Bankers often use the promise of additional cross-sell to make commercial loan deals work. But those promised accounts often never show up. Why do banks struggle so much with this critical final step? We dig into that topic in this episode of The Purposeful Banker.
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Jim Young: Hi, and welcome to The Purposeful Banker, the podcast brought to you by Precision Lender, where we discuss the big topics on the minds of today's best bankers. I'm Jim Young, director of content for Precision Lender and I'm joined again by Dallas Wells, our EVP of strategy.
Today, we're going to do two of my favorite things. We're going to talk about cross selling and we're going to make Seinfeld references. First, let's play one of my favorite Seinfeld scenes. The background here is that Jerry is at the car rental counter and he's just gotten some bad news about his reservation.
Jim Young: All right. So don't know, Dallas, if you were able to hear that on your end, but it is one of my favorites. Now, why are we playing this other than just to make Jim happy? It's because it pops into my head, Dallas, every time we talk about cross selling. Because let's be honest, any banker looking to make a deal can make it better by adding a promise to cross sell. But the key, Dallas, is getting that cross sell delivered onto the bank's portfolio. That's, as Jerry would say, really the most important part.
First off, what do you think? Does my Seinfeld car rental/cross sell analogy work?
Dallas Wells: It really does, and I feel like this is one you've had in the works for years, to actually get it to be able to be incorporated. So congrats on that big moment finally coming to fruition.
Jim Young: Thank you.
Dallas Wells: Yeah. But, I think it absolutely works and this is one of those moments as we're talking to, especially bank executive teams, where we get the knowing smirk every time we have this conversation.
One of the aspects of Precision Lender that we always talk about is the ability to cross sell and the ability to look at a holistic customer relationship. And for years, when we started having that conversation, we would get the "Yeah, but," from the bank executives. Of, "Yeah, but how do you know that stuff's actually going to show up? I have all these relationships where my RMs have promised the same deposits 10 times in a row and they've never actually showed up, but we keep booking skinny loans on account of those phantom, someday, whimsical deposits that may or may not show up."
It's a real issue and I think the clip sums it up well, of lots of bankers know how to promise those cross sold things on the front end, all the deposit and fee-based business, but very few actually know how to do the important part, which is to make it show up and actually be on the books.
Yeah. This, some of you guys may recognize parts of this conversation, something we had earlier in a podcast
, gosh I want to say it was back in about February, when we were reviewing our 2021 commercial market survey results
. Back then, I was flabbergasted that only 25% of the respondents said that they actively track whether promised accounts are showing up on their books. But at the time, you were not really surprised and from what you were just saying, bankers wouldn't be surprised either if that number was shared with them.
Why is that? Why does everyone go, "Yeah, sounds about right?"
Dallas Wells: These are really two very different functions within a bank, so it's difficult even for a small community bank to pull off, where maybe the two executives who are responsible for these two functions work across the hall from each other. It's hard there. It's next to impossible in a large, global bank where you may not even know who that other executive is, whose responsible for that other piece of it. The walls between those silos are really tall and really thick, and it's because they are just very different functions. The credit world is all about relationships and executive level relationships, and the bank has to decide about making credit risk decisions. That's really what it comes down to.
On the other side, on the cross sell piece where you're looking at what non-credit things can we add, so that would be deposit products and any fee-based business, those become much more operational issues. And a lot of times those, at the bank customer, will get delegated, those will get kicked down to someone else. "Well, talk to my CFO, or talk to my office manager. Or talk to Sheila, who runs accounts payable."
Whatever that may be, it gets kicked down to whoever's handling that operational, day-to-day bank stuff. And, getting that stuff moved, actually switching banks with that stuff, is really, really hard. I don't want to downplay that aspect of it.
If you think about moving your personal checking account, that is a real pain in the rear to get all the automatic payments, and wherever you have your account numbers stores and automatically pulling things, even just getting your paycheck deposited. On a personal level, that's hard. On a business level, you can add multiple levels of orders of magnitude to that complexity. It's a big deal, it's a lot of effort and it's effort that the business owner, or the business executive that the relationship manager whose talking about credit, they probably don't really have to actually do it.
