Bankers: Build Your Own Small Business Loan Platform

Banks that grow revenues do it in spread or fees. To grow spread, increase your net interest margin, or grow earning assets while maintaining net interest margin. To grow fees, either increase your fee schedule or the activities that generate fees, or grow fee-based lines of business. 

Since 2007, banks have been challenged to grow revenues. And if the bank strategic planning sessions I attend are an indicator, bankers think small business account acquisition and growth will be a significant driver of revenues.

This presents a challenge. Many if not most small businesses are not “bankable”, in the lending sense of the word. I once offered this hypothetical situation to a senior lender: An owner of a three year old engineering firm wanted to expand. The expansion would take him into the red for the next two years and his seed capital, taken from his personal savings and a home equity loan was not enough to fund the expansion. He leased his office space. Would the senior lender make the loan? His response: “I’m glad you’re not one of my lenders.”

Would his reaction be different at your bank? Check out your current and recent past loan pipeline. How many non real-estate backed business loans did you make? Yet this hypothetical business is more typical of the businesses that will lead our economy forward. So to grow revenue, perhaps your bank should be a little more creative in getting capital to businesses of the future.

No risk appetite to do early stage business lending? There are alternatives to help that business get much needed capital to grow without plunking a risky loan on your balance sheet. Perhaps develop a small business lending marketplace with several options. One option could be balance sheet lending in the form of home equity loans or other similar avenues that fit your bank’s risk appetite. Think: Your Bank’s Small Business Capitalizer package.

If outside of your risk appetite, how about SBA lending? Ridgestone Bank, a $395 million in assets Wisconsin bank was ranked seventh in SBA 7(a) lending last year, generating between $20 – 25 million in gain on sale of loans per year. 

SBA loans not an option for our hypothetical engineering firm? How about a partnership with a peer to peer lending platform such as Prosper that can be co-branded with your financial institution? Prosper will pay an affiliate fee for each loan offered. OnDeck Capital, which specializes in business cash flow lending, will also affiliate with financial institutions, providing another avenue to fund our hypothetical engineering firm.

It’s not necessarily the affiliate fees that will move our revenue needle, but providing budding businesses within our communities the needed capital to succeed will build loyalty, deposit balances, and eventually “bankable” loans should these businesses succeed. Instead, we send them elsewhere, giving a potential competitor the opportunity to win these businesses’ relationships.

Imagine the “Your Bank” small business loan platform, with multiple opportunities for the local business person to help fund their growth. You start with the least expensive, such as “bankable” real-estate secured loans from your bank, and work through the other options such as SBA, OnDeck, Prosper, and even equity platforms such as Kickstarter. That would be a bank dedicated to small business capital formation, and growth, within their communities.

And a growing community usually leads to revenue growth at your bank.

Or you could stick to business as usual, and hope small businesses come your way. Your choice.

~ Jeff


Note: This article was previously published in the April 2015 issue of ABA Bank Marketing and Sales magazine in the Growing Revenue series.

De Novo Banks: Only Apply If You Intend to Matter

ABA President Frank Keating wrote an Op-Ed piece recently in The Hill entitled New jobs and new growth call for new banks. I don't believe it. A more accurate title should have been New jobs and new growth call for new businesses. His leap-of-faith assumption was that new banks are critical to new business formation. I'm skeptical.

Why? I don't think de novo banks are key players to business startup capital formation. Sure, if you cite studies that say these banks' loan books are predominantly small, as the FDIC measures them. But that is because de novo's are limited to making a loan to one borrower of 15% of their capital position. If a de novo starts with $15 million of capital, its largest possible lending relationship is $2.2 million. So the bank necessarily hunts for smaller relationships.

I'm also skeptical that small community banks in general are financing startup businesses. See the accompanying chart for the loan composition for all FDIC-insured banks and thrifts with less than $1 billion in total assets.

So, if a de novo bank has $100 million in total assets after its first year of operation, and it's loan portfolio was $70 million, then its business loan portfolio would be $9 million, if they achieved the community bank average. And that's all non real-estate loans to businesses, not necessarily startup or early stage businesses. Since I often hear credit people talk of getting three years of tax returns to get a loan decision, it makes me wonder how a 1 year old business can satisfy the requirement.

OnDeck Capital, not a bank, will lend to businesses with one year of operating history and only $100,000 of annual revenues. How do I know this? They tweeted it to me. That's right, they tweeted it.

