Banks often ask if we can help them see what loan pricing is like in their markets. With the data we’ve accumulated - $1.9 trillion in loans were priced in 2019 alone on the PrecisionLender platform - we certainly could. But we believe banks are asking the wrong question.
Each day relationship managers at these banks push for pricing exceptions by arguing, “We need to do this because that’s the market.”
If that’s ever the reason for any of your bank’s pricing exceptions, then you need to be asking this question instead:
What is my market?
The answer had better not be some version of, “the banks nearby.” If you’ve ever lost a deal to a competitor that doesn’t even have a physical address, much less one nearby (and you know you have), that market definition won’t cut it anymore.
Here’s why it’s time to go beyond your zip code and get smarter about determining the market your bank is really competing in.
The Move Away from Geographic-Defined Markets
Once each geographic market was its own little financial universe, within which a handful of local banks competed with each other. They all knew where the others stood and often operated with handshake rules of engagement. But the three trends below have contributed to a shift that has broken down those old barriers.
Consolidation – This is hardly a secret. The number of commercial banks has been declining steadily for decades, dropping by 187 in the last four quarters alone. All this consolidation – from small community banks all the way up to the BB&T/SunTrust merger – has resulted in a more homogenized approach to strategies and tactics.
Technology
It’s never been easier for customers to access information and that’s made them savvier, more powerful shoppers. That’s given bankers a much wider range of competition to consider when pricing deals.
Non-Bank Competition
That range now extends beyond other banks, to fintechs, investment funds, insurance companies – basically anyone who’s looking for yield. Their search for business isn’t limited by the driving distance from their office.
What Makes a Market Now?
If “geographic proximity” is no longer synonymous with “market,” what other contextual factors should banks consider when pricing and structuring deals?
Here are just a few:
- Deal Size
- Deal Term
- Risk Profile
- Customer Industry
- Product Type
Put another way – when pricing a deal, a bank can now go from asking, “What are the other banks in the area charging?” to asking, “For a deal of this size, and this term, with this risk profile, in this industry, and for this product type, what price range do we need to be in to win the deal?"
And yes, you can also add in “in this area/region” as well. Geography is still a factor in determining the market. It’s just not THE factor anymore.
Constructing Your Market Profiles
So yes, the definition of a bank’s market is a lot more complex than it used to be. But the good news is that for all those factors listed above, there’s available data that’s useful to you. You don’t have to rely on customer anecdotes for good guidance.
Now, for example, you can use Bloomberg to pull up a wealth of data on syndicated loan deal prices. And our latest product, Market Insights, delivers more relevant, accurate market data to your bankers, while they’re pricing and structuring deals.
The explosion of available information should cut both ways. It’s made bank customers smarter shoppers. It’s time banks become smarter sellers.
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