In this episode of The Purposeful Banker, Alex Habet and Tony Hernandez talk about why a relationship approach is more important than ever, from interdepartmental collaboration to pricing and deal structuring.
Video Podcast
Helpful Links
[Podcast] Finally! Interest Rate Effects Start to Take Shape
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Transcript
Alex Habet
Hi, and welcome to The Purposeful Banker, the podcast brought to you by Q2 PrecisionLender, where we discuss the big topics on the minds of today's best bankers. I'm your host, Alex Habet, back here with another one for you today. And this episode is somewhat of a continuation from the last episode, so thank you for joining again.
If you listened to the last episode, we ran one of our commercial market updates, right? But we did call an audible when we were planning for that show. Because in that episode, we were thinking we would get the commercial market update back and it would be the same trends and metrics that we were observing. So we didn't think it made sense to dedicate an entire episode to that. And we were going to give a quick update on that and then move on to today's topic, which I'll get to in a minute.
But what actually happened was we saw some news come in and new metrics, new trends that were telling us some things. And we wanted to make sure that we were giving it proper time and attention in last week's episode.
But here we are today on the heels of that, and we're going to start by continuing what we originally were planning to talk to. And we wanted to talk about primacy today, right? We've talked about primacy lots of times on the show in its history, but the reason we wanted to call attention to it back today is to ... . In the environment of rising rates, all of those kind of things can take up a lot of mind space, whether it's for the bankers or for the clients. And one of the things at least I started to notice and a few others on the team was that, "Hey, we're not hearing the buzzwords of primacy or relationship banking anymore." It's not like they went away, right? Relationship banking and primacy is ever present. But because it wasn't being talked about, we wanted to make sure that we brought it back front and center.
And the reason is, despite all the noise, everything you're hearing about rates and how borrowing costs are going up, a lot of businesses are going to start to have some difficult decisions to make, right? It's going to be more expensive to finance their businesses. And so we thought bringing primacy or relationship banking back into the equation can provide a renewed set of approaches to finding creative solutions to them.
I mentioned that relationship banking's always there, it always will be, and we need to jolt ourselves sometimes to bring it back so that we can keep our eyes on the prize. So think about a situation, if you are a banker and you're working with a client and that client has some sort of overt sensitivity to the rising rates. A lot of that can be softened, right? Maybe this is a good opportunity for the bank to have a little bit of give and take, cut a little break to their clients. Of course, it only makes sense, though, if on a relationship basis that works out.
It's a good time to think about all these different kinds of scenarios and to think about what are some other ways the rest of your bank can help at least soften the blow of higher borrowing costs? So good opportunity to bring new ideas and new perspectives into it, that can steer the conversation into a much more productive, forward-thinking discussion rather than one that you try to figure out well, what's the cheapest way to achieve this particular financing need you might have in front of you?
But we want to also make sure on this show that we are addressing some of the key obstacles that we observe many banks have to executing a relationship banking strategy effectively. We wanted to give those specific air time. So in good fashion and how we've been doing it in the last few episodes, I'm welcoming back the Deal Doctor to continue with our regularly scheduled programming on this topic. Tony Hernandez is back with us to take a look at how financial institutions can double down on relationship banking and why the environment today is actually ideal to help your clients with creative solutions. Tony, welcome back to the show.
Tony Hernandez
Thanks Alex. And I think you hit the nail on the head there. I think in just about every conversation we had with our clients, and across the spectrum of size, primacy is always a key tenant of the strategy to grow and better serve their clients. And doubling down on how you mentioned in regards to the rising rate environments that we've been covering, while to some extent we have seen banks protect loan NIM, that ongoing battle to protect from the ongoing erosion remains. So once again, primacy stands in front where both banks and bankers are focused on being the primary bank or the first call for their clients. The strategy really paves the way for long-lasting relationships that protect against NIM erosion and overall help improve client attention.
