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We've seen that our clients have very high pull-through rates, which piqued our interest. What are they doing to be so successful?
Jim and Dallas discuss insightful and interesting tactics to help you improve your pull-through rates in this episode of the Purposeful Banker.
Podcast Transcription
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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 your host, Jim Young, director of communications at PrecisionLender.
Today I'm joined again by Dallas Wells, our EVP for international operations. The title of today's podcast is improving pull-through rates through better tactics and better tech. The idea came from some research that our data insights team is doing. They were taking a look at some of our clients banks and how they were performing, and a couple of them had some really interesting numbers in their pull-through rates.
Just to be clear, and Dallas, correct me here if I'm butchering this definition, but when we're talking pull-through rates, we're talking about when a bank prices a commercial deal, what percentage of those deals eventually get put on their books? I guess that's the glass half full way of defining it. The other one would be dropout rates, which would ...
Add your pull-through rate to your dropout rate, and you'll be shooting toward 100 percent basically. All your deals, either pull-through or they dropout. But anyways, the numbers we ... That a couple of these banks had were north of 90 percent, which was pretty impressive, but this is not meant to be a podcast to pat ourselves in the back, but rather to use the stats to answer the question.
What are those banks doing right? Because clearly they're doing something right. But first Dallas, let's get a little bit of context. Like I said, above, north of 90 percent for a pull-through rate, sounds impressive to me. But what's your general idea about where that industry average might lie?
To be honest, I've hunted around a little bit for it. I haven't seen one universal number. I'm wondering what you've seen.
Dallas Wells: Yeah, this is another one of those things that's really hard to find one universal number. Part of it is just because it's tricky to define things like this. So when you consider-
Jim Young: Are you saying I botched my definition? Is that what you're saying?
Dallas Wells: No, you nailed it, Jim. Of course.
Jim Young: Okay, thanks.
Dallas Wells: Yeah, it was everybody else that botched it. So that ... It's hard to ... when officially has a deal been priced, and so this is actually a whole conversation about kind of how you classify and measure those things, which I think is important. We talk about this a lot of times in terms of pipeline. So you walk into some banks and you say, "What's the size of the pipeline?"
They call anything in the pipeline that their RMs put in their Excel spreadsheet they measure it with, which could be they waved at a buddy across the bar last night and now he's in the pipeline because he might do a deal down the road. There are others that are very strict about their definition of what's in the pipeline, which means it has to be a signed term sheet, where we've agreed on terms and now we're getting ready to underwrite this, and everything in-between.
So somewhere in there, a bank considers the deal has been priced, and so we have to measure then how many of those get closed. So the definition's a little messy. So the numbers then are ... End up being all over the place. The numbers I have seen some banks and the ones that I especially felt like they were struggling with it is maybe 60 percent of their deals would pull through.
They were looking at that as if we spin up the credit function. If the credit group starts their underwriting process, they don't necessarily have to get all the way through. But if we spin them up and the deal doesn't land on the books, we consider that a dropped deal. That one fell out.
30, 40 percent if pretty typical on a lot of banks, and that is incredibly expensive and painful for a whole bunch of reasons.
Jim Young: Well, so let's take a look at that part of it then. If you want to go on there, you get a bonus to your list. Let's take a look at what ... The dropout rates, but what are the main factors then? So let's say again, if we're defining it that way, we basically ... We have now put it into motions so that credits going to get involved, in however percentage it is. 25, 30, 40 percent of the time, those deals then don't get books. What are the factors that are typically killing those deals?
Dallas Wells: Well, I think in a lot of banks and I think part of what we'll talk about as a solution here is they're just sloppy about when that process starts. So and it comes from good intentions, right? It's in an effort to move quickly and to get a deal done. Let's go ahead and get credit started, before we're really ready for that step in the process.
So when that happens, you can get lots of things that come about, which is the customer just changes their mind. There's a lot of ... We see these deals in our data flow, whether it's just kind of abandoned deals, where there was a conversation that was clearly started because there's a deal being put together and structured and there's a couple of different scenarios and then just nothing happens to it. Never officially gets turned down, and never officially gets booked. It just sort of languishes there.
So commercial transactions, sometimes that happens. Maybe there was a real estate deal that that things was financing. Or an equipment deal, and the deal just fell through, through no one's fault, and so the financing's not needed anymore. But it can also be things like you still have borrowers shopping those deals, and so then you've got competitors swooping in with last-minute offers.
You've got credit just saying no. The deal does not qualify. So they turn it down or we turn it down as the bank. The other things that we see though is that once it gets to credit and they start the underwriting process, then we start rearranging the deal terms on our own side. So then when we go back to the customer with that, they changed their mind.
So there's a lot of moving parts there, but basically either the borrower or the bank is walking away from it typically because something has changed. We didn't get something nailed down the right way upfront.
Jim Young: Would you also add in there just simply time that it's ... Just may have moved too slow. It took long and someone just got tired of waiting.
