Commercial Banking's Revenue Problem

Greg Demas, PrecisionLender's VP for Community and Regional Banking, joins the podcast to talk about what he's hearing from the many bankers he meets out on the road. Greg offers his thoughts on where he sees potential for improvement - specifically why banks should focus more on revenue growth and less on expense reduction. 


Helpful Links

Greg Demas (Linked In Profile)

Here's How Banks Are Spending Money on Technology (BankDirector)

The Brain of the Bank (Greg Demas at BankOnPurpose 2019)

Greg Demas' Popular Bank Story (BankOnPurpose 2019)

Moving From Defense to Offense (Greg Demas at BankOnPurpose 2016)


Maria Abbe: Hi and welcome to The Purposeful Banker, the podcast brought to you by Precision Lender where we discuss the big topics on the minds of today's best bankers. I'm Maria Abbe, senior communications manager at Precision Lender.
And today's show features Greg Demas, Precision Lender's VP for community and regional banking, and Jim Young, our director of content. Greg's job takes him out on the road where he talks to bankers from institutions of all sizes. We'll get his thoughts on what he's seeing at those banks, the problems they're facing and the ways they're trying to solve them. We'll have links in the episode notes to relevant articles and information. Now, onto the show. Enjoy.
Jim Young: First off, I want to let the listeners know that this is a big get, industry term, for The Purposeful Banker Podcast because Greg Demas is, quite frankly, a hard guy to track down, and that's because Greg is so frequently on the road out there talking to banks all over the United States. So, we wanted to pick Greg's brain about what he's learned from those conversations. But before we do that, Greg, first, give our listeners a sense of what your banking background is.
Greg Demas: Yeah, absolutely. Thanks, Jim, for having me on today. Yeah, I am a lifelong banker. I've pretty much done everything under the sun in the world of banking, at big banks and small banks alike. So I really cut my teeth at JP Morgan. I was in a corporate finance function at JP Morgan, doing a lot of financial planning analysis, doing a lot of CCAR stress testing type stuff. So, really cut my teeth at the back end of the bank, seeing how the gears all tied together.
And after several years of doing that, really decided that I wanted to spread my wings a bit. I wanted to see how more of the machine worked, get involved more on the front office side of the bank. So, I left JP Morgan and went to a smaller bank called Popular Bank. Actually, at the time I joined, it was called Banco Popular. And that was about a $5 billion bank in the U.S. that's part of a larger institution in Puerto Rico. And I joined there as their head of strategy and transformation. So, it was a really great opportunity for me to kind of take what I learned as the big guy on the block at JP Morgan in the back office and really start to apply it to a smaller bank.
Most of the assets on Popular's balance sheet were commercial assets, mostly commercial loans. I came on board right in the wake of a restructuring where they exited some markets. And it was really a growth strategy: "How do we grow this bank quickly?" And with most of the balance sheet being commercial assets, I knew that's where most of the growth was going to come from. So, ironically, the first thing I did, was roll out PrecisionLender because I knew it was an important way to stimulate growth. And it worked really well. We doubled the size of the bank organically in three years. It went from 5 to 10 billion in assets, which was great.
Ironically, what that did was actually create a different problem, which is a funding problem, for the bank. So, we were growing the asset side of the balance sheet so much, we were having trouble keeping up on the liability side with deposits. So, is that a strategy for the bank? I kept saying, "Hey, we've kind of solved this asset issue. We like the returns we were seeing in addition to the absolute just volume of asset growth. How are we going to fund all this and fund it in an effective cost efficient way?" I remember the COO of the bank, who was my boss, said, "Great question. Why don't you go solve that?"
So that was kind of my foray into the world of retail banking. So I was running the branch network and the whole retail side of the bank for Popular for the last two years that I was there. So I really got a lot of exposure to transformation, both in kind of the brick and mortar side of the bank with branches and all of the staff that run the branch. But also equally important on the digital side. So I launched a direct bank called Popular Direct to really just a pure online business model in addition to taking on the whole transformation of the branches to really transform them from your traditional transaction processing centers. That branches have always been really into more business development centers.