Alex Habet
And that's why we like to talk about these kinds of topics on this show, because that's what our audience, who's ... there's a lot of bankers that listen to this show and this is the kind of thing I think occasionally you need to hear again, just to remind yourself of what's at stake. Look, let's take a step back here and set this stage for the rest of this episode. I mentioned a very rudimentary example on give and take, right? Well, let's kick it up a notch, right?
Tony Hernandez
Sure.
Alex Habet
What should be top of mind? Why is it important not to put primacy on the back burner today?
Tony Hernandez
Yeah, I think that there are a few areas here for us to discuss, and note that some of these are challenges that the industry has really been faced with for years, honestly, decades, even. Let's start with collaboration or ensure the entire client team has a seat at the table and engage in a timely manner. The lack of healthy collaboration and communication leads straight to the next topic here, which is fee waivers or discounts that make product or services more palatable to the client and win the business. But we want to be cognizant of double discounting, that no sharing of offering concessions or multiple offerings that go against a core strategy of protecting against NIM erosion and dilute all the work that we just did to win that business, right? Again, collaboration, being cognizant of when we offer fee waivers and avoid the double, perhaps even triple dipping of concessions or discounts when trying to win business.
Alex Habet
OK. Those are the macro-level themes we're going to zero in on for the rest of this show. On the collaboration one, which obviously is the first one, it's a big one. You and I, in our past experiences, have witnessed an acute version of how this can be challenging. The larger the bank, the harder it becomes to collaborate. I think that actually applies to any business, not just banking, right?
Tony Hernandez
Yeah.
Alex Habet
But it's especially true when you're in the middle of working with clients and getting everyone on the same page. It can be challenging. So I really look forward to hearing some of your thoughts on the collaboration part first. Why don't you tell our audience, what are some things that you look at or what are some observations and what are some ways to mitigate some of those issues along the way?
Tony Hernandez
Yeah, absolutely. Look, let's start broadly, because it is a big topic. Historically, let's call them our revenue generators, they may be different people, could be the relationship manager, the treasury officer. And while part of the same client team, they may also sit on separate hierarchies. So how can we start to build a bridge that they can navigate? This, in theory, should pave the way for the client team to differentiate through ideas and insights. It offers the opportunity for them to tailor credit proposals that complement efficient working capital management. The best thing that a bank can do is help clients manage their cash flow more efficiently before lending to them or finance whatever project they might need. So pricing deals at the relationship level and optimizing this format positions the bank really well for primacy. These, then, almost become the side effects of bringing treasury management to the front end.
But one of the challenges that needs to be addressed is that our client teams, again, sit in separate orgs and are likely incented differently. So that disconnect may as well have them speaking a different language when it comes to deal economics. On the one hand, we may have a group focused solely on ROE, while the other is more focused on straight revenue generations, since they're not encumbered by hefty capital requirements. So I think we need to ensure that treasury officers and other product partners are brought to the conversation early and often for a way to communicate and being able to see deals through a common lens.
We need to do away with the old model approach of, "Tell me about what your needs are and your current banking structure so that I can see if I can do it cheaper." I think it doesn't work that simply anymore. Our clients really need to be compelled through innovation, advancement in technology, and novel ideas to help them better serve the clients. So when we price, shouldn't we price as a client team with overall relationship economics in mind, in a way that's consistent with our value proposition? Not only does it help us be competitive, but it also ensures we're bringing in good, profitable, long-term relationships with the right economics that support our extension of capital.
This is a process and assistance challenge. This is where we need to build a bridge, Alex. This is where we bring everyone to the table to collaborate, bring transparency against consistent targets and standards. And one more thing here in collaboration is that what the onboarding process is based on, what was proposed and agreed to, has to be consistent so you can meet, or obviously better yet exceed, expectations. This also can't happen consistently if you have a fragmented process.
