As Mom always said - "Don't be a victim." While harsh, the often used comment was empowering. Events don't happen in isolation and when things don't go your way, you can bellyache about it or you can be part of the solution. Victims look to blame, point fingers and make excuses. People or organizations that control their destiny, seek to change their environment. However, some banks may be acting like victims when it comes to loan pricing.
If you fall into this category, you have 3 choices. One, you can architect your bank to compete on price. This can be done by focusing on deposit pricing, controlling growth, becoming more efficient, boosting fee income or increasing leverage. Two, your bank can differentiate itself on service. This allows you to command a higher margin in the industry despite competition. Increasing marketing spend, building a cohesive brand image, turbo-charging training and creating a sales culture that positions your bank more as a consultant than a commodity, are all ways to do this.
While we have said these points before, the difference now is that as lenders raise underwriting standards and growth slows, it is important not to let service suffer. In this market, it is easier to differentiate yourself and grab this opportunity. Does your bank still provide quick turn around time on credit decisions? Can the bank offer a 15Y fixed rate loan? Can the bank advise clients on when to accept floors in loans or pay up front fees, in exchange for a lower rate?
Instead of competing on