Our recent survey asked commercial bankers about their pricing processes and technology, and the deals their RMs price each day. In this week's episode, we discuss some of the most surprising results.
Helpful Links
Commercial Pricing Market Survey Results
Why Most Banks Hate Their Pricing Models
Talent Challenges in Commercial Banking
Putting Jobs to Done into Practice
Podcast Transcription
Jim: Hi and welcome to The Purposeful Banker, the podcast brought to you by PrecisionLender, where we discuss the big topics on the mind to today's best bankers.
I'm your host Jim Young, director of content for PrecisionLender, and I'm joined again today by Dallas Wells, our EVP of strategic initiatives. Thanks for those who bore with us. This is rare. We're normally like clockwork once every two weeks. This is a three week break we took here because, well, summer, and summer vacations and that sort of thing. But we are back and don't worry, we're back on the biweekly, and this also allows us to skip ... This is total inside baseball at this point ... skip Labor Day so that we can have a podcast right before it and right after it and you don't have to listen to our podcast while you're on the beach at Labor Day.
But right now for today, we're going to discuss a recent survey that we conducted here at PrecisionLender, and it was sent out to commercial bankers throughout the United States. Over 150 responses and it produced ... well, at least for me, maybe not for Dallas ... we'll see in just a second ... but as the non-banker, I thought some of these results were eye-opening.
So we're going to discuss those in general terms. If you want to dive deeper into the numbers and other results from this survey, we'll have a link to that as always in the show notes, or you can go to explore.precisionlender.com and it'll be up there on the homepage as well.
So Dallas, first off, it's been a bit of a break. I wanted to make sure you're doing all right, having a good summer, all that sort of thing.
Dallas: I'm sunburned and ready to go. So let's do this.
Jim: Fantastic. All right. Let's start out with a general question. When you saw these survey results, what was your sort of instant reaction? Did you nod your head and just say, "Yep, sounds about right"? Did you recoil in hard? Did you hang your head in sorrow?
Dallas: So you know the scene in The Godfather where Michael kisses Fredo full on the mouth and said, "I knew it was you"? It was kind of like I knew it. And these are the things that a lot of times a banker won't say to your face when you're in the room, but anonymous surveys have a magical way of illuminating the truth. So these things that we feel, we see it in behaviors, we see it in some results, and then bankers will look you right in the eye and say, "No, that's not how we do it. That's not the case here." So anyway, it should be interesting to talk through.
Jim: Gotcha. And just to be clear, we don't feel betrayed if you guys are planning to go on fishing trips with anyone from PrecisionLender, don't worry. Don't be alarmed.
All right, so we divided the survey results into three sections called Powerless Pricing, Painful Processes and Problem? What Problem? Now, obviously we editorialized a bit. Obviously I like alliteration, but you will understand why we chose those titles as we continue. We're going to spotlight one finding from each section, and starting with Powerless Pricing, Dallas, probably, I think the way they teach you to do this stuff is to save the best for last. But I've got to tell you, this number to me jumped out the most and that is, only 34% of our respondents felt the deals that they were winning would benefit their portfolio. Am I missing something here? If you're winning a deal and the deals you're winning, don't benefit your portfolio, then what exactly are we doing here?
Dallas: I think that's a fair question. So this of course is all about perspective. So in some ways I'm surprised the number came out that high, and maybe that's a little bit of an exaggeration, but if you go into a room full of relationship managers, their customer and the deal they're working on is the most important one in the bank, right? And frankly, that's their job, right? That's the way they should approach it. They are an advocate for their clients and it's their job to serve them. But those RMs are shocked, shocked, I tell you, when we actually measure profitability of their portfolio and they're not at the top of the list sometimes. In fact, sometimes there are red brackets around some of those numbers.
And so I think what you're seeing with that only 34% of the deals benefit the portfolio, you're feeling a lot of the angst in the room. Where bankers are, they know that the market is tight, they know that spreads have been declining. If you kind of ignore some of the rate fluctuations and look back over four or five, six decades, right, this is the trend in the industry, is that it's all getting more competitive and spreads are shrinking on the whole.
So there's a lot of bankers in the room that have been doing this a long time, and they're doing deals today at spreads that 5 years ago, 15 years ago, would never have been allowed. And so they kind of realize, "Yeah, I get it, that some of this is what we have to do to keep winning business and keep the music playing, but also it feels kind of icky." So I think that's where you're seeing two thirds of the people that are answering this question are saying, "Yeah, I don't know if this really benefits our portfolio. We're doing what we have to do. We're keeping the revenue flowing, but we're barely making money on these things." So it's tricky.
