Primacy is a buzzword at a lot of commercial banks these days, but what does it mean, exactly? What truly determines primacy? And what do banks need to do to achieve it? Dallas Wells and Jim Young dive into the hot topic in this episode of The Purposeful Banker.
Helpful Links
- A New Focus on Primacy in Commercial Banking (Novantas)
- Commercial Loan Pricing Market Update: 2020 Review (Anna-Fay Lohn, PrecisionLender)
- Webinar: Understanding and Improving Your Bank's Relationship Profitability
- Report: The State of Commercial Banking: Jan. 2021 Analysis
- COVID-19 Market Updates & Resources
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 PrecisionLender, where we discuss the big topics on the minds of today's best bankers. I'm your host. Jim Young, Director of Content at PrecisionLender, and I'm joined again today by Dallas Wells, our EVP of Strategy.
Today's episode, we're going to be talking about the buzziest of buzzwords in commercial banking. I don't have the stats, but I think it's past share of wallet and customer experience in the buzz word/phrase rankings. I refer, of course, to primacy or primacy if you're in the UK, I'm told. Either way, primacy is the term that's come up repeatedly in our conversations with banks these days, so it seems like now would be a good time to explore what primacy really means for banks and then to talk about how banks can achieve it.
The basis for a lot of our discussion today will be an article that was actually back in December of 2020 by Novantas titled, A New Focus on Primacy in Commercial Banking. We'll have a link to that in our show notes.
First things first, I just need to clear something up for myself on when to use primacy and when to use primary. Quick grammar lesson, and I hope we don't lose many listeners here, but feel free to hit the 30-second fast forward button on your podcast app if you like. Basically, primary is used as an adjective here and primacy as a noun. If you are the primary bank for a client, you are their first bank. If that's the case, then you have achieved primacy, the state or condition of being first. Dallas, I know you are glad that we managed to clear that up.
Dallas Wells: I actually am, because I was like, "Jim, why the nitpicking about which particular word we're using?" But I see now that the bankers were getting the grammar right, and I was not, so I stand corrected.
Jim Young: I just kept wondering. I was like, "Why do we keep..." In conversations, I would just go back and forth on it. All right, so wanted to get that out of the way so we could be consistent throughout this podcast. Now that I've given the Oxford Dictionary definitions, Dallas, let's go to the more important definition, which is, what do you think of when you hear bankers say, "We want to achieve primacy with more of our clients," or, "we want to be the primary bank." What do you think of?
Dallas Wells: I actually think that it is a little bit of a buzzword thing right now, meaning that it's one of those words that gets tossed around, and if you actually pin people down on it and go, "What do you mean by that," even within the same room, an executive team at one bank, if you've got five people in the room, you're probably going to get five different answers. I think that's... I'm sure we'll get into it... that's part of the issue here, is banks feel this is important, and they want to pay attention to it, and they want to invest in it, but not real clear on exactly what that is.
I think what they're after is they just want to be the most important bank to, especially, their best customers. I think they understand that commercial clients, retail clients, are going to have both. They're going to have some scattered relationships. They're going to have accounts at other places, but they want to be at the top of the list, so when someone says, "Where do you bank," they say, you, they mention your bank. How do you actually get there, and how do we actually define that, I think is part of what we'll get into.
Jim Young: Yeah. Okay. It is interesting, one thing I should note, that Novantas, Novantas... I probably should have thought about how to pronounce that one before the start of this podcast, as well... they said that RMs often overestimate how many of their clients are primary, and as they said, "In part, because the institution doesn't define it really well." Feels like, yeah, first step for banks here is to maybe send out a company-wide memo that says, "Here's how we define primacy as a bank."
Dallas Wells: Yeah, if you're just making it a judgment call, you're going to way over estimate it, and especially for relationship managers. They feel they are the first stop for most of the clients in their portfolio, and it's just not true. Without giving them some quantifiable, measurable ways of defining that, you're never going to really pin it down and be able to see if you're making progress here.