Dallas Wells: Yeah, I mean that absolutely happens. It can be ... I've seen a few things like a bank requires a certain document as part of the ... Well, we have to have this in our file. So whatever the maybe difficult about coming up with that, it could be old financial data or lean satisfaction kind of stuff if we're perfecting leans. Whatever some of that stuff may be to ... For the bank to get comfortable.
Basically it's ... What I see it as a lot of time is this ... It's a soft no from the bank. Here's this thing that's really difficult to comply with. Go do that, and we'll say yes. So the customer kind of kicks it around for a while and then just eventually goes and solves their problem another way, which means probably they found a bank that wouldn't require that.
So yes, you can absolutely move too slow that can be either intentional or not. But there are plenty of other financing options out there now for credit worthy commercial borrowers, and so straining them along is no longer an option.
Jim Young: Got you. So as you mentioned, some of these things are out of a bank's control. You can't ... Sometimes a customer is ... It's just going to flake out on you sometimes. Like you said, particularly with CRE, you're lining this thing up and then the whole deal goes south. So the loan doesn't matter anymore.
Let's tackle the areas where the bank has some control over it. So I guess the first one that we hear about is credit kills the deal, so how do you avoid that? It's not credit. Credit knows what it needs to do or doesn't need to do. Do you tell them to soften up or what's happening wrong in that situation?
Dallas Wells: Yeah, so I think banks typically solve this in one of two ways. I think maybe the ... What I would call the more traditional old school way of doing it would just be that your relationship managers come from at some point in their past a credit background. So they know which deals are going to fly and which ones aren't. They know enough to do some of the basic analysis to know if it's going to be a thumbs up or a thumbs down.
If it's right on the edge, that then they know to dig deeper before they get too far down the road with that customer. What we're seeing more of now which I think is ... I'm actually working on a post for this that I think will be interesting for folks, is the concept of a deal team, which is really thinking about lending more like a technology company operates. Which is instead of having this very formal top-down org chart and silos of functions, so basically the RM does their entire thing with the deal and then they throw it over the wall to credit and hope that all goes well.
Instead we create these little pods or teams that are cross functional, and so you would have a credit person involved much earlier. You don't have to do the official underwriting a full-blown spread analysis write-up, run the committee. You don't have to do the full process. But you have someone from the credit group who's a part of that deal from early on, who can say, "Yeah, this one looks like it'll go or not."
Or here's the things that we're going to have to have we know to get this approved. So letting each area of expertise weigh in earlier in the process so that we can get faster answers for customers and better answers for customers. Instead of stringing this out over multiple weeks.
Jim Young: Okay, what about you mentioned, you alluded this a bit earlier. You're going through this process, maybe you've even got this team together and you're working on it, and then, a competitor swoops in at that point. Because the customer is ... and then it's certainly their right. They don't have to sit there and say, "Well, I'm not going to look for any other deals until I find out whether you're going to do with this deal." They can go and shop around as much as they want, and let's say that happens. Is there a way to guard against that?
Dallas Wells: Yeah, there's a few different ways that we see banks do that. So one is that just the start of the underwriting process is typically fairly labor intensive for both sides. So in other words, if we're going to do this, you're going to have to produce a bunch of stuff and you're going to have to go through, jump through these hoops with us, so let's make sure that we're committed to this process before we do that.
So instead of kind of piecemeal, asking for things along the way over weeks and weeks, have a good idea of what that borrower's going to need to bring you. Make sure they understand kind of the weight of what this means for both sides. So that they commit just from an effort perspective that they know that they're going to be committed to you.
Lots of banks actually can charge a fee and they will maybe apply it towards the ultimate origination fee, but it's basically like a commitment fee. So we're going to commit terms to you. We're basically going to set aside some capital to lend you. We're going to spin up resources to get this deal put together. We need to know that you're actually on board with this. That you're not doing exactly what you alluded to there of continuing to shop this deal, hoping that somebody swoops in with a better deal.
Let's agree to do it. Let's agree to the terms, and let's have you maybe even write a check and that can be a commitment fee. It can be paying for some of the expenses. Again, get a commitment through effort and through dollars to get that borrower on board with you that we're going to put this thing together. That means of course you're going to have to meet your obligations too, right?
You have to stick to your terms, unless something drastically unexpected comes up during underwriting. You have to move quickly. You have to meet deadlines. You have to put things together in the agreed upon timeframes on both sides. So there's ways to solve it, and if you're seeing a lot of deals being lost to competitors at the last second, you need to visit some of those. Because you've got a problem. That shouldn't be something that happens a lot.
Jim Young: So but let's say even if you're moving fast, you may have already answered this in the market shifts. Just the timing of it. The market shifts. In this scenario you just said, are you basically ... If you've signed that thing, are you saying, "Okay, actually we're going to stick to this even though that it's no longer as good a deal for us."
Dallas Wells: Yeah, I'm guessing what you're talking about is. So if we commit to terms and then something happens in the interest rate market or whatever, so rates go up or down either in favor of the banker in favor of the customer, and so the deal feels different to somebody on one side of that transaction. Again, those are things that should be well understood upfront. You should never commit to a rate on either side without being very clear on what the outcome of that is.
