Dallas Wells and Jim Young discuss the newest chapter of Earn It: Building Your Bank’s Brand One Relationship at a Time. In chapter 4, Dallas and Jim discuss the impact of moving the pricing process forward. And don’t worry, there’s plenty of sports analogies in this one.
Dallas: Welcome to another episode of the 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 Dallas Wells. I’m joined again by Jim Young, Director of Communications at PrecisionLender.
Jim: Hello everyone and thank you for joining. Dallas and I have reunited again on the podcast because we recently released another chapter in the book we’ve been co-writing along with PrecisionLender CEO Carl Ryden. If you need a refresher the book is called Earn It: Building Your Bank’s Brand One Relationship at a Time. We’re releasing the book in section a month at a time. It’s available at theearnitbook.com. This week on the podcast we’re going to discuss chapter four which is titled Moving the Pricing Process Forward.
Dallas, let’s actually start there with the title. I wish I could claim to be this clever but it wasn’t until after I wrote the title that I realized it did sort of have a double meaning to it. Can you talk a little bit about first that larger idea of simply moving the pricing process forward and then more of the specific idea of moving it forward within the bank structure.
Dallas: Sure. As you said there’s kind of an accidental double meaning there which we’ll claim full credit for thinking that out ahead of time.
Dallas: Moving it forward just from the respect of technologically forward, improving the process, it’s something that most banks have been doing the same way for a couple of generations at this point where it’s a real simple calculation of cost to funds plus something. That’s the extent of the conversation or all that stuff happens after the fact. That’s really the second part so moving it forward technologically the second part is moving it forward as in closer to the customer. A lot of the decision processes are very slow moving and there’s these big gaps in between where banks scurry back to their caves and huddle over the documents and then come out at some point later and hand off their decision to the customer. This is talking about really moving that decision process as close as we can to the customer so that we can be faster and more responsive and just in general serve our customers better.
Specifically within a bank moving it forward, what we’re talking about there is if you think about a typical pricing decision and we’re talking about a commercial loan pricing decision in general here, is a customer and a lender will have a discussion about pricing structure. This is somewhere early in the process. This is when a customer is deciding is it worth me gathering all the stuff that they’re going to ask for and bringing it to them and the bank is deciding is this worth our time and effort and money to actually underwrite this loan and go through all those hoops to make sure this is something we want to do.
Before both parties make that decision they have some sort of rough discussion about pricing structure. That’s generally what the customer feels like has been committed to them. Then the bank takes that and in a typical process somewhere after that when a credit analyst is actually doing the underwriting some two weeks after that discussion the analyst will put the deal into some sort of pricing model. It’s a pass fail type decision so thumbs up or down. It hurdles, great we move forward. If not, then the bank has this decision to make. Do we go back to our customer and re-trade the deal or what happens more typically is the bank just decides well we’ll try better next time, right? We’ll scold our lender a little bit for doing it wrong and maybe put out a bunch of reports about who was profitable and who wasn’t and who met hurdle rates and who didn’t and that’s how we’re going to try to navigate this process.
This is really the whole chapter is about the mechanics of within that structure moving that pricing decision forward. What we’d ideally like to do is have the lender have a good enough framework where they can really commit to pricing. Obviously there’s underwriting we have to make sure that everything we’re talking about is as expected but as long as it is the pricings good. We’ve already gone through the parameters of what the bank has to have, what the customer’s looking for and we come to an agreement on those thing during that first pricing discussion, not 2 weeks down the road.
Jim: Along those lines then we actually go through it at the beginning of the chapter and we talk about it. You outlined a lot about this what a typical loan process might look like at a bank and then we compare it with a peer-to-peer process. Granted that might be I think there might be some bankers listening who say well that’s not really a fair comparison. We’re talking about very big commercial real estate loans and that sort of thing and these guys are talking about a very small peer-to-peer loan me $5,000 for my startup type thing. Can you talk a little bit about why we did decide to lay those two things out and show just how different the processes are?
Dallas: Yeah. The big reason there is that from the banker’s perspective, the bankers that have been in the weeds and they know all the ins and outs of why that process takes a lot longer at a bank and why it looks so different. From the customer’s perspective they don’t care. They don’t care what the reason is that it looks different. All they know is that it does look different. A lot of those peer-to-peer things started out as yes they were little $5,000 loans to somebody doing an online retail store something like that. That’s no longer the case. Some of these have some real dollars behind them. There have been some recent stumbles in their funding but those are all things that I think they’ll figure out. What they do have is a really good customer experience and they’ve started from there and they’re working backwards now.