Jim Young: Early-on in this article, they sort of stake a claim for what they think of when they say, primary relationship. They say, pretty come out, second paragraph, "It's based on payments business and the operating account, instead of traditional connection to lending." Basically, they say that if that's what you call a primary relationship that's based on that, that's what can help pump up fee income at a time when margins are squeezed, et cetera. They're basically saying, "Define it however you want, but this version of it is one that will help." Agree, disagree, too simple?
Dallas Wells: I think they're probably right. They sort of say it as like a, well, obviously this is the case. It is a little trickier than that. There's some nuance to it, and I think this is a definition that has changed over time. If we back up though, and try to look at it to compare it to how you would treat retail banking, so the consumer side of your business. If someone asked you, Jim, "Where do you bank," I'm guessing what you'd probably say is wherever your paycheck gets direct deposited. That's what you think of as your bank. Even though I'm guessing you've got different accounts at probably half a dozen to a dozen financial institutions. Between mortgages and savings accounts and retirement accounts and 401(K)s and stuff, it gets spread all over the place.
Even though it may be the balances may not justify it or whatever, where you say you bank is your checking account where most of the transaction volume happens. I think for a long time, the commercial side of the business didn't treat it that way. It's always been a credit-centric business model, so in classic bank fashion, we kind of thought of it as, "Well, if it's the most important thing to us, it's the most important thing to the customer, so the primary bank is wherever the big loans are." I think that has shifted over time to where now we're seeing that much more in parallel with the retail side of the business and the primary bank is the operating account, the one that does most of the transactions and where you kind of have the core payment flows in and out for that company. The credit may be elsewhere.
Jim Young: Yeah. I mean, first off, with the obvious caveat that I do most of my banking through the Caymans and Swiss banks, but-
Dallas Wells: Obviously.
Jim Young: ... for the other stuff, it is sort of interesting. Again, I am certainly not a corporation, but yeah, I actually had this conversation with someone else at our company. I said, "You know what? If that's my primary, they're not making any money off of me because all they've got is my checking account." Yes, my mortgage is somewhere else, and my car payments in the past have been at other places. They haven't really gotten anything out of me besides my checking account, and that 0.00001% they pay off of the small savings account there, as well.
Dallas Wells: Right.
Jim Young: But I guess that's the first thing I sort of thought about was, "Okay, great. You got that payment sort of thing. You got the core account." Are they sort of assuming that if you have that, you are more likely then to be able to add the big loans? I guess my thought is, what if a corporation is like me and they say, "Great, I'm going to do payments over here, but still going to take the better loan deal I've got over there"?
Dallas Wells: Yeah. I think that's the hope, is that that can be the foundation or the anchor. To back up one step, again, we'll maybe beat this analogy, beat this dead horse a little too much, but on the consumer side, that's where all the data is. That's where the best understanding of that customer's life is, is to watch the payments flowing in and out. You have a good understanding of income levels and spending habits and demographics, and you can extrapolate a lot about what's the next likely product and make some intelligent pitches around that. The same is true on the commercial side. There is this kind of fountain of information there. That's why you see a lot of fintechs focusing on this, is that I think they feel it's that window into that business world, and it is the jumping off point.
The tricky part though, and where maybe the correlations start to break down a little bit, is that corporations don't make decisions the same way that consumers do. There're multiple levels of interactions with the bank. A lot of times that primary account, that interaction, comes from finance or office staff at that commercial borrower, whereas credit decisions are made by executives or owners of the business. They know where that primary operating account is, but they're not into the details. They're not interacting with that bank staff that handles that. They're interacting with DRM on the credit stuff, which again, may be at a totally different institution. I think it's a little harder to make the leap from operating account to winning the rest of the business than it might be with a consumer where you have that direct connection. The decision maker is one and the same there, and it's not necessarily at a business. But you do have that avenue. You do have a better understanding because of the data.
Also, it is the stickiest part of a relationship. Those operating accounts tend to have really long account lives. Even at relatively modest profitability, the lifetime value of those accounts is pretty big. Whereas, in the credit world, you kind of have to constantly re-win that business. You have to constantly compete for it, just because by its nature, it's going to have some maturity dates to it, and it's going to have to be renewed, or it'll be paid down, and you have to redo it, whatever the case may be. It's a constant churn on that credit side that doesn't necessarily exist on the operating accounts.
