Chief Investment Officer
Commercial Loan Automation
a primer on business banking
Business banking, the undefined line of business that falls between corporate/commercial banking on the one hand, and consumer loans on the other, is an unsolved mystery for most banks. We intuitively know that this business should fit well within the branch network. We know that it is a perfect candidate to leveraging the brick-and-mortar, as well as the human capital, embedded in those branches. Yet so few have successfully come up with the magic formula to achieve this elusive goal: serving small business needs, both credit and deposits, from the branch base.
The reason why so many banks ponder this question is obvious: the highest profitability tier of the small business segment (businesses with sales under $5 million, loans under $500,000) is four times more profitable than the most profitable retail customer segment ($4,000 vs. $1,000 average profitability). In one bank, which is representative of the industry average, the lowest profit tier of small business represents profits under $500, while the consumer side is at $180. With such attractive statistics, driven primarily by high average deposit balances, the small business segment is indeed a winner.
This is especially true in today's deposit starved environment that so many banks experience. The average small business deposit account balance is at $20,000, as compared with the typical free checking balance of $1,500 at best.
Conversely, both underwriting and servicing small loans are very costly to administer if you use traditional underwriting methods and the same standards for loan servicing as you do for larger loans. Figuring out how to underwrite, service, maintain and build the relationship with small businesses is the question most of us are facing.
As you revisit your approach to serving the small business market, consider the following elements:
Large banks offer small business services in a mass marketing mode. They often solicit by mail large numbers of prospects, underwrite them like unsecured personal loans using credit scoring models, and service them through remotely located phone banks. SuperCommunity banks cannot compete effectively with the mega-banks on the playing field, since they do not enjoy the scale these large banks can bring to bear, nor do they have the resources necessary to effectively build a small business underwriting scorecard and to revise it through continuous learning. SuperCommunity Banks need to identify an approach to this market segment that will allow them to achieve a competitive advantage. Given their relationship orientation to the customer vs. the transaction-based mass marketing approach described above, it is appealing to offer relationship banking and needs-based selling to the small business marketplace as a way to enter and expand such relationships beyond what the large banks can do.
The differentiation SuperCommunity Banks can offer centers on bringing relationship banking to the market while executing it efficiently by leveraging branch resources. The model that works best for many community banks calls for an integrated approach of several sales forces: the branch, the business banker and, often, the private banker or financial planner, to offer a full service solution to the small business owner, business and its employees. As a generalist with the broadest product knowledge, the branch manager is the quarterback of the relationship, the business banker is the technical expert on the lending side, and the private banker offers the investment and wealth management expertise. Others, such as the cash management or merchant services sales forces, can be brought to bear as well, but the three legs of the stool that is the small business solution are the branch, business and wealth management specialists.
This high cost model fits SuperCommunity banking, but it works only if revenues match and exceed the cost base. It is a high cost, high revenue strategy that demands teamwork and superior production on the part of all three sales forces, and its execution is tricky, as all silo-breaking strategies are.
Relationship management as the sales focus
Serving the small business market in a relationship-based model requires four basic skill sets:
- Customer needs assessment
- Pre-call planning
- Effective sales interaction, including closing skills
- Follow-up and customer relationship maintenance
These skills must be resident within all three sales forces for this strategy to succeed. The sales forces must be proficient not only in their own technical realm but also in effective needs-based sales execution, while working in a team environment to meet the full range of customer needs. The belief underlying this approach is that selling is, in fact, identifying and meeting the needs of the clients. The challenge is to ensure consistent, high quality execution through prescribing leading and lagging activities. An example of a set of leading activities includes:
- Requiring each sales force to conduct 10 quality sales calls per week
- Expecting 10 quality prospects identified each quarter
- Conducting a weekly meeting of the branch manager, business banker and financial consultant to ensure they coordinate their effort and fully serve the customers
All sales forces should use the same nomenclature and sales approach to their clients in order to facilitate consistency of the customer experience, a cornerstone in the success of relationship management.
The sales forces should work to identify the prospect's situation across the four major financial needs:
- Transaction (checking account, debit and credit card)
- Investment (including savings and CDs)
- Protection (insurance)
Together they have the requisite composite of technical expertise to address all these needs.
Business banking objectives
Relationship management for businesses can have many objectives. Typical examples include:
- Increase retention. The two top profit tiers of the business segment (the top 20% in profitability) are typically retained at 89% rate. It is helpful to calculate the value of every 1% improvement in the retention rate for the bank, and then goal it for gradual improvement with the ultimate goal of retaining 95% of the top business customers.
- Increase cross-sell. Deepening share of wallet works both for the customer and for the bank. Existing customers contribute often about 70% of all new sales, so focusing on the current business banking segment and mining it further is a bank imperative.
- Facilitate integration across business silos. Working effectively across retail, business and wealth management as suggested above is a key to both differentiation and customer profitability. Removing internal politics and increasing cross-silo incentives are two effective tactics to get there, and executive management expectations for such collaborations are essential.
An effective sales process calls for both leading and lagging indicators that are measured, tracked, reported, celebrated and rewarded. Examples of such indicators and other elements of the activities of all three sales forces are provided below.