So we were very successful in migrating transactions to digital channels like either mobile or self-service ATMs and that really allowed us to reconfigure our footprint of branches and really reposition our branches into real business development centers and get those bankers more involved in lending and just development, all that stuff. So that was really fun. Really challenging but really fun. And over time I got to know Precision Lender really well. I got to know Ken (Garcia) and Carl (Ryden), the founders as well as a lot of other folks in the company including you, Jim and yeah, one year ago almost to the day I made the jump over to Precision Lender and we're now running the community and regional banking business for the company.
Jim Young: So I'm curious though when you're in an industry like that, anybody that is thoughtful about it starts to sort of think about like what are we doing as an industry? Where are things moving? What does the future look like? I'm curious, you had during those times as you mentioned, a really wide range of experiences at both big and smaller banks, so how did that shape your view of the industry and what it's going to take for banks to succeed going forward?
Greg Demas: Yeah, man, I know we could have a whole podcast on that. I have a whole lot of thoughts on that. No, I mean, look, I was actually talking with my former boss, Manuel Chinea, who is the chief operating officer of Popular, the other day. And the analogy I used with him as I I'd be like there's been some transformation happening in banking, right? Banking's always been changing. It's been around for thousands of years, but I really feel like the tectonic plates are shifting. This is not a surface level thing. This is really, I think a fundamental below the ground foundational shift in what banking even is, right? You have Jamie Dimon coming out saying "JP Morgan's not a bank, it's a technology company that provides financial services." And that's a powerful statement. I think that this is a massive change and even bigger than I think a lot of banks even realize that this is not just putting a digital spin on the way they've been doing things forever.
I think it's a much more fundamental change. The other thing I would say too is like the role that a bank plays may be changing in society, right? I mean, if you look at consumer feedback and you ask them, most of them would say they want their bank to be Amazon or Apple or Google or Facebook, right? Which is crazy, right? Though they're not even financial institutions, but most of the people out there are telling you that's where they want to put their money, right?
So what's fascinating, one of the really fascinating things to me that I think is going to get bigger and bigger is a whole concept of like banking as a service, right? So you can think of the classic software as a service or a software company goes and provides software to any sort of company who essentially leases that software, right? Gets all that infrastructure. It doesn't have to do a lot of that big heavy lifting on their side. You're starting to see a lot of that with the concept of banking as a service, right? Where one thing that banks haven't historically been great at is building great brands, right? That consumers and people resonate with or that's look at the powerhouse that Apple or Google or any of them are. And that's what you're seeing. That's why people are saying, "I'd like to bank with them because those are brands that I like and trust."
So Apple is not going to go spin up a bank, right? But perhaps a bank can partner with Apple and provide all that infrastructure on the back-end as a service. And Apple could be the front end of it. In fact, I think that just got announced yesterday for Google, right? I think Google just came out yesterday and said that they are going to start launching financial services, but it's actually going to be powered on the back-end by banks. And so yeah, I think we're kind of seeing this all play out in front of our very eyes, the very traditional model of a bank having branches, accepting deposits and then lending them out. And those margins are how they make money are going away. And banks are going to have to be a lot more strategic if they want to stay competitive.
Jim Young: Yeah. Well, there's a lot to unpack there, but what I'm curious about, you just said about that banks need to be more strategic in order to be competitive. And that kind of brings me back to part of the conversation that Dallas Wells and I had in our previous podcast when we were going through the BankDirector survey on bank tech spending and in spending obviously is a outgrowth of your strategy. And there was one particular stat and you know Dallas and our listeners know Dallas. He is a mild Midwestern guy. At least I could hear the irritation in his voice when I read him this stat from the bank director, again, survey on tech spending and when it said just 30% parentheses of banks say that driving top line growth fuels their technology strategy, which indicates that most banks see technology as a way to save money and time as opposed to generating revenue.
