How a Data-Driven Sales Methodology Can Help Banks Grow

Written by

Two issues are challenging banks to capitalize on any sales momentum and risk sales inertia. Without data and analytics, banks will struggle to scale sales methodology and grow revenue — even if they have an effective sales methodology and highly trained team in place.

Current market dynamics are creating a new set of obstacles for financial institutions to meet commercial revenue targets in the face of economic uncertainty and deteriorating industries and sub-segments. In addition, frontline sales resources at banks have become consumed by servicing and monitoring activities as institutions refocused relationship managers to portfolio management during the coronavirus pandemic

While banks might experience short-term growth, they will struggle to find long-term success given the absence of a focused, cost-effective and scalable process aimed at the ideal, targeted customer. That’s because the traditional, historical methods for selling are largely ineffective in today’s environment. Commercial banking sales have been rooted in selling through relationships and networking with “centers of influence,” such as accountants or attorneys. This is challenging approach in today’s climate because of a lack of a methodical plan to expand, repopulate, curate and filter the network on an ongoing basis to insure ample and effective referrals. The financial results prove this out with historically low win rates, sporadic cross-sale success and — in many cases — heightened levels of sales personnel attrition.

Without a standardized methodology, banks are generally unable to unlock the magnitude of their organization. Sales efforts are not repeatable and must be reinvented with each new sale, proving both costly and ineffective in business development. Without scalability, as banks grow inorganically, these challenges compounded and complicate further growth.

Banks have historically failed to leverage their disparate data sources to drive the methodology and optimize execution of sales plans. It is nearly impossible for bankers to identify and prioritize relationships in a meaningful way, given how data is typically stored in disparate data houses across multiple non-integrated systems.

The lack of coordination around data means that banks typically fail to effectively, easily and accurately align product revenue, whether interest or fee income, to an individual borrower or relationship. Executives face a challenge in planning and segmenting holistic, high-opportunity sales calls through proper segmentation and targeted sales activities without a clear understanding of the 360-degree profitability view.

Why is this important? Now more than ever, banks require a new scalable method to effectively identify, pursue, and sell to targeted existing and new prospective clients who offer new opportunities within optimal, performing industry segments.

A data-driven sales model is the key to scalability. Scalability is a sought-after state of operations, and provides the foundation for rapid, cost-effective growth. At the core of scalability is repeatability — the ease with which results can be reproduced even as bank operations change and adapt to varying conditions. Scalability is often made possible through technology enablement while leveraging automation.

Banks have explored scalability through technology and tools such as loan origination systems, base level CRM systems, and integrated third-party tools to automate the credit underwriting and scoring processes. But this alone does not create or generate scalability. Scalability is constructed by standardized, streamlined policies and procedures, and is evidenced by its repeatability and simplicity.

Scalable organizations benefit from economies of scale, processing greater volumes with fewer resources. The direct result of top line revenue growth is increased net profits and reduced operating expenses. A bank’s DNA must be central to the intersection of sales methodology and technology to drive support and insight, leading to greater scalability and accelerated growth.

In our view, banks should operate with a delivery model that leverages data and analytics, provides scalability and identifies the following: advanced customer segmentation, early-stage opportunity identification, early detection of significant cross sell opportunities and pre-defined sales targets supported by actionable and tactical workplans. With the right tool, banks also unify the sales management process and drive user adoption and experience through customized automated dashboards and reporting, accelerating success and driving sales accountability and transparency. With this approach, banks can manage relationship managers’ sales activity in ways that create scalable, sustainable sales success and ultimately achieve higher growth rates.

Keeping Optimism Alive

Written by

We are all in survival mode.

While the health and safety of one’s constituents takes top billing, keeping a business relevant — and viable — during these times should top the shortlist of any board’s agenda.

And while nobody has a compass to navigate these times, we at least have the means to aggregate an incredible amount of information and insight, vis-a-vis BankBEYOND.

With many fatigued from virtual conferences, we challenged ourselves to bring concise, novel ideas to a hugely influential audience. We followed Steve Jobs’ principle of design, working backward from the user’s experience to present board-level issues in new ways on BankDirector.com.

Our North Star in crafting the BankBEYOND agenda and experience: Respecting viewers’ time while surfacing issues that are both specific and relevant to their interests and responsibilities. Hence, our focus on issues that are strategic, risky and potentially expensive.

Since March, the industry has witnessed — and undergone — a rapid evolution of financial services. As a result, officers and directors must now assess the potential of their bank’s business in a post Covid-19 world. Growing a bank prudently and profitably took center stage at our Acquire or Be Acquired Conference in January; today, I suspect many boards and executives today emphasize efficiency to protect their franchise’s value. Indeed, a 50% efficiency ratio used to be the stretch goal for many banks; now, that might be closer to 35%.

