Earn It – Chapter 7: Sunlight is the Best Disinfectant [Podcast]

August 15, 2016 Iris Maslow


When it comes to your lending team, choose transparency. Giving out information, rather than hoarding it, empowers your lenders and gains the trust of your customer.

In Chapter 7, you’ll learn about the downside of withholding information and why successful banks aren’t just transparent internally; they’re open with their customers too.



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Podcast Transcript

Dallas: Welcome to another episode of 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 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.” We’re releasing it in sections a month at a time and it’s all available at theearnitbook.com and the “the” part is important. Theearnitbook.com. This week we’re going to discuss Chapter 7: Sunlight makes the Best Disinfectant. Dallas, in the interest of transparency I want you to know that I completely forgot about putting together the outline for this week’s podcast until you sent me a reminder earlier this morning. Am I doing the whole transparency thing right here?

Dallas: Yeah, I think you’ve got it nailed. Now everybody knows how much preparation went into this episode so that’s good to let them know right up front. Also in the interest of transparency, I think we should clarify when you said “the” in theearnitbook is really important, so that’s theearnitbook.com. I feel like we’re holding out on people if we don’t say go to earnitbook.com and just check out what’s there. It’s fantastic. Not our thing, but it is worth going to see. If you go check that out and you feel it was worth the 10 seconds to go there and look at it, then go look at our book site. That’s the bargain I’ll make with you.

Jim: That sounds great. I’ll be curious to see what the crossover demographic is between the two sites.

Dallas: Exactly.

Jim: In all seriousness here, transparency may sound like a new-agey, warm and fuzzy concept that’s hard to quantify and that may then seem a little out of place at a bank where being able to quantify things is, safe to say, a fairly important part of the institution. In this chapter, we argue that transparency is important to the bank so much so that we devoted an entire chapter to the topic. Dallas, can you explain the thinking here.

Dallas: Yeah, I think what we’re getting to is that there are two big things happening inside of banks that makes this really important and, as you say, something that’s not just new-agey and warm and fuzzy, but a critically important factor to success. Those two things are number one, just the amount of information and data that’s sitting in all different places within the bank, then number two, the need to communicate about those things. That data is useless unless the right people know about it at the right time and that’s what banks are really struggling with. What their struggling with is just the logistics like how do we communicate about this, but also how much should we communicate. There’s still these walls up in between these different pieces of the bank and between banks and their customers. Really we’re talking about which of those walls should come down so that the right information is available to the right people and we can really make this a better process both for the bank and for the customers.

Jim: It’s a two-level thing we’re talking about with transparency. The bank level and the customer level. Let’s start off first by tackling transparency at the bank level. What does that entail and what’s it like when banks quite frankly aren’t good at it.

Dallas: Yeah, so we’ve talked about that here on this podcast a few times and there’s a couple different ways you can frame it. One of them that makes sense is kind of the front of the bank, back of the bank. You’ve got the back of the bank that is responsible for managing risk and managing the financial aspect of the bank profits and how much capital we’re allocating and all that fun math stuff. Then you’ve got the front of the bank that is generally interacting with the customers. They’re producing, they’re trying to put things on the books and the back of the bank is responsible for managing that stuff as it lands. The communication between those two groups is really critical. It’s also historically been really hard. What we’re talking about there is how can we do a better job of communicating to those front line producers, lenders, branch staff, anybody involved with actually talking to the customers. How do we make it transparent to them what the bank’s looking for and why and what does the bank really need in each of those transactions so that they go into that well-armed with enough information to actually represent the bank in a way that makes sense, to be flexible, to make good decisions, and to be responsive to their customers.

For them to do that, we have to get them the right information. When banks fail at it, well we see that all the time. This is a common enough issue that we wrote a whole chapter about it and one of the things we put in there was the story about one of our clients and sort of how they showed up to us this little bit of trouble. Their performance wasn’t all that great, they knew they needed to fix some things and, as usually is the case, just implementing a piece of software and changing the math on how you price is not going to get you there. That’s one of the things we talked about is, there’s all this other process change that you have to go through. Sometimes it makes our jobs more like marriage counselors rather than just a software company. We had a client, the name we’ll use to protect the innocent is Ryan. Ryan was the treasurer at his bank, really sharp guy, knew all the ins and outs of why the bank needed certain things on the balance sheet and how to get them there and how all the math worked out.

That part he got, but a lot of focus in that position, he didn’t want to share a lot of that information. In his case, it was a lot of lack of trust. He just didn’t feel like the lenders would know what to do with all that stuff. He kind of felt like just tell them the bare bones of exactly what I want them to do then they need to go do that. That’s really what they’re supposed to get out of this.

