Today, we're going to talk about aligning the self-interest of different business groups at the bank, to ensure that the customer is best served and, to be blunt, that the bank doesn't shoot itself in the foot. Along the way, I'm going to probably try to use my political science degree to make a Cold War analogy, while also relating self-centered sales strategies to my freshman dorm room. Meanwhile, Dallas will provide actual knowledge and useful tips and techniques. No pressure, Dallas, right?
Dallas Wells: Exactly. Thanks.
Jim Young: Before we dive into my tangents, we need to actually have a topic, from which I can later divert. Is it just me, or have bankers been talking more and more about the importance of noncredit income and expanding relationships?
Dallas Wells: No, you're definitely right. They have, which I think is the only reaction they can have, given what's happening with net interest margins and with general credit spreads. Credit spreads have been on a pretty much straight down trend, really since we've recovered from the financial crisis, so 2010-11. As things started to thaw a little bit, spreads have been getting tighter ever since. What banks are left with is to try to make up the difference somewhere else. That tends to, as the bank gets larger and as the relationships they deal with get larger, they rely more and more on that noncredit income to make up for those shrinking spreads.
Jim Young: I'm going to connect this eventually around to our main topic here. Folks know what's meant by “your left hand doesn't know what your right hand's doing,” but can you relate this to that idea of trying to expand those relationships and noncredit income, and then what goes on a commercial bank and how this left hand/right hand thing can be an issue?
Dallas Wells: Yeah, almost every bank in the world is organized around products, so you have a ... To boil it down in really simple terms, there's a loan department, and there's a deposit department, and then there's maybe treasury services or an investment banking division, all these different divisions. They serve their own little slice of that customer's world, and there are sometimes some pretty tall walls in between those. In fact, in some of them, there are regulatory walls in between, where they can't actually talk to each other.
What happens is whenever one part of the bank is working on their piece of that customer relationship, they are not only completely blind to what the other side is doing, but sometimes actively working against it. We see this all the time. Again, of course, it makes sense, as banks get larger and more complex, you see more of this.
We have clients who start using PrecisionLender, and they want to be able to price relationships through there, but all they can really make function is the loan part. They're like, “You can pretty much turn off deposits, because we have no hope of actually engaging with that side of the bank.” It's like, they sit right across the hall from you. It can't be that difficult, but it really is. There's deep organizational things that I think banks really have to get their arms around here.
Jim Young: This leads me to my freshman dorm story.
Dallas Wells: Okay, good.
Jim Young: Yeah, exactly. Now, we've gotten to the real meat of this show, because I was thinking about, as when you talked about those different groups and the way they sometimes behave toward each other ... In my freshman dorm, my roommate and I were ... I'm trying to think of a good euphemism here. I believe the scientific term is we were slobs, and we just ... pizza crusts, that sort of stuff. Naturally, that attracted ants, but we didn't learn about this because of ants in our room. They were in the rooms surrounding ours. Apparently, they were commuter ants. They would come into our dorm room, eat a nice meal, and head back to their cleaner homes in my neighbors' rooms.
The connection here is basically, we were the ones behaving badly. We were the ones that were not keeping the community pact, but it wasn't having a negative consequence on us. When you talk about that sort of thing, like in a bank, can it sometimes be that the left hand is doing something that's really hurting the right thing, but that's okay, because it's still going to help the left hand anyway?
Dallas Wells: Yeah, I think so. I'm trying to get over the fact that your room was so gross that the ants wouldn't even live there, but I'll do my best to move on from that. Yeah, I think there are definitely times where that happens. You hear lots of ... You'll hear conversations that go something like, “Hey, this is one of my best customers, and” ... That “and” is usually an accusation of something that someone else has done to potentially screw this relationship up.
My view of it, maybe it's where I came from in banking, but the frustration of a relationship manager, who's been blood, sweat, and tears, chasing a potential customer, and they feel like they finally have a deal that they're going to make happen, and then someone else just does something silly, because they're treating it like just another customer. This is a once-every-few-years kind of customer for you, as the relationship manager. It could be simple things, like requiring that customer to stand in line and fill out a bunch of forms, when they should get more of a VIP treatment, simple things that we don't communicate well, of really relationship manager, that was your job to make sure that that never happened to them.