Jim Young: Gotcha. They lay out a chart pretty early-on about the value of having primary relationships. Not to sound glib here, but I looked at it and went, "Yeah," you know what I mean? Having primary relationships, you're going to see... Maybe the degree of lift in having it was maybe higher than you might expect perhaps, but certainly not that there was a lift. It wasn't really like an aha moment for me. This isn't like, "Holy cow, maybe we should all be doing primary. We've been missing the boat on this." I guess my question is, why is it so hot then these days?
Dallas Wells: Yeah, it is sort of a Captain Obvious thing. Some of that came out of the relationship profitability analysis that we recently did on a handful of banks, where we kind of did some case studies on them and surprise, surprise, the big and primary accounts are the most profitable. Some of those relationships would have 150 separate accounts with one relationship. Well, clearly you're probably the primary financial institution for that customer, and whenever they need something, they come to you. Or, another thing they mentioned in this article is that as the primary bank, you kind of get the last bite at the apple. They may shop some things, but they'll always bring it back to you and say, "Hey, I got this offer. Do you want it? Do you want to match it, or do you want to let me take it over there?" You can kind of pick and choose the business that you want to do with that customer. It is obvious that these are going to be profitable accounts and that you want to achieve that status.
I think it's so hot for a couple of reasons. One is this 50-plus-year trend of shrinking margins and shrinking credit spreads. It's harder than ever to make money on the credit side of the business, so this stuff is more important than ever, especially since the financial crisis, as we've redefined some of the capital rules. Capital's always been the constraint in the financial world and the banking world, but that's even more so now. It's really important to kind of how you allocate capital to these relationships, and credit is very profitable. It's also super capital-intensive, so it's very resource heavy, so to speak, both in terms of people, and in just, you have to tie that capital up in lending money.
You don't have to do that on these treasury services. They take very little capital allocation. Again, even at modest profitability, you're talking about pennies of capital to actually support that revenue. It's a way to generate profits without that capital constraint that's going to kind of limit the size of everything else. There're lots of factors that have made it more important than ever. I think it's just part of a trend. We've now kind of reached that tipping point where banks kept saying, "Yeah, it's important. We'll pay attention to it. We'll pay attention to it." But now it's like, "Okay, it's no longer a nice-to-have. We have to have this to survive." If we're just going to try to maintain our business model and we live off credit spreads, that's a bad business to be in right now, just because all the trends are the wrong direction. The competition is tough, and especially in this current cycle, in this current environment after the pandemic, you got to win some of that fee business, and to win that fee business, you're going to need to be the primary account.
Jim Young: You just mentioned the other thing, factor, to me out there, which was the pandemic. We did some stuff on this with Greenwich Associates about how we were starting to see people switch banks more often. I think when they said, switch banks, they were probably talking about, what was unspoken, was switch primary banks, in this situation. Is that part of it, too? Do we look at this as sort of a... I mean, I hesitate to use the word opportunity in the same phrase as pandemic... but like this recent environment, has it created a moment where you say, "Okay, actually, this is a time where if we put some focus on this, we can make some headway"?
Dallas Wells: Yeah, absolutely. There're a couple of reasons for that. One is that just the... I don't know if it's the bank's acceptance or the customer's acceptance or some combination of it, but it was this forced digital revolution, where you couldn't drop by the branch and sign papers and drop things off. You, literally, couldn't. The bank had to invest in the infrastructure to facilitate that stuff, and customers had to get comfortable using it. All those digital tools, actually, I think, heightened the competition a little bit, where now you've got some feature discrepancy between banks. If your bank didn't invest in those things, and they kind of made life hard on you over the last few months, and you got used to all this digital interaction everywhere else, you're like, "You know what? I'm tired of messing with this stuff. I'm going to move somewhere where they have the newest capabilities, and I can handle all this stuff from my office chair, instead of having to constantly go to the bank or send couriers or all that kind of nonsense." It was a tipping point in that regard.
