Banks struggle with lending when they try to be “all things to all people” and go about selling without a clear focus and strategy.
They need to know which products and customers are profitable for them, and where they can provide real value outside of just the lowest rate. Then, spend their sales time and resources working those deals instead of spinning their wheels on low margin “commoditized” loans just for the sake of volume.
Hi and welcome to Lender Performance, your guide to becoming a better lender. Dallas and Jess here from PrecisionLender, thank you for joining us.
We know that banks can really struggle with lending when they try to be all things to all people. They start to go about selling without a clear focus of strategy.
They need to know about which products and customers are profitable for them, and where they can provide real value outside of just the lowest interest rate, and then spend their sales time and resources chasing those deals instead of spinning their wheels on low margin commodotized loans just for the sake of volume.
Yes, Dallas, in one of your recent blog post entitled “In Lending, Hope is Not a Strategy” you talked about this theme. In there you said, “What you definitely don’t want to do, is sell more stuff to more customers.” What does that mean?
We see this a lot, especially with smaller banks that are often times in more rural markets. They’re serving very much a geography instead of some specific niche. What they end up being is, or at least trying to be, is all things to all people.
The basic idea here is that the big banks that are already playing that game and they’re really good at it, they have the resources obviously to excel at consumer lending and commercial lending and mortgage lending and be able to invest in the type of technology that retail deposit customers would want. Where we think you should start is with a solid game plan. What do you want to be? Who do you want to be your customers? Instead of just taking the main office of you bank and drawing a circle around it, ‘x’ number of miles away there is our market, to think about which market would make the most sense?
It doesn’t necessarily have to be geography any more. A lot of the banks that we see excelling are the ones that have made that shift away from geography and more to a product that they have a great fit with. The old strategy of let’s sell more stuff to more customers, that’s getting harder and harder to execute on. This idea struck a chord with us because we’re being honest here, we’d struggle with this exact same problem. We do what a lot of vendors do, we go to conferences and we produce content and we do some very targeted cold-calling, essentially of people we want to do business with. What we end up with is a pile of leads. How we would deal with those was basically, “Who wants to talk to us the most? Who seems the most excited?” We have found out is that’s a bad approach. You end up spending time on accounts that are not necessarily a great fit with us, and so we spend a lot of time and resources doing things that don’t make the most sense for them or for us.
We started digging into this, and that’s where this post came from was us rethinking our own approach to our market, and we see lots of parallels with how banks approach their markets today. One of the great things we found, a great resource, was an article and it was from the Harvard Business Review, written by Frank Cespedes and Steve Thompson, and it’s called “Don’t Turn Your Sales Team Loose Without a Strategy“. They do a great job of laying this out. We’ll add a link to this in our show notes, so that article, definitely worth the read.
Their big takeaway is that very few firms clarify what their deal selection criteria is. Either directly in meetings or through compensation plans, or through the culture there, they essentially tell their sales teams, “Go forth and multiply. Go bring us deals,” that’s what happens. Sales people then, they’re going to go out and try to make their volume quota. They don’t have a whole lot of targeted resources, they don’t have a good support system around, “What am I looking for? All I know is I need deals.” There’s lots of opportunity costs associated with that. Money, time, people.
We’re paying attention to prospect A then we’re not paying as much attention to prospects B, C and so on down the line. We’re trying to be … We’re approaching the market with this shotgun scatter-shot approach. The banks that do well are the ones that zero in on what’s the best deal for us.
We know that the theme here is to not go out there and hope, you said, the shotgun approach works. What strategies should banks be looking to? What kind of thought process you might recommend for how to think in on what customers matter?