- 10 calls per week minimum
- Work list jointly with branch manager
- 1 branch sales meeting per month
- 1 relationship management meeting (business banker, branch manager and private banker) per month
- Review business booked and pipeline
- Best producers review
- Upcoming promotions
- Share and review weekly pipeline reporting with branch managers
- Support branch and wealth management goals with referrals
- Send thank you emails and other recognition to retail and private bankers for their help
- Call 10 of the best customers (top 20% in profitability) per week
- Weekly joint calls with the business and private bankers
- 1 relationship management meeting per month (with the business banker and the private banker) to review topics as described above
- 5 loan applications per branch per month
- Joint ownership of business banking loan goals and application numbers at the branch
- Recognition of retail referrals from the business and private bankers
- Develop commercial and investment awareness with other key staff
- 5 sales per week
- 2 referrals to Retail per week
- Joint business calls with branch manager or business banker
- 1 relationship management meeting per month
- Support branch and business banking goals with referrals
- Recognition of wealth management referrals from branches and business bankers
Successful business bankers can grow their portfolio about 30% a year. Portfolio size is typically 60-90 relationships of the top tier customers for the business banker and 60-90 relationships for the second tier for the branch manager.
Some business bankers are better babysitters than hunters, and those should have a place in your organization as well, with adjusted portfolio growth expectations focused upon retention success and lowered rewards.
All goals should be NET growth goals to ensure that enough attention is paid to retention.
Incentives for portfolio transfers and mentoring should also be put in place so that superstar business bankers will have the motivation to groom junior officers and transfer some of their relationships to up-and-comers.
Incentives motivate behavior if the definition of success and the path to earning money are both clear and upfront. Effective business banking incentives often have the following characteristics:
- Significant upside potential. Some of your bankers should make more money than the CEO does, if they truly create value for the shareholders
- Do not cap incentives; your best performers will achieve more than either they or you ever dreamt of if you give them the sky as the limit
- Provide your business bankers with incentives to pass to their junior bankers some of the portfolio they own or offer them to head a new team of junior lenders as their portfolio grows beyond their individual capacity. The team approach is not only an effective way to offload overgrown portfolios, but it also facilitates mentoring and improved customer service
- Measure growth and results quarterly and reward quarterly so that major payoffs and new originations will not skew performance for the entire year
- A good portfolio load of top quartile customers for a business banker is 60-90 accounts. The branch manager can also handle a similar amount, thus covering the universe of high-value business customers in most branches
- Celebrate more than you think is necessary. Banks are short on fun, which is unfortunate and de-motivating. Business bankers enjoy recognition and celebration, including hokey parties, galas and trips, just like retail bankers do. Give them the trips they like (and their spouses too, so you'll have an advocate at home helping you motivate your business banker), recognize them in front of their peers and continue to celebrate their success even when you fear it will cause them to stop working so hard since they got a huge pat on the back. It will only motivate them to work harder.
There are several other tips that make a positive difference in the business banking initiative. While very tactical, they are also most effective.
- Change year-end for incentives and measurement to September 30. This simple change injects energy for a year-around effort vs. the slacking off during the holiday season, since it now is the first quarter for the incentive period and the measurement toward achieving annual goals.
- Aligning front and back office. Many banks are reluctant to burden the executive in charge of the production side with the back office associated with that line of business. However, by aligning the reporting relationship of the production side and the back office supporting it one can eliminate much of the natural tension between the two operations. A good sales executive need not be distracted by operational issues, but will certainly pay more attention to fixing them if the operation reports to them as well. Such a structure makes the executive in charge both the customer and the servicer of the function, which typically makes the support areas more responsive and efficient.
- Rank, rank, rank. Some banks shy away from ranking their individual sales people. Ranking is a simple yet highly effective tool to both motivate the stars to do even better and to show the laggards what's possible. The more frequent the ranking and the tracking needed to produce it, the better. Daily is ideal, and weekly is the minimum lag time that should be considered. Ranking by itself can enhance sales performance by up to 30%.
- Key metrics. Measuring is critical, but evaluating too many variables is confusing and dilutive. Key measures that are typically the drivers for this line of business are:
All metrics should be done weekly and vs. goal.
- Number of calls
- Number of appointments
- This week's anticipated close volume
- This month's anticipated close volume
- Recruitment. Recruiting year-round is the best practice for snagging the best performers in your market. Recruiting isn't an event but an on-going effort. Target key producers like you would target best prospects and recruit them with the same "sales cycle" in mind. In other words, it might take you years to recruit a superstar in your market, but you'll stand a better chance of getting that person if you have solicited them in the past. Further, the higher the rank of the recruiter, the more likely you are to succeed in your efforts. No matter how you do it, since the #1 success factor in business banking is the people you hire, this is an activity of paramount importance.
In sum, small business is an underserved, highly profitable market. You should get your fair share of that market. The best way to get there is by:
- Specifying your definition of the target market (how small is your small business target?)
- Mandating and continually reinforcing teamwork across retail, business and wealth management
- Understanding the overall profitability of your delivery approach in order to maximize revenues and reduce costs
- Identifying measurable behaviors and activities that will lead to desired results
- Reviewing key measures weekly in order to celebrate successes and share best practices
- Paying incentives quarterly with a target of at least 20% of base pay on average and NO CAPS
- Supplementing quarterly incentives with weekly, monthly, and annual recognition. While monetary incentives represent an essential component of compensation, the "atta-boys" are often more impactful at a fraction of the cost
All the above are techniques to consider using to grow your presence in this highly lucrative space.