I am doubtful many financial institutions would make such a loan.

To be fair, the loan portfolio composition in the above pie chart is from Call Reports, which categorize loans by collateral, not purpose. There may be small business loans in the residential category, because the business owner pledged his or her house as collateral for the loan. But I doubt OnDeck or similar neo-banks are requiring such collateral. And OnDeck and similar lenders are growing rapidly in the startup or early stage business financing landscape.

So, no, Mr. Keating, I don't think de novo banks, being run and regulated as they are currently, are critical to small business formation. Who wants a regulator to come in for their periodic exam cycle and ask "why did you make this loan"? What banker is running to capitalize an early stage business without real estate as collateral?

I don't know of many.

Do you think de novo banks are actively participating in startup or early stage business financing?

~ Jeff

Five Bank Marketing Leadership Takeaways from the ABA School of Bank Marketing Management

Lance Kessler introduced a new subject to the ABA School of Bank Marketing Management (SBMM) this week... Marketing Leadership.

A few months ago, he asked me and two other marketing experts to be on a panel for the class. I rejected the moniker "marketing expert". I may be an expert on a couple of topics, but marketing is not one of them. But I applaud Lance and the school for putting a finance and strategy wonk on the panel to get some outside perspectives on how the marketing function can be a significant contributor to the evolution of our respective banks from what we were to what we can be.

The class was a combination of lecture, questionnaire, and panel. So there was not a list of key takeaways displayed in a slick PowerPoint presentation. But I was taking notes on key items identified as critical takeaways for marketing leadership. Unfortunately, I left my notes back in Atlanta. So you, my readers, are stuck with my memory.

Key takeaways for marketing leadership:

1. Speak the language of the C-Suite. As much as marketers read and discuss the increased number of "impressions" they get from a witty Facebook post, your CFO could care less. If you talk social media impressions, you better know how that translates to greater unaided brand awareness, and ultimately more at-bats for your sales force that leads to greater balances than you would have otherwise achieved without the increased impressions. Tell the CEO/CFO how you will drive volume, increase margin, or drive down costs, and their ears will spike like a German Shepard that heard a rabbit shuffling in a thicket. Otherwise, check the marketing-speak at the door.

2. Take your CFO to lunch. But first take heed of (1) above. Building internal relationships will be critical to improving the marketer's influence on the future direction of your bank. Having stronger relationships with bank executives will give you the opportunity to demonstrate you do more than run the ad budget and branch merchandising. 

3.  Be analytical. Many if not most marketers got into the profession to leverage their creative nature. But the marketing function is evolving to be more analytical. Correlating organizational actions to outcomes based on statistical analysis gives the marketer far greater internal credibility than a discussion on how different primary colors impact the senses. You're going to have to trust me on this one.

4. Don't wait to be asked for help. It grates me when marketers focus on retail account acquisition when the bank's strategy is to grow commercial customers. I have not yet concluded that this is because it is within the marketer's comfort zone or that commercial bankers simply don't think they need marketing's help. Maybe a combination of both. If marketers' want to be an integral part of executing bank strategy, then go to the senior commercial banker and show them how marketing will be helping them achieve their objectives.

 5. Grow revenue. Position marketing expenditures as the fuel that grows organizational revenue. Having a well thought out campaign that shows multiple financial outcomes should result in funding. Delivering on the results improves your internal credibility and will make it easier to fund your next project, reducing the need to "whine for dollars" (i.e. can I puhleeezzzz have $50,000 for a direct mail campaign?).

Five is all that my memory will allow. There was a lot of great discussion, and marketers had excellent questions for panelists. 

What else is critical to marketing leadership?

~ Jeff

Community Banks and Our Retirement Problem

How can your financial institution stand out in a crowded marketplace? Why don't we play a critical role in solving the nation's retirement problem?

I recently read a report by the US Senate Committee on Health, Education, Labor and Pensions titled The Retirement Crisis and a Plan to Solve It, led by Senator Tom Harkin (D: Iowa). It called for the establishment of USA Retirement Funds to re-establish pension funds as part of the three-legged stool of social security, pension, and personal savings.

Although it calls for USA Retirement Funds to be private, it used the typical keywords of "transparency, accountability, etc." that reads... government controlled or heavily regulated. The current methods proposed to fix social security such as increase retirement ages, change cost of living calculations, make wealthy people subsidize it, should give us pause that putting more resources and control in the hands of government flies in the face of our unique American independent streak. But how do we overcome the retirement problem?