Banks across the country are grappling with the tough choices they will need to make to rapidly bring those ratios down while delivering consistent service across physical and digital channels. We appreciate how so many institutions quickly embraced new technologies to solve specific business challenges, like the rollout of the Small Business Administration’s Paycheck Protection Program. In recent merger announcements, the drive to leverage technologies proved a primary catalyst for striking a deal. In fact, that’s where many efficiency gains come from.

However, boards realize that many of these technology additions can be expensive, which is why economies of scale becomes critical. We have seen how mergers can become the most expeditious way to generate meaningful economies of scale. But of course, much of the bank space is stuck in neutral at the moment when it comes to bank M&A.

We know that BankBEYOND’s audience has the responsibility for finding answers, rather than identifying barriers. We are tackling issues like:

  • Setting high-priority, short-term goals;
  • Keeping optimism and a sense of purpose alive; and
  • Weaving the best of the past eight months into everything the bank does going forward.

These are only three of the topics we’ll address with the help of various advisors and executives. Unlike a digital conference, with specific dates and watch times, we release families of videos and presentations at 8 a.m. CST. Beginning Monday, Nov. 9, we explore strategic and governance issues. The next day, we add information geared to the audit committee and risk committee. We conclude on Wednesday, Nov. 11, by sharing content developed for the compensation and nominating/governance committees.

BankBEYOND tees up the topics that allow for proactive — not reactive — change. By placing a premium on complex issues that all directors must address, we strengthen the knowledge of a bank’s board. And we rarely find a strong board at anything but a strong bank.

Four Takeaways from One of the Biggest Events in Banking

Written by

One of the marquee events in banking has concluded, and what promises to be an interesting and important year for many institutions is underway.

More than 1,300 attendees, including 800-plus bankers, assembled in Phoenix for Bank Director’s 2020 Acquire or Be Acquired Conference. We heard from investment bankers, attorneys, accountants, fintechs, investors and — yes, other bankers — about the outlook for growth and change in the industry. There was something for everyone.

To that end, I asked my editorial colleagues to share with me their biggest takeaways from the conference. Here’s what we came away with.

 

Mergers Get Political

The discussions I found to be the most surprising were executives’ concerns about political regime change, especially as it relates to their decisions around M&A or remaining independent.

“The elephant in the room is that there are two radicals running for president right now,” says Dory Wiley, CEO of Commerce Street Capital. And it’s not just investment bankers who see risk in the potential political change.

Executives of both Lafayette, Louisiana-based IBERIABANK Corp. and Memphis, Tennessee-based First Horizon National Corp. cited political uncertainty on the horizon in their motivations to combine through a merger of equals, which was announced in November 2019. Daryl Byrd, IBERIA’s current president and CEO, says the $31.7 billion bank saw the potential for political risk evolving into economic risk at a time when competition from the biggest banks for customers and deposits remains high. First Horizon saw emerging regulatory risk if the political tides turned.

“Generally speaking, we like a fair and balanced regulatory environment. We knew with the upcoming election that the regulatory would, at best, stay the same, but that it could get worse. So that was a consideration,” says BJ Losch, CFO at $43.3 billion First Horizon.

The mention of these concerns — and the magnitude of the response — has interesting implications. Banks operate in all types of environments, and many elements are outside of executives’ control. The industry has demonstrated resilience and flexibility before, during and after the financial crisis. What are the remaining 5,000-plus banks supposed to do in the face of the impending presidential election?

Kiah Lau Haslett, managing editor

 

Tipping the Scales

The most remarkable observation I had is how important scale has become in the banking industry. It was clear from comments at the conference that the large banks have been taking deposit market share away from the smaller banks, and that is partly a function of size and partly a function of technology. But the two seem to be inexorably connected — it’s the scale that allows those big banks to afford the technology that enables them to dominate the national deposit market.

The recent flurry of MOEs seem inspired partially by the perceived need to create enough scale to afford the technology investments needed to compete in the future. There also seems to be evidence that large banks have become more profitable than smaller banks (although I’m waiting for Bank Director’s 2020 Bank Performance Scorecard to confirm that), and that advantage may be in part because they have become more efficient and driven down costs. JPMorgan Chase & Co. had an overhead ratio (which is basically the same thing as an efficiency ratio) of 55% in 2019, down from 57% in 2018 — that’s better than many banks a 10th of its size. And I bet they continue to drive that ratio even lower in the years ahead because they know they have to.

