Sumitra Karthikeyan, Managing Director Partner at BCG, and Tim Shanahan, VP of Client Strategy and Partnerships at Q2, join the PurposefulBanker podcast in this episode to talk about the recent BCG/Q2 partnership. In particular, they discuss the two companies' joint product, YieldBuilder, and the impact it will have on the commercial banking industry.
They'll be going into more depth on these topics in their upcoming webinar, "Introducing YieldBuilder: Driving Yield Improvements at Your Commercial Bank."
Helpful Links
- Webinar - Introducing YieldBuilder: Driving Yield Improvements at Your Commercial Bank
- BCG and Q2 Partnership: Driving Impact Through Commercial Loan Pricing
- Q2 and BCG Join Forces to Tackle Major Commercial Banking Challenge
- Commercial Loan Pricing Market Updates
Questions? Comments? Email Jim Young at jim.young@q2.com
Transcript:
Jim Young:
Hi, and welcome to The Purposeful Banker, the podcast brought to you by Q2 PrecisionLender. And we discuss the big topics on the minds of today's best bankers. I'm your host Jim young director of content at Q2 PrecisionLender, and I'm joined today by Tim Shanahan and Sumitra Karthikeyan. Tim is VP of Client Strategy and Global Partnerships at Q2 PrecisionLender, and he's made several previous appears on the podcast, as I'm sure you all know. Sumitra is partner and managing director at BCG in the financial services practice. Tim and Sumitra are here in advance of their January 20th, 2022 webinar, “BCG and Q2 PrecisionLender Present YieldBuilder.” We'll have links to that webinar registration page in our show notes, as well as a link to Tim's blog post about the BCG Q2 partnership. Sumitra, Tim, welcome to the show.
Sumitra Karthikeyan:
Thank you.
Tim Shanahan:
Yeah, thank you. Great to be here. Thanks, Jim.
Jim Young:
All right, Tim. We'll start it off with you here and let's start off with the basics. What's going on with Q2 and BCG?
Tim Shanahan:
That's a great first question to start with. We've known BCG for a number of years. The team at BCG actually spoke at our client advisory board back in 2019. I'm actually a former customer of BCG going back to my banking days and got to experience firsthand some of their cutting edge capabilities on the consulting side and some of their different change management initiatives and expertise.
And so really, as we foster this partnership with Q2 and BCG, we're really just bringing together the best in class strategy consultancy alongside the best in class technology and that of course being BCG and Q2. So we actually launched this formal partnership on November 2, and the initial focus for us is really going to target in on commercial loan pricing. From there, we're going to continue to build out our partnership and talk about other things around the world of treasury pricing and cross sell in all kinds of different places that we're going to help improve the overall industry and its performance. But here at the outset, we're just very excited about bringing the YieldBuilder program to the market with the team from BCG.
Jim Young:
Okay. You said that's “at the outset,” that what you're starting off with is YieldBuilder, and that it's a program focused on commercial loans. So Sumitra, I think I'll turn to you for this one. Why this particular area of focus to start off with?
Sumitra Karthikeyan:
Loans really are the biggest revenue driver for any commercial bank, right? But at the same time, it's very interesting when, time and again, we hear from banks and relationship managers that lending is really seen as a commoditized product and banks have no choice but to look at pricing as a means to win market share. We very, very strongly believe that's not the case. Pricing can actually signal the value of differentiation. What is it that a bank brings to the table? What is it that a relationship manager brings to the client in terms of expertise and advice? And really focus the attention on that value rather than thinking of loans as a commodity?
So our entire approach to loan pricing is value-based pricing, thinking about both the total value that the client brings to the bank, but equally, if not more importantly, the value that the bank brings to the client. We can get into the details of how we do that, and what the components are in a bit, but it really is this notion that pricing is a very strategic tool to differentiate yourself in the marketplace and it can actually be a driver of profitability done right.
Tim Shanahan:
Yeah. Now I'll just kind of back that up. I think, if you talk to different leaders at different banks, you’ll find that many times it's because of the lack of capability to kind of signal value that loans kind of have been a bit of a commodity. And it doesn't have to be that way. So much of this program is really kind of designed as to how you actually change that, and as a result, improve the performance of the institution, as well as the relationships that commercial banks have with their customers.
Jim Young:
Yeah. And just listening to Sumitra, listening to you talk about this, the pricing, I can definitely see the fertile ground for the partnership, because it was a lot of very similar thoughts that we've shared on this podcast in white papers and in other areas. So definitely there's an opportunity here to address commercial loan performance. That then leads to kind of the obvious next thing. How does YieldBuilder work? How does it do this? I'm not sure if that's a question for Sumitra or Tim, so I'll let you guys fight it out.
Tim Shanahan:
Sumitra, why don't you go ahead and start with that one.
Sumitra Karthikeyan:
Sounds good. Maybe it'll be helpful to start with what are some of the challenges that bank face when it comes to loan pricing and therefore, how do we solve for that? Typically the approach towards pricing in most banks right now is a cost-plus approach where you're looking at a risk-adjusted return on capital. You're looking at a hurdle rate. And so while that is an important component of pricing, what we typically see missing is the other side of it, which is, what is a client willingness to pay?