Lots of those kinds of things can happen when the banks are so siloed, and you do require that customer to go to such different areas of the bank and deal with different people to get simple little transactions done. It can be little things, like standing in line. It can be big things like they didn't send a wire, or they sent back a check that, when they have a multimillion dollar line that they could've drawn to cover a transaction, little things to big things, all of which can jeopardize that customer relationship that we've worked so hard for.
Jim Young: Yeah, and I guess, it would seem that on the flip side of that sort of thing, too, is when you are communicating with each other, it would seem like you could turn that on its head, right, and benefit each other? I was actually thinking in terms of, again, putting that political science degree ... It's the Cold War philosophy of mutually assured destruction, which is basically, “I'm not going to behave badly, because if I know I do, then you will, and we'll all end up losing in the end.”
Dallas Wells: Right.
Jim Young: Customers don't ... While banks compartmentalize customers a lot of times by products, customers certainly don't. They don't go, "Well, geez, I'm getting a bad relationship with treasury, but man, I sure do like what I'm getting ... the relationship I have with deposits." It would seem to me that there should be this obvious thing of we need to pull together for this overall or we're all going to get hurt by this. It would seem to me also that working together would end up with benefits in the way that like, “Hey, I don't have to price this loan quite as aggressively, because” ... or, “I can price it more aggressively,” I should say, “because I know that treasury or deposits has done this, and the overall relationship is better.” It would ... I guess I'm struggling a little bit to understand why this can't be fixed at banks.
Dallas Wells: Yeah, well, I think what it comes down to is generally the incentives are all wrong. In your example there, you've got two sides there, where there's a treasury group and a loan group. Really, what they're deciding is who gets to make the money off this customer, and then who just has to go skinny on their side and be the loss leader, right? Who's going to be the gallon of milk that gets the customer in the store, and then we make it up on everything else?
The problem is that each one of those people often get paid on their own slice of the business. If I'm the loan person, and you've asked me to now do this loan for no profit, I may not get paid for it, so my willingness to cooperate goes down pretty significantly. This is one that we see all the time, where the ... In that scenario, where we're trying to win the loan business and make it up on the treasury side, and then the treasury side looks at it and says,
“But I want to be the one to be able to do that. I need to cut prices to win what's a good relationship for me. I want to make my bonus, too.” That's the mutually assured destruction, where they both end up saying, “Well, I'm getting mine,” and you both overprice the deal, and nobody gets anything. That's really what banks have to get to is a better way to handle those individual, personal incentives of how to satisfy that customer.
Jim Young: Before I put you on the spot and get you over to your suggestions on how to pull that off, we've talked, taken a more cynical eye on this, but are there situations in which this is happening unintentionally, in which you're really almost in a vacuum, and you're doing this with your group, but you don't honestly know that it's affecting other groups, or am I trying to give bankers an out here?
Dallas Wells: No, you're right. I mean, it even happens within departments, where we're not real sure whose customer someone is. There's a lot of banks that are now actively buying, building, or maybe going back for a round two and trying to improve a CRM system, and this is why. It's because it's not real clear who owns a customer relationship. That's really hard, between departments, of who's actually responsible for this customer, who's coordinating contact points? Even within departments, you can have two relationship managers, that have pieces of one customer relationship.
As banks get more and more specialized, we see that more often, where maybe a customer has a real estate loan for their property that they operate out of, so it's owner occupied real estate, and then they also have, then, on the other side, equipment loans and revolving lines of credit, and so you have a real estate banker on one side, and a C&I banker on the other side. Who owns that relationship? Who's responsible for that customer? It can be where we don't know what the other one's promised, what they have in the works, what the intention is for the grand plan with that customer, and it ends up making things really sloppy for the banks, and it is. It's totally unintentional. No one's being purposely difficult. They're just flying blind. They don't know.
