John Reed will always have a special place in banking history as one of the early visionaries in banking. He was a forward thinker, tech visionary and to a large extent chartered a new course in creating a global retail bank. Perhaps one of the most famous memos in modern banking history is a young (he was 37 year old then) John Reed’s legendary “memo from the beach” which laid out his thinking and vision for what a Consumer banking business must be .
Thanks to the generosity of an ex Citibanker and prolific blogger Mike LoRusso, I managed to get hold of the transcript of this memo which I have attached here for your leisure perusal, Makes for fascinating reading – and it is stunning how , nearly 5 decades ago, Reed lays out principles would even today would be forward thinking for any Fintech or neo-bank who sets out to “disrupt” the status quo.
For Consumer banking and Fintech enthusiasts, this Sunday , I thought I would parse the top five take-aways from this legendary memo which shaped Citibank over the decades .Almost all of these management nuggets have aged well, and are as relevant and important today as they were in 1976 when Reed penned this from St.Croix beach.
- He starts from the essence – it begins with the customer. .“when I say that what we are building is new – I am not referring to technologies nor to new delivery systems. Rather I refer to a fundamentally new business starting with a dedication to the consumer and to the proposition that we can offer a set of services, that will substantially satisfy a family’s financial needs, under terms and conditions that will earn the shareholders an adequate profit while creating a healthy, positive and straightforward relationship with the customer….” “…it should be clear that we must start with the customer. With the family unit and with its needs for financial services. Our objective cannot be to be in the loan business or the deposit business. Our task is not to run branches nor to issue cards. There are but a means to an end – the business is an effort on our part to manage resources so as to satisfy consumer needs. Our products and services will change as those needs evolve.”
Marketing students will have immediately noticed the parallel to Theodore Levitt’s famous “we are not in the railroad business; we are in the transportation business” … So the starting point for Reed’s retail banking thesis was a) it’s not as much about the delivery or technology or product line – those are a means, as it is about achieving the core purpose of meeting a family’s financial needs, by building a transparent and straightforward relationship. Great foundation. Let’s see what he says next:
- He creates a compelling vision for the business : Reed declares “ our current efforts reflect the conviction that in the years ahead the consumer business will be fundamental to Citicorp – that it is not a sideline business but a core business and that we must bring it to an operative reality” ..Note however that he does not shy away from being brutally honest in describing the current situation – “the business has suffered the economic burdens of inflation, branches are over designed “ (he unleashes a quiet revolution by saying “as a corporate presence branches are unnecessary”!) , the card business suffers from an inflation vulnerable paper processing base, etc. What we would refer to today as diagnosing what is broken and describing the problem statements.
- He then brings clarity to defining the success metrics; and what is the point of arrival. This is perhaps the seminal part of the memo. He looks at the desired outcomes from 3 perspectives –
- Space: Market share, family share of wallet and how “healthy” is the relationship (another way of saying customer NPS or customer service levels)
- Profits: defined by contribution to post tax profits, and return on risk assets
- Culture of the organization: Super interesting that Reed emphasizes this upfront as part of his vision. He talks about creating the environment, (does the organization provide a healthy environment for each of us) learning agility, (to what extent does the organization learn and regenerate itself) and character of the organization. Interestingly enough, this aspect more than anything else, “the Citibank culture” is perhaps his most enduring legacy and the item talked about first when anyone talks about the Citi model.
- He moves on to the “how do we get there” part of the strategy next. He lays out his plans along 5 pillars of
– Momentum: “pushing towards increasing the volumes of our business” – what we would today call “scaling”
– Margins: While recognizing the “supermarket banking” nature of business, Reed was acutely conscious of the risks of cross subsidization and ensuring unit economics for individual product lines.
– Distribution: This was possibly the area where John Reed pressed the hardest. More international, digital vs physical, and completely “re-thinking and re-configuring our distribution systems rather than through efficiencies. Such redesign does not stand alone but relates to the fundamental business proposition being supported”. (True to this , John Reed figured that online interactive systems would have the most influence in banking – he defied conventional thinking by setting up a company within a company, Citibank Systems Inc and this “start-up” within the bank looked at branch electronification, automating credit card processing, replacing cash registers, and of course his claim to fame, democratizing ATMs. )
– volume(market share) – Reed elegantly articulated the framework for looking at Volume – you could get more by “more of the same” , by product line extension (DDA accounts in Europe vs checking account alone) ,or by upgrading service levels (modern day examples would be growing account relationship by offering “premium” service levels e.g., Citigold). He understood and laid out also the healthy tension between margin and volume and when to dial up or dial down one or the other.
– profitability – Reed’s summarizing the profitability imperative however laying out the interplay between todays profits vs investing for the future and viewing of profit lines horizontally by geography as well as vertically by product line is classic and is used till today.
He is honest – even brutal in describing what is not working on each of these levers and what needs to be done to fix them – also covering the inter-play between these variables which are sometimes in conflict e.g., volumes at the cost of margins, profitability for the present vs investing in the future, and the trade-offs.
- Lastly and important Reed talks about Leadership. He makes 3 powerful points. Firstly, the “business manager” is fully empowered and ought to run the business line and the P&L in an empowered and entrepreneurial fashion. The other parts of the organization support the business manager and executive leadership acts as “player coaches”. Second, people management is a line job and the business manager is responsible for this aspect. “it is important to recognize that the people dimension of our job is a line responsibility. A staff function – Personnel – is not going to maintain the fabric of the organization. Ensuring that people are listened to, talked to properly paid is one of the prime jobs of management.” Lastly risk management and risk protection are a line responsibility. ( of course on the other hand, Reed laid out the framework for what would become a programmatic audit program, ARR, independence of risk, and Product approvals centrally – the famous CCPPs, but he was clear the buck stopped with the business manager.)
This timeless masterpiece has served many generations of bankers, and certainly in the Citibank context has built out a culture, a lexicon and a business model framework that has been passed on across at least 2 generations. And remains as fresh and relevant today, as it was back in the day. Would love to hear your thoughts.
T R Ramachandran 