Banks have all sorts of C-suite officers from chief executive officers to chief risk officers to chief loan officers. But for some reason, there’s no chief pricing officer.
In this episode, Dallas Wells and Jim Young discuss why a bank should have an advocate for pricing on the executive team. Read the newest chapter of Earn It: Building Your Bank’s Brand One Relationship at a Time.
Dallas: Welcome to another episode of the Purposeful Banker, 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 and I’m joined again by Jim Young, Director of Communications at PrecisionLender.
Jim: Hello everyone and thank you for joining us. Dallas and I are back again to talk about the book we’ve been co-writing, along with PrecisionLender CEO Carl Ryden. It’s called Earn It: Building Your Bank’s Brand One Relationship at a Time. Just a reminder we’re releasing it in sections a month at a time and it’s all available at theearnitbook.com. This week we’re going to discuss Chapter 5: The Case for a Chief Pricing Officer.
Dallas, as we let out at the very beginning of this chapter, there are all sorts of C level officers at a bank. Your CEO, your CFO, your COO, your chief credit officer, your chief loan officer, your chief risk officer, the list can go on and on, so what prompted the idea of hey, banks can actually use another one of these C level officers?
Dallas: Yes, because all banks are so excited about going out and hiring another C level person. The basic concept comes from the idea that pricing is one of, if not the most important things that a bank does, and yet it’s the one thing that doesn’t have a C level officer. Banks keep adding these C level titles, and so it didn’t make sense to us that there would be something like a chief marketing officer but never a chief pricing officer. Those C level type titles, the idea of them is that they have enough authority and they rank sufficiently in the organization that you can really break down the silos between all the different functions and departments of the bank to be able to get important initiatives done and that is the big struggle in pricing. It’s so siloed and there’s so many different functions that have their fingers in some part of pricing that getting one cohesive strategy and matching the tactics to that strategy most banks really stumble and fall down with that part of it.
Someone who’s job is pricing and has the authority to jump across those departments to make it happen was really the only solution that we see to that big overarching issue.
Jim: Let’s talk about that, about the cross functional aspect of this on the two levels that you mentioned. First the barriers or the cross functional issues that banks have with pricing at the strategic level, can you kind of give maybe an example of what that would look like?
Dallas: Yes, so pricing if you think about pricing one individual commercial deal, the people with the seat at the table to discuss that price. You have the loan officer who’s carrying a quota so they want to price it a way that the deal gets done. You have a borrower so they obviously want a price that’s as cheap as possible, but then you’ve got all the other factions at the bank. You have the credit group, you have the finance group, you have probably some marketing input there as well. You have the executives who want to handle it a certain way, you have compliance and all these different folks have something to do with pricing but they have a one dimensional view of it. They all have their own perspective on what the right price is.
If you ask the chief financial officer versus the loan officer who’s actually talking to that customer what those two folks think the price should be you’re going to get two very different answers. That’s the first high level issue that you run into is that those groups all have different opinions, different perspectives and different priorities and the question is in your bank who’s running the show? Who actually gets the final say on that number? In some banks it’s kind of well we’re not real sure, it seems to be a random process, a random number generator basically of how we come to a price or it is we’ll just do what the competitions doing.
In other banks we see where there’s a really strong faction there. Maybe finance is running everything and so their view of the world of maximizing that interest margin and profitability versus maybe the credit group. If they’re running the show in a different one where it is no losses no matter what and so you can actually usually tell by a bank’s performance who’s making the pricing decisions. You can see it in the car report data of how’ve they done over the last few years? The banks that do really well are the ones that actually balance all those inputs, those are all valuable things that we need to consider and balancing those is tricky and the high performing banks do that really well.
Jim: Let’s then, for the purpose of this exercise, is assume we’re at a bank where they’ve got things pretty well smooth, smoothly operating at the strategic level with their pricing. That’s not I guess the full story, what comes next then? Once you’ve got your strategy of here’s how we want to approach pricing, what are the pitfalls that come next?
Dallas: The strategy part is really kind of getting all the different parts of the balance sheet aligned, so deposits and the bomb portfolio and the different categories of loans. You have all of those things aligning is really the first challenge, and as you say there are some banks that do that fairly well. They have someone who owns that balance sheet and can allocate the pieces of that the correct way. When you get into the tactical part of it of now we actually have to go execute that, that’s where it gets really hard and that’s where you have to come up with a way for all of those voices to have some input but you have kind of a final decider and they don’t come from one of those departments where they’re representing that one perspective. It’s somebody who can balance all of those things.