Also, there was a lot of banks that used, especially the Triple P and to some degree, the Main Street Lending Program, as a beachhead with new customers. They wanted to be the ones and really to use something that Novantas touched on in their article of lending through the cycle. There's the old joke about the banker loves to lend you their umbrella, unless it's raining. They're happy to extend you credit when you don't really need it. But when times are tough and you actually need credit and liquidity from the bank, they're going to pull the rug out from under you.
Well, the pandemic was a hard time for a lot of commercial customers and a few industries, in particular. Some banks really leaned into it and decided to lend through the cycle. Now with the backstop of the federal government and Triple P, but they did proactively lean into that. They didn't just sort of passively take applications when their customers asked for it, but they went out into the community pushing, pretty aggressively, these programs, and, "Hey, did you know you were eligible for this amount?" and really trying to help, and also again, using that as a beachhead, as a way to win some new business, perhaps.
If you're a customer who was struggling, having a hard time, your bank was not all that accessible, they didn't have a lot of digital tools, and all of a sudden, some new bank calls on you and says, "By the way, you're eligible for some help through this, through a forgivable PPP loan, and we'll help you process it all digitally. Now those banks are coming back through and trying to pick up some of the primary accounts from those customers and saying, "Hey, we were the ones that were there for you in hard times. Why don't you move all your business over here?"
Jim Young: Yeah.
Dallas Wells: It's working. That's been a good strategy. I think opportunity is maybe the right way to think about it. Things, I feel like, are more competitive. Customers are more apt to kind of reevaluate their relationships and switch. The banks that have been willing to invest in it are reaping some rewards from that.
Jim Young: But at the same time, it was a little bit contradictory in this piece because they noted a lot of that, but then they also said, "Hey, one of the reasons you really need to focus on primacy is that it's really hard to get people to move from one bank to another." This is sort of like, "Well, but wait a second." But I also understand their argument. Once you can get it, it's a hard thing to dislodge. They're basically talking about, "Hey, listen. What you really need to do is shift your focus." I think what they're saying is, shift your focus from lending as that thing to more of treasury management, but to focus on this version of primacy.
But, obviously, it can't possibly be that easy of, "Hey, we're going to focus on this now." You touched on a little bit of this, but if you are and let's say maybe you're a bank that has been credit-focused in the past. Now you're saying, "Okay, actually we need to focus more on treasury and payments accounts and that sort of thing." What are some possible steps just to make this go from a buzzword to a reality?
Dallas Wells: Yeah. I think this is another place where this is an opportunity. If you rewind 10 years, heck, even five years, if you wanted to become a more treasury-focused bank, that was a daunting undertaking. There was not a lot of off-the-shelf capability. You kind of had to piece this stuff together. A lot of community and regional banks were heavily reliant on their core provider. If you want to add payments capabilities and stuff, you had to take what they could offer you. A lot of stuff just wasn't that great, which means if you wanted to stand out, you had to build your own. It was a big investment, and you had to have both the expertise and the technical skills and the resources to pull it off.
That's why you saw a lot of banks that just didn't do this stuff. That's why correspondent banking used to be such a big business, as it was community banks kind of funneling that business upstream, saying, "Well, we're too small to really do that kind of stuff, but we have this partner that'll do it for you." Well, really you're just taking the most profitable part of your relationships and farming them out to what, realistically, is competition. Now you don't have to do that, and that's why correspondent banking is a harder business than it used to be, because even the small banks can compete on this stuff.
Either that's because there's more off-the-shelf capability, there're lots of SaaS-type providers of lots of this stuff. They'll let you white label it, brand it as your own. It's pretty darn good. It's also a pretty lightweight setup, again compared to what you used to have to do. You could pick a calendar year or a budget cycle and say, "We want to make a big dent in this, this year," and you could do that. It would cost some money, but you could absolutely make a demonstrable difference there. It's doable now.