So getting that stuff to actually come to fruition is a big deal, and it's hard and it just happens so very rarely. When we talk about it at the front end, it sounds great, everybody's on board. But when you actually have to do the work to get it switched over, a whole bunch of these deals fall through the cracks.
Jim Young: Once again, we have tapped into the age old silos problem. If I had $1 for every time that phrase was used and actually, it's not like a cliché, it's a perfectly accurate one. It's almost never overused, it's almost always accurate. It's an old problem.
And Dallas, I felt like you were starting to get dark there, so don't let me get too much darker here. But, pulling back from just this particular thing, but the whole silos thing that we talk about all the time with banks. Is it getting any better?
Dallas Wells: I don't know that it is, is the rough reality. I think there are banks who are ... Really, what we're talking about is taking a more customer centric approach, instead of almost all banks are organized around a product centric framework. And, getting those two things to line up is harder than it seems like it should be.
One of the projects we worked on just recently, and we had podcasts, and a webinar and blog posts about it, was relationship profitability and how hard that really is, just because even the data is scattered across the bank, and across different systems and across different reporting functions. They're different parts of the org chart, they're different budgets, they're different initiatives. It's hard to align those things.
There are pockets, there are banks that are making this a real focus and they are making some progress. But, there's no other way to put it, it's hard work. It's expensive, and it's tedious, and it takes real focus and effort. And frankly, it takes an executive with some vision and with the gumption to just push through some things like this. Not all banks have that, and not all banks have made it to this thing on their list of things to do. There's pockets where it's getting better. But on average, is it? I would say not really, not yet.
Jim Young: All right. But, I'm glad you mentioned that it takes an executive with some vision, because now we can play out my scenario here in which I am labeling you. I am the head of the bank and I have decided that you are that executive with vision, Dallas Wells.
Dallas Wells: Oh, wow. Well, thank you.
Jim Young: I am hiring you as my head of commercial strategy and I think you have the gumption, here. My bank, it's not a matter of actively tracking it, we're just not tracking cross sell, the outcome of cross sell promises at all. Which again, going back to that survey, I think 39% of our respondents said that. Said, "It's not a matter of active or passive, or whatever, we're just not doing it at all."
So I'm going to ask you, in that role as my head of commercial strategy, to walk me through how we're going to solve this problem. Or, I'll give you a little bit of a break and say how we're going to start solving this problem, how about that?
But first, let me ask this. You mentioned it, in passing. Assuming I'm a typical bank with typical problems, where does this one rank? If I did hire you for the job and I asked you to solve this, would your first answer be, "I will, but first I need to get to?" Or would you say, "Yeah, this is problem number one I need to get to."
Dallas Wells: I think it should be, at this point given the dynamics in the marketplace, I think this is either number one or should be very, very close to number one, for most banks. Maybe you're dealing with LIBOR transition, or some other thing that has a regulatory deadline on it. But other than that, the reality is is that rates are low, everyone's drowning in liquidity, nobody knows where to go for loan growth. So what all those things turn into is just this insane competition for bankable, viable credits. So credit spreads are shrinking, everywhere. Every market, every type of business, every type of customer, you're going to have to price those more aggressively to win them.
To meet the profit expectations for your institution, you're not going to get there through margin. If anything, your margins are going to shrink, and you're going to have to run faster and faster to keep that net interest income level where it is, much less grow it. You've got to turn to non-interest income, so fee-based business and really, truly cross selling your way to a deep, profitable relationship from that beachhead that is maybe a credit relationship.
It's got to be top of the list, it's got to get some priority. What that means, we are believe it or not, going to be sneaking into budget season awfully soon, so it needs some budget. It's going to need some systems, it's going to need some people, it's going to need some internal data projects to really make this happen. You have to spend money on this if you want it to get better. This is not something you can just browbeat people.