If we take a quick detour on collaboration and briefly mention where innovation is happening in the commercial banking space, while the past few years have recently challenged this space to transform giving client businesses and preferences, treasury management is really the main area where innovation is happening. Some of that innovation revolves around the ways companies can automate manual processes, accelerate and better control cash flow and liquidity, make the online buying of goods and services easier, and equally important is protect against fraud. Through technology, companies are offering these innovations in a customized and seamless manner, so treasury management is really a great way for a bank to differentiate and be the strategic partner for clients. Tying it back to relationship economics, treasury management is one of the best ways to generate recurring and sticky fee revenue. Also, given the ongoing challenges around larger compression, top-performing banks might require revenue streams like this to support the extension of capital with acceptable risk adjusted return.
Alex Habet
Yeah, all that you just mentioned, literally in that last sentence ties perfectly back to some of ... . We've been giving some advice on how to think about loan structures, for example, but that's not the whole picture. And you're not always going to be able to find the perfect solution that works for the bank and for the client in just the credit side. Using treasury management or other fee-based products is an area where it can be very feasible to actually close that gap, in fact, outperform that gap. And even your point about where you're going to see the most innovation, as someone who used to only focus on the credit side, I would be like, "No way, man." But it's true, a loan is a loan after all. It hasn't ... it's evolved a little bit, I guess, but it's true to its core, how it used to be back in the day as well.
And it's not like there's a ton of innovation that can happen apart from how these things are creatively structured. But when it comes to the treasury side, that's actually innovation that they'll feel, the clients will feel in their everyday business. Right?
Tony Hernandez
Definitely.
Alex Habet
And that's why you've been hearing our organization, for the last year or so, beat that drum, right? That's a big part of the value prop. In addition to the things that you get through collaboration, you get the differentiation of thoughts and ideas. Right? The old saying, "Two heads are better than one," right? This is what applies here. You're getting the best insights. Your proposals are going to be much more tailored. They will complement exactly to the situation that your client might be facing. And treasury management, again, is a great catalyst to getting that all done.
Tony Hernandez
Absolutely. And ...
Alex Habet
Especially in an era where we're only talking about rates and fees these days, right?
Tony Hernandez
Right. And the ever-changing regulatory environment.
Alex Habet
Sure.
Tony Hernandez
But I might have gone over it a little fast, but when I mentioned the one consists of targets or holding everyone to one standard, there's huge benefit for our clients there as well when we have an entire client team knowing exactly where the finish line is, right? And when we're all marching toward that, not only does it make us work together better, perhaps even more fun, but also we get to challenge ourselves to come up with a solution that truly shines for our clients, right? And especially because they're dealing with just as many challenges as you might be. So the fact that you're ... Again, we've talked before in the past, Alex, that the point of bringing options, but now that's on steroids even, right? Because it's not just, "Oh, I'm going to take from this fee and I'll give it on your spread. You're thinking about it holistically, you're really looking at it from a client and 360 perspective and looking at them just like how they would view themselves, right? It's like, "Well, Alex, I have all of these products and services with you. Why are we so hyper-focused on just the one item?"
Alex Habet
Yeah. And just to add to that, it's not like the banks have become less siloed recently. I think they're just as siloed as they've ever been, but at least the technology and the innovation that's at play in these spaces has at least improved the situation significantly, in my opinion. When you're going to have different incentive plans, you're going to have different metrics that are important to different business units. But it's 2022 now, we're a stones throw away from 2023, we've got the technology to solve a lot of those headaches while still stuck with the old-fashioned HR issue of people just being in a different org structure. I'm really excited by what I'm observing, and you and I, we work with clients every day, we see how we get to influence that and improve upon that. These are big, chunky problems, but I at least wake up every morning feeling good that we're doing something about it.
Tony Hernandez
Yeah, no, I cannot agree more.
Alex Habet
Yeah. Why don't we shift a little bit back to some deal tactics, right? We do like to talk about deal tactics on the show a lot, and you are the Deal Doctor after all. So why don't we talk a little bit about ... Step away, of course, from the credit side only, and let's look at broad, macro-level relationship type stuff. You talked about fee waivers first. Why don't you dig into that a little bit?
