In this episode, Jim Young and Dallas Wells share the latest chapter of Earn It: Building Your Bank’s Brand One Relationship at a Time.
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Dallas Wells: Welcome to another episode of The Purposeful Banker, the podcast brought to you by PrecisionLender, where we discuss the big topics on the minds of today’s best bankers. I’m your host, Dallas Wells, and I’m joined again by Jim Young, director of communications at PrecisionLender.
Jim Young: Hello, everyone, and thank you for joining us. Dallas and I are back again to talk about the book we’ve been co-writing, along with PrecisionLender’s CEO, Carl Ryden. It’s called Earn It: Building Your Bank’s Brand One Relationship at a Time. We’re releasing it in sections a month at a time, and it’s all available at theearnitbook.com. This week, we’re going to discuss Chapter 8: Building a Pricing Ecosystem. Dallas, let’s start off with the first line of the chapter, right below the title. It really is an attention-grabber: “Banks spend as much as 70% of their total technology budget on maintaining their core systems, but that’s not where value is created.” Let’s tackle this in two parts. Part one: why are banks spending that much on their core systems, and then part two, why is it there’s no value created there?
Part one, why so much on the core?
Dallas Wells: Yes, I think part one is probably the harder part of that question. There’s a couple reasons for that. One is because banks, and especially community banks, see their core provider as the path of least resistance whenever they’re adding a new system. In other words, they’ve done the due diligence on them as a provider. You don’t have the fear of the unknown. It’s somebody you’ve done business with, even if you’re not thrilled with every part of that relationship, it’s a known quantity. The core providers have added all these ancillary services, and so whatever you’re looking for, they probably have some sort of bolt-on solution that they’ll sell you as well integrated, and it’ll seamlessly work with your core. I think banks have learned the hard way that that’s not always the case, but that’s part of it, that these systems have kind of become these Frankenstein-looking systems, where there’s all these bolt-ons that are attached to that core from the same provider.
The other part of it is that these are legacy systems that have been around forever, and just the way the billing of these things work, any time you add any sort of customization, so I remember being at a bank, and we wanted to add a customized field. It was a small little charge. They charged us like 1,500 bucks to add that, and then it was going to be a few hundred dollars a year to maintain that, in perpetuity. You do that enough times, over a few decades, and pretty soon you have many thousands of dollars of recurring maintenance charges on little tweaks and adjustments that you’ve made along the way. They end up becoming these customized, custom-build solutions for each and every bank, and they’re just really cumbersome and expensive. Those two things combined really make it to where it’s a very expensive thing for most banks to just keep it up and going and kind of keep feeding that thing to keep it doing what it’s supposed to do.
Jim Young: All right, so part two of that, then, is why is it that, you know, you’re spending all of that money, and now we sort of understand why, but why is that after all of that spending, there’s not a whole lot of value creation?
Dallas Wells: Yeah, and this is where we really get into our heart and brain of the bank concept that we talk about quite a bit. We really view the brain of the bank as all those system where you’re making decisions and building relationships with customers and managing risk. The core system is really the heart of the bank. It is vitally important. We don’t want to dismiss it as not something that’s important. You obviously need it. You gotta have it. It’s always gotta be on, but it’s delivering this one piece of information to all those other systems, which is current status. What accounts do we have with that customer? What’s the current balance? It’s transaction management, and that’s it. When we say there’s no value created there, what we’re really saying is, as a transaction management system, that’s kind of the basic level of service you’re supposed to provide as a bank. I should be able to see what transactions have I done, and what is my current balance.
You can’t really differentiate yourself on that. You can’t show a better balance than the other bank. What you do on top of that, how you deliver all of those other services to all of your customers, that’s more brain stuff, that’s more delivery channels, whereas the core is just maintaining that current balance. You don’t have any ability to differentiate yourself, or to provide better service there. You can’t manage risk better, you can’t manage your relationships better, so there’s no real value being created.
Jim Young: So, we’ve established that banks probably should do some shifting in where they’re allocating their money. What’s sort of that next step, then, in reorienting them to where they should be spending money?
Dallas Wells: I think there’s really two parts to answering that. Number one is, banks have been very internally focused for quite awhile now, but especially since the financial crisis, just healing from the financial wounds of that, and all the regulatory issues that came along behind it. Banks have been keeping their own shop in order. It’s time to focus back on the customer experience. That’s what a lot of non-bank competitors are doing. It’s what people are used to in all the rest of the parts of their life, is the customer experience is being completely reshaped. Banks haven’t been spending money there, at least not the degree that they should be. That’s the first part.
The second part of it is on that brain side of the bank. The brain side is really the collection of systems where the bank is building relationships and measuring and monitoring those relationships, making better decisions about how to handle those relationships, and then measuring and monitoring risk. Those are the two ways where banks actually can create value, where there is a big positive ROI, and where you can spend money on technology that will actually drop results to the bottom line. That’s where you can differentiate yourself. Customer-facing, making better decisions, better serving customers. Those are really the areas where money should be reallocated.
Jim Young: Then we move into this concept of what we call pricing ecosystem. Can you give us sort of a quick explanation of what we mean when we say “pricing ecosystem”?
Dallas Wells: The pricing ecosystem really is the systems that we have to put in place to handle this big overarching theme of pricing. It’s this big, overarching theme, because as we’ve talked about a lot here, it’s very cross-functional. There’s a lot of stakeholders. There’s a lot of parts of the bank that have to be involved. We have to have the relationship manager. We have to have the customer. We have to have marketing, finance and treasury group, the credit group, all of these different people have different perspectives on how we should be doing pricing and what the right answer is. How do we come to this one number that’s the price for this deal that we’re working on? We have to put together these systems that cover all those stakeholders, and then, here’s the key part, those systems have to talk to each other, which is something we really struggle with in the banking industry. That’s the concept, really, is all those systems that have to interconnect and share data about that one customer, that one transaction, so that we come to the right, best answer in a quick and efficient way.