First, I agree we have a problem. If a 35 year old earns the average household income in the country, then they will need over $1 million in savings to maintain their standard of living for a 25 year retirement (see table). This equates to saving $17,000 per year, every year, until this family reaches 67. I think this family needs a trusted advisor to tell them this, and map their path to get to their hoped-for retirement.

So how can this family save $17,000 of a $50,000 annual income? Well, part of it can be accomplished through the now-typical employer 401(k) plan, where the employer matches some form of employee savings. 

Also, Uncle Sam picks up part of the tab. The employee can save all of the needed savings tax deferred. If the family is in the 15% marginal rate, then Uncle Sam picks up the equivalent of 15% of those contributions.

The Harkin's report identified four principles of reform:

1. The Retirement System Should Be Universal and Automatic. I agree it should be automatic. Universal sounds like Big Brother is telling you what to do. This is a continuing theme with the US Government... Americans are too stupid to care for themselves and need us (i.e. the Government). 

2. The Retirement System Should Give People Certainty. I think peace of mind would be better than certainty. Many great US companies went down the tubes as a result of defined benefit pension plans.

3. Retirement is Shared Responsibility. The US Government already shares with Social Security. The only other sharing (i.e. controlling) they should do is enforce laws against the charlatans that plague the investment community.

4. Retirement Assets Should Be Pooled and Professionally Managed. Well, we call that mutual funds, don't we? But I think Harkins' group is suggesting more centralized control in defining "professionally managed".

I don't disagree with the retirement challenge. I also think saving should be automatic. But I disagree with greater control of a national pension system in Washington. Here is where I think community banks, banded together through associations such as the ABA or ICBA, can play a critical role in solving our problem.

There are countless examples of organizations coming together for a cause. The Rotary Foundation strives to eradicate polio. Feed the Children, well, is self explanatory. Why can't community financial institutions band together to help customers prepare for retirement?

I'm not talking about our frequently half-hearted attempt at retail investment sales. I'm talking about a national program, established through our associations, that vets money managers like associations now vet "approved" vendors, and establishes low cost investment option packages that customers can select based on their risk appetite.

They can range in risk from mostly all stock funds, to mostly all bank CDs. The key will be to automatically move the money monthly from customers checking account into a tax advantaged IRA-type account. I'm not suggesting receiving no compensation for it. But keep fees low, such as 25-50 bps. Negotiations with money managers can partially offset these fees, since nationally community banks will be placing large sums of money into these funds. The money will be portable, and owned by customers, and not the federal government. I think we can establish a national program that meets the Senate committee's four principles, without it morphing into another federal bureaucracy to be tinkered with by future elected officials, as is the case with the Social Security system.

Imagine, a middle class family, through their local financial institution, putting away $250/month into such a program, in addition to their 401(k) plans at work. We can play a positive role in helping our customers enjoy their retirement years, and achieve piece of mind.

Should we band together and embrace the retirement cause?

~ Jeff

Banks Versus Credit Unions: Much Ado About Nothing

Credit Unions don't pay taxes! They're trying to steal our business customers!

I often quote Sun Tzu from his over 2,000 year old book, The Art of War. One of my favorites: "If you know the enemy and know yourself, you need not fear the result of a hundred battles." The frequent and resource sapping waling about credit unions tells me that banks don't know their enemies, umm, competition.

Last year I attended the CUNA Government Affairs Conference (GAC). By the way, it was the trade show beyond all trade shows. Clearly credit unions put heavy resources into lobbying. So I will give banks that point. We had a booth, and my company's tagline is "helping banks perform better". We like the alliteration, and use the word "banks" in a generic way, like Kleenex.

But one would think we would hear about it from CU executives and trustees. And we did hear some quips. But one CEO opined that the rift between banks and CUs was greatly exaggerated by trade associations to keep the masses engaged. I believe her.

Why? Take my home state, Pennsylvania, for example. We do business with both banks and CUs in the state. Admittedly, mostly banks. And we hear plenty about credit unions in strategy sessions. But I pulled deposit market share data for the state, and the results are telling (see table).

Credit Unions boast a 9.5% deposit market share in the state, or $33 billion out of $345 billion total. There are 497 credit unions headquartered in PA, but 447 of them are less than $100 million in deposits (ok, shares for you CU technocrats). All PA CUs combined have the same in-state deposits as Wells Fargo, and half that of PNC. There are only two CUs in the state's top 20 in deposit market share.