Because what happens, we see banks do this all the time, "We're going to browbeat our bankers into cross selling better." And it's exactly the issue we talk about. They say, "Fine. We'll have the conversation at the outset, we will cross sell," and all that really happens is that they receive a promise that, "Oh sure, I'll move these accounts." And when we look at the data, Gita Thollesson has done multiple dives into this data
, and something like just barely over a third of these promised cross sell accounts actually show up. And it takes years to get up to that 36% level, it takes two years to reach that level. This is something that banks are really bad at and it's really important, so those two things converge and that this should be a top priority.
Jim Young: I gave you an out here and you didn't take it.
Dallas Wells: Yeah.
Jim Young: We can't put this off any longer, then. You've come in and you've said, "I have said we've got to solve this," and you have said, "Yeah, we do have to solve this. This is where we should start."
Can you give me a step-by-step way to make sure we're not like that Seinfeld reservation counter lady saying, "Actually, I know we did cross sell but we don't actually have it." How do we get to that point where we not only get promises for it, but where we actually get those accounts delivered?
Dallas Wells: One of the reasons that that scene is so funny is because it's so relatable. Everybody's been in that position and you've probably been on both sides of that little interaction. We've all been Jerry, where we made the reservation, or made a call, or ordered something or whatever, expecting it to happen and it just didn't. And we've also been the unfortunate employee who is staring at this patchwork set of systems on our side and knowing, "Oh my gosh, that thing got lost. Who knows what happened to it, or who knows what inept coworker of mine didn't do what they were supposed to, but now I'm stuck delivering the bad news." We've seen both sides of that. It's funny because it's realistic and it happens all day, every day, in all kinds of interactions.
So for banks, it's a little bit of a cliché but it's also one of those cliches that it is a cliché because it's true. Which is what gets measured, gets managed and the only way you can measure this stuff is to actually have it be visible. So sort of like the reservation that disappears, for most banks the cross sell disappears. It gets stored, literally, in a Microsoft Excel spreadsheet, maybe on a shared network drive. If you're really doing it right, it'll be on a shared drive. But, that doesn't mean that any action actually happens from it. There's no task created, there's no shared responsibility for it, there's no accountability. It just dies because there's no visibility. You have to make these things visible.
What that means is having some system for tracking these. So banks that we've seen do this well have one of two, or some combination of these two things happening. So at Precision Lender, we've made a focus, our platform includes these things. Meaning, if you promise cross sell business, it's out there, it's visible. The relationship manager can see it, and just as important their boss and their boss' boss can see it. You can follow up on those things, and you can create triggers and actions to follow up on them.
A related system, and one that you can integrate that also works really well, is just a CRM. I say just a CRM like that's a simple thing. But if you have Salesforce, or Microsoft Dynamics, or whatever other flavor of those you may be using, if you're using them well you're creating sales opportunities. So when you create an opportunity for a credit, if you cross sell something, you have to have the process to trigger creating an opportunity for that cross sell business. There has to be an opportunity to go get the commercial card business, and the cash management business, and new deposit accounts and the operating account for the related entity, all those need trackable sales opportunities.
Because then, they get into the sales machine and you've got people following up on them. "Hey, this opportunity's been sitting there for three months and hasn't moved. What's going on with it?" If you close it out, "Why did we lose that opportunity? What happened to it? Where did it go?" But, there's a record of it. There's a way that you can measure how long did it take, did it actually show up, was it as profitable as you promised it would be, all those things have basically a line drawn in the sand. And then, we can see did you measure up to it or did you not.
So the first step is just to measure it, make it visible. The second step is then to have some sort of accountability. You can do some flavor of the carrot or the stick, but you've got to have one of the two to really make this happen. That's the second process, operational people aspect of it. You put systems in, but then you also have to do something about those records that sit out there in the cloud to make them a reality.
Jim Young: I'm curious about that carrot-stick part of it, because it seems to me that we've had carrots, certainly. Which is, "Hey, add cross sell to this." Boom, added cross sell. Great. And we've had the stick approach to that, "Well, if you don't add cross sell you'll be in trouble," sort of thing. But, it feels like this is some sort of a combination of both. It's a carrot, we want to reward people for proactively getting those account promises, but then you also want to make sure that those people ... I think of it maybe carrot and stick, but incentive versus accountability. They're incentivized to get those promises, but then they're held accountable for whether those promises are delivered on.