Tony Hernandez
Yeah. And we already kind of briefly touched on that, but when our client teams or banker, even the treasury officer, when we get backed into a corner and we want to defend a relationship or are hyper-focused on winning one of our top prospects, the go-to is usually offering a discount to incentive the moving of some of these services at either discounted rates or discounted for a limited time while they move some of those more challenging services over. That makes sense, right? It's cumbersome. We do want to give them some sort of incentive and so long as it make sense, hey, let's do it. But then the challenge becomes, when are we going to reprice or size the waivers? And I feel like that's exacerbated given how manual and time-consuming account analysis can be.
So again, having that client 360 view and the wherewithal for our client teams to understand where our revenue streams come from, allows them to stay on top of those limited-time discounts or be better footed to pivot when they're backed into a corner. And when they do have the ability to expand that relationship, either because their credit facility is coming up, it's coming up for renewal or whatever might be happening with the buyer environment, let's again, have that full client 360 view and say, "If the client is that sensitive to the rising rates, can we right size a little bit or bring up to where our standard pricing would be on a particular product or a service?" Right? So it's difficult, but through the tactful execution of that conversation, there is a way there to offer clients better service and also protect against NIM erosion. It's just like what we said in the past and what I said earlier: Have options, but don't be so limited to just a product. Think broadly of how we can, again, benefit the client, benefit the bank.
Alex Habet
Yeah, perhaps you can call me naive, but I remember back in the day when we were meeting with the different teams within the bank, and we came up to the concept of how are new originations handled versus renewals. The overwhelming description of the renewal side, and again, I'm focusing on credit right now, is, "Hey, just sail it through." I actually remember those exact words being used, "Hey, our portfolio team just sails them through," which is, I guess it's fine if your rates are falling and you're locking them to a time when they were higher rates, but now it's the opposite of that problem. If things are sailing through, you are losing money.
But I thought this was a problem that was just unique to lending. I never realized how common that is also on the treasury side, especially when we're working with some prospects and sharing our approach to treasury, it's the same exact problem, right? I guess it's uncomfortable to right size a deal, but you can't give ... unfortunately banks aren't charities. I don't know any that are. So at this point you have to compromise in some places. If you're a client working with a financial institution, and this is just a great way to actually make it not even feel like a compromise, it's just, "Hey, you're getting value out of this. You're getting innovation. You might not get those great discounts anymore, but you're going to feel something that's really positive in your organization going out of this." And that'll just only strengthen the relationship overall.
Tony Hernandez
Exactly. And it's that give and take, right? I mean, look through the inflationary pressures that we've gone through. I'm sure that when the bank's clients go to pass on some of those pricing increases to their clients, they're probably scrutinizing over that decision just as much as the bank is. Right? But if you are working toward primacy and have that broader relationship, again, through the tackle conversation, it's almost the same conversation. And to some extent, the client will understand, but that's where it becomes a little bit more art than science, it's you're going to pass on some of those expenses, right size some of those previously offered discounts, but don't make it too punitive, don't necessarily make it feel like they're getting squeezed on just because the timing is right. So tactfulness, having that ongoing relationship and again, having that whole client wherewithal of staying on top of that client's story, I think paved the way for those conversations.
Alex Habet
Absolutely. The next thing you mentioned in the beginning was the concept of the double ... or I think you called it a double dip ...
Tony Hernandez
A double discount, triple dip and I ...
Alex Habet
Triple dip, yeah. Why don't you go into that a little bit? How is that related? And what's the issue with that?
Tony Hernandez
Yeah, let me share two quick stories before we get into the double or even triple dipping. And to your point, it doesn't miss ... I was like you where I thought it would only happen on the credit side, but it also happens from other products. On the loan side, I remember we were trying to make sense of returns on a particular loan. It was a 10-year loan and when it was originally onboarded, there was a discount thing that was given, maybe for a year or two. And that was supposed to be adjusted up. However, once onboarded, no one went back to see if they had right sized that pricing. And the fact that they hadn't increased the pricing only came to light after year eight on a 10-year loan. So by the time that they realized that someone was wrong, it was pretty much a moot point. And I think that what that team had done was given, call it like a 1% intro rate that was supposed to right size after the completion of a project or something like that, but very painful experience there.
