Jim Young and Dallas Wells discuss what it means to "price by tourniquet" and how the practice can be detrimental to your bank and your customers. You'll learn exactly what this phrase means and how you can reverse the damage that may already be done.
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How Short-Term Pricing Cures Cause Long-Term Bank Damage
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. I'm joined today by my co-host, Dallas Wells, EVP of Client Development at PrecisionLender.
Dallas, we're going to today, talk about the short-term pricing strategies that can cause some long-term damage. It's based on a blog post you wrote a few days ago. It's a post that has an interesting image of a tourniquet at the very beginning of it. A painful one to be honest, if you look at that image. While we always seek to educate, inform, and entertain on our blog, we're usually not handing out first aid advice. I'll start off with that. Why a tourniquet?
Dallas Wells: Yeah. Good point. Maybe we should include the disclaimer for all our banker friends out there. Don't actually take first aid advice from a banking blog. The tourniquet is actually another analogy that comes from Carl Ryden, our CEO. I'm convinced that Carl only thinks in pictures and analogies. We get a string of these every day, all day. This one's pretty good though. What he's talking about is, tourniquets as a response to a common problem we hear from banks.
The problem and the language around that's pretty colorful too. The problem is slipping basis points or leaking basis points. Lately what we've been hearing, a couple times, is called hemorrhaging basis points. What they're talking about is, as deals are put together, the difference between the price that the bank would love to be able to charge and then the price that actually ends up on the books. There's this gap between those. Banks feel like that gap is really growing. It's because of all the competitive pressures in the marketplace. There's always somebody out there willing to underbid a little bit and drive that gap wider and wider.
Carl took that one step further in describing how banks tend to react to that, which is that they apply a tourniquet. Our first aid advice here, talking about tourniquets and there's a disclaimer in that article we link to that says, "tourniquets are not for everybody. They work really well, but they can also be really dangerous." They work really well because they stop the bleeding. It's a way to save a life in a very critical situation. They're used on the battlefield. That's where the most people are familiar with them. Massive bleeding, apply a tourniquet, the bleeding stops, you can find where the damage is, repair it quickly. And then here's the key, remove the tourniquet.
What Carl sees banks doing is a similar thing, where they apply a tourniquet, right? They go and they stop the bleeding and then that's where things tend to go awry a little bit. I think that's what we'll get into from here.
Jim Young: Yeah. I was going to say. Okay. To go with the tourniquet thing, if you don't take the tourniquet off of your arm, essentially, the lower part of your arm loses all blood flow, loses-
Dallas Wells: Yeah, it's a con.
Jim Young: ... nerve damage, et cetera, et cetera. We know where that ends up. What does the long-term damage look like at a bank if you put in this equivalent of a pricing tourniquet? I guess and also talk a little bit more what that pricing tourniquet would look like and then, what would be the long-term damage it could do?
Dallas Wells: It's a similar idea in that you want to restrict things down really tight. That's how a tourniquet works. You squeeze the dickens out of something and it stops the blood flow. That's what banks tend to do when they see what looks like messiness in the pricing process. Lots of exceptions and lots of deals being priced uncomfortably skinny. What banks do is, they add a lot of restrictions. You're not allowed to do this, and you have to check with me to get this kind of a deal done. Lots of approval steps along the way to make it very hard to get that special pricing or those exceptions done.
That leads to some long-term damage. It's similar to what you see in a limb. You squeeze it too tight and things start to atrophy and die, and there's really bad permanent long-term outcomes. In the banking world, you see the same thing. These over-restrictive policies tend to lead to really bad customer experiences. If you have a deal that is competitive and the customer's asking for maybe unique or unusual things and it doesn't fit neatly inside box that you defined for your bankers, well, you've purposely made it really hard for them to navigate through that and actually get that deal approved.
You're talking about multiple weeks of them sending emails and then somebody's on vacation. Then you have to get it approved another way when the customer comes back with a slight change. Something that should be a quick back-and-forth, an easy negotiation, ends up stretching out over weeks. That's before you even start underwriting. Just to qualify a deal, you're well down the road and your customer feels like they're not always getting ... not only quick responses, but sometimes even honest responses. They feel like they have a deal put together and you come back and say, "I'm sorry I couldn't get that done."
It's the classic, like we've talked about a lot here, that used car salesman feeling from your bankers, where they always have to go check with the boss to get something approved if it's not straight off the sheet, you know, straight off the rate sheet, pre-approved structures and rates. That customer experiences, unhappy bankers, deals that take a long time, which means to compete, now you got to get even cheaper on price. If you're really hard to work with, you got to be cheaper to win those deals, and it's the cycle that starts to repeat itself.
Banks get into that situation because the tourniquets work at first. When you first start paying attention to this and you apply some accountability and some visibility to what's going on in the ... and pricing individual deals, you see this quick lift. There's this improvement right out of the gate. That actually is dangerous because then, banks start to double-down on that and say, "Well, if a little bit of control got me good results, how about a lot of control. Maybe I can really squeeze some extra basis points out of this." That's where banks start to go astray.
Jim Young: To take the analogy further, you stop hemorrhaging basis points, but you also cut off the flow of new deals essentially, if you take it to this extreme with them.
Dallas Wells: Yeah. Exactly.
Jim Young: Carl would be proud of me adding on to that analogy.
Dallas Wells: Yeah, just go ahead and beat it to death.
Jim Young: Exactly. I got a couple potential push backs here, but first, let's talk about the example you used, the names changed to protect the innocent in the blog post for Flowchart Bank. I would have gone with Firstflow Chart, but still, Flowchart Bank, I like. Talk a little bit about what you encountered with that bank and it's exception and approval process.