Number two, we see that there is a lot of discretion in the discounting practices. So if you take like to like loans and compare them, we see a huge price dispersion, sometimes 3X to 4X differences between yield for similar loans. And when I say similar loans, I mean you have the same PD, LGD, same size, duration and nature of the client relationship.
With any of the typical rational factors that should explain the price difference, once you normalize for them, you should expect very little price difference - whereas the data for every single bank that we have done this with shows that not to be the case. You see this huge dispersion. When we talk to the field for some of the reasons for that dispersion in discounting practices, it’s because there is either poor pricing guidance and or lack of robust pricing tools.
Typically there isn't enough benchmarking internal or external for RMs to know what the right price the loan would clear at. Most of the governance that pricing committees have within the bank tend to focus only on larger deals. So you have this long tail of smaller deals that do not get that attention. And another very key reason is the client will always tend to negotiate price down based on the promise of future business. But banks have an inability to track that in an effective manner. So you look at your book a year later, two years later, you're saddled with a huge number of accounts where the discounting was given on the promise of that business, but the business did not materialize. And so you are left with a pricing that is lower and margin than what you had expected going in.
So you put all of that together and you can understand why we see such a big opportunity in both standardizing pricing, but also using pricing as a strategic tool to signal value. If we think about the joint solution that YieldBuilder is, it's basically in three layers. There is an analytics layer, there is a digital or platform layer, and there is a change management layer. So let me talk about the analytics and the change management layer. And I'll ask Tim to talk about the platform part of it.
The analytics is really bringing to bear multiple components. You take the bank’s own RAROC models. You superimpose on that the market benchmark – and PrecisionLender has a very, very deep market benchmark by PD, LGD, region, loan size, et cetera. And then you apply what we call machine learning or deep analytics to it, where you're trying to understand based on your own historic performance, what is the customer’s willingness to pay? A lot of banks actually think it's difficult to figure out what the client's propensity to pay is or what their price elasticity is. But if you use big data analytics, you can actually come at it very precisely. So you put all of those pieces together and then you can come up with not only a target price for every single deal that is based on client willingness to pay, but also a standardized way of how you should discount. So that it's less of an art and more of a science for the RMs than when they're negotiating prices.
That in summary is the analytics layer. The change management really is about up-skilling the field force and making sure that you are equipping them with the right insights and data for them to be able to have effective pricing conversations with their clients, where they're able to show internal and external benchmarking, where they're able to understand the role of every component in pricing, how much of it is driven by the spread? How much of it is driven by the fees? What is the rationale behind the fees? How can you adjust things like utilization rate versus exposure rate to bring the price to what is applicable to the client? And really what is the value that you're bringing, which is what the transparency around the price is all about.
This change management is done through a series of different tools. First, there is real-time training that's provided on the platform itself. So that each time the RM is pricing a deal, they're getting very, very actionable insights on conversations that they can have with the client. It is also augmented by offline training, around negotiation skills and pricing for value, and then other components like the governance and the compensation, because all of them need to work hand in hand for this to be a well-orchestrated end-to-end pricing engine. Tim, do you want to talk about the platform?
Tim Shanahan:
I'll be happy to. Thank you very much Sumitra. And so much of this really, as you go through that, the analytical layer as you go through that change management layer. So how do you compliment that with technology in a way that's going to improve execution and also create long term sustainability. And that's certainly where Q2 PrecisionLender kind of comes into play there. We partner with BCG in understanding specifically all of those deep analytics and how we codify that algorithm and everything else, all that hard work done on a bank-specific basis. How do we codify that within Andi, our digital enterprise coach that resides within the PrecisionLender platform?
We partner with BCG and we develop that. We also are able to facilitate workflows for different types of approvals. The net results of all that effort is technology that compliments all the fantastic work that BCG has done. And from that point, it makes things much more efficient and delivers much higher levels of execution. And again, they'll be able to sustain those improved levels of pricing and that change over time. So it definitely, it's one of these two things where it's a bit of a peanut butter and chocolate, I guess, in some ways where they just complement each other in fantastic ways there.
Jim Young:
Great, well obviously our audience are bankers, so numbers are the thing that are going to really catch their eye or the thing that's that are going to tune into. And boy, those that yield variance that Sumitra mentioned earlier is certainly one that would get people's attention. But I'm also curious about some of the results that banks have seen with this type of program.
Tim Shanahan:
It's a good question, because obviously there needs to be a strong result from of all these different programs and approaches. And really here there have been kind of two separate pieces to this puzzle. BCG has done a ton of this effort around the globe, right, when it comes to specifically commercial and pricing strategy. So I think there's a BCG component. And then separate from that, PrecisionLender has done business with hundreds of banks and as a result, we've seen other types of performance in terms of loan pricing improvement as well. I guess maybe it just makes sense for us to talk about how one plus one equals something greater than two and maybe Sumitra, you can first speak to the success that BCG has had in terms of different banks they've been working for, specifically when it comes to just loan pricing uplift.