I also think the pressure has picked up. Part of it is technical capability, and part of it is also some proper motivation at the management level, because this is expensive, and there are some risks involved, and you're going to have to get some new expertise on the payroll. This is a big undertaking. Just to be blunt about it, there're a lot of bank executives that were not willing to make that kind of bet late in their career. They just weren't willing to step out on a limb and take on a hard project that could fail.
Well now, I think they're motivated, because you not only have increased competition from the bank across the street, but this is where the fintechs are coming. If you look at what Square's done over the last couple of years, if you're not losing some sleep over what they're doing, you should be, because they are coming for your business customers. They're starting at the small end and working their way up the scale. They have capabilities that you don't, and they have some marketing prowess that you probably don't. It's no longer a, "Well, it's a big bet. I don't think we really have to do it, too." It's not as big of a bet, and we probably need to do this to stay relevant. It kind of shortens the window of when you have to do something about it, but there's some proven paths to take. That's a long way of saying, it's doable now, but it's going to take some focus and some being intentional about it.
Jim Young: Yeah. I guess... and apologies if I may be repeating what you said and it's likely the way... but the actual conversation you can actually have now as a relationship manager, because of tech, has changed. It's not a, "Well, all I can do is talk about credit. If I want to try to get this, let me get this guy to call you back in a week to talk about this other thing."
Dallas Wells: Right.
Jim Young: That whole process, and I'm not saying it's as simple as, "Hey, boom, we put up one conversation and suddenly we were primary," but you can have the conversation of, "Well, here's this loan we're going to have here. What if we did this? I know you've got these accounts." The act of cross-selling and that sort of thing, because of tech, has made it such that it's possible to work your way into primary, through credit if need be or the other way around, I guess, if you've got a treasury to work it into the loans, as well, is a possible conversation that wasn't there a while back.
Dallas Wells: That's an excellent point. A lot of what I was talking about is really infrastructure stuff. But once you have that, the next piece, and one that surprisingly few banks are able to pull off, is actually to have that global view of a customer, to really understand, actually, what business do they have that's not within my silo? The bigger the bank is, the harder this gets, actually. To have an understanding of, "Well, how much payments business is there? How profitable is it? Is there payments business that they likely have that's somewhere else that we should have?" Those are things that we sort of take for granted.
You see the Amazons of the world pulling it off with what looks like such ease in the consumer world and in your personal world. Those same capabilities are there in the commercial banking world. Those banks that are able to pull it off, they're the ones that are going to win these primary accounts, because they can see it. They can see the value of it. They know when, and where, and who to ask for what. That's how you build those actual deep-core relationships that all of this stuff stems from. It's an equally important part, and again, one that is doable. That is something that the data just used to not connect, and now it does. The banks that want to invest in that will get a pretty quick payback on it.
Jim Young: Yeah, and should add, also, the other step on it. You mentioned it a little bit just with the whole digital part with pandemic and that sort of thing, is that it's no longer a, "Listen. I'd love to, but my God, I can't go through the trouble of moving all this stuff over to your bank," the banks that have invested in the onboarding tech and that sort of stuff. It's actually, again, if you can walk someone through that conversation and say, "Here's how we can make a deal that's going to work for you. By the way, it's really not going to be that painful for you to move it over, too," now you've opened that door.
All right. Well, cool. Once again, I mean, we've solved the commercial banking's problems in 30 minutes or less.
Dallas Wells: Yeah, done. I don't know why this is so hard.
Jim Young: Pretty simple stuff, again, absolutely. All right. Well, that will do it for this week's show. Dallas, thanks again for coming on.
Dallas Wells: Yep. Thanks, Jim.
Jim Young: Thanks so much for listening, and now for a few friendly reminders. You want to listen to more podcasts, check out more of our content, visit the resource page, precisionlender.com, or head over to our home page to learn more about the company behind the content. Like what you've been hearing? Please make sure to subscribe to the feed and Apple podcasts, Google Play, or Stitcher. We love to get ratings and feedback on any of those platforms. Until next time, this is Jim Young, Dallas Wells. You've been listening to The Purposeful Banker.
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