Dallas Wells: This was a pretty large regional bank. They're well known. They have a pretty good reputation in the marketplace as far as being a safe, sound, well run bank. They've started to have some push back from their producers, saying, basically, you guys are killing us. It's hard for us to get things done.
They started shopping for better ways to price deals, hence the conversation with us. Their requirements for buying were a little strange and very specific. Basically, they said, "Hey, our problem is, is that it's hard for us to get deals approved. So we need to make sure that PrecisionLender can accommodate all of those approvals. That's a fairly common question for a big, complex bank. They have some complexities that we have to help them navigate.
We started to dig into it. Theirs was not the usual big bank complexity. They had these flowcharts, hence, the name, that they had to pass out to their relationship managers to help them figure out who has to sign-off on your deal given which criteria. Lots of these if, then, flowcharts, to try to work your way through and on top of that, on top of it being really complicated, they'd made the boxes so tight and so restrictive that ... and some of their lines of business, upwards of 70% of the deals are exceptions.
If you think about that from your RMs perspective, that seven out of 10 deals that I bring in are going to be an exception. Then I have to break out the flowchart to figure out how to get it approved. Sometimes there were sub-flowcharts off of those. It was, if you land in this box, then go to flowchart C and go follow that one. We followed the mazes for a while. Technically it was something we could do, but we went back to them and said, "Buying software that just fits your existing workflow is not the answer. It doesn't solve your problem. We're treating the symptoms instead of the real underlying disease."
They had started to see, even though they had this good reputation in the marketplace, started to see some of the damage that we talked about, of leaving that tourniquet on too long. They'd squeezed it too tight and that's where the feedback was coming from their RM, saying, "Look, some of our very best customers are getting pretty ticked at us over this. We're losing some good deals to good customers, because we can't be as responsive or as flexible as we used to be." They even started losing some bankers over it. It was just not a pleasant place to get deals done anymore. Anyway, that's a ... maybe an extreme example, but it's a pretty common problem that we see. Where basically, things get over-complicated.
Jim Young: Yeah, no kidding. I was going to say, when you have something that's sort of like, there used to be a store on the corner in my hometown that had a sale every day. It's like, if it's every day, then it's not really a sale. If you have seven out of 10 or exceptions, then, there's no longer relief in exceptions. The whole thing is ... that's just a standard part of your process, which is just really complicated at that point.
Dallas Wells: Exactly.
Jim Young: Let me give you a little push back then. One is, that's easy, that's great, so I should stop [inaudible 00:10:31] the tourniquet. It's easy for you to say, but you don't understand how competitive buy market is. That would be push back number one. And then two, what am I supposed to do? Just let my portfolio bleed-out in this situation? What's the alternative if we say tourniquets are a good idea short-term, but going to hurt you long-term. What's the alternative?
Dallas Wells: You have no idea how competitive my market is. I think you can see if you follow this through to the end, you can see why banks have conflicted some of this on themselves. If you're working at a bank and 70% of the deals are exceptions, you know when that deal comes through the door, more than likely you're going to have to go ask for special approval anyway. You might as well make it a big ask. Go bigger, go home. If you're going to ask for an exception, it's going to be on the naughty list, so to speak. You might as well make it big enough to actually win the deal.
That was the mentality that these RMs were coming at it with is, survey the market, dig deep with that customer, and find out what the absolute cheapest rate is and then let's see if I can get an exception approved to beat that. I know that this is going to be difficult for them to navigate. They're going to have to wait a while. We're going to have slow funding time. Might as well make it cheap. That way at least, hey, I got you a good rate.
Some of that is self-inflicted. Now, that doesn't change the reality that markets are competitive. Especially for those very best deals. There's a whole bunch of liquidity still chasing not enough qualified, high quality deals for banks. Yes, it's competitive. How you respond to that competitiveness is, if you make it all about rate, if you're difficult to do business with, if you're slow, if your relationship managers can't be flexible, they can't handcraft something for your customers, what do they have to compete on? The only thing left is rate. You've taken a lot of the levers away from them. Things that they can do to make the deal work. If everything's got to fix in the box for them to get quick approvals and fast funding, well, it's got to be cheap. You commoditized your own product there.
Secondly, the what am I supposed to do, just leave it be. Goes back to why the tourniquet is such a good analogy and why Carl was so spot-on with this one. The tourniquet is not the problem. It does exactly it's job, which is, you tighten it down, the bleeding stops, you repair the damage and then you release it. That's the part that a lot of these banks are missing, is, yes, we're strict down the pricing, pay attention to it. That's only so you can get some visibility into what kind of deals are we winning and losing. Where is that line really between we won the deal and we lost the deal. It's a really fuzzy thing that tends to be defined by which RMs can yell the loudest.
If you raise the visibility and you restrict things down a little bit, you'll find where that line is. You'll find how much flexibility's really needed. Fix that, right? Find where the ... and clearly communicate to your RMs where those out of bounds lines are. Once you define those, remove that tourniquet, let them operate much more freely within those out of bounds lines that you've determined. You should have a much clearer picture without it having to be so restrictive.
Jim Young: All right. I think you may have convince me on this. I was going to say, to me, that would be the scary part, is the, I've stopped the bleeding but how do I know when I take off that tourniquet that what I'm going to replace it with is going to actually hold the line basically, versus ... it's just going to start bleeding again essentially.
Dallas Wells: Right.
Jim Young: Well I think that will do it for us today. Thanks for listening. If you'd like to learn more, visit our resource page at explore.precisionlender.com. If you like what you've been hearing, make sure to subscribe to the feed and iTunes, SoundCloud, Google Play, or Stitcher. We love to get ratings and feedbacks on any of those platforms. Thanks for listening, until next time, this has been Jim Young with Dallas Wells. You've been listening to the Purposeful Banker.
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