Banking and Formula 1 racing may appear to be worlds apart but there is more in common between them than most realize. Peer benchmarking is a domain of banking which remains underutilized, especially when it comes to smaller banks. Peer benchmarking is essential for banks in any situation, but its importance is increased even further in uncertain economic eras like the one caused by the economy shutting down and reopening due to the pandemic. Looking at the way Formula 1 drivers and teams are ranked can provide context for the benefits that peer benchmarking can provide.

Performance Metrics Need Context

Banks keep track of performance metrics so they can assess their own performance and detect inefficiencies. The problem is that performance metrics do not paint the full picture because they may lack the context necessary for an accurate risk analysis. Banks are not isolated businesses – they are an integral part of the economy. Banks are sensitive to changes in the overall economy and are thus affected by downturns and rises in not just the banking industry but in every major industry and sector of the economy. This means that it is always possible that even if the performance metrics are going down, the performance of the bank is still great when put in context of the economy.

Another challenge is that simply comparing a bank’s performance to other banks in the same geographic area does not provide the right context either, because the performance of a bank is affected by its investments and the product lines it offers. If people start buying more houses, the banks that deal in mortgages will see an increase in business while the banks that are not in the mortgage domain will not see the same increase. Thus, the peers of a bank are not just other banks in the area, but banks that have a similar investment portfolio and product lines.

Banks are sensitive to changes in the overall economy and are thus affected by downturns and rises in not just the banking industry but in every major industry and sector of the economy. Click To Tweet

How Formula 1 Drivers are Rated

For many people Formula 1 racing seems simple; 20 drivers go around the track, and the driver who is able to drive their car the best will win the race. While the official driver rankings are based purely on the position a driver takes at the end of the race, when teams want to assess drivers, they use different metrics. The most important thing to understand is that not all Formula 1 cars are the same, the same way not all banks are the same, and thus simply looking at the bottom line (race wins) is not a good approach to gauge the skill level of a driver.

Something that non-F1 fans may not realize is that Formula 1 isn’t just a race between the drivers, but also between the teams. While the drivers are focusing on their driving skills, the teams are focusing on creating the best car they can and choosing the right strategy for the race. Different teams often have cars that differ wildly in performance. Mercedes has had the best vehicle in Formula 1 for almost 7 years and have won the championship for the 6 previous years and will easily win their 7th straight championship this year. Yet, when the analysts rank and compare the drivers, the top 2 drivers are almost never from Mercedes.

Codemasters develops the official F1 racing video game and for realistic racing simulation they assess drivers in-depth based on multiple metrics so their performance can be accurately recreated within the game. Comparing the official standings of drivers on the Formula 1 website and the ranks selected by Codemasters reveals major differences. Lewis Hamilton is an outlier – he is the best driver and drives the best car – so he is at number 1 on both the lists. That is the only rank that is consistent across both lists.

Max Verstappen is 3rd in official standings but ranked 2nd by Codemasters. Sebastian Vettel is currently 13 in official standings but Codemasters rank him as the 4th best driver in Formula 1. Kimi Raikkonen is 17th when ranked by his points in Formula 1 yet ranked as the 7th best driver in Formula 1 by Codemasters. Adding context makes it easy to understand why these discrepancies exist. Valtteri Bottas is 2nd in official standings, but since he has the same car as Lewis Hamilton but delivers lower performance, he is ranked lower on the list by Codemasters. Sebastian Vettel drives for Ferrari, who are having a disastrous year because of poor car performance, so he is ranked higher in the Codemasters list because his performance is still good when the poor performance of his car is taken into account. Kimi Raikkonen drives one of the worst cars in Formula 1 right now, which means he is 17th in official standings because of the car and not because he is not a skilled driver.

banks need to take the same approach if they want to assess their own performance. They need to be able to put performance metrics in context so they can determine whether their performance is acceptable or needs to be improved.

Automated Peer Insights

The reason many banks do not make peer benchmarking an integral part of their strategic planning is because manually generating the insights can take an unsustainable amount of effort. The better approach is to use a tech-based solution that allows the bank to choose its peers and then generates the insights automatically. The Predict360 Peer Insights tool has been designed to automate peer benchmarking and streamline workflows. Interested in seeing the tool in action? Get in touch with our experts for a demonstration.