2021 will present a lot of challenges for commercial banks, but there are ways that banks can improve their revenue performance. We offer a few suggestions in this week's podcast.
- Commercial Loan Pricing Market Update: 2020 Review
- State of Commercial Banking: Jan. 2021 Market Analysis (webinar signup)
- What British Cycling Can Teach Your Bank
- Knowledge Is Power: Be Transparent With Your Lenders
- COVID-19 Market Updates & Resources
Questions? Comments? Email Jim Young at firstname.lastname@example.org
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 Jim Young, Director of content at PrecisionLender, joined again by Dallas Wells, our EVP of strategy.
And welcome to our first podcast of 2021! And before we dive into that, I wanted to alert you to a slight change in our podcast schedule. Normally, as I'm sure all of you set your clocks to once every two weeks when our podcast comes out. But this time we're going to follow up this podcast with another one next week, on January 11th. And that's when we'll have Gita Tolleson join us to give a preview of her annual State of Commercial Banking report. If you haven't already registered for that webinar, we will have a link to it in the podcast posts. So be on the lookout for that, because that is probably our most popular webinar and report that we do all year.
All right, but back to the present. Today, we're going to talk a bit about revenue generation in 2021, and hopefully the next 12 months won't throw us another curve ball the way that 2020 did. But even if things proceed normally, and air quotes are most definitely added there, 2021's going to be a challenging year for commercial banks. So first off, Dallas, welcome to 2021. And please tell me it will be better than 2020!
Dallas Wells: I make no promises anymore after I have no idea what we said last January, about what 2020 was going to be like. The only thing I know for certain is that we were dead wrong, but-
Jim Young: And we were not alone-
Dallas Wells: Yeah, that's right. What you will notice about our approach, though, is that we did not decide to do a year in review podcast, but instead a "Okay, enough of that. What are we going to do next year?" That just felt appropriate. So here we go.
Jim Young: Yeah. Although if you did want to see some of the year in review, and if you messed up, because you took off early for a holiday break, I will say that Anna-Fay Lohn who has done our market updates diligently since the start of the pandemic, put together ... We decided basically mid-December, when we normally do our update ... We decided, you know what? Not a whole lot ... Let's be honest, we know you bankers. Not a whole lot was going to get done at the end of December. So, we basically decided around December 20th or so, let's just take a look back at what we saw in pricing. So we'll put the link to that in the podcast as well, if you haven't seen it. But, again, let's go back to today's topic and Dallas, there's a lot of ways we could have approached, "Hey, looking ahead to 2021!" But we decided to focus on revenue. Why that versus all the other industry challenges out there?
Dallas Wells: Well, there's a lot of challenges out there that I think are frankly, beyond our control. So, of course, you can't just throw your hands up and say, "Oh, well, hope we survive!" As a banker, you of have to be proactive and manage through those things. But there's a lot of just big, environmental things that you will just have to react to them. Revenue's one where you can actually move the needle a little bit. And we decided to focus there frankly, because we feel like it doesn't get enough focus. It's thrown out there as a given that, well, revenue is going to be down again, so where can we cut costs? Where can we get more efficient? Where can we go and find some ways to save money, because margins will be down fee revenue will be down. Competition will be tougher. We'll probably have to set aside another round of money at some point into loan- loss reserves, all those sorts of things that where the dollars left over, just feel like they're smaller.
And so what we wanted to talk about is that that doesn't have to be a foregone conclusion and the not so hidden secret out there is that there are some banks that haven't fallen into that same trap and they are growing revenue. And then they actually have the ability to go out and spin circles around everybody else that's cutting budgets. And that becomes a positive cycle instead of a negative spiral that feels like you can't get out of it. So we thought that we'd look at the positive, and instead of looking at who to fire, or what branches to close or ugly things like that, let's look at some ways that we can add a little more money to the pot for next year.
Jim Young: Gotcha. All right. But still, and it's a good argument for focusing on revenue, but that is not a small mountain to climb. So speaking from experience with big projects and that sort of thing, sometimes just figuring out where to start is the hardest and most critical step. So if you were cutting this down into some feasible steps here, where do you start?