Now, Greg, you just got done talking about all the big tech companies. I don't want to color your answer, but I'm pretty sure that they're not great because they are saving money and efficiency. There's something else to it. So what is your reaction to hearing that after you just gave us kind a state of the industry and where things are heading? And then when you hear that stat from bank director, what's your reaction to that? And I guess I'm also wondering how does that compare to what you're seeing or hearing when you're out talking to banks?
Greg Demas: Yeah, so I think it's important. As you talk about that bank director survey, right? Where again banks are commonly saying that their priorities are around efficiencies and all that and not growing the top line. I think rather than passing judgment on whether or not that is right or wrong, of course everybody has their opinion, right? I think it's important though to juxtapose that with how the industry is performing. Right? And see if there's a disconnect there and if you look at banks over the last 20 years, revenue per dollar of assets is down 21%. Net interest margins are down 12%. Massive declines in revenue, right? Revenue per dollar of assets. I mean, that's a huge number, 21%. But expense reductions, efficiency ratios are also down 4% which is a good thing, right? So if you look at this over the last 20 years, banks have gotten better and better and better at managing expenses with efficiency ratios being done and they've gotten worse and worse and worse at generating revenue out of their assets.
So that's down 21% and in the face of all of that, banks are saying that expense reductions is the most important thing for us. So I do agree with that. That's crazy, right? I think that you need to justify with the staff, but like how can you be staring at this massive revenue declines that you're getting and say, we're going to keep investing in technology to cut our way to prosperity, right? And I think that does tie back to everything else we were just talking about that banks are a lot of them very uncomfortable, right? These tectonic plates are moving underneath them. And for them to say we're going to keep investing in technology, it's going to generate efficiencies. Seems to be somewhat shortsighted.
Jim Young: Yeah. But I guess again, and I'm curious cause you are out there talking to bankers more than I am, but I can totally see a banker saying, "Look yeah that was great Greg, that's awesome." But there's so much competition. I don't know for certain if it's possible for me to get to grow that revenue. The only thing that has been proven in the last... It's worked for us as NIM continues to drop as our revenues for assets continue to drop. But you mentioned it. We've gotten better at being more efficient. So if I'm looking at something that I feel like has worked to this point, cutting back on expenses has, so I'm going to keep going to it's like a football team. I'm going to keep running that play basically until it stops. So how would you kind of respond to that?
Greg Demas: Yeah, and I have to respond to it all the time. I'm not saying that efficiencies aren't important. They're extremely important. They're absolutely important. But I think fixing this revenue problem is more important. And I think that they're probably not mutually exclusive. There's a part where they tie together and I think the question that needs to be asked is, what do customers want? Ultimately, not really just what the bank wants. What do your customers want? Ultimately that's why businesses exist, right? To be able to serve customers with what they want. And I think an efficient bank is one thing that customers do want, right? Particularly in the world of commercial ranking, what is the customer experience? The customer experience more than anything is speed. It's more about how do we, as a bank, get transactions from their birth, very early on in the sales process, through origination and onboarding - where we are essentially funding a loan and giving that borrower their proceeds - how do you do that as quickly as possible? I think from a value proposition standpoint of a bank, a commercial bank in particular, that's probably the most important.
So I'm not saying that efficiency isn't important. It absolutely is, but for creating efficiencies just for the sense of cutting expenses is very different than investing in technology that's going to drive efficiencies to improve the customer experience. And I took the bank director survey to be in a little bit more about, we just need to whack costs to protect our bottom line because our revenue continues to climb. And to me that is a shortsighted approach as opposed to investing in things that are going to ultimately drive revenue.
Jim Young: Gotcha. So when you and I have talked about sort of that thing of driving revenue, you've said basically that, to me, the most important moment that ... Cause it's great to say, "Hey you need to." At the risk of sounding like some of these consulting companies back when I was at a law firm and they would say like, "Hey you need to improve revenue by generating more sales." Thanks. That's sort of obvious. How do I do that? Basically. And you've said to me it was sort of the most important point for a bank in this that can impact revenue comes when that relationship manager is negotiating, structuring a deal.