Sumitra Karthikeyan:
Yeah. Before we get to the one plus one equals greater than two, let's talk about the individual components, right? So in our experience having done this with very many banks, on an average, the impact delivered is somewhere between 12 to 15 basis points over the entire bilateral loan book of any bank. This is sustainable over time and this is without any impact to the win ratio. I think that's very, very important to say because typically the pushback that you get is, "I can improve pricing, but I'm going to lose a lot more deals." So I want to emphasize that, with virtually no impact on the win ratio, you continue to win as many deals as you did before and you've improved your entire book margin by somewhere between 12 to 15 basis points - combination of yield and fees.
Tim Shanahan:
Perfect. Thank you. And then on the PrecisionLender side, we talked to a lot of different banks about - specifically the loan pricing piece, because PrecisionLender also impacts deposits and impacts cross-sell et cetera - but specifically when it comes to loan pricing uplift, we've talked about seven basis points due to the technology. So if you're looking at just doing some quicker arithmetic of 12 to 15 plus 7 is going to be 19 to 22 basis points in terms of potential uplift. If you were just to say one plus one equals two, but Sumitra, maybe you can just speak to some of the performance that we've achieved at a common client.
Sumitra Karthikeyan:
So the punchline is, we’re actually going to have one of our clients come and speak about their experience during the webinar and that client alone saw an impact of about 30 basis points. Bringing together the YieldBuilder solution - instead of getting somewhere in the 12 to 15 basis points range, if they had worked only with BCG or seven basis points, if they had worked only with PrecisionLender - we were able to jointly deliver around 30 basis points. Exceptionally powerful, but I would rather that you all hear it directly from our client during the webinar.
Tim Shanahan:
Makes good sense.
Jim Young:
Yeah. I was going to say I'm kind of dying to know the details, but I understand that this is a preview and we don't want to give away all the good stuff from the webinar just yet. I am curious about, you mentioned the common bank. So what are the types of banks can take advantage of this YieldBuilder program?
Sumitra Karthikeyan:
So there really isn't a limitation from a size of bank perspective. So pretty much any commercial bank is a fantastic line for us to provide the solution to. Typically we focus on the, I would say, top 30, 40 regional banks in any country. So in North America, we'll probably begin with the top 30 or 40, many of whom already have some form of our solution in place, but we are also simultaneously working to develop an approach that's a bit more standardized for some of the smaller banks - community banks, small regional banks - because the approach in methodology is very similar. It really is about the portfolio that you have and the complexity in that portfolio. So we are very hopeful that quickly we'll have the solution rolling out even to the smaller banks that are 10 billion or so in assets or less.
Tim Shanahan:
That's certainly one of the great things about this partnership is you have these fantastic learnings and capabilities coming from BCG in terms of analytics and change management, where we can pair that strategy and leverage it with technology and pair those things up. You really create scalability, right? So the ability us to learn from the larger financial institutions and then bring those learnings down to kind of democratize some of these advanced capabilities for smaller financial institutions is really for us just a great way for us to help the broader industry.
Jim Young:
All right, well, listen, I guess maybe we can kind of wrap it up with, if you guys maybe share a little bit about how people can learn more about the YieldBuilder program, if listening to this podcast has piqued their interest. And Tim, obviously there's the webinar, but if you can share maybe a little bit about that and in other ways, if people are interested that they can find out more.
Tim Shanahan:
No, for sure. I'm very much looking forward to the webinar that we're going to have on January 20, here in the new year in 2022. And we'll actually be joined again by a YieldBuilder customer on that particular webinars, looking forward to that. And then Sumitra how about on the BCG side?
Sumitra Karthikeyan:
So first of all, look, we are very, very passionate about this topic. We've had impact with a number of banks and since the announcement of the YieldBuilder solution, we are jointly in discussions with the number of banks now on how to implement this. So we look forward to hearing from you. You can contact either me at karthikeyan.sumitra@bcg.com or ….
Tim Shanahan:
… You can reach out directly to me, tim.shanahan@q2.com or feel free to reach out to your relationship manager at Q2 PrecisionLender, either one of those two works. Great.
Jim Young:
All right. And again, we'll stop there because we don't want to give away the store here before Tim and Sumitra's webinar, but Tim and Sumitra thanks for coming on the show.
Tim Shanahan:
Thanks for having us, Jim. You've been as always a wonderful host.
Sumitra Karthikeyan:
Thank you very much Jim. Really appreciate having me on this.
Jim Young:
And thanks again so much for listening and a reminder again, one more time that webinar "BCG and Q2 PrecisionLender Present YieldBuilder," will be on January 20th, 2022. And again, we will have a link to the registration page in the show notes, but as Tim and Sumitra just noted, you can also reach out to your contacts at BCG and PrecisionLender if you'd like to learn more. Now for a few friendly reminders, if you want to listen to more podcasts or check out more of our content, you can visit the resource page at explore.precisionlender.com, or you can head over to q2.com to learn more about the company behind the content. If you like what you've been hearing, make sure to subscribe to the feed on apple podcast, Google play or Stitcher. We love to get ratings and feedback on any of those platforms. Well, next time, this is Jim Young, Tim Shanahan and Sumitra Karthikeyan, and you've been listening to The Purposeful Banker.
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