Dallas Wells: Yeah. So we surprise, surprise, started to talk about pricing. And yes, it's because it's what we do, but also like we say often here, it's what we do because we feel like it matters. So lots of the revenue advice and revenue strategies you will see out in the industry, or you'll hear pundits talk about is big technology investments. You have to make new lines of business. You have to open big strategic shifts that no matter how nimble, no matter how agile you try to be about it, there's just no way around it. Those are multi-year investments. The magical thing about pricing and, in particular for banks is that your book of business turns over constantly. So, a typical commercial bank, your entire portfolio will turn over every two years, three years, somewhere in that neighborhood.
So even if you don't grow, you will touch a significant portion of your portfolio next year. And those are thousands of transactions on the commercial side. If you include the consumer side, you're talking, across the industry, many millions of transactions. And in a sizeable bank, you're going to get lots of at-bats and lots of chances to get slightly better and make just incremental progress. So if you can get a few pennies or a few basis points better, deal by deal, you can actually start to make a difference within the same quarter, and certainly within the next calendar year. And you also don't have to get fancy with this. So if you just put a few processes in place, just a little bit of elbow grease is all that really has to be applied for most of these, you can actually see tangible results. And that is more revenue, which I think should be something that everyone should be after at this point.
Jim Young: Yeah. And you mentioned that this is surprise, surprise, wheen we talked about this, and I was reminded when you talked about those little incremental gains of a blog post, I think you and I wrote, gosh, four years ago, I think, about the British cycling team with Dave Brailsford and the value of small, little incremental improvements and what that can add up to. I will put a link to that in the podcast post feed, if I can find it.
Dallas Wells: Back to the archive. There you go.
Jim Young: Yeah, seriously. But, of course, I'm sure all of you already read it and Earn It, our book as well. But anyways, this is not purely a self-promotion podcast here. All right, so pricing. Then let's then going forward from here, let's divide this up into different types of pricing conversations. Then first let's start off with the classic one, pricing new credits. All right, so ... ? All right, so Dallas you're the smart guy who says we could do this better. You can get more revenue out of this. What are your suggestions here?
Dallas Wells: Three for you here, in just looking at brand new deals onto the books. So, number one, I think you have to be cautious about how you do this, but you can and should add steps and rigor to how you make pricing exceptions. So we've talked about a concept we call tourniquet pricing, where you can actually make short-term gains by just getting really strict with how you approve pricing. And basically make it difficult, lots of hoops to jump through for your bankers to get deals done. That can be overdone and there's some long-term effects that you have to be aware of there. But, most banks are really far away from that being the case. They're pretty haphazard with how they approach pricing exceptions. They usually give sign-off within the market for those things, which I think is generally appropriate. But how those then get applied is really inconsistent.
So when we dig into the data for any given bank and look at how they handle pricing and the performance of the deals that cross their books, they can be very different from market to market. And that is not just nuances of that local market, because when we apply our market data to it, that doesn't hold up. Right? There's not just one market where they get better pricing because it can be gotten there. But they actually will outperform in some markets, more so than you would expect. And that tends to just be who's making the decisions there. Who's holding their bankers accountable? Who is consistent in what they require for a pricing exception to be made? And generally there should be good reasons for it. Right? There should be future potential upside of some kind before we make exceptions to go out and put our precious capital out in the form of credit.
So that's the first one, is just get more consistent, a little more rigorous in how you apply those things. And maybe even if you're not a giant bank, I think you can funnel those through a central person, just to make sure that they are a little more consistent. If you're bigger that gets a little more difficult and you can start to slow yourself down too much, but there should be some sort of centralized criteria, at least for when do we make pricing exceptions. And then I think there's probably a middle ground where you let those happen locally. And then there should be some escalation point beyond that for really deep discounts, instead of those just being at sole discretion within the market.
So we see lots of variants in how banks handle that. And we see lots of variance in the performance based on how they do that. So, pay attention to your process there, and if you don't have one, you need one like yesterday. So that's first.
Second, is just to use some, what I call is good, old-fashioned peer pressure. And this is especially when you're talking about origination fees and credit spreads. So, again, bank to bank, those numbers are all over the place. And what you will hear as you look at individual deals is, you'll hear bankers say, "Well, that's just the market. That's all I can get." But then if you look, same market, same type of deal, same industry,. There are other bankers in the same four walls, who are getting 20 to 30 basis points more spread, who are getting three and four X, the number of fee attachment.