But I don't know any way to sort of sugarcoat this. A lot of banks' leaders and execs, when I talk to them, they don't really seem to have a terribly high opinion of their RM's ability to do some of this stuff. So if this is the point where you think you can have revenue impact, can you blame banks again for saying, "I'm going to pass on these guys that I'm not 100% confident in and instead again, focus on where I know I can get that return even if that return is getting smaller and smaller?"
Greg Demas: Yeah. So a couple of thoughts on that, right? So the first piece right around how do you drive revenue? How do you solve this revenue challenge? That's the elephant in the room, right? And my goodness, our revenue is down per dollar of assets 21%. Well, what can I do about it? Market's market. And I hear that all the time, well pricing's pricing. Market's market. And we have a model and it's accurate, right? And there's a lot of things to think about there, right? The first thing I would say is think about the sales process. So think of, well, okay, so think about it as a bank and we'll take a commercial bank again and we'll say we have a strategy, whatever that may be, right? We want to solve things that are ... We're going to go through our planning exercise and we want to solve things.
Whether it's improving, capturing more of the relationship in the form of deposits and treasury, improving margin, reducing risk, whatever that may be, or all the above, right? You can come up with that strategy, but the question is how do you execute it, right? And who's going to execute it? So any commercial bank strategy is going can be executed through the commercial bankers, of course, right? Those are your folks that are out there on the street and they're the ones that you're going to count on to go and actually deliver what needs to be delivered for your strategy to be executed. And if you look at the sales process, when is the time in that sales process, those commercial bankers are actually going to be able to do that, right? Are you able to deliver what it is that you want for your strategy become reality?
And that is in the negotiation phase of the sales process, right?
I mean, if you decouple the sales process, and you look at it, you think, "Okay, well there's typical CRM platforms when they're out there kind of prospecting, right?" They're meeting with borrowers. They're meeting with brokers, all that good stuff. And it's too early then to actually really do anything. You're really just trying to get to the table on something and make sure that it's real. Then comes in negotiations. After you've negotiated it, you typically send it to your LOS for underwriting and onboarding it. And at that point it's probably too late to do something about it because already issued a term sheet, and anything you want to change, you're going to need to re-trade the deal. So there's kind of that Goldilocks zone that exists in the middle, which is when you're actually at the negotiating table, you've already qualified the deal.
It's real, but it's still early enough while knowing it's real, that you can do something about it. You can shape it and you can execute on whatever that strategy is that you want it. Right? So that's really the most opportune prime moment for bankers to execute and do what you want them to do. So a lot of times what I ask these banks as I'm sitting with them and I actually asked myself this, right, when I was a banker, was in that critical moment where we're counting on our bankers to go and do whatever it is we want to do. What are we giving them? What tools are we giving them? How much are we empowering them? What type of intelligence and coaching are we giving them? And most of the time the answer is an Excel model. And that's it.
And that's my point that when you think strategically about technology investments, that has always seemed crazy to me. Gosh if we're going to invest anywhere, invest there. That's how new results and new outcomes are going to be achieved. Let's invest in the best technology we can in the most critical times that those bankers have the highest chance of delivering what we need them to deliver. That may seem really obvious. When I talk about that with a lot of bankers they say, "Yeah, of course that makes sense." But then you actually ask, okay, well so what do you have for that day? And then it's most of the time it's so we don't really have anything except an Excel model.
Jim Young: Yeah. Well thanks for doing that. You're doing a much better job of clarifying sort of that point of it. So you won me over there that this is the most important point, but let's go back to the okay. But I've always maybe built my systems to make sure that RMs color between the lines, that they aren't constantly trying to get exceptions and getting around our approval system, etc. Why would I want to put, I guess for lack of a better, more power in their hands over the destiny of this bank? What's sort of your response there?