I guess maybe if I'm a frontline banker I'm going, "Dude, you're asking me to be held accountable for something that's way out of my hands at this point." I guess maybe I'm going back into process. But, what if I'm a banker who comes back to you and says, "That's great, Dallas. But, you and I both know that once it goes to this point, it's out of my hands."
Dallas Wells: The incentives part is really critical and it's where we've seen ... As banks try to actually get this operationalized and especially at scale, and the larger the institution the hard this is. This is where Wells Fargo ran into issues with their ... Look, they're just the ones that got caught, and it was public and ugly. They're not the only ones who have messed this up.
Jim Young: That was there, but for the grace of God sort of thing for a lot of banks, I think.
Dallas Wells: Exactly. But, their whole thing and what they were trying to do was scale this. So they had the mantra of, "Eight is great," eight different accounts per customer. Somebody had run some analytics, so they were measuring it to manage it, they did the first step. And then, they were putting some incentive in place and holding people accountable by saying, "Our most profitable customers have at least eight accounts, so try to get them to eight. And in fact, we'll pay you to do that." It was shortsighted enough that they had people opening deposit accounts or savings accounts that would never actually have money put in them. Or, credit card accounts that would never get used, they would just get opened and then closed. But, they would be open for a little while, and they'd get to the eight and they make their quarterly bonus, or whatever.
So, how you actually go about doing this matters. That's why we're big believers in, for a commercial relationship, it's actually a little easier. Retail is just such a massive scale thing that you have to put in place in the branch networks, and that's why that gets messy. In the commercial world, you should be able to come back to some universal, North Star metric, which should be some risk adjusted profit number. So risk adjusted net income, or risk adjusted return on equity, so a RAROC based approach. The key part is, and why that first step of getting everybody on shared, visible systems, is so that you can have those shared metrics and everybody's rowing in the same direction. Everybody's working towards the same thing.
We've started building out our treasury services functionality inside of Precision Lender for that reason. It's the most important cross sell business, for most banks, their most profitable customers. That's where they make that big income is in things like sending wires, and ACH originations and a $50 million average collected balance, those things are what drives commercial relationship profitability. So having the lead on the deposit accounts, and the treasury services officer, and the relationship manager whose leading the relationship and the credit aspect, having them all trying to get the relationship profitability number up over time is useful. They're working together. If I promise that that cash management stuff's going to show up, it's because it makes that relationship profit number go up. And I need to make sure that it actually shows up, because I don't get paid on just making the introduction, I get paid on it becoming reality and those becoming real, actual realized revenue dollars for the bank. So we should be working together.
In practice what it looks like is you have to make an introduction to the treasury management officer. Who then, as we talked about, is probably going to get matched up with whoever that's been delegated to at the bank's customer, so whoever handles the banking stuff. And, those do have some hard work ahead of them to actually make that stuff happen, and it may take six months to actually get that stuff moved, and the deposit accounts funded, and it's going to take a lot of handholding and a lot of follow-ups. And what it will probably take is, at some point, the relationship manager, the RM at the bank, going back to their executive and saying, "Hey, you've got to push on your employee. We haven't quite gotten this stuff all done and moved yet, and it's time. You've got to push them."
That's why you have to have the accountability, so that everybody's working towards the same thing. The RM can't just say, "Hey, I made the introduction. You either close the deal or you don't. That's your problem, not mine." It needs to be their problem, that's really what it comes down to. So as you design these incentives, it has to be not introductions, not promises, not referrals. If you want to give a little kicker, or a restaurant gift card, or whatever for referrals, great. That starts the process. But, if you actually want real results from it, you have to incentivize based on, "Okay, they moved the account and now we're making money on it." It's a done deal, you've got to pay it based on that. And maybe, you have to have the follow ups based on that, "Hey, you promised this thing six months ago and it's still not here." How do you make that a priority for them?