Jim Young: All right. Now, I’m going to give you a banker push back that I know you’ve gotten in the past, which is essentially, “Whoa, whoa, whoa: ecosystem? My bank can’t handle adding a whole bunch of systems, nor can we afford it.”
Dallas Wells: Yeah.
Jim Young: How do you respond when you get that?
Dallas Wells: We start talking ecosystem, we get a lot of deer in the headlights looks. “Holy crap, we can barely function with the technology we have. Why would I add all of this stuff?” These are systems, or functions, at least, that you’re already doing in the bank. You’ve already got some solution, even if it is a very manual, writing stuff down on paper kind of system. You have a way that you’re managing the pieces of this. What we’re really talking about is finding a way to do it more efficiently. Now, adding a whole bunch of stuff, doing the all at once transplant of everything? Yeah, that’s overwhelming for just about everybody. The beauty of these types of systems, and especially the modern versions of these things, is it’s not like a core conversion. You don’t have to rip everything out, put it all back in over the weekend and write a gigantic check to make it happen. You can do it piecemeal. You can take the blocks of this ecosystem and plug them in one at a time, as long as you have the final vision in mind so that you’re buying systems that will play nice together, and you can connect them and share data when you get to that point.
Jim Young: Do you have a suggested order, then? If you’re going to go one at a time, where do you start?
Dallas Wells: The answer can be different for each bank. It’s going to depend on really, where’s the biggest pain point? What do you already have in place, and some of those kind of things. I say this, I’m trying to say it as unbiased. There is a pricing system, a pricing tool, that is the logical place to start. It’s the logical place to start because when you’re making this ecosystem, it’s going to be the central hub. When we draw out this diagram, it has the most arrows in and out. It’s the one with the most connection points. Whatever your tool is, whether that’s PrecisionLender or something homemade, or some other vendor, it’s going to have to connect in lots of places. That’s, if you start there, then you’ll have an easier time bolting everything else together.
The other thing is is that it’s the positive ROI. It’s the one that has the biggest immediate impact, where just look at the volume of deals that you’re pricing on a monthly or quarterly basis, and look how many zeroes are on the end of that. Moving the needle by a basis point or two helps cover the part of that question of, we can’t afford this. We can’t do it, much less pay for it. This should help you pay for that. A pricing system that’s put in place with some thought behind it will have immediate fast impact on the bottom line, and you can start putting those dollars towards the other things that you’ll need to have in place to really make it work as it should.
Jim Young: Now, we’ve seen this work beautifully, this ecosystem concept, work beautifully at several banks, including the one we talk about in the book, which is Ryan and Dean’s bank. Can you share a little bit more about Dean’s story, some of the obstacles he had to overcome, and what sort of outcome they arrived at?
Dallas Wells: I think the big obstacles were the first push back that you gave. You know, “How the heck are we supposed to tackle this giant thing all at once, and pay for all of it?” They were also in the process of pretty drastically shrinking their bank. They had a smaller asset base generating net interest income to actually pay for all this stuff, too. Their big obstacles were the same as everybody else’s, just on maybe a bit of an accelerated timeline. Their solution to that was, number one, the fast, rip it off like a Band-Aid, just get it over with kind of approach. They didn’t want this thing to drag out for five or six years, and then you end up with implementation fatigue, of everybody just tired of new systems, new change, new projects all the time. Fast, all at once, spend the money that you have to to get it done.
They had this basically mapped out when they started. They knew the systems they wanted to glue together. They’d already chosen the pricing tool. They’d chosen the CRM platform they wanted to use as what we refer to as the conveyor belt. It’s the thing that the deal can sit on as it goes through all your other workflows. They had that part mapped out, so then they could go about just piece by piece, building it one block at at time. The big obstacles were really not the systems, though. Those ended up being easier than they thought they would. Modern systems have API connections, which is basically a way for them to, for data to be piped in and out of every system. Those work much better than what banks are used to dealing with in the core world. They’re designed to work that way.
The harder part was really the people, taking what in most banks would be a decade’s worth of change and doing it in just a little over a year. There were some culture shock. There was some, people who didn’t make it along for the full ride. They changed, rearranged some of the org chart stuff that went along with this, but it started at the very top. They had buy-in from the CEO that said this was really important. It’s vital to our future success, so we’re going to make it happen. We’re going to hire people to drive the process. If there are roadblocks or people who end up being roadblocks along the way, let’s just solve that problem quickly so we can move on, so that’s what they did. The outcome was very impressive. We lay out the results in the book. They went from shrinking to huge, organic growth in some really brutally competitive markets. Their reputation in the marketplace is pretty impressive now.
Jim Young: Can’t ask for much more than that as a selling point for why it’s a good idea to start thinking about orienting your bank along those lines. That’ll wrap it up for this episode. Thank you again for listening. A reminder, you can go to theearnitbook.com to read each section of the book as it’s released. You can also sign up with your email to have those new sections sent straight to your inbox each month. A reminder, the first 500 who sign up will receive a free copy of the final print version of this book when it’s released. Those details or more will be in the show notes for this episode, which you can always find at explore.precisionlender.com. If you like what you’ve been hearing, make sure to subscribe to the feed in iTunes, SoundCloud or Stitcher. We love to get ratings and feedback on any of those platforms. Thanks for tuning in. Until next time, this has been Jim Young and Dallas Wells. You’ve been listening to The Purposeful Banker