Greg Demas: Yeah, good question. So, a couple of different responses there, right? Number one, you think a lot of banks tell me, well, market's market, right? And I just need my relationship managers to go out there. My bankers go out there and just use their relationship management capability to get deals done and whatever market is just market. Well, I always ask the question of, well, what is the market? And they typically say rate, right? Bankers who say the rate, right? The market's the market. Is what's the rate. And my response is, gosh, in the world of commercial banking, one of the beautiful things about it is that there's an infinite number of things that you can do to generate revenue and only one of those infinite number of things is the rate on the deal, right? So you know you can get better deposits, which are going to drive down your costs.
You can cross sell into treasury services because it gives you fee income. You can structure deals better and price better for risks, which is going to reduce any sort of losses or a triple... Any sort of losses you're going to have on it, which will still impact your margins, etc on the deal. Not your NIM, but it will impact your margins after loss reserves. So there's a lot of other things that you know you can do in that moment and actually use that. Most other bank thinking that rate's the only thing that matters. You can use that to your advantage and structure deals that actually sometimes even when on rate and still make more money on the deal. So I think that's one really important thing is how do you educate your bankers in the moment when they're having those negotiations to think along those lines and help them craft deals along those lines?
The other thing that I would say is we've all sat with sales people, right, which is what bankers are, and dealt with the pain of sales people either A, not knowing what they're talking about, or B, not having authority to answer your questions. I don't know. Let me go back to my manager. I'll get back to you. I'll call you back or this or that. Right. In the world that we live in now, in this demand economy where everything is real time and customer experience demands are real time. You need to empower those bankers to be able to answer questions on the fly. Not only have the knowledge and the skill set to answer the questions, but also know that their answers to those questions are in line with bank policies. So that requires a tremendous amount of intelligence and coaching in the moment to get those bankers so that they can answer those questions with confidence.
Jim Young: Yeah, and I would think too, just from a talent attraction standpoint, which is another thing that in some of the other bank director surveys they've done, one of the top priorities is year in year out is attracting talented commercial relationship managers. That if you've been perpetually giving them a rock and telling them that this is only a rock fight versus giving them something that they can use and feel more like they have control over, that becomes just instantly a more attractive job and some of it becomes self fulfilling. If you don't necessarily have a huge high opinion on their ability to do something, well maybe give them a chance to do something and see what happens.
Greg Demas: Yeah, I mean we've been talking this whole time about the customer experience. What about the employee experience, right? You're absolutely right. Your ability to attract talent. It's not all just about dollars and cents. I mean, I think company culture and employee experience also have never been more important than they are now. You see these incredible campuses that all these technology companies are building and all that great lengths that companies go to to create this incredible employee experience. Well that's a lot what talent wants. And think about it. Yeah, from a banker standpoint, what type of technology are you investing in is actually going to help your bankers? And that if you were to go out and poll your bankers, is the technology that we're investing in as an institution, is this helping you be a better banker? Is this helping you do your job?
And absolutely. I mean, I think a lot of times what I ask that question of bankers all the time. And what they tell me is that management seems to be investing in technology that's good for management. It's not good for me as a banker, right? It's another system that I need to go and enter information into so that my manager can have their dashboard and tell me what a bad job I'm doing. More so like gosh, when is the bank going to come around and start investing in technology that's going to help me as the banker be better? Because again, ultimately those bankers are your front line. They're the ones that are going to go and execute whatever it is that you want to have happen.
Jim Young: All right, well finally there are some banks out there that are thinking this way in terms of revenue generation and not purely in terms of expense reduction. When you come across those banks, are there certain kinds of, I guess common traits that they share? When you're in a conversation, is it a point where you go, yeah, this is the kind of bank that I don't actually have to go through my arguments here? They kind of already get it.
Greg Demas: Yes. I would say that there's a couple of different traits. Ironically, the banks that understand that and the banks that are most pro that are the ones with the least revenue problem. You would actually think most of the time that the banks with the worst margins or the most tepid loan growth or whatever that may be are the one that's like, "Oh my God, we need to invest because this is really a big problem for us." Those are the ones that are going to see it the least. Right? The banks that are the leaders that have strong margins, that are seeing the strongest growth. Are seeing the strongest cross-selling, have the best relationship management, that kind of stuff. Those are the ones that are easiest because they're already good at it and they already understand that how important it is.
So that's interesting. It's like the banks that you would maybe say need it the least are the ones who want it the most because they understand and they've seen success in investing in that side of the house is really, really important. I would say that's probably the biggest thing. I would think the second biggest trait like you said at the beginning, Jim, I'm all over the world meeting with banks, talking about this stuff. And I would say maybe half or so of the time do the banks actually involve the bankers in these meetings. A lot of times they're involving the finance team, the credit risk function, the treasury folks, and of course the management team. All very important, right? I'm a former finance guy myself, but the banks that I see having the most success here are saying, "Well let's get our bankers in the room and ask them what they want."
Right? And that may seem obvious, like let's get these folks in the room and ask them what do they need? And to the point that you made earlier, some banks just don't want to hear it. They try to say, "Our bankers need to be out there just closing deals and we'll make the technology decisions and they'll use it." And I think also that's shortsighted not only from an employee experience standpoint, but also who knows this stuff better than the folks that are out there living and breathing it every day? And never astonishing to me.
I mean pretty much almost every single time when we get the bankers in the room, they see that the bank is listening to them and thinking about investing in technology different than some Excel model or some CRM tool where they have to go log their meetings. They get really excited and it's huge breath of fresh air for them. So that typically leads to the bank saying,
"We are under-investing here and this is putting our financial performance at risk because these are the people that we're trusting to go out and essentially build our financial statements for us. Fill out our balance sheet at least."
Jim Young: Yeah. Well that's great stuff Greg, and definitely I think it's a conversation that, as you mentioned, there's a whole lot of different rabbit holes you can go down. I tried to avoid most of them, but I'm hoping that maybe we can go in depth in some of these particular areas on some future podcasts with you.
Greg Demas: Yeah, let's do that, Jim. You did do a good job. I like taking you down rabbit holes. So you did a good job avoiding them, but I'd be more than happy to dive into any of these cause these are all really important to banking. And again, I think banking is changing fundamentally and is going to change forever before our very eyes here. So thanks for having me on. I'd love to come back.
Maria Abbe: That'll do it for this week's show. Now for a few friendly reminders. If you want to listen to more podcasts or check out more of our content, you can visit our resource page at or you can just head over to our homepage to learn more about the company behind this content. Finally, if you like what you've been hearing, make sure to subscribe to the feed in iTunes, Google Play or Stitcher and we would love to get ratings and feedback on any of those platforms. Until next time. This is Maria Abbe for Jim Young and Greg Demas and you've been listening to the Purposeful Banker.

About the Author

Jim Young

Jim Young, Director of Content at PrecisionLender, is an award-winning writer with experience in a range of positions in media and marketing, from reporter to website editor to content marketer. Throughout his career Jim has focused on the story – how to find it, how to understand it, and how best to share it with others. At PrecisionLender, he manages the many ways in which the company shares its philosophy on banking and the power of relationships. Jim graduated Phi Beta Kappa from Duke University and holds a masters degree in journalism from Columbia University.

Follow on Linkedin More Content by Jim Young
Previous Article
Hot Topics from the Small Biz: Banking 2019 Conference
Hot Topics from the Small Biz: Banking 2019 Conference

Dallas Wells returns from American Banker's Small Biz: Banking conference and shares his thoughts on the ho...

Next Article
What Commercial Banks Are Saying About Tech Spending
What Commercial Banks Are Saying About Tech Spending

In this episode of the Purposeful Banker, we take a look at Bank Director's 2019 Tech Survey and what it sa...