I think the end result is probably a lot more partnerships but what banks have to be really careful of is that they don’t lose the customer facing piece of that and just become the back end plumbing of executing those customer things. That’s not where the value is. Yes it’s a little bit unfair to those peer-to-peer lenders that have a different regulatory picture than a bank does. They don’t have to check all the boxes, dot all the i’s, cross all the t’s. That part may change but again the customers don’t care. That’s the expectation that banks are now being expected to live up to because it’s not just lending. It’s every part of their life. If they want to take an Uber from their office to yours and then they walk in the door and they had this process that looks the same as it did fifty years ago, that’s a really jarring anomaly in their day. I don’t think banks can expect that to go on forever.
Jim: Yeah I think you make a good point about the partnerships because it can be dismissed sometimes is this thing is totally different from us so therefore it’s not relevant whereas at the very least not saying you need to become a peer-to-peer lender not by any stretch, but rather what can you learn from them? What can you learn from what they’re doing?
Jim: One of the ways we like to learn here is through analogies and cultural references and I was thrilled to see that we were going to be making a reference in the book to one of my favorite movies Office Space, right? Using it to illustrate the soul crushing one more report. These aren’t TPS reports that you need to have stapled to the front like poor Mike does in Office Space.
Dallas: Yeah, the new cover sheets right?
Jim: Got to have the cover sheets on the TPS reports but what are these? Talk a little bit about what these reports are we’re talking about for lenders and why do lenders dread them?
Dallas: I referenced it a little bit earlier in talking about that typical process where a bank realizes whoops this deal doesn’t hurdle and what are we going to do about that. That’s typically how those reports are used is as a blunt instrument to kind of bludgeon the lenders with. That’s really what most of those things are. It’s the finance group saying how do we get a better control over this process and frankly how do we control the lenders a little better. Their answer is well let’s point out using the data, let’s point out what they’re doing wrong and maybe then they’ll be able to fix it.
I don’t think the intentions are terrible. They’re looking for improvement. What you’re doing is you’re saying, okay at the end of the month we’re going to generate a report that shows all the things you did wrong last month so that next month you can try to do better. Our philosophy that goes 180 degrees against the way we try to look at it which is you have to get the information that people need to make decisions. They have to have it in their hands when they’re making that decision. An after-the-fact report is not going to get you to change that decision. The framework we always use is well if you’re going to generate a report, what are you going to do differently on Monday morning based on that information.
By that metric, by that criteria, most internal reports that a bank generates are completely worthless. A lot of those reports are things like technical exceptions, pricing exception reports, measuring bankers against those hurdle rates and how profitable were your deals when really the bankers are shooting from the hips. They don’t have that information when they need it. You just bludgeon them with it after the fact and say boy you screwed that one up. The lenders are saying I didn’t know. There’s way too many variables in a loan and in a relationship and in that discussion for me to rely on thirty day old stale information about a different deal to make a better decision now. That’s really what we’re talking about is don’t rely on that financial reporting that they’re not going to look at anyway and even if they do it’s the wrong information at the wrong time.
Jim: The alternative that we throw out there is yet again another analogy and another one I like because it involves sports is this idea of rather than doing the one more report, treat your lender like your lender’s a quarterback. What does that mean exactly in this case?
Dallas: If you think of the way a quarterback is making decisions and we’re talking about not a high school quarterback but at the highest levels. They’re connected to the coaches through their headset and the coaches can give them real time feedback while they’re on the field up to a certain point and then the mic’s cut out and the banker, like a quarterback, would walk up to a deal. They have all this information that’s handed to them as they walk up there and then they use that to make a real time decision.
You’ve got somebody basically in your headset saying here’s what we saw in the last play. Here’s what the personnel package looks like. Here’s the play and then here’s two plays that you can call when you get up to the line. Now the quarterback walks up to the line. They survey the situation and they know what their best options are and if we can think of a lender approaching the deal the same way. They’re the quarterback of that transaction. They’re the one who’s driving the process but they can lean on experts. They don’t have to know it all. They just have to have those experts providing them that information in our analogy of as they walk up to the line. As they’re having that conversation do they have the right information in hand to know what’s our preferred outcome? What are a couple of audibles we can go to if things look different as we walk up there? That’s really what they need.
Jim: Yeah in the flip side of that using the old way in the analogy would be like going through a game, getting absolute literal radio silence from the sidelines and then walking into the locker room after the game was over and having the coach say well here’s where we didn’t work out very well and here’s what you should have done on that play and that sort of thing. In that scenario like you said, it would seem crazy how was that going to help me right now?