And not too different on the cash management side, there was a lockbox operation that had been won. And again, to the point we made earlier, to allow the client to go through that painful and challenging process, the fees associated with that lockbox were waived until everything had moved over. I think it was supposed to be about six months time. And again, it wasn't until years later that someone asked why their relationship economics were so low, given the scope of that relationship, that they realized that they hadn't collected a single fee in regards to that lockbox operation. And honestly, these are horror stories. So much work and effort is poured to win the business, only to not get paid appropriately for all that work and effort that went to, not only winning the business, providing excellent service to our clients, but then to not get paid.
Alex Habet
Yeah. And that works out great for the client, I guess, right?
Tony Hernandez
Yeah. Talk about getting ...
Alex Habet
Maybe that buys you loyalty forever, but if your whole book is made up of that stuff, that's scary.
Tony Hernandez
Yeah. Talk about getting an unbeatable discount, right? On the double discounting, and if we go back to that earlier point, having that broader context. So imagine if that 10-year loan was the wedge that got pitched to get that lockbox services over, right? It's like, whoa. Now that's an extreme case, but I think it highlights the point that we need to have that client 360 view to have the wherewithal on the credit and the cash management side to understand where it is that maybe we've deviated from where market pricing might be or where we've deviated from internal standards or benchmarks, right? So that when we are in that situation where we're leaning on either product as the wedge, that we're not quick to do away with that origination fee, then do away with charging an appropriate level for the service piece for something like lockbox, right?
Can we instead, again, come to the table, have a conversation of, "Well, where are our client sensitivities? Where can we give and where can we take to balance this equation out to help them achieve whatever goals they might have without also completely eroding our internal NIM?" Right? And again, that client 360 view, understanding where our revenue streams come from and where our clients may have sensitivities allows for the client teams to really be creative and shine when delivering ideas for the clients.
Alex Habet
As someone who used to be part of a pricing horizontal, I'm speaking to you now, I mean, there's both of us, but to you specifically I'm putting the question out, what are some of the key findings that you've found through some of that cross-functional work, realizing that just a few years ago, this was all done very manually, right? The silos were the silos and it might as well have been sometimes different companies talking to the client, but ...
Tony Hernandez
It might as well have been.
Alex Habet
Yeah. What are some things you found interesting in that?
Tony Hernandez
Yeah. I think that, regardless of the product, and let's go broad, outside of credit, cash management, merchant cards, keep going down the list of the commercial suite offerings that a commercial bank might have, was that everyone loved the ADL relationship pricing. Hey, that makes a whole lot of sense. And it really puts discounts in the context, right? And goes right back to that notion of let's make sure that we're not double or triple discounting if possible. But the number one challenge there is that the client team, perhaps the banker or whomever, literally had to go hunt and peck for all those bits and pieces of information to then bring it back and have that conversation. Sometimes there was just no time. We were part of that credit team and I felt really fortunate where all of our product partners looked at and envy that, not only did we have the right solution to help us eliminate that hunt and peck, but provide our bankers and our credit partners, that client 360 wherewithal because it truly was a game changer, not only in protecting NIM erosion, but building those stickier relationships.
And then the other part, and we touched on this briefly as well, is that it served as a mirror for those teams of, "Let's challenge the process. And is there a way that we can eliminate some of these speed bumps through technology? And if it's not today, can we start working toward that?" I think that the thing that I took away is that, whether it's the leadership team or the bankers, everyone was hovering right around that idea, that notion of primacy and the need to look at relationships that way, acknowledging, again, those speed bumps and wanting to work better. Because if we're serving ourselves better internally, that only means that we're going to be better when interfacing with our clients.