Does the banking industry dedicate disproportionate strategic decision-making, marketing and lobbying resources fending off CU competition? Because when I look at the above table, it's clear where a community bank's strategic focus should be. And it shouldn't be on the Locomotive & Control Employees FCU in Erie.

What is this table telling you?

~ Jeff

Your Branch in Your Pocket

I am attending the annual ABA Marketing Conference, where I spoke on how marketing can focus efforts on improving profitability and moving their bank forward.

The program had plenty of learning opportunities. One was the best attended general session in conference history, Brett King on the future of banking. Brett is the author of Bank 2.0, Branch Today, Gone Tomorrow, and the forthcoming Bank 3.0 and is what I would term an industry futurist, predicting and staying ahead of where he perceives the industry is going.

In the below clip, Brett speaks of the friction in our system that is slowing our adoption of change. He used the example of Compliance friction, that often thwarts efforts for online account opening and other technology adaptations. He makes the point, quite correctly in my opinion, that there is an irreversible trend in our industry away from customers coming to our branch, and calling us on the phone.

That puts a premium on building our bank's team on customer and prospect outreach, visiting them on their turf, with convenient technologies. Because if we wait for them to come to us, they're likely to go somewhere else.

Are you trying to reverse the trend and encourage customers to come to your branch? If not, how do you reach them?

~ Jeff

Customer Profitabilty in Banking: Do you do it?

According to an ABA survey (see table), I doubt it.

I am speaking at the upcoming ABA Marketing Conference next week. Well, maybe not as much speaking as appearing. Mary Beth Sullivan and I are appearing as guests of Susquehanna Bank's Susan Bergen, in an Oprah like talk show format. I suggested Saturday Night Live's Point-Counterpoint format, but it was rejected. To appease my objection to appearing on Oprah, they orchestrated my entrance to a Pitbull song. I did not know who Pitbull was.

Our discussion will revolve around an ABA survey done this summer regarding actions banks have taken, or intend to take, to improve profitability. One question that didn't make the cut in the interest of time, was the one represented in this post's table: Does everyone in management know profitable versus unprofitable customers the bank serves today?

If you were in the corporate headquarters of McDonald's, you would be alarmed at the results. If you are in banking... not so much alarmed as happy that so many others remain as in the dark as you. I think lack of knowledge of profitable customers comes from three things:

1. Getting such a number requires investment in resources your FI currently does not have:

2. The regulators don't require the information; and

3. Even if you had the information, what would you do about it anyway?

All are related. FIs earn money on the spread. In order to create spread, FIs focus on creating a basket of the highest yielding assets within risk parameters, while funding them with a basket of the lowest costing funding. Why do you need some fancy profitability information to tell you that?

Problem: Various assets and liabilities take differing amount of operating expenses to accumulate. Also, based on risk, different assets and liabilities require different equity allocations. If your attitude is that the "incremental" cost of chasing this business or that is minimal, you may very well be mis-allocating your precious resources to low profit customers.

For example, we have a client that served the bar/restaurant business in a college town. These establishments brought decent balances to the bank. The problem: we found employees that spent half their day sorting through the bag-fulls of cash delivered every day. Could the bank allocate that operating expense to a campaign to acquire and serve higher profit customers? Without determining the profitability of those customers, we would never know about the opportunity lost.

I think it's time to change the paradigm from acquiring the highest yielding assets and the lowest costing liabilities based solely on interest earned or cost of funds. We should instead focus on acquiring and serving baskets of the highest profit customers. Doing so will efficiently allocate resources, improve our profitability, and enhance our FIs value.

~ Jeff

Banking: Data hungry and decision challenged?

I had lunch today with a client's regional manager. We discussed many things, but one thing he told me stuck... they used average balances to determine their highest priority customers. Many of my comrades in the community FI blogosphere feed on data, some good, some bad. But using average customer balances to determine your best customers is unfortunately very common... bad use of data.

Similar to the above, a client of ours requested that my firm identify their top 100 customers by coterminous spread. We distributed the list. They reviewed it quizzically. The senior management team did not know half of the customers on the list. Their perception of their best customers also revolved around balances.