Then of course we went with yet another sports analogy but I’m telling you these things work so well. They really do. An idea here is to push your managers, your chief lending officers to be more like John Wooden the famous college basketball coach from UCLA. That may seem like it’s setting an impossible bar there but we’re not necessarily saying go out and invent the Pyramid of Success or win nine national [winning 00:12:48] titles in ten years. It’s a different sort of message. It’s really in a way not about what John Wooden did but what John Wooden didn’t do with his players. Am I right?
Dallas: Yeah, absolutely. John Wooden, the famous picture of him is during a game sitting on the sideline leaned back in his chair with his legs crossed just watching with this nonchalant look on his face like he’s barely interested in the outcome. His whole philosophy was to prepare his players during practice and then during the game let them play. Let them execute what they talked about. It’s that analogy we talk about all the time of the one we want to avoid where you’re buying a car and you’ve got the salesman saying let me go check with my manger. Then you sit and wait for twenty minutes while they pretend to talk about what the decision’s going to be.
We don’t want our customers to feel like that. You can’t expect your lenders to really perform. You can’t hold them accountable for the results if you don’t also give them some authority to make some decisions and to negotiate. Give them what they need and then step out of the way. Give them the right to go through that negotiation when they come to a deal that they know works to be able to say yes.
Jim: Yeah and you laid that out really well because it was actually something that when we wrote it we worried a little bit. Are we giving conflicting advice here? Are we saying hey you need to be right there with your lender giving them feedback and over their shoulder and letting them have all this information right there in real time but then turn around and saying hey you need to just let your lenders go.
It’s sort of that mix like you said with the football analogy. You’re not there taking the hike from the center and handing it to the quarterback and then telling him where to pass it but you are giving the information. At that point in the real time he’s going to figure out how to use that information. Which guy do I pass to? What defense are they in? To go back to the real world what competing deal do I have to work with here? What are the different scenarios? What sort of relationship does this customer have with our bank and now I have this information and I’ll figure out which levers to pull and here in the same way that the quarterback will be the one who eventually executes the play out on the field.
After going through all of that we come back and say okay here’s how the timeline might look if you through all of these things and you do push that pricing process forward and you do put more on your lender’s shoulders but also at the same time give them more tools to be able to handle it. It’s definitely a shorter timeline but in your view is it short enough? Do banks need to push the envelope even more or is there a risk of pushing it too far?
Dallas: Again when you compare it to what the expectations are for all the other services that they’re using, it’s not even close to short enough. I think our goal here was to show and we talked about this a couple of times in the book of don’t let perfect be the enemy of good and kind of incremental progress. This is a simple change in your process. It’s a reasonably easy thing to put in place. It cuts a meaningful percentage of time out of the process.
What the banks actually need to do is go through that same thought process with each one of those blocks that are in that assembly line. We talked about the pricing decision. There’s also a credit decision. There’s a documentation prep. There’s audits of the files. There’s all these things that are happening in there and all of them would need to go through that same exercise. Move the decision process as close to the customer as we can get it. Cut out the extra stuff. Do it faster more efficient. Leverage some technology and some practices being used in other industries that are working really well. This is something that I think banks will be working on forever. How do we get this thing faster and more efficient because that’s going to be the expectation.
Jim: Yeah and one of the ways that we’ll argue in next month in the next chapter for speeding this thing up and making it more efficient is to really have somebody dedicated to it, the concept of a chief pricing officer. Can you talk a little bit about that without of course giving away chapter five because we do want people to eventually read it.
Dallas: Yeah the basic idea is that the reason pricing and that part of this process is so hard is that it’s cross-functional. There’s a whole lot of cooks in the kitchen there and so decisions are really difficult and slow. The easy solution in there is well let’s appoint a head chef. That’s really what we’re going to talk about is what’s that person look like? What’s the process look like to make that happen and is it worth going through that effort to come up with a chief pricing officer who can own that whole process and make it go faster and more efficient.
Jim: Alrighty we will be back next month once that chapter is released to discuss that one more in depth. For now that’ll wrap it up for this episode. Thank you again for listening. A reminder you can go to theearnitbook.com to read each section of the book as it’s released and you can also sign up with your email to have those new sections just sent straight to your inbox each month. Again the first five hundred who sign up will receive a free copy of the final print copy of the book when it’s released later this year.
Those details and more will be in the show notes for the episode which you can find at explore.precisionlender.com/podcast. If you like what you’ve been hearing make sure to subscribe to the feed in iTunes, SoundCloud or Stitcher and we’d love to get ratings and feedback on any of those platforms. Thanks again for tuning in. Until next time this has been Jim Young and Dallas Wells and you’ve been listening to The Purposeful Banker.
Feature Image Credit: By Associated Students of the University of California at Los Angeles (1972 Southern Campus (UCLA yearbook), p.77) [Public domain], via Wikimedia Commons