Jim: Yeah. And I think also this reveals, the respondents were a mix of front-line people and management you can answer this question the same way from two different perspectives, and one of which would be the front line guys saying, "I'm doing this deal and yeah, sure, it meets all these hoops I had to jump through, but I don't think it really helps me." And the other version of that is, "Yeah, these guys won this deal, but I don't think it really helps our bank." So I think that that may be in play too.
Dallas: There's another big cyclical trend happening here, and we've talked a lot about this with our clients, especially the larger ones, where just given the realities of the market, so we talked about how competitive it is.
There are also some regulatory issues at play here. And I'm not talking about the, "Poor bankers. It's really hard to do all this regulatory stuff and it's expensive to make it all happen." I'm talking about the hard math of the liquidity that they have to hold on their balance sheet, the amount of capital they have to hold against certain kinds of deals. It's become really, really hard between that and the competitive marketplace for larger banks to make much, if any money on doling out credit.
So the way we phrase that question is, we said, "The deals that you win, are they benefiting your portfolio?" And so when we say portfolio, people are immediately thinking of loans, and they're like, "Gosh, we're just not making much money on loans."
In fact, we see a lot of really smart banks that are just going into that equation now with their eyes wide open and saying, "We're not going to make money on loans. That's not what we're here to do." Loans are sort of the cheap milk at the back of the store, right? It'll get you in the door.
And the way banks are actually making returns now are the deposits and the fee-based income and true relationship banking. But the portfolio, the credit portfolio piece of it, they almost think of that as a loss leader now. And it's not really a loss usually, but it's not really covering the cost of capital. So the risk-adjusted returns are below what they would like to get returns on their capital and then they juice it with all that other stuff. So the data holds that out. If you look at industry trends, it holds that out. It's more true for the largest banks. But that of course filters all the way down through the marketplace. So I think you're seeing several things go on here that that number is not that shocking.
Jim: So you've made me feel marginally better about this. So thanks. All right. On to painful processes, which will now make me feel the opposite again. But the ultimate pain really is described to me in this stat, which is more than half the respondents felt they'd lost deals because approvals and funding took too long. I'm going to go ahead and play the skeptic here, Dallas. Any chance that this is just a reflection of sour grapes from RMs who didn't make a good enough initial deal and rather than saying, "I got beat because I didn't structure a good enough deal," they go, "Ah, I got screwed over by credit and by underwriting"?
Dallas: I think that's probably some of it. My boss Carl has a similar mantra. He's like, "If you're not getting a deal done, whatever reason they're telling you, that ain't the reason. That's not the real problem." But I think there is some reality of the harder you make this process for your clients, so the more painful it is to them, which takes a while, you ask for a whole bunch of stuff, you make a referral to the deposit and fee-based side of the house because that's how you make your money, and they ask for the same stuff over again, and all those kind of ugly processes that still live inside a lot of banks, the more of that you have, the reality is the cheaper you have to make everything to make it worth the headaches.
So it's sort of like grocery shopping. You'll go maybe to a store that's not as nice and you'll drive a little further and you'll put up with a surly cashier if it's really cheap. If it's not, why one earth would you put up with that? So we've actually had some banks tell us that, like, "Look, we are cheap and it's because we kind of have to be, because we've got some messiness and we just know that." So this is why you're seeing the big dollars being spent on ... I think the buzz word for it is probably still digital transformation, but it is trying to digitize, automate, bring efficiencies to a lot of these back office processes, trying to get things onto platforms and get rid of the silos in between data and integrating all these systems that have been kind of cornered off in their own little server room for decades.
And it's painful and it's expensive, but this is why, is because we kind of now live in this instant gratitude, Amazon, Netflix, get whatever you want, whenever you want expectation. And then you've got borrowers who come to the bank and they're like, "Hey, I need something simple." And we're like, "Great, that'll be three weeks and fill out this 40 page document and send us all your financials and your blood type." So it doesn't line up with what they see in the rest of the world. And so there are some banks figuring it out. And so those that do can still charge premium pricing, right? People are willing to pay for that kind of service and those that don't better be cheap.
Jim: Yeah. Yeah. I was just about to say, when you mentioned the Amazons and the Netflix of the world, I was going to say, on the other hand, those guys have gotten us to do what we never used to do, which is pay for this stuff, you know what I mean? The infuriating cable raised my bill $5 this year when it's like, now I only get 685 channels for $40 a month.
