embody what Carla says we don't do. And she's right. We need to tell our story and take responsibility for the people who work for us."

RMAj: In addition to what you've just said, I was impressed that you make a personal call to welcome a new manager.

RKD: It's probably only five calls a week, but I always call to thank them for joining us; find out how we got them, because we can learn from that; and, if they've been in the position a little while, I'll ask what surprised them about U.S. Bank, because that's where I learn the most about our strengths and weaknesses. And, of course, I can use this information the next time I speak to a group!

But I've been gratified, too, when a few years later someone comes up to me and tells me they remember phone calls I made to welcome them or to congratulate them on an accomplishment.

RMAJ: The bank stresses five r's: role, relevance, reinforcement, recognition, and reward.

RKD: For me, relevance makes up 50% of the five r's. A major focus of my team is for everyone to understand what and why they are doing something. If there's anything I learned from being a teller, it's that if someone explained the relevance to me of something I was doing, I'd do the job with 10 times more gusto. For example, if I were told to push checking accounts, I'd do that, because I'm dutiful. If, on the other hand, I were told the value to the bank of checking accounts--how the unused funds are used for loans and how everyone profits and that enables the bank to have products and services that are better than anybody else's and make our customers' lives better--I would still push checking accounts--but now I would have a depth of understanding that serves as a true motivator. If I can explain to someone in credit cards, consumer loans, or SBA why they do what they do and how they fit into the bigger picture, that person is 90% there. But not all banks do that!

RMAJ: "Going the distance" for customers entails technology and systems, internal policies, incentive programs, marketing and customer communication, and tracking and monitoring. What order would you put those in?

RKD: I'd put tracking and monitoring first, using the adage, "What gets tracked, gets done." Of course, that implies the right stuff is being tracked and it's all useful. After that would come incentives, because of the relevance factor.

Next would be communications, because while communications is an enabler, it's not the top enabler--we're still capable of doing my job without a marketing script.

As important as systems and technology are, and in the credit card world they're perhaps the top consideration, they can disable as much as enable if they cause me to become less humane. This company would not use technology to discriminate one customer's worth against another's.

And last would come internal policies, because while these policies keep you safe, they often inhibit the latitude and risk needed to try something different.

RMAJ: Your service quality barometer is U.S. Bank's version of Six Sigma--the quality control process used by many industries. And you believe that good service requires access to data. Your reasoning included the statement "You're either working for the bank or you're not." How does U.S. Bancorp handle the risk inherent in such data access?

RKD: The language of our quality control process differs from Six Sigma in that it is less oriented to manufacturing and more oriented to people. Our barometer has three facets:

1. Certain actions we take are expected to be on time and perfect, but might be impaired in some way. We have 700 million touch points with our customers that are monitored each month--through statements, wire transfers, our call center, direct mail response, etc. If a customer is in some way denied access to a transaction, we've failed. For one hour in the afternoon, for example, 114 ATMs in the Greater Ohio Valley for some reason did not dispense cash, which meant 1,465 customers may have been denied access to their cash. During the same month, cycle #14 in our statements caused 405 statements to be sent a day late. And so on.

2. We have 482 employees provide feedback from a monthly Internet customer survey to preassigned support areas.

3. An outside agency calls customers within 48 hours of a transaction to ask them to evaluate their experience. This is now in effect at the branch level and, beginning next year, incentive plans will reflect performance at that level.

We can condense all this data to a 10-page document. The numbers are really quite small considering our universe of 700 million possible problems. But by using this, we can track the migration of customer satisfaction and fix things that are broken or move on from areas that were broken and are now fixed.

RMAJ: Initiatives such as the bank's Five Star Service Guarantee require overcoming obstacles. You've probably heard it all--which ones do you hear the most, which one grates the most, and are most of the obstacles now out of the way ?

RKD: Our competitors like to say "Gee, I'd hate to work for a company that pays for mistakes, because I'm planning to make them." Our response is, "It must be great to be perfect, but we acknowledge that we're human." As stated, we acknowledge a higher level of risk taken to benefit and satisfy our customers. We will gladly stand behind this guarantee.

My pet peeve is when I hear an employee say, "You don't really want us to do that, do you?" We tell that employee to call 300 or so people who used to think that way but now know we really mean it. Internally or externally, it's typically a belief issue that will frustrate me.

RMAJ: Here's the "crystal ball" question. What are the biggest challenges and greatest opportunities you see in 2005? What advice would you give other retail risk managers?

RKD: In 2005, banking will introduce itself to the image world, in which everything is electronic and digitized. This will be as much a watershed event as deregulation was in the 1980s. It will change the way payments are made and the way money is moved and reckoned with. Interchanging and settling could be instantaneous. Most risk management is built on prior iterations of paradigms; we'll be getting into areas of retail risk we couldn't have foreseen because it's an environment we haven't lived in yet. The fraud potential is unknown and unchecked. In that world, how will we define insufficient funds? A returned check? At what point do we declare the money as presented? At what point do we decide whether the customer's identity is valid? What if fraudsters are smarter than the good guys?

The opportunity we have, as I mentioned at the outset, is to be a true counselor to the customer. With emerging wealth and transfer of wealth, the reaction of the equities market to rising rates, customers will rely more on their bankers for trusted guidance. We need to stay in that position and own it. Remember how banks were convinced we would lose our position in the 1980s to the Merrill Lynches? We didn't. Remember in the mid-1990s when banks were beginning to sell uninsured products and we were told we were selling our customer right out the door? It didn't happen. Remember when banks began to be infiltrated by monoline card companies? There's a place for them in the world, but banks still have their place as well.

So I continue to hold the optimistic view that while things will change and we must remain very aware of risks and rewards, we've never had a greater opportunity to become guide and counselor to our customers. We simply must remember that as risk managers, we cannot lose the customer within the increasing demands of our job. It's challenging to balance doing what's right for the customer and protecting the bank, and, oh, yes, that's probably why we're here. Good for us!

COPYRIGHT 2004 The Risk Management Association
COPYRIGHT 2005 Gale Group