For example, we work with a lot of banks, and again saying that you can kind of tell who’s running the show by looking at the numbers, we work with a lot of banks who they let finance own pricing. Those banks, a lot of times, their mentality is well let’s really restrict what the lenders can do, let’s control very tightly, what they’d really like to do is they would like to be able to personally price each deal. Since that’s not practical then what they want to do is really limit the options that they have. Here’s the four things you can do, pick from the menu but that’s it.
The other end of the spectrum is someone who says hey, let’s let our senior lender or someone from their staff really run the show and their job is I’m supposed to grow loans period. That’s how I get compensated, my job at this bank is to make sure that we have loan growth. How we set up the entire process from how do we quote prices, to what do we do when there’s competition, to how do we handle pricing exceptions those two ends of the spectrum will handle all of those things very differently and that’s the tactical part of it where you have to have the checks and balances from both of those groups and then you have to have someone who owns pricing, not who is a finance person who’s doing pricing or a loan person who’s doing some of the pricing. They own pricing and all of the outcomes that come from that, so the growth and the risk and the profitability, those things all have to be balanced if you’re going to price correctly.
Jim: Let me play devil’s advocate here for just a second. Why does it have to be someone, why couldn’t it be … I can hear a banker now saying we got an ALCO committee and that’s where we handle pricing, what’s wrong with the committee approach versus the single person approach?
Dallas: ALCO is the right place to allocate the balance sheet, to decide how much do we want from which kind of funding and do we have an appetite for non-owner occupied commercial real estate? The ALCO can maybe come to that conclusion, the issue is is that committees are really bad at actually executing things and that’s not an indictment of banks, that’s just a fact and banks know better than anybody all the committees that get formed, how many actions actually come out of those.
We can come up with the right idea and the right strategy, the problem is is who’s actually going to make sure that that happens? Who’s going to do things like say, if we do want those non-owner occupied commercial real estate loans how do we reflect that, how do we change the profitability targets that we have for those? How do we communicate that to the lenders, how do we communicate that to the market at large so that we actually align and the price we’re quoting to a customer on the front lines to that strategy that we decided, in what most banks is the smokey back room of ALCO decisions. Where we huddle up around the table and we make the decisions and we say okay great, we’ll come back in three months and see how it went. Then nobody actually goes to do the thing, that’s the part where you need a person who has ownership of that. You can hand them from ALCO maybe the marching orders so to speak.
Here’s the strategy that we would like executed, but now you have a person who is responsible for it and who can be held accountable for it versus yes well the loan guys do the loan part of it and the finance guys do the finance part of it. That’s where then you start getting the butting of the heads where they each have their own little piece of that agenda that they’re responsible for and that they’re supposed to execute on, versus one person who says I will take the pricing that lines up with this strategy and make it happen.
Jim: I’m a bank exec, I’m a CEO slash president and everything you said so far is making sense to me. You are making the case for a CPO, but now I want to know that sounds great but what does that person look like? Is this some sort of banking superman who was master of all aspects of the bank?
Dallas: Sure, ideally yes but we don’t come across too many of those. Realistically it’s going to have to be somebody who does have at least a deep enough understanding of the finance to really understand what I call the butterfly effect. When you touch one thing over here with pricing what’s the impact over on the other side? These are complex transactions and they need to understand the basics of the math, why deals that are structured a certain way show a certain level of profitability or why they don’t. That’s going to be a prerequisite but this is such a cross functional thing, pricing, that you’ve got to have somebody who, even if they don’t have any direct background in actually doing loans, they at least understand what that entails and the importance of it so that they can balance that sales versus profits versus risk thing that we’re trying to balance with pricing.
The ones that we see that are really the best at it of filing this chief pricing officer kind of role are the ones who have the technical chops of the finance background, but that consider themselves as working for the loan department. They see the lenders as their customers and so it’s their job to help them come to the right price for that deal. It’s hey I’ll help you come up with solutions rather than tell you what you can’t do, so they’re a pricing expert who’s there to bring all the resources to bear to come up with the right deal for whatever structure we’re looking at. We’ll help you with the math, we’ll help you with all the ideas that maybe you didn’t think of and let’s find a way to make this deal work. It’s that mentality paired with the broad enough financial background to be able to actually make it happen.
Jim: Even if you bring that person in and you find that ideal candidate and you hire them, what sort of support system does that person need from the bank? I’ve got to imagine that even though you bring in this person they’re still going to be finance is going to want to do finance things and credit’s going to want to do credit things and lending’s going to want to do lending things. How do you set the CPO up for success?
Dallas: Good question and I think this is where we see banks who get the concept but maybe struggle with actually making it happen is they’ll say all right, well we’ve put someone in charge of pricing but it’s a financial analyst who’s four years out of school so the lenders go okay fine, I’m still going to price however I want to price or finance can still run the show there. They have to have sufficient authority and the simple fact of it is they have to slot in the right place on the org chart, so they have to have enough credibility and enough authority that they can overrule some senior level loan officers and some senior level finance and credit folks on pricing.