Meanwhile, I'm totally happy with paying $10 a month for Netflix because I'm happy with what I get there. And we've heard that. We've had bank customers come onstage at Bank on Purpose and say essentially, "I'm totally fine. I don't have to have the best price if you can just make this process easier for me." So yeah, I do think that it reflects sort of that number because if you can't do that, then I will go on price at that point.
All right. And then that last section's called Problem? What Problem? And we called it this because, and when we were kind of going back through the results and sort of looking at this, from a marketing standpoint, do we have a story to tell here? And it was going through these numbers and, "Yeah, we've seen these before. Uh-huh. Yeah, that sounds like a pain point we've encountered before, people have told us about." And then we got to the last one and then we got answers like this one. So we're asking banks at this point the steps they're taking to address their issues and pricing through technology, and 64% said they felt comfortable with their technology and didn't see a need to change.
Dallas, to quote the movie Zoolander, I feel like I'm taking crazy pills here. We've just gone through, man, this is a problem and commiserated to be fair, and not pointing fingers here. Understand, yeah, this is a problem that bankers deal with. This is a problem that bankers deal with. This is a problem that bankers deal with. And then we get the answer of, "I think we're pretty good with what we got." So am I missing ... Is it not really a problem? Explain this one to me.
Dallas: So I explained away the first couple you mentioned, and I felt very calm and logical and level-headed. This one is the one that just, it's the face palm one for me. And here's the fundamental core conversation that we have in the room with bankers over and over and over again is, we can point out not only these sorts of things like, "Hey, your bankers are frustrated, your clients seem frustrated. Your bankers say they can't see basic things like how profitable is the relationship and what other accounts do they have?" Basic blocking and tackling kind of stuff. But you can also see it in the results, right? We've talked about in other places and other content, where bank profitability is a struggle right now, and it's really at the whims of what's the fed do with interest rates. And outside of that, we still have that kind of long-term trend of every piece of business we do is less profitable.
And so at some point, we have to look and say, "Look, these things are causing real problems." But the issue here is that, again, in how we phrased the question. We said, "Your current technology," right? "Your current pricing technology. How you handle some of these things that we're talking about?" And most banks in the world still think of pricing as a calculator. It's a calculation. I have to calculate a number and I get a thumbs up or down. And so I ask this question so often that it makes me want to pull out what remaining hair I have. It is, "Okay, why do you calculate that number? What are you doing with it?" And they're like, "Well," and so that's when you'll find out what kind of banker you're talking to. We literally get answers like, "Well, because I have to have that number to put it in this form in this system and it won't go unless I put that number in there."
Jim: Right.
Dallas: Okay. Gotcha. Understood. I know sort of what I'm dealing with here. But others, well, they actually struggle with that. They're like, "Well, why do we measure it?" Well, we don't want to do dumb things, right? We don't want to do deals that are too cheap. Okay. What happens when your banker prices a deal and it comes in below this threshold that you've plugged in, which by the way, that threshold has been the same one for maybe 15 years, and it doesn't meet that threshold and so it turns red, right, or there's a red flag or whatever happens in your systems, what do you do? Right? You measured it. You didn't get the measurement that you needed. Now what do you do? Well, most of the time we book it anyway and we make an email around some exceptions, and then we file that away and it's a pricing exception. Okay, gotcha.
It's that game you have to play where you keep asking why, right? Why do you care about exceptions? Well, we're pricing too low. Well, why does that matter? Because then I'm not making any money. Bingo, right? We do this to make money and pricing is the lever that you have, right? You can only squeeze so much cost out of your operations. Yes, you can do digital transformation. I think a lot of people are finding now that some of those efficiency plays are really painful and expensive and they take a long time.
Jim: It can be somewhat inefficient to do the efficiency play sometimes.
Dallas: Yeah, and it takes years to happen. So for a while, you're doing two systems instead of one and your payback is now in the order of like five decades, you'll eventually get back your money. There's some of that stuff happening, and so you can only squeeze out so much cost. You can only cut so many more people out of the process. At some point, this is about revenue. So this is about providing value to our clients and being able to charge them for it and generating some revenue.
And the means by which you do that in a bank more so than in any other industry is how you actually structure these relationships. And I'm not just talking about loan structure. I'm talking about being able to cross sell deposits and cross sell fee-based business so that you have a healthy, sticky, profitable customer relationship where you're meeting their needs and being compensated for it. And it is possible. It does happen. There's banks that are really good at it, but they don't treat that as a calculation thing, right? It's not like we have a widget that we sell in the bank. We are selling digital movement of money and we are selling financial structures, right? It's all very abstract. So how you actually put those financial instruments together, that's the product.