So the typical way that for example a fixed rate loan gets booked, you've got two options. You can either price it as a spreadlock. So rates can move between now and closing and we get the spread over say the five-year treasury rate or the 10-year treasury rate. Some publicly available rate, and so the customer's taking the interest rate risk while the deal gets put together.
Or you can just quote a rate. So the rate is five percent and here's the closing date, and that means the bank takes the interest rate risk in the meantime. Those two should be priced differently because of who's taking that interest rate risk, but that should be set upfront. We should know exactly what the parameters are. Again, once we agreed to the deal, things are in motion. That's why the time frames are important.
You have to meet your own deadlines, and you need to make sure that you have a committed customer, because the bank is committing to some risk. They're committing some capital to that process. More than just the overhead. We are already taking an interest rate position that may need to be hedged, thought about, protected against, for when that deal eventually hits the book. So if it goes away, that is a real cost that has been incurred and needs to be ...
You need to be able to recoup that, and so you need to have a way of agreeing to that upfront, which means you need to move that pricing decision way before underwriting. Don't have your credit group doing the pricing, don't have them be running things through a pricing model and figuring out if a deal hurdles or not. All that stuff should be put to bed before you ever start underwriting a deal.
Jim Young: That's actually I was ... The last one of this I was going to ask, which is that one. Which is we kind of talked about as more in terms of this specific sort of processes or that sort of thing, but do you just have situations in which they RM says, "I priced this. What do you think?" The creditor goes, "No."
That it's not so much they ... They didn't-
Dallas Wells: Yeah, and that happens way too often. So really the problem is is that pricing approval and credit approval end up getting convoluted at a lot of banks, and those two should be two separate processes. So if you lay them out, of what has to be done for this deal to get booked, is we have to negotiate and come to agreement on terms, and there will be some assumptions made there about what do we think the risk levels are going to be of this deal? What's the ultimate profitability going to look like for the bank?
That's why again, I think it's valuable to have some early input from credit without it being full-blown underwriting when needed, is what's the structure going to need to look like? What information do we need from our credit group to be able to properly price that long? But we price it. We come to an agreement with our customer, some sort of formal agreement. There's a signed term sheet there where these are the terms that we are agreeing to, maybe even some money changes hands at that point.
Then we go to the credit underwriting process, and that should just be validating all the assumptions that we made. We assumed that it would be great for a loan. We assumed that the appraisal would come back and the value would be $5,000,000. We assumed that you would get a guarantee from your partner. If any of those things don't happen, then of course that changes the deal. But as long we're just checking the boxes, there should never be a reason to revisit price through underwriting.
As long as everything checks out the way we assumed it was up front, pricing should already be put to bed.
Jim Young: Got you. Okay. Finally, how big of a deal is this? I know we just spent the last 15 minutes or so talking about it, but what is the ... If you can get, if you can do this, if you can improve your bank's pull-through rates, or drop their dropout rates however you want to frame it, what's that ripple effect? How important is this to a commercial bank?
Dallas Wells: Oh, it's really important. So we've talked to some banks who've been struggling with this, and with pricing and getting deals booked in general. So they're ... They either have really high dropout rates or they're really slow. Those two are often related, because if you have a lot of dropout rates, that means you are very inefficient. You're wasting time on deals that are never actually going to happen.
Which means real deals that are going to hit the books are waiting in the queue behind them. So banks that are struggling with this, they tend to end up having to try to make up for it with price. With lower rates, so in other words, I'm going to be a real pain in the rear to deal with, but at least it'll be cheap.
So the banks that can execute really well, that can meet their deadlines, that stick to the terms that were agreed upon, where the process is clear, it's spelled out ahead of time. You meet your obligations as the banker, those banks can charge premium pricing. Because that's what people are really after. Yes, of course, they want to ... They want competitive pricing, but what they really one is for the financing to happen, when it's supposed to happen, how it was expected to happen.
There should be no guess work, no potential holes in there. So if you get really good at executing this, you can price better. The other thing is that if you're more efficient, you just have a lower overhead burden. That directly translates to pricing as well. We don't have to cover such a big overhead cost to meet our profitability targets, if we have a smaller credit group, because they only underwrite deals that are actually going to hit the books.
So its reputation, its efficiency, and it also can come down and directly impact the actual rates that you charge.
Jim Young: Yeah, that's actually what I was going to say. When you're talking about premium pricing, I was going to say that it seem to me like you could, but you also had the flexibility to go the opposite direction if you're reducing your costs involved in the whole thing.
Dallas Wells: Yeah, absolutely.
Jim Young: You can plug that back into it, yeah. So that's good stuff, and definitely important stuff and I suspect we will have our data insights team digging into that deeper to see what other gems they can find from our clients, but that'll do it for this week. If you want to listen to more podcast, or check out more of our content, you can visit our resource page at PrecisionLender.com.
Or you can head over to our homepage there to learn more about the company behind this content. Finally, if you like what you've been hearing, make sure to subscribe to our feed in iTunes, SoundCloud, Google Players, Stitcher. We love to get ratings and feedback on any of those platforms. Until next time, this has been Jim Young and Dallas Wells, and you've been listening to the Purposeful Banker.
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