Jim: Sorry, I just want to interrupt your story, but I can kind of understand it a little bit. Maybe not in a sense I can understand it, but it seems like it’s not uncommon. How do you deal with that sort of that feeling of like I don’t know if I can trust these people with this information.

Dallas: I think there’s the trust thing then there’s also the information is power. If you get to be the man behind the curtain and sit there with all the answers and people have to go through you, then that’s, this wasn’t Ryan’s case, but in a lot of cases that is what we run into where someone is kind of brokering that information and that’s their value to the institution is that they are the gate keeper and the keeper of all the prices.

Jim: Yeah, good point.

Dallas: There’s some of that too and that’s what I mean when I say marriage counselor. You got to dig into that and figure out what’s going on with that stuff because it’s a problem that needs to be solved in that the lenders do need a lot more information than you’ve been giving them. Now, is there a certain way that they need to get that information and a certain time they need to get it? Yes. I think there is some real science behind that. The simple part of it is, they need that information, they need the action, not just a tables of data, but they need here are the actions that you can take and they need those at the time that they’re actually talking to their customer. That’s the hard part of making this all work, but the concept itself that they need better access to what the bank’s looking for and why because then I know what I can trade and move around with this deal and I can be more responsive to my customer.

Jim: You’re at that point now and maybe you’ve overcome that initial concern and you’ve started to share this information from the back of the bank to the front, but it’s not done there. In fact, it doesn’t do you a whole lot of good if you don’t have that second level of transparency which you call the transparency with the customer and we’ve referenced this a bit in our last week’s podcast when we were talking about haggling for cars and how that relates to banking. That went back to one of my all-time favorite, and this is saying a lot because Seinfeld I adore it and I love all the episodes, but the dealership episode in which George and Jerry go to the dealership and he thinks he’s getting an inside deal on the car and it’s all contingent on rather Elaine doesn’t break up with the car salesman. George is of course there being his usual hilarious, paranoid self. It’s a funny episode and it’s meant to be a bit ridiculous, but it’s also funny because a lot of people find a lot of truth in it. What I wonder is it really that bad for customers at banks? Do you think they equate getting a commercial loan with the experience of buying a car.

Dallas: Well, it’s not quite the same, but it’s close in that there is asymmetrical levels of information there. The bank kind of holds all the cards, so historically what banks have done, it’s just kind of the way the business works, they use that to their advantage. You can kind of bully customers because you knew all the moving parts of the math and the financing end of it and the customers were in the dark a little bit. They didn’t understand how all that worked. Like all other industries, that is changing. It’s a lot easier now for a customer to come equipped to have that conversation with you. They can learn more about how commercial loans in general work. They can learn more about where the marketplace is. They can more easily shop between different financial institutions and Fintech providers. Just like shopping for a car where I can shop online and I can show up at the dealership knowing exactly where that line in the sand is, the customers have a much better feel for that now in a commercial loan transaction.

That is really the kind of turning point that we’re at is how are banks responding to that. Some of them are still trying to play by the old rules where it is, hey, let’s see if we can sneak past another five basis points. That’s how we’re going to improve earnings is we’re just going to gouge the customers that we can because they don’t know any better. The banks that we see doing really well though kind of take the opposite approach which is when that negotiation starts. It’s typically, the bank quotes something and the barber says, actually I was thinking this or I have an offer of this already. They’ll have some counterpoint to that and then it’s a classic negotiation. You’ve got what we’ve offered and what they’ve offered and there’s some gap in between there. What the transparency is about let’s not use our asymmetrical information and our power as the holder of the cache in the banking world, let’s not use that to just try to bully our way to where we win that back and forth. It’s just hey, maybe we meet in the middle on rates and my job as a lender is to make sure, if it’s not in the middle, it’s closer to the bank’s side than to their side.

Instead, let’s be a little more transparent with our customer. Say, hey if you want that rate, if it’s really got to be a rate of four and a quarter for you, we can do that. Here’s what that deal looks like. Show them their options to make that work. We were talking about five year fixed rate balloon, four and a quarter. That’s short of where the bank needs it to be and again that’s short of where the bank needs it to be. That’s the important part of the transparency from back of the bank, management, whatever you want to call it, but that’s the communication within the bank. That lender knows what do I need to get on that kind of a deal and they know exactly where they stand there. Now, the other part of it is that they know, what things can I trade for that. If the rate won’t shake out where it needs to on the five year deal, can I trade four months of maturity? Can I add some collateral, can I add a guarantor? What can I do differently, what are my options instead of just saying, well I quoted you four and a half, so would you please pay four and a half?