Alex Habet
Yeah. You're elevating the complexity of the deal scenario by forcing the dialogue at a relationship level while simultaneously, thanks to good technology, also simplifying how it all gets done.
Tony Hernandez
Yeah. I'm glad you said that.
Alex Habet
Well, yeah, but it's important, because it's huge part of adoption. It's one thing to say, "Hey, 4,000 bankers, you got to now do it this way." And it just adds more complexity and it does not help them do their job. Right? It's another thing to say ...
Tony Hernandez
No, so then families suffer.
Alex Habet
Yeah. It's another thing to say, "Hey, 4,000 bankers ..." or however many are at your bank, "... we have to elevate the conversation at a higher level. It's going to get more complex, but the technology that we're giving you is actually going to make things much easier."
Tony Hernandez
Giving them the spreadsheet.
Alex Habet
You called it hunting and pecking. I mean, it's instant context.
Tony Hernandez
Yes.
Alex Habet
I don't know, the job just becomes so much easier. And then it'll translate itself to great relationships.
Tony Hernandez
Absolutely.
Alex Habet
And you will be rewarded as a bank with the loyalty of those clients.
Tony Hernandez
Yeah. I want to double down on what you just said, because when you say it's like, "Well, always consider the full relationship." And depending on where you might be in your organization, that could be a huge, scary task, right? But if you're able to remove that layer and just make it instantaneous, then it suddenly becomes, "This is what we should have always been doing."
Alex Habet
Yeah. Right. I mean, I just think about how doing taxes was like before there was software that helped you do it, right?
Tony Hernandez
Oh, man.
Alex Habet
Now, it's just follow a questionnaire and you can do a pretty complex task right there. It's not the perfect analogy for what we're talking about, but it's just another application of how things just evolve and you can accomplish complex things with better collaboration, better technology and things like that. And so that's why we talk about it. That's why we're talking to clients every day, dude.
Tony Hernandez
Man, I love it.
Alex Habet
Yeah. Look, just to sum it all up, it's important to keep the credit-based strategies in mind, the things we talked about in the last episode, actually the last few episodes for that matter, but let's not forget you have a war chest available to you by thinking at a relationship solution level, right? That's what your clients are really looking for. They're not looking for just a loan, they're looking for you to enable a large part of their business, right? And it requires you zooming out and thinking broadly. And again, your clients will feel the effort that you're putting into it, right? If you're really collaborating internally, you're using the best data available to you, you're coming up with options. You talked about options, very important, but different options, different product sets, spotlight why it might be a good idea to lean to some new innovation on the treasury side. You will be rewarded in that relationship. That I can almost guarantee. Any last thoughts, Tony, before we call it an episode?
Tony Hernandez
No, just, Alex, thank you. Thank you again. Like I always mention, I really enjoy our conversations here. And it's rewarding in and of itself, so thank you.
Alex Habet
Absolutely. Doc, as always, great insights. I'll probably see you in the next episode. No, I'm just kidding. Well, maybe not, right?
Tony Hernandez
TBD.
Alex Habet
But I'm not going to say goodbye for long, right? But thank you again, as always, for coming back to The Purposeful Banker. I also know you've heard from the audience, from some of your past appearances on the show. That's proof to me that the doctor is in demand. Hope you have a good Labor Day weekend, my friend.
Tony Hernandez
Thanks, Alex.
Alex Habet
And to the rest of you, if you want to catch more episodes of the show, please subscribe wherever you listen to your podcast, including Apple, Spotify, Stitcher, iHeartRadio, and more. Just search for The Purposeful Banker. We're the only one. And if you have a minute to spare, let us know what you think of the show by dropping something in the comments. Also, head over to Q2.com to learn more about the company behind the content. And don't forget, mark your calendars and plan to join us in Austin in November at the in-person 2022 BankOnPurpose Conference, visit BankOnPurpose.com for more information, and you can save $100 off of the registration if you use the code "podcast." Until next time, this is Alex Habet, and you've been listening to The Purposeful Banker.