And so treating it as an afterthought where you measure it with a 10 year old Excel spreadsheet and then you ignore the results anyway, if that's what you think pricing is, then yeah, why would you change that? Right? The spreadsheet still works. It's not broken. But if you actually want to treat this as a sales issue, as a customer service issue, as a way to build a revenue, that spreadsheet ain't going to cut it. And so yes, I'm biased, right? But I think that's the disconnect where you see banks will list all the problems, and in this anonymous survey, they'll admit the struggles. We can see the performance issues. And especially once we get their data, we're like, "Hey, these bankers are pretty good. The other 85% of them, not so good." But what are you doing about that? Well, 62% say, "Nothing. We're good right where we are."
And so I think that is what is changing. There's a tide shift happening where there are more and more banks that are getting this and understanding this and technology plays are not just about efficiency, but they're about how do we actually build the value into the business and build some revenue. And so there's investments being made there, and that's where I think you're seeing the bifurcation of the market, right? More of the haves and the have nots.
And so you're seeing banks that invest in that stuff and then they make more money and then they have bigger budgets and they reinvest again. And that's where you start to see also some M&A transactions picking up. There's a lot of bankers that just say, "Look, the gap's gotten too wide," and they throw their hands up.
So lots of, I think, big picture issues there. And I think all of the buzz around Fintech and digital stuff and what are banks doing about this, I think they feel like it's sort of whack-a-mole. There's so many problems to solve, but how do they really go about it? And this one, for 62% of banks at least, they haven't prioritized it at all yet, and they're going to get left behind. This is the one that touches your customer directly, touches your most important, your most profitable customers directly. So there's some getting to right, and 62% who are not.
Jim: Yeah. I don't want to make you even angrier, but it's 64%.
Dallas: Okay, thanks.
Jim: Yeah. And this is honestly one of the areas that we work on in terms of, it's almost an educational thing for us that it really depends on how you define the word pricing. And like you said, if you approach it from a, "Oh no, our calculations are totally fine. We're comfortable with our calculations," then all right. You know what I mean? But if you understand that this is the product you offer, then that ties into all the things you just said, which is all the things we got from the survey. Yeah, we're not really good at pricing. We struggle to do these things. We put deals that we're not crazy about on the books ...
Dallas: Yeah, exactly.
Jim: ... Or we lose deals, then you go, "Okay, this is something we need to fix."
Dallas: All of those struggles, you'll notice not one of them that we talked about, in fact, none of them in the survey are calculation problems of like, "Hey, we tried to divide this number by two and instead divided by three." Right? The math is not hard. Is there some complexity to it? Yeah. There's some, and there's some sophistication under there, but there's no proprietary math. You're not going to out math the competition as a way to beat them. It's about behavior change. It's about getting your relationship managers to use that math for something, right? What does it tell them? What do they learn about their customer? What do they learn about the marketplace so that they can serve them better?
That's the last mile problem of changing a calculation into actually something useful and that's where the real value is. So anyway, as you can tell, that's what I spend a fair amount of my day is talking about. So you set me off on a rant and at some point you're going to have to cut me off.
Jim: Well, you know, it's one of those also, I almost wish that we'd had the ability to immediately follow up with these people because it would be like, "Okay, well if that's not a problem then what is the problem?" You'd get that answer. "So what are you going to do then? If it's not this, what are you going to do?" And the answer is probably somewhere along the lines of, "Cut costs, get more efficient, hire better RMs," which feels like a white whale that's been out there for a while, like, "If we could just get better RMs."
All right, well that'll do it for this week's show. I'm going to go ahead and call it here before Dallas bursts a blood vessel here on this. And for a few friendly reminders, again, you can find that survey under featured resources at explore.precisionlender.com. If you can't remember that web address, don't worry, you can just reach it by going to our homepage and then clicking on the resources tab at the top of the page.
Finally, if you like what you've been hearing, make sure to subscribe to the feed in iTunes, Google Play or Stitcher. We love to get ratings and feedback on any of those platforms and our listener numbers continue to go up. So I'd like to think that you're enjoying what you're hearing here, despite the fact that it's Dallas and I that are giving it to you. But until next time, this has been Jim Young for Dallas Wells, and you've been listening to The Purposeful Banker.
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