They have to have the backing, some friends in high places so to speak and it has to be clear to everyone who owns the final pricing decision. Rather it’s pricing one individual deal or setting up a model that gets us to the final answer, they’re the ones that own that process and yes they get input from all those other folks but it’s their call at the end. It’s balancing those two things that actually makes it work and if you don’t get that part right then even though you’ve bought into this concept it’s not going to work.
Jim: Fortunately this isn’t just purely conceptual on our part, I mean we have a case of a bank that we refer to in the chapter. Can you kind of give the loose story of Dan Martin, who’s a pseudonym for a very progressive banker, forward thinking banker that we know who is maybe the closest thing out there to the CPO model?
Dallas: Yes, so lots of banks have given ownership of pricing to one person, but again it’s somebody who’s in the loan department or in the finance department and this is one of the first cases we’ve come across with somebody who pricing is what they do and what they own. The abridge version of the story is that this bank understood how important pricing was and realized that the way they were going about it was not working. Dan finance background and had actually made a pricing model in Microsoft Excel that was pretty good and it was because he built it to be a tool for the lenders. Again, not a control mechanism, not something to bludgeon the lenders with, but hey here’s a tool, here’s a thing that will help show you some options for whatever deal you’re working on.
That mentality with the technical know-how to actually build the thing got Dan noticed by some of the right people who also felt like pricing was really important. They let him go out and choose some systems to actually kind of scale that thing, so this went from a pilot that they were doing in one small part of the bank to all right, let’s run this across the entire organization, a decent sized regional bank and let’s go spend the money on the technology to make it happen. They bought several different cloud based systems, actually then integrated them together and were really proactive in making that happen and pushing the vendors to make that happen, us included. Created this really slick end to end CRM through pricing tool and so as their lenders are prospecting they now have a really good feel for what things actually impact deals getting closed, what sort of call activity translates to deals on the books and they can actually start to budget that stuff now.
If we want X million dollars of production, here’s how many phone calls that our lenders have to make, here’s how many visits that have to do. Very few other banks have that kind of insight into their sales process, it’s this mystery thing of deals show up when they show up. They’ve actually connected those things enough to be able to track all of that and that was all with Dan kind of driving that process and you notice connecting a pricing model to a CRM system, it’s one of those things that most banks would say well what the heck are you doing that for? He viewed it as a sales tool, the importance of it is how you negotiate, that’s a really important part of the relationship that we have with that customer, my job is to facilitate that.
Dan went from finance guy who was behind the scenes putting all this together, to then he was training the lenders on how to do it, they were having really good success so they kept spreading it to their other markets, it became a bank wide thing and basically Dan became a superstar at the bank. He went from kind of junior level financial analyst to, of course bankers don’t always make titling simple, but he’s essentially is the chief pricing officer, he owns pricing at that bank. Has friends in high places who back whatever call he wants to make and he adjusts pricing as he sees fit and gets really great results. It’s been fantastic for the bank, fantastic for Dan too, but that’s the story we always come back to is let somebody own it, give them the authority, hold them accountable for it and what gets measured gets managed kind of thing, and also giving somebody ownership to actually do that. Very few banks actually do it and if pricing’s really that important to you then make it happen.
Jim: Spoiler alert though, this is not the last chapter in the book. We have the CPO in place at this point. Looking ahead to chapter 6, where does this journey of using pricing and how it helps banks create those relationships that build it’s brand, where does that story take us next?
Dallas: It still is building out that right team and so you’ve got the chief pricing officer driving the strategy and the process behind the scenes, really a lot of what we call the back of the bank stuff. Then we got to move to the front of the bank, so who are the lenders that are actually making this happen? That’s really what the next chapter is about is finding the right lenders, giving them the tools they need to succeed, how do you train them to actually be able to execute on this stuff that we’ve been talking about up to this point? That’s coming up.
Jim: That’ll wrap it up for this episode, so thank you again for listening. A reminder you can go to theearnitbook.com to read each chapter of the book as it’s released. You can also sign it with your email to have those new sections sent straight to your inbox each month and the first 500 who sign up will receive a free copy of the final print version of the book when it’s released later this year. Those details and more will be in the show notes for this episode which you can always find at explore.precisionlender.com/podcast. If you like what you’ve been hearing make sure to subscribe to the feed in iTunes or SoundCloud or Stitchr and we’d love to get ratings and feedback on any of those platforms. Thank you for tuning in, until next time this has been Jim Young for Dallas Wells and you’ve been listening to The Purposeful Banker.