And there are some bankers who their fee attachment's very close to 100%. They get the sticker price on origination fees on just about every single deal. So what's the difference between them and then the bankers who say, "You know what? The market just won't tolerate origination fees,"? It says zero. Their attachment rate is close to zero. What helps there? And lots of banks try to get, I think, really complicated with this. And they make it part of the comp plan and then in come the consultants and the spreadsheets and the tracking.
There's an interim step that you can take, which is put those deals up on a screen in your loan meeting and your staff meetings with names beside them and just stack-rank them. You know, "Jim did this deal at this rate and you were 20 bips below that."
You don't even have to do a whole lot of public shaming, just putting it up there on the screen. People don't like to be at the bottom of those lists. And they love to be at the top. It is surprisingly effective to just be transparent with that stuff and show it and applaud the wins. And you don't have to publicly needle the ones at the bottom of the list. They'll feel it and they won't like being there.
So just use some peer pressure of, "You can get more fees. You can get higher fees. You can get better spreads." We've actually, inside of PrecisionLender, tried to automate some of that peer pressure by putting in algorithms to say, "Here's five similar deals or 10 similar deals that look exactly like this, and we're priced better than what you have." It works. And so figure out simple ways to do that, to apply that peer pressure.
And then finally, last one. And then you can poke holes in this, in my flawless logic here, but ... The last one is, I think, what the pandemic has brought on is something that doesn't happen very often, which is some big sea changes within banking, of which industries are good credits and which are not. And I think there's some room for upside expansion in some areas that maybe you were reluctant to lend into, or just weren't a big deal to you before.
So we talked a lot here about specializing and the way to compete is to be an expert in some niche area, to some industry where you're the go-to player in your market. Rethink those. I think that things have changed quickly and if you can be one of the first to respond and say, "Hey, there's these delivery businesses in town that now are doing great things and we think they're going to stick around, even after much of the pandemic proper is gone. A lot of these things are going to linger. People like to have stuff brought to them. So we think these are viable businesses. Let's go and seek them out."
So I think it's just worth going back and thinking about, is there some area that we've overlooked or that we were not paying enough attention to? Are there some industries we should cross off the list? And are there others that we should highlight and go after in ways that we haven't before?
Jim Young: Gotcha. Yeah, I was actually going to mention, when you mentioned the peer pressure one, I felt like initially you were going almost in a Glen-Gary-Glen-Ross way, but then I think you meant you switched off from the, "Third place, you're fired!", but rather than the, yeah, shaming part of it, just the, "Hey! This is just putting up on a screen and subtly showing this guy's doing way better than a lot of you guys," is I think a very effective tool on that.
So next conversation. And the next one, or type of conversation is one that, quite frankly, I think a lot of times it doesn't really get treated as a conversation so much as an administrative task on the to-do list, which is the renewal conversation. But I have to imagine after what's occurred in 2020, that renewal conversations will get more time and attention in 2021.
Dallas Wells: I think they will. And so our point here is that you're probably taking a deeper look at the credit side of these things, at renewal. Banks are generally pretty good at that. Even though it is a fairly automated process, most of the time, they do a genuine review of the credit and, basically say, "Are we still okay with this? Before we re-up, is this still a deal we're okay with being on our books?" What they've much more rarely look at is, "Are we okay with this deal on our books at this price? Are we being fairly compensated? Is the risk and return in proper balance here?"
And you mentioned at the beginning here, you're going to have Gita on next week, so everybody gets an upgrade. But one of the things that I'm sure Gita will talk about, because it's a recurring theme, is that bankers are not all that great at pricing renewals. And so even in cases where there are credit downgrades, typically those things just roll over the exact same price. And, I was actually working, saw some of the work Gita did on a project for a client just recently, where they felt like they were below market on some of their pricing. And as she teased apart where was that actually coming from, it was all on these vintage deals that were booked five, in some cases, 10-plus years ago. And they just keep rolling them over. Over and over again. And so it drags down their performance forever and ever. And their actual new pricing out in the marketplace is pretty darn good. So even some of the best high-performing banks struggle with this. But make sure that the pricing and return discussion gets equal weight to the credit discussion.