We may be entering the Era of Big Banks, driven by scale, MOEs and technology. It will be interesting to watch.

Jack Milligan, editor in chief

 

The Attributes of a Trusted Partner

A growing number of technology companies have been founded to serve the banking industry. Not all of them have what it takes to satisfy bankers. What specific attributes is a bank looking for in a partner?

This was the question that inspired a session featuring Erin Simpson, EVP and chief risk officer of Little Rock, Arkansas-based Encore Bank, and Ronny Chapman, president of Compliance Systems.

One of the most important attributes, according to Simpson, is financial sustainability. A bank doesn’t want a partner that may or may not be around in a year or two. Flexibility and configurability are also desirable. “We want partners that will work with us,” says Simpson. “We want partners that are willing to tailor their solutions to our needs.”

A comprehensive product offering is another attribute identified by Simpson. As is the proven viability of products. “We don’t want to be your beta bank,” she says of the $247 million institution. “We don’t want you to be testing your products on us. We want a partner that knows more than we do.”

In short, given the growing role of technology in banking, articulating a defined list of desirable attributes for third-party tech vendors seems like a valuable exercise.

John J. Maxfield, executive editor

 

Learning the Language

“We have to be agile. We have to be nimble.”

That insight was shared by Brent Beardall, the CEO of $16.4 billion asset Washington Federal in Seattle, on the main stage during Day 2.

Since the financial crisis, Beardall has transformed his bank from tech-phobic to more tech-centric. And his thoughts sum up the strategic imperative faced by banks seeking to survive and thrive in today’s challenging marketplace.

In response, boards and executive teams need to learn to speak the language. Technology is no longer an issue that can be delegated to the IT department; it impacts the entire bank.

Talent is needed to drive these strategies forward. Presenters in a session on artificial intelligence asked attendees, how many banks have a chief digital officer? Data scientists? Few bankers raised their hands, identifying a talent gap that aligns with the results of Bank Director’s 2019 Technology Survey.

And change promises to be a constant. “If we go back five years and look back to what we thought this point in time will look like, we would’ve been so wrong,” said Frank Sorrentino III in another panel discussion. Sorrentino is CEO of ConnectOne Bancorp, a $6.2 billion asset bank based in Englewood Cliffs, New Jersey. “The future is still being written.”

Emily McCormick, vice president of research

The Case for Rating Community Banks Investment Grade

Written by


investment-9-18-18.pngFor years, legacy rating agency thinking held that community banks could not be rated investment grade. They were too small, the thinking went, and therefore could not compete with scale-advantaged larger banks. Moreover, this structural deficiency likely made community banks riskier, as they were naturally subject to adverse selection in terms of loan originations.

All of this is intuitive. But it doesn’t stand up to further scrutiny.

If we consider the history of bank failures, we see that very small banks and very large banks are disproportionately represented. Meanwhile, well-run community banks, with long-standing ties to local markets, core deposit funding and well diversified risks have a long history of successfully riding out credit cycles. That piqued our interest. But we still needed to get over the hump of competitiveness. How could a community bank’s cost structure—the basis for pricing assets and liabilities—match the efficiency of the largest banks? We took a closer look.

Started with funding costs. Turns out that government guaranteed deposit funding—available to all FDIC-insured institutions, large and small, is a great equalizer. In fact, most community banks derive substantial amounts of their funding via core deposits, giving them an advantage over the largest banks that require substantial sums of more expensive market-sourced funding.

What about operating costs? Surely, the largest banks enjoy substantial economies of scale relative to community banks. That may be true, especially in terms of being able to absorb things like the significant increases in regulatory reporting and compliance costs. What we found interesting, however, is that the efficiency ratios of community banks in many cases compare favorably to those of the larger banks. Our research came up with two explanatory considerations. First, according to the FDIC, the benefits of economies of scale are realized with as little as $100 million in assets, and second, among larger banks, the benefits of scale are typically offset by the added costs brought on by complexity and administrative friction. This serves as a reminder that, in terms of competitiveness, banking, especially small to mid-sized commercial banking, is a local scale business, not a national (or international) one.

Now, you might point out, broader and more sophisticated product offerings must tip the scale in favor of larger banks. And there must be some benefit to the substantial technology and marketing spend of the larger banks. We wouldn’t disagree. But we also believe community banks can punch back with value of their own created out of local market knowledge and relationships as well as superior responsiveness. And most small businesses really don’t demand a sophisticated product set, and marketing spend generally creates value in consumer financial services, much of which left community banking some time ago.