That’s not really the, that’s not an approach that is going to win, not in today’s banking world. Rather than just haggle over the one piece of it, over rate, say hey, we’d be glad to do four and a quarter. Here’s your options for doing four and a quarter. There’s a few ways we can make that happen. Bring us some more business. Bring us your checking accounts or your other loans, your home loans so you can cross sale your way to that rate. That’s really the two levels of communication, the bank’s made it clear to the lender what they need, what they expect, what their appetite is for all that stuff and then the banker can turn around and have that kind of transparent conversation with their borrower. Put your cards on the table, show them the ways that work and now you’re having a back and forth conversation and you’re finding things that fit for your borrower instead of this negative butting of the head trying to figure out who’s going to win and who’s going to get the better day.

Jim: Yeah, that’s the way we’ve talked about it in the previous podcast and actually talked about I want to say in the one before that too. I see it’s been very popular talking about caps and floors and how the usage of that really fits into this in the sense that you share basically, again to get a little warm and fuzzy, you kind of sit down and talk about your fears.

Dallas: What you’re afraid of.

Jim: Yeah, exactly. Sing Kumbaya. You know what the customers fears are about that sudden interest rate spike early on when they’ve got a big balance and then you talk about, well look, here’s our fear. We need to know, we need to have some idea of what our income is going to be coming through this. We don’t want to have this uncertainty and quite frankly it’s not in our interest to give you a super long, fixed rate on this thing. Here’s what we need and here’s how this can help you with what you need. It’s a very transparent conversation, but one that we put in our light paper and the banker last resort. In the book as well, you can see it gets results. The ROE on those deals is really impressive.

Dallas: Yeah, it’s a high ROE and they’re winning more of those deals.

Jim: Right.

Dallas: It’s a thing that’s working where the borrower walks away happy, the lender walks back to the bank and the bank is happy and that’s not the situation if you’re out there just trying on rate only win fixed rate deals, which is what most lenders, more than half of them on the data we look at, that’s what they’re doing. This is a way to differentiate yourself and arm your lenders to do just that.

Jim: Let’s go back to the Ryan story. We touched on the beginning and that Ryan had really a difficulty opening the information troughs and sharing it with his lenders and that went badly south, quite frankly, for him and then bank for a while. How did that story turn out?

Dallas: The results they were getting, as I said they showed up at our doorstep in pretty bad shape. The loan portfolio had been shrinking, they had problem assets on the books, earnings were terrible, margins were terrible, basically every way you could measure how was their loans portion of the bank doing, the answer was terrible. They saw this at the highest levels of the bank and said we’re going to do something about this. They made some pretty drastic wholesale changes and really went through a lot of the other things we talked about in this book and in the podcast chapters there. We’ve covered the sort of playbook, they went down it almost line by line. The part here that was really important is that Ryan figured it out. There were some people hired around Ryan that helped him get there. That wasn’t just on us, that was the bank making this conscience decision to do it. They brought in some new folks who shared that belief that like look, you have to let go of this information so stop trying to hide everything from the lenders. Stop trying to be the broker of that information and instead let’s figure out the best way to deliver it to them.

Instead of it being an adversarial thing, us against the lenders, the front against the back of the bank, let’s basically consider this, hey we work for the lenders. We support them, our job is to help them sell the right deals and just that subtle change in mindset made a huge difference. For the bank, they put some new systems in place, they changed a lot of their processes, they gave some authority back to their lenders that had just been slowly taken away over the years. With that and armed with some new training on kind of how to actually interact with customers and how to do those negotiations themselves, they saw almost instant results. So, instead of a declining loan portfolio, they’ve been one of our fastest growing clients with organic growth, really healthy deals, profitable deals, and they’ve become major players now in their market when a very short time ago, they were the laughing stock. Everybody knew they were in trouble and now they’re not. This was one piece of the story, but it was a critically important piece and that is that you got to share that information with your lender so they can have better conversations with their customers. That’s really the core of all the systems and tools and processes that they put in place was around making that a possibility.

Jim: Yeah, as you mentioned, those results are a really compelling argument to make the case for transparency. Well, that will wrap it up for this episode. Thank you again for listening. Again, as a reminder, you can go to theearnitbook.com to read each section of the book as it’s released. You can also sign up with your e-mail to have those new sections sent straight to your inbox each month. First 500 people 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 of this episode which you can always find at explore.precisionlender.com. 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 or feedback on any of those platforms. Thanks for tuning in. Until next time, this has been Jim Young for Dallas Wells and you’ve been listening to The Purposeful Banker podcast.


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