From what we found, and again this is a combination of our own approach to our market, and also working with banks very closely in their own sales approach. It takes two pieces of this puzzle. You have to identify a good deal. What makes a good deal? Number one, we have to know that it’s a profitable, valuable, long-term relationship for us. As a bank, is this the type of customer that we do well with and make money on. That’s an easy thing to say, and a lot of banks guess at that, very few are very good at quantifying that and clearly communicating that in a useful way. You need to have a picture in mind and one that you can consistently use throughout your bank, of who is our ideal customer? Not just a list of names, you personify that customer. Give them a persona so that you know, “We are good at servicing these types of customers and those are very profitable to us.” You need to do some basic math on it, and the profitability calculations, but then go one step further and build a profile about what those most profitable customers look like.
Then you can hand it to your lenders and say, “This is what we’re looking for. Bring me more of these, and not just bring me 10 deals. Bring me as many deals as you can find that look exactly like this.” The other side of it is not how profitable is it to us, but where do we have this competency where we can provide value to that customer. We can, as a small bank, say, “Hey we’d love to do business with Microsoft, that doesn’t mean that we’re the right fit for Microsoft.” It needs to be someone that we can effectively service and that we can provide real value to. Otherwise, we’re going to be going out and trying to find those deals that make sense to us, and the only club we have in the bag is, “Let’s give them a better deal. Let’s give them a cheaper rate.”
We did a recent podcast with Bill Ragle of Comerica Bank. That basic idea, they built a whole team around a medical lending group. That’s what they specialize in. They loan to doctor practices, small hospitals, and they have a real competency and expertise in that industry. When they go out and they’re prospecting, one of the last things they talk about is the price of the deal. Instead, they’re talking about their customer’s business. They have enough of an understanding of it. The feedback they get anecdotally and in their production, is, “We like to do business with you guys because you know how our business works. You can help us think through the strategy and help us figure out the best way to finance the things that we have to do. When I go to the other bank, I have to first, explain the business model, and then try to negotiate a deal that fits that. I have to educate them first.” It could be specialization in some particular industry, some particular deal type that you’re good at, and it doesn’t mean that you have to do that exclusively to everything else, it means that that’s something you’re good at.
And you say, “We want to own this part of the market.” Even in smaller rural markets, there’s some ability to differentiate yourself there, to be the niche lender and the go-to bank for that kind of stuff. Valuable to yourself, valuable to your customers. When you marry those two things, and you have your lenders focused on exactly that type of deal to that type of customer and providing the kind of value that you know they’re looking for, that’s when you start to see some powerful stuff. To bring it back to our own experience, here. As we’re trying to do business with banks, rather than trying to sell our software and our service to every bank in the world, we’re trying to build some personas. What are the banks that get the most value out of the tool that we’ve built.
Let’s go find those banks and chase them with that value proposition rather than trying to find everyone out there and say, “Hey, we have the great tool for you.” There are some people that are not the right fit. We’ve gone through the sales process before, where we figured that out along the way, and we’ll tell them, “Hey, we don’t think our tool is the best one for you, here’s three other options for you, let us know how we can help, but this isn’t the right one.” We want to help them make that same decision, but let’s do it really soon in the process. We have a limited amount of time and resources, just like everyone else. Let’s spend it chasing the 100 banks that will get the most value from this and that will be the most valuable to us.
In the little bit of time that’s left over, we can still cast out those wide nets and do the other stuff, too. I think that same basic approach is where we see a lot of banks heading, especially the ones that are really high performers, they differentiate themselves beyond just, “Hey, they’re the bank that’s closest to me in town.” That’s the basic framework, is best products, which ones are most profitable, which ones are we best at servicing, if you go about doing that, they’ll be a lot fewer bidding wars where it’s, “Hey, can we undercut them Monday?”
Awesome. We will, as Dallas said, link to that Harvard Business Review article. It was a great read that will complement this episode. That should do it for us today, thank you all for listening. We’ll include that link as well as some more at lendeperformance.com/podcast. As always, if you like what you’ve been hearing, make sure to subscribe to our feed iTunes, SoundCloud, or Stitcher and we always love to get ratings and feedback there. Until next time, I’m Jessica Stone, …
I’m Dallas Wells.
… And this is Lender Performance.