So, what about the risk side of the equation? Larger banks by definition will have greater spread-of-risk than community banks, where risks are more concentrated, certainly in terms of geography, and quite possibly loan type (most notably CRE). What our research found was that through cycles, community banks’ loss rates per loan type were typically better than those of larger banks. In other words, no evidence of adverse selection, and a realization that most markets in the U.S. are relatively well diversified economically.

This is not to say that all community banks are investment grade. Well-run community banks can be rated investment grade. Therein lies an essential element of our rating determination—an in-depth due diligence session with senior management. Here, we look to understand the framework and priorities for managing risk, key aspects of growth strategies, and the rationale underpinning capital and liquidity structure. This is a story sector, and the management evaluation is critical to our rating outcome.

Our research suggests that well-run community banks can compete successfully with larger banks, and generate solid fundamental performance through the cycle. We rated our first community bank in 2012, and today that figure stands at 115 and counting, testament that our approach has resonated with investors and depositors alike.

Top Five Ways Mergers Will Achieve the Needed Economies of Scale (Because Most Don’t)

Written by


Achieving economies of scale is one of the key strategic reasons behind a bank merger. The thinking is that a larger institution can spread costs such as investments and regulatory burdens across a larger customer and revenue base. Plus, for banks with $10 billion and more in assets, a merger offsets the lower interchange revenue from the Durbin Amendment and higher regulatory requirements.

Data from the Cornerstone Performance Report shows that the necessary improvements to productivity often fall short of the economies of scale that make a merged bank more competitive. In the report, Cornerstone compares “assets per employee” for banks of two broad asset size ranges.

  Banks $5B-$10B Banks $10B-$20B
  Peer Median 75th Percentile Peer Median 75th Percentile
Assets per employee $4,433,255 $5,500,897 $5,642,144 $7,229,156
Return on average assets 0.80% 1.07% 0.99% 1.11%

A median performer in the $5 billion to $10 billion group needs to achieve a 24 percent productivity improvement to become a 75th percentile performer and a 27 percent productivity increase to be a median performer once it breaks the $10 billion barrier. However, most merger cost savings usually target 20 to 30 percent of expenses—with 50 to 60 percent of those savings being people-related. In other words, a bank’s cost-save targets may enable it to achieve 75th percentile productivity temporarily but it will revert back to the “average” as the bank grows. Clearly, banks do not pursue mergers to sustain mediocrity. A bank that is a median performer today in the $10 billion to $20 billion asset category would need to improve by 63 percent to achieve and sustain high productivity performance.

So, how can banks turbo-charge their merger efforts to achieve high-performer economies of scale and productivity improvements? Here are five ways:

  1. Ensure that the bank is performing an integration and not just a conversion. The terms “integration” and “conversion” are often used interchangeably. However, they are very different. Integration includes conversion (i.e., getting all customers and employees on common technology platforms) and a rigorous evaluation and streamlining of the bank’s operating processes and organization. Conversions do contribute to productivity saves and scale but not to the extent that integration does. In the race to convert their core, Internet banking and other systems, many banks will not perform any significant redesign. Serial acquirers often fall into this trap as they want to convert quickly and move on to the next deal. Nine times out of 10, the serial acquirer’s processes are geared to a much smaller institution and eventually break down, requiring the bank to stop and truly integrate.
  2. Ensure that metrics related to scale benefits (both bank-wide and in key functions) are included in any merger reporting. Management and board reporting typically include progress based on achieving milestones, which usually just measures conversion priority. Tracking benefits such as productivity improvements is as important as integration costs and cost-saves. Managing conversion risk is a critical responsibility for the board and management, but so is managing the strategic risks of not being competitive because the bank is less productive than its competitors.
  3. Engage and empower younger managers in the integration process. Banks that pursue true integration often fall short of full success due to an inability to change. Senior managers 1) feel comfortable with what they do and are reluctant to change, and 2) want to change but don’t know how (i.e., don’t know what they don’t know). This occurs most often when a transaction or series of transactions increases the bank’s assets by 30 to 50 percent in a short period of time—when real change is required. Fresh perspectives in the form of newer and younger managers who are free of a “we’ve always done it that way” mindset can help drive new ways to do business that better leverage technology and/or streamline processes.
  4. Discourage “Phase 2.” Banks sometimes approach productivity savings by planning a Phase 2 after conversion to optimize processes, better leverage technology, and so forth. Phase 2 almost never happens, especially with serial acquirers because other priorities or opportunities arise, causing banks to leave money on the table. If the bank insists on a Phase 2, ensure the initiative is continually monitored and measured as part of ongoing merger reporting.
  5. Integrate to what the bank will look like in the future—not just what it will look like after a transaction. Determine the performance levels (and metrics) for a much larger institution and plan the integration efforts to achieve them.