I think what's tricky about this time right now is that a lot of banks look at, well, we had to downgrade the credit, but is it really right? It's almost a moral, ethical issue of, is it right to gouge people right now and say, "Hey! You're riskier than you were 12 months ago. Through no fault of your own, you're going to pay us an extra 100 bips. It doesn't have to be. You don't have to adjust the returns that way. You can clean up structure. I think that's a reasonable thing to ask, is to tighten things just a little on structure, on term somehow other than just credit spread.
And the other thing you can do is ask for more business. If you need additional return and say, "Look, I don't want to increase your pricing. Times are tough. We're not going to do that to you. We're a partner in this. But what we ask for is that you also be a partner in return. Bring us your deposit business. Bring us the other fee-based business that you have somewhere else, so that we can be in this with you." And I think you can make yourself whole that way and you just have to be intentional about it. So I think that's really more important, this year than ever, is first and foremost, make it important. Second of all, get creative in how you do that. Not just add spread on top of where you're at.
Jim Young: Yeah, Sometimes I think, and this is the, the writer in me that how you label some things really can affect how you approach them. And when the words that you use is "renewal", then your first thought is, like you said, "Are we doing it again? Are we not doing it again?" And not, "Are we going to do it differently?" Maybe it's a "Review or revisit conversations" is better a label on that. But ...
So then, let's turn then to the conversation that has the most potential, but I'd say probably the most challenges, and that is the cross-sell conversation. Well actually, let me back up before we talk about 2021 cross-sell conversations, do bankers first need to go back to the cross-sell deals and conversations they had in 2020?
Dallas Wells: Well, again too, I'll only steal a little bit of Gita's thunder. She'll have plenty of extra stuff to talk about with this. But Gita's going to tell you, yes. That's where you start on cross sell is not what are you doing today, but look back at what you were already effectively cross sold, but didn't actually just go execute on. So I think bankers are actually getting pretty darn good at having that conversation upfront. I really feel like that's true. It's been made a focus in just about every bank. It's a big deal in every implementation ee do at PrecisionLender. How do we get those cross-sell conversations to happen? So I think those are getting better.
The problem is, is they in most banks die right there. And really these relationships, and especially when you close a brand new one, it's the beginning of this long multi-year process. And I think bankers need to look at their customers much like there are other industries that look at lifetime value of their clients. Not many banks view their customers that way, but they should look at lifetime profitability, lifetime viability of that customer. And phase one is just, get your foot in the door. And very often that happens with the extension of credit. Loan is the way that you kick the door open and start that relationship. But then the real work comes of actually making it whole, making the profitability picture fill in a little bit. You took the leap of faith with the credit. Now you have to make good on those other things.
And what we found as we dug into this ... So Gita's first thing to look was this delivery-to-promise concept. So was the additional business that was promised, did it actually show up? Was it delivered by that customer? Did they bring the deposit accounts? Is all the treasury services and cash management stuff actually showing up? What we find as we look at the data in that, is that across the board on average, no, it's not showing up. 36% of that business actually shows up. Now, that's another one of the things where the average is really misleading, because in some banks, they're actually north of 100%. They close more down the road than was promised upfront, but there's a whole bunch of zeros, or close to zeros anyway, that bring that down. So that's one aspect is just like actually getting it to show up.
The other thing is that it takes a long time. So that 36% number that Gita talks about, that's after two years. And when she charts it out, as you'll see in the report that she's putting out, it's a slow, gradual build over that two years. But again, that's the average. And what you see is that some banks are really good at not only getting it, but getting it sooner. And the difference is they just have a real process. There's actions that have to happen after that credit is closed. There's things that need to be put in place and bankers, not just the relationship managers, but everyone else that's attached to that deal ... There has to be some accountability put in of, "Hey, you said they were bringing the checking account. What are the steps that we actually have to put in place to make sure that a checking account actually gets opened and funded?"
Those are pretty straightforward steps, but again, that's just a lot of work to get that done and things that you have to pay attention to. So banks that do that, that have a formal process over the next year, they go and get that business, and usually, and then some. Those that don't, it's not going to show up. And what's interesting is you actually see over that two-year timeframe, you see a little spike at the one-year mark, which is like, you come back for review time and what happens? Everybody's like, "Oh crap! They were supposed to bring their operating account and it didn't show up!" And then they go get it.