It has to be meaningful incentive comp, it can't be these little $100 things. I'm not saying those aren't worth the time and effort, but it's got to matter to somebody's paycheck because this is hard stuff. It's complicated, it's time consuming, it's tedious. It's going to take maybe six phone calls to get it done. You've got to make that worth their time, that's really what it comes down to.
Jim Young: I guess I'm curious too, not to get too in the weeds on this. But as Gita's stuff pointed out, that a lot of this stuff, it gets better after 18 months in, you're starting to see a better percentage and that sort of thing. Where at the bank do you set the time limit, or do you set it scaled down? "If you can get it done in six months, you get this. If you can get it done in a year, you get this. If you get done in 18 months, you get this." I'm curious, when do you start dropping the hammer and say, "You've failed," basically?
Dallas Wells: I think there's some reasonable amount of time, it should be inside of a year. It's not going to happen in 30 days, but it also shouldn't take 18 months.
What was interesting about Gita's data is that you see this slow, very little, small progress, and then you get to the one year mark and there's this spike. If you tease out what's happening there, the bank booked a revolver, a revolving line of credit, and that thing rolled over in a year. So everybody picked back up that relationship file 12 months down the road and said, "Oh my gosh, they were supposed to bring a bunch of deposits in and treasury business, and it didn't show up. So before we do the renewal, you better actually get it here."
What that tells is that, number one, that's when it became visible again, so make that happen sooner. And number two, you can move the needle on this. You can make a difference, you can take some action that will bump your progress. Do it at six months instead of 12 months. And then once you get better at that, do it at three months instead of six months, so make incremental progress. What I would say start with is if you can't do any better yet, tie it to those renewals. Because by the way, there's plenty of banks who they don't look at it at renewal time either, and that thing just gets put on auto renew and you never actually ask for it.
So start there, there's nothing wrong with doing it in 12 months if you're not ever doing it as your baseline. And then, just get better, just make incremental progress over time. But, if it's too hard to add a bunch of steps, if you don't feel like you're staffed appropriately for that or you don't have the resources for it, tie it to the renewals. If you want to roll over that revolver at the same terms you have it at, "Hey, you promised you'd bring this stuff. If you don't bring it, we're adding a quarter point to your credit spread." Put some teeth to those things, that's when you have the ability to do something about it. If they call your bluff, are you going to blink in today's environment? Maybe. But, if you ask for a bunch of them, you'll get some. That's really what this is about. It doesn't have to be perfection, it just has to be better then you are.
Jim Young: All right. Well, cool. I guess I'll close out with the part you didn't hear in that clip is that eventually, Jerry gets a subcompact because that's all that's left. The woman asked if he wants renter's insurance and he says, "You'd better add it because I'm going to beat the hell out of this car." The connection here is you better deal with this really thorny problem because if not, it's going to continue to beat the hell out of your bank's bottom line is the way I would wrap that up in a nice bow.
Dallas Wells: I think that's a good way of putting it. The big focus that we've been talking about with a lot of clients, a lot of prospects is primacy, meaning that you are the primary bank for your most important relationships. If you don't become a pain in the rear and annoy your customers into following through with this stuff, their primary relationship stays somewhere else. You have to earn it with some hard work. So use your frustration to your advantage, and pass it on down the line to your frontline staff, make them frustrated too, and get these things done.
Jim Young: All right. Well, that will do it for this week's show. Dallas, thanks again for coming on.
Dallas Wells: You bet. Thanks, Jim.
Jim Young: Thanks again so much for listening. And now, for a few friendly reminders. If you want to listen to more podcasts or check out more of our content, you can visit the resource page at precisionlender.com. Or, head over to our home page to learn more about the company behind the content.
If you like what you've been hearing, make sure to subscribe to the feed in Apple Podcast, Google Play or Stitcher. We'd love to get ratings and feedback on any of those platforms. Until next time, this is Jim Young and Dallas Wells, and you've been listening to Purposeful Banker.
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