Financial institutions have in their possession more information about their customers than any other industry, with the possible exception of medical. How do we collect it, parse it, and use it? My guess is we don't do a very good job of harnessing this information to identify top customers, profitable products, or strategic opportunities.

I teach at the ABA School of Bank Marketing Management. One of my courses is Profitability & Strategic Issues. I distribute a questionnaire to determine what information students' FIs use to make strategic decisions. The below chart identifies their response to one of the questions.

Forty three percent of respondents reported that their institution did not use marketing data for strategic planning. Another 11% reported using it sometimes. This is astounding but consistent with past years' responses. Marketing data about customers, products, and markets should be critical to strategic decisions. Yet frequently, this data remains within the confines of the Marketing Department. Trapped as bits and bytes in the FIs MCIF or similar system, only to be busted loose to help with the next product promotion.

Aside from information trapped within our core processing and ancillary systems, there is ample data available for strategic decision making in the public domain and primary research conducted by industry professionals. Are we identifying the necessary data points to make important decisions?

For example, if considering branching, one would think the key data points are as follows: Are their enough of the types of customers within a certain community that we typically target and have success with? How many competitors are in the community and what is their branch size? Are branch deposits growing or declining in the community? Are businesses growing and in what industries? Are new housing developments on the horizon and are average home prices increasing? Are branch sites available in locations with adequate traffic?

Most if not all of the data mentioned above is either publicly available or can be obtained from private sources such as local realtors and from the FIs own marketing databases. But if your experience is similar to mine, you understand many branch decisions are made based on anecdotal data or because somebody we know owns the prospective branch property.

As succeeding in financial services becomes more challenging, making informed strategic decisions will be critical to our success. The days of throwing grass into the air to determine wind direction is no longer adequate. Important information need not be out of our reach. Much can be obtained freely via public sources, or can be mined from our own systems. When making decisions with long-term impact, FIs must identify the information needed to make informed decisions and collect and analyze it. Successful execution of the strategies to lead us into a successful future depend on it.

How does your FI use data to make strategic decisions?

~ Jeff

An open letter to bank marketers...

Change is difficult. Consider the difficulty in changing our own behaviors. A friend of mine that runs fitness clubs on Florida’s Gold Coast told me that it can be more effective to increase weight training in my workout regiment if I want to shed some pounds because muscle burns calories. This required me to rethink and change my workout routine. The end result: I decreased my cardio workout and increased weight training five measly minutes.

I did not doubt my friend’s advice. I had difficulty changing my routine, a routine that is totally under my control. Imagine changing the culture of a whole organization. To my bank (thrift and credit union) marketing friends, I throw this challenge to you.

The talent of the individuals facing me these past two days at the ABA School of Bank Marketing Management in Dallas was impressive. Collectively, they have intelligence, education, intuition, and the ability to think strategically. Marketers, in my experience, have demonstrated a greater acceptance of the need for cultural change in banking.

But there is a challenge to them. In many instances, they have been marginalized in their institution; relegated to running the ad budget or organizing the next customer mixer. Many, if not most bank employees, think about the next loan deal, or the next CD promotion. Marketers are the proverbial right brain thinkers in a left brain world.

But banking is changing rapidly. The need to develop a vision and a strategy to support achieving that vision is greater today than at any time since post WWII. If our bank is simply an efficient processor of debits and credits, are we needed? There are plenty of other financial institutions to fill that role. Each bank must assess where it stands in its communities and among its customers. Once completed, they need to identify the type of bank they want to be and set about getting there.

Marketing is in a unique position to play a critical role in evolving our industry and be the lynchpin for cultural change (see link to Susan Heathfield’s blog on organizational cultural change below). The personality of Marketing leaders are typically well-suited for strategic thinking. They have their fingers on the data about the bank’s customer base, markets, and prospects that is critical to creating strategy. They have the skills to design service standards that are truly superior, to implement training that goes beyond compliance, and to demonstrate to employees how to execute on those standards.

But how should a bank marketer implement cultural change in an industry that has not yet embraced it? How should one convince a CEO that the long-term relevance of the bank is dependent on cultural change and not simply minor tweaks to business as usual?

I don’t think this will be easy. But I find the marketing function to be in a unique position to start the process of cultural change. Marketers intuitively recognize the need for change, have the ability to pull back the camera and think strategically, and have the ideas to show a path to successful change and lead their banks back to relevance. Take the initiative.

-Jeff

http://tinyurl.com/2syu3m