Jim Young: Yeah, and then it gets back to the left hand/right hand thing that we were talking about.
Dallas Wells: Yep.
Jim Young: So I'm creating my mythical bank here. We'll just call it the First Bank of Jim, and I'm putting you in charge of basically the commercial side of this thing. How do you set this up? What do you do to ensure that there's maybe a clear owner to each relationship, that everybody pulls in the same direction, but that everybody's also, to be quite frank, making enough money so that they don't go to another bank where, hey, we might all go against each other, but I know if I close my deals on my particular business, I'll be okay.
Dallas Wells: Yeah, as long as I get mine.
Well, I think I'll give you two scenarios. There's an ideal world, which I understand is going to be difficult from where you are in most banks. If you're starting from scratch, you just have a blank piece of paper. If you're starting a bank today, I think you are best served to organize around the customer, rather than around products.
Instead of I have a loan department and a deposit department, and all the others that have to then figure out how to throw things over the wall to each other, let's have a team that serves the customer. Then, it's a multifunctional team, and so, on that team, you'll have a loan specialist and a credit specialist and a deposit specialist and a treasury services, et cetera, and someone on that team owns the relationship. Someone is responsible for it and makes sure that all the other pieces are aligned and doing their part of it, but the boss is the person who's responsible for the customer. They're not responsible for the deposit side P&L. They're responsible for that customer P&L.
That's in an ideal world, and I understand that, for most banks, those are contortions that can't easily be done from where they start today. If that's the case, you at least have to go back and get the tactical part right, which is the incentives, and so we see some banks that do a really good job of this, even if they have to rely on other departments. They have a relationship manager, who is one clear owner of a customer, so that customer relationship ...
That one belongs to Jim, and so Jim is then responsible for coordinating all those other pieces.
Now, with those departments and those silos, Jim's job is harder. You're going to have to fight a lot of battles, and you're going to have to do a lot of the internal politics, but that's what the good relationship managers are really good at is managing those things, so that their customer doesn't have to do those things. They don't have to deal with all those knowledge gaps and inefficiencies. The banker does that for them, and what they get is a smooth, you'll hear it on the retail side, omnichannel delivery of services.
On the retail side, they're talking about mobile, and the web, and the branch all aligning. On the commercial side, I think it's more that all those different products align, so that you get one cohesive package of all the services that you need. Align the incentives, so that it's about customer profitability, not product profitability, and so that overall customer relationship ...
We really shouldn't care whether it comes from the treasury services or from the loan side.
Whatever it takes to win that customer and keep them happy, and as long as that profitability target is met, then we're all okay, and we all get paid accordingly versus you have to get your product, and I have to get my product, and we're battling each other to make that happen.
Jim Young: Yeah, I mean, it all makes sense, but, as you said, it's an easier said than done situation. At the same time-
Dallas Wells: Yeah, now I'm touching paychecks, so people get all, for some reason, upset about that. I don't understand it.
Jim Young: It's weird.
But yeah, but you would also wonder, within an environment of increased competitiveness, that people might be able to see a little bit of a bigger picture. You would hope.
But that speaks to, maybe a topic for a different show at a different time, maybe your hiring processes. If you're bringing people in that can be team players and that can sometimes say, “Look, my self-interest isn't” ... “My long-term self-interest is served by not listening to my short-term self-interest, maybe.”
Dallas Wells: Yeah, I think you're right. I think it's a deep-seated cultural thing. This is not a piece of software that you can buy that solves all this problem. It can help. It can put the right information in the right places, but this is a thing that takes real organizational effort from the top, and it takes consistent messaging. It may take some hiring changes. It probably takes some paycheck changes. It's not overnight. It's going to be painful, but we see banks that are doing this and doing well with it, and they're starting to separate themselves, because the customers see the difference, too.
Yep, all right, well, that'll do it for this week's show. A reminder: If you want to listen to more podcasts or check out more of our content, you can visit our resource page at Precisionlender.com
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