So what that tells me, if you look at kind of all those inputs is this is another thing that doesn't just have to be considered a given of, "Oh, well, of course they promise things and it's just a third of it's going to show up, and two thirds of it is not." What it shows is that the banks who have a process can do really well. And within banks, there are some bankers who do really well and some who don't. And then you see that little bump a year out. So that means that there are actions you can take. There are processes you can put in place and it does move the needle. And it matters.
So again, think of where we started this conversation. What are things that you can do that will matter in 2021? Well, how would you like to add more fee income, without additional products, without additional tools, without investing in anything other than creating a process of followups? It can be as simple as if you have a well-built CRM. Put those in as opportunities. Right? When you close the loan, there should still be opportunities floating out there that get tracked and followed up on for the other pieces of business. If you don't, you're going to need to create that. That's another thing we've automated within PrecisionLender, but we automated it using data that the bank send us. They have this information, they have the ability to do it themselves. So put some of those processes in place. What'd you say you were going to bring? Did it to actually show up? And what are we doing about that?
And the last thing I'll add in this area is, well, two things. I think that this concept of a deal team, I think is really important. So much falls on the shoulders of a relationship manager to be the quarterback of this. But what that means usually is that there's an outsize focused on the loan and not as much focus on the other stuff. And so I think banks need to create this idea of a deal team. The RM can still be the leader of that, the quarterback or coordinator of it, but they need to be bringing in those experts at the right time, making actual introductions. And I think those are the pieces of the process that you have to put in place. How do you get a checking account open? You're going to need a deposit specialist and a treasury management officer, et cetera. How do they get invited into that deal? And then how do we make sure that each person brings their promised piece of that to fruition? I think there's going to be opportunities for customers that you did PPP loans for. That's your door opener. You know?
We've talked a little bit about that before. That's probably a long list of businesses that you didn't deal with before. Circle back to those. Right? You probably have some goodwill that you can maybe cash in during 2021 of ... Go back and say, "Hey, we were there for you when you needed us. Let's do this." Right? "Let's let's make this your primary bank. Let's do all the things for you." And I think banks are going to need to proactively ... Again, there's some shift changes with this pandemic.
Proactively go out and offer things, the no-contact approach to banking. You have products that generate fees that do that. Don't wait for customers to raise their hand and say, "Hey, I need that!" Go find them. Remote deposit capture, ACH origination, wire transfers. Right? Things where they can move money around, where they don't have to come to your branch, where they don't have to physically interact with their customers or their suppliers. Help them do those things. Create little packages out of it, a no-contact banking thing that just has a prebuilt package of those sorts of products that you have.
But these are long-term implications of the pandemic that don't just have to be about the risk and about what do we need to save money on. I think there's opportunity there that you have to look at the upside and where there's revenue potential, based on what's happened.
Jim Young: Yeah. What strikes me about all the stuff that you've gone through here is there's not a lot of ... And don't get me wrong, I think you're an innovative, visionary thinker, Dallas. But really what you've gone through here is not a lot of, "Holy cow! Galaxy brain" stuff here. It's a lot of stuff of simply things you already do that you can just do a little bit better.
Dallas Wells: Yeah, it's execution. And I think that's what I meant at the beginning when ... And I get why, but bankers get wrapped up in, "Where can we save money?" There's lots of discussions happening right now about branches that can be closed and how do we get tremor? How do we reduce some of the technology expenses that we have? Are we using those in the right way? Are there investments we need to make that wring out efficiencies, which is code for, "Is there a head count we can reduce?" Those are all worth some time and attention.
But I think that oftentimes comes at the expense of just execution of the fundamentals. These are things that you do every day. If you just do them slightly better, you're talking about squeezing out additional fees, additional cross- sells, additional credit spreads. And it doesn't have to be a ton to make a difference because you do so many of those. Every day, every week, every quarter, those really do add up. And that's where performance comes from, is just being really disciplined about those.
Jim Young: All right. Well that will do it for this week's show. Dallas, thanks again for coming on.
Dallas Wells: You bet! Thank you, Jim.
Jim Young: Then a reminder again that we will have another show coming up next week with Gita Tolleson previewing her State of Commercial Banking webinar and report. But, again, that'll do it for this week. Now for a few friendly reminders. If you want to listen to more podcasts, check out more of our content, you can visit the Resource Page at 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. And you've been listening to the Purposeful Banker.
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