Loan-to-Loan Combat With Pirate Bankers

George Neal

In today’s yield-hungry environment, it’s easy to fall into the commoditized banking trap - the false belief that commercial banks are only offering a commoditized product at a slight mark up.

This is particularly true if you have a “pirate bank” in your market.

The Scourge of Pirate Bankers

A pirate bank is the kind that swoops in to raid your potential deal, armed only with a simple statement: “We will offer the same thing at ¼ point less.”  

These pirates frustrate everyone, particularly relationship managers, and leave them feeling that rate is the only thing that matters; if they can’t undercut the rate, they cannot win deals. Further, this pirate tactic misleads clients, making them think that the initial deal terms are unfavorable, or worse yet, are an attempt to take advantage of them.

If you see this happening to your bank, you must act quickly, because it’s likely your relationship managers are unprepared to deal with these raids. 

We have seen this happen again and again. Fortunately, there are a few simple steps you can take to combat these pirates, protect your relationships, and force these unwelcome raiders to move on.

Price With a Capital “P”

The key to turning the tables on pirate banks is an understanding of “Price.” The use of the capital P is very intentional: We’re not talking about the lowercase version of price that folks commonly use as another word for rate. Price with a Capital P consists of all the elements that make up the deal and all the ways it can be structured to meet the needs of the customer, as well as the financial goals of the bank.

Relationship managers who understand Price don’t regret losing a deal by a ¼ point because they know it’s not just about the ¼ point, but rather the rate, the duration, the collateral, the full deal structure.

The Pirates’ Dangerous Gamble

When you think about it, the pirate bank has taken a dangerous market gamble, effectively saying, “You are overcharging your customer, and Pirate Bank can operate successfully with less interest income.” Are they really “better” than your bank and able to manifest a significant competitive advantage? In most cases the answer is no, and that makes the Pirate Bank market gamble a bluff. By blindly matching your terms while lowering the rate, Pirate Bank’s position is both dangerous and vulnerable!

How dangerous? The FDIC Failed Bank List is littered with banks that had slightly to significantly lower net interest margins than their market peers, but lacked the operational rigor, recovery capability, funding source, etc. to support those rates. In the end, true pirate banks tend to fail, but often not before they’ve done damage to your bank.

It’s not just your loan growth and RM morale that are negatively impacted. Pirate banks encourage customers to think about commercial loans as a commodity. Otherwise,, how could a bank swoop in and make such a bold matching offer? If they can blindly offer ¼ point less, surely there is no difference between banks, right?

As bankers, we know there is a difference between banks and that ignoring these differences harms everyone involved in the transaction, including the customer. The Pirate Bank wants to reduce these differences down to a single dimension – rate – and use that to pressure both the customer and other banks.

This is also where Pirate Bank’s position is vulnerable. They ONLY compete on Rate, with the implied accusation that you have not previously offered the best deal. Pirate Bank’s insinuation is that you were trying to slip something by the customer!

In the face of this assault on the integrity of your brand simply waiting for the Pirate Bank to fail is not an option.

Pushing Back on the Pirates

To fight back, keep your market reputation, and prevent your deals from being raided, you need to put the other dimensions of competition back on the table; specifically, those that correspond to your competitive advantages. You need to do this in a way that deepens the customer’s understanding of the transaction and allows the customer to understand Price, rather than rate.

One way to do this is proactively, through sharing a limited set of scenarios with customers, showing rate / term trade-offs. PrecisionLender data shows that where competitive offers are identified, relationship managers are 38% less likely to have set up and presented multiple scenarios. This suggests that offering various scenarios at the onset and making the customer aware of their influence over rates, acts to vaccinate against raiding.

Should a raid occur anyway, those initial scenarios form the basis for conversation that can go a long way toward warding off Pirate Bank. When faced with the counter of ¼ or a ½ point less, scenarios provide the relationship manager with a direct example of where the customer made choices that impacted rate. If the customer has influence over the rate/term trade-off, they are less likely to feel you are trying to put one over on them.

In the absence of initial scenarios, presenting timely alternatives is also effective. Understanding value substitution is an important part of any sales process, and one in which the originating bank has a relationship advantage. Because you understand the customer’s needs in terms other than rate, you have the ability to counter rate raiding by using things such as duration, collateral, deposit value, or numerous other terms that might be higher in relative value to the client.

This insider information is key to moving from “match the rate” to “increase the value,” which is the ultimate goal of any anti-raid strategy. Moving the conversation from rate to value through mutual understanding improves our client relationships, our bank’s brand and our bottom line.

It also means that the next time Pirate Bank is looking to raid, they’ll avoid your bank in search of easier targets.



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