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Scott Morgan and Maria Abbe discuss the pricing struggles Scott is currently seeing within the banks he works with. He talks about transparency, sharing data across the bank, and utilizing technology.
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How Disney Would Run a Bank
Maria Abbe: 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 today, Maria Abbe, content manager here at PrecisionLender. I'm joined today by Scott Morgan. He's a managing director here at PrecisionLender, and this is not his first time on our podcast. Welcome back, Scott. It's great to have you.
Scott Morgan: Hey, thanks, Maria. Excited to be here, thank you for having me.
Maria Abbe: Of course. Now, the last time you were here, which was unbelievably almost a year ago, we talked about how Disney would run a bank.
Scott Morgan: That's right. That seems like yesterday. That was right after a family vacation to Disney World, and I have to admit, I was blown away by the ability to move massive amounts of people without feeling like you were standing in line. It got me to thinking, if Disney could make waiting in line fun, what would he do with a bank?
Maria Abbe: We will link to that show in the show notes, just in case anybody wants to go back and take another listen. For today, we're going to switch gears a little bit. Before we get started, do you mind reminding our listeners of your role here at PrecisionLender?
Scott Morgan: Of course. I'm a managing director here at PrecisionLender, and what that means is, I work with banks and help them develop their own unique view on risk based pricing. It's been our experience that no two banks look or think alike. We help ask the right questions and document and capture the way that they view the world when it comes to pricing, and then we weaponize that information so that the lenders have better tools when they're talking to their customers. I help make that happen.
Maria Abbe: Great, and it sounds like you've worked with a lot of different types of banks all over the country, which is going to be really helpful here today as we talk about, like I said, something a little bit different than what we talked about before. To kick it off here, do you think that you can tell us a little bit more about the problems that banks face when it comes to the pricing discussion?
Scott Morgan: Oh wow, Maria that's a wide open topic. Where do you want to start? Let's see, well you know, we've been in this rising rate environment for a little while now, and I see some banks struggling to hold or maintain their profitability objectives. I hear a lot of lenders saying that their customers expect the lower rates of yesterday, while the bank expects yields to keep up with the higher interest expenses. I'm hearing a lot of concerns regarding the difference between the customer's expectations and the bank's. That might be a good place for us to start today.
Maria Abbe: Great. Now, I hate to play devil's advocate here, but you mentioned something about the lenders complaining about their customer's expectations don't really match the bank's. Now, isn't that what they do? Don't they try to find a way to bridge that gap between what the bank's goals are and what the customers desire?
Scott Morgan: Yeah, actually that's a good thought. That really is kind of a good definition of their job description, but that doesn't mean that it's an easy task. In fact, I see a lot of frustration develop when lenders are not given the right tools to properly evaluate each opportunity they have in front of them.
Maria Abbe: I see. What are some of those tools that you think the relationship managers need?
Scott Morgan: Well Maria, obviously this is the point where I mention Andy and PrecisionLender and how we help banks hand craft unique solutions for their customers, but it's so much more than just buying software. You know, I see the best banks building a process around their pricing tools. They want to ensure that the right information is in front of the right set of eyeballs at the exact right moment in the conversation.
Carl Ryden, who our listeners are very familiar with, he always says that the right data, no matter how small, can change the whole outcome if it's presented at the exact right moment in the discussion. That's what I see the best banks doing. They're developing a pricing culture around tools like ours. It's not just about buying the software. It's defining who will use the analytics and intelligence and how will they use it, and who's best positioned to get the most from that data.
Maria Abbe: That's great. That sounds like a big feat, though. Can you give us some examples of what it might look like?
Scott Morgan: Well, actually this is a work in process. The banks I'm working with are still kind of trying to figure it out. It might be easier to give you some examples of what it does not look like.
Maria Abbe: That works.
Scott Morgan: For example, some bankers, I see some of the old fashioned bankers who still go out and negotiate the terms of the deal on a handshake. Then they'll come back and they'll hand it off to their credit admin and just tell them, "Hey, enter in this loan." Well, when credit runs their analysis, hey, they get a surprise because pricing needs to be higher. What do you do now? The terms of the deal have already been determined. You've already got a handshake, so do you go back on your word? You can't build a good business that way.
I see other banks who are kind of the exact opposite, and they refuse to talk numbers until their credit department has had time to run their analysis. If you think about that from the customer's point of view, it's just a horrible experience. I mean, think about it. We're going to ask you to complete this 10 page questionnaire. We're going to ask you to provide just an overwhelming amount of information, and then once you've done that, we're going to make you wait. You may wait a couple of days, you may even wait a couple of weeks before we provide any sort of feedback. Then, once we've had time to do our analysis, we hand it over almost like it's a ransom note. It's kind of like, "If you're going to do business with our bank, these are the terms you must accept."
That sort of process just is not a very good customer experience. It's not customer-centric. I share those two examples with a little tongue in cheek, but they're both great reminders that your credit department isn't the only one that needs access to better data.
Maria Abbe: You're suggesting that the relationship managers need access to that data as well, then?
Scott Morgan: Exactly. You know, if you think about it, your lenders understand relationships like nobody else in the bank. It's their job to guide the rest of the bank in making the right business decisions when it comes to your relationships. Without the right tools, without the right information, they're often forced to make recommendations on intuition, or just good old fashioned gut feelings.
Maria Abbe: Now, just recently actually, we had Jim Marous of The Financial Brand. He's the co-publisher of The Financial Brand. He was on here a few weeks ago, and he spoke about automating pieces of our businesses so that we can actually focus on the human side of banking. You know, mixing technology with humanity in a way. Does that fit into what you are recommending here?
Scott Morgan: Yeah, absolutely Maria. In fact, I loved Jim's message there. Now, I know some people hear the word automation, and they think, "Oh my god, Skynet's going to take over," but that's not what we're talking about here. The best banks are delivering better intelligence and insights to the initial conversations that you're having with your customers so that we can make better and more meaningful decisions on our customer's behalf. That fits perfectly into Jim's message.
Maria Abbe: Okay, so Scott, I'm going to push you here a little bit. Do you think you can give us an example of how some relationship managers are using data to help guide the bank's decision making process?
Scott Morgan: Well, let's see. Think about the scenario where an existing customer that we have at the bank has already talked to another bank about a new loan request. Let's say that this other bank has offered an extremely aggressive package. Now, our customer has some loyalty to us so they've come to us asking if we would consider matching their rate. Now, assume we've taken a look at that and the rate that they've offered has no chance of reaching the bank's profitability goals. Matching the competition means that we're going to need to make an exception to our pricing policy here.
Maria Abbe: I know we emphasize the value of the relationship. Is this a scenario where we have to match the competition because of all of the other business we have with them?
Scott Morgan: Well maybe, but how do you know for sure if you haven't had the time or the ability to assess the relationship? I mean, we may have a lot of their existing loans, but if they talk to every other bank in town before they come to us, chances are we've become the bank of last resort. They know we'll match the lowest rate, so they go out and gather as much information as they can before they come talk to us. How do you define the value of that relationship? Is it the size of the loans? Is it the number of loans that they've done with us in the past? Should we be thinking about the actual profitability that the business is generating?
Maria Abbe: All of the above?
Scott Morgan: You'd think so, but so many RMs just don't get it. You see, a lot of banks don't provide their lenders with the ability to quantify or measure profitability. The tools that they have show them the loan balances and the deposit amounts. It's no surprise that when it's time to fight for their customer, they begin preaching about the volume of business they'll lose if they don't give the customer what they want. They push the bank to cave because of the size of the loans, and they're not thinking about the profitability.
Maria Abbe: I see, I see. Isn't that when credit should then get involved? Aren't they supposed to, I guess, be the voice of reason here?
Scott Morgan: Yeah, and that's often what happens, but now it becomes a standoff. Our production team, if you think about it, they're saying, "We have to make this loan," while our credit team is saying, "We can't afford to make this loan." Who do we listen to? Who's right? That's why your loan committee meetings can often become hostile. You have two different sets coming from two different points of view giving you two different recommendations here. It becomes a very tense situation oftentimes.
Maria Abbe: Got you. The different departments are telling different stories. Everyone's kind of siloed, they're not really working together with the same data.
Scott Morgan: Exactly, exactly. You know, think about how much more productive those loan committee meetings would be if the RMs had the tools to understand that both the size and also the profitability of the relationship. Or, let me throw this out there. Think about how your conversations with your customers might change if the RMs could recognize the value, or maybe the lack of value, within that existing relationship. That could lead to a whole different conversation before you even got to loan committee.
Maria Abbe: Then in this case, when the relationship has been priced so aggressively that we don't have much value, is it best to pass on the deal and let the other bank have it?
Scott Morgan: Well you know, maybe, and there are certain times when it's best to say, "No thank you," and walk away. Sometimes, this relationship still might be worth fighting for. In fact, I recently saw a lender who brought a pricing request to his manager and used the poor performing relationship to his advantage. The first thing he did is, he showed how the relationship wasn't producing the type of profitability that they had hoped it would. He then acknowledged the fact that the new loan request wasn't reaching their profitability targets either. You know, he didn't hide from his problems. He identified and addressed them up front.
This new loan, he felt like it was a step in the right direction. It was more profitable than anything they had done in the past. Now, he couldn't magically wave his wand and turn that low value relationship into the golden goose today, but he developed a plan. What he did, is he showed his management several loans that were coming up for renewal over the next year, and he was using this first conversation as kind of that spring board to increased rates, so that when those existing loans were to re-price, they could raise pricing and improve the overall profitability of the relationship.
Bottom line, he was working smarter because he had the right tools to develop a plan. By the time he was ready to present it to his management team, he was able to lay it out, and he ultimately got the deal approved because now everyone's working towards a better tomorrow. Maria, that right there, that was a great example of how the right data in the right hands at the right moment could change the whole outcome of the conversation. He used his tools to make sure that everyone in the bank saw the value of sticking with that relationship. You know, that's what I feel is the end game here. It's not just about buying software. It's about building the process. How can you make sure that the right people have the right access to the best information, so that when it comes time to make a decision we all go in with eyes wide open?
Maria Abbe: That's incredible. That's a great story. Now, I have another question, actually, to add onto this. Regarding process and technology, where would a bank start? Do they start with the process first and then find a tool that matches their process that they're putting into place, or vice versa? They start with a tool and build a process around that.
Scott Morgan: Yeah, Maria, that's a good question. Here at PrecisionLender we have something we call People-Process-Product, and you've probably heard Carl talk about this in the past.
Maria Abbe: Oh, yes,
Scott Morgan: The first step is, you've got to make sure that you have the right people in place. I think a lot of our banks that we work with lately, they have that checked off. The next step is the process. What should that process look like, and how would you build it if you were going to build it internally? In that situation, I encourage a lot of our partners to look at some of the third party vendors that are out there, because they've already kind of figured out their piece of the pie. You can fit this together, but what's critical is to make sure that all of your third party systems are able to integrate and talk to each other. Then the final piece to that puzzle, the product side of it, once you understand what that process should look like, you really kind of commoditize it and build it into a solution that you can teach to each one of your relationship managers out there. People-Process-Product is what we recommend there.
Maria Abbe: Well everybody, that will do it for us today. Scott, thanks so much for coming back on. It's been a pleasure. Thank you all for listening. If you'd like to learn more, visit our resource page at precisionlender.com. If you like what you've been hearing, make sure to subscribe to the feed in iTunes, in Sound Cloud, Google Play or Stitcher, and we would love to get ratings and feedback on any of those platforms. Until next time, this has been Maria Abbe with Scott Morgan, and you've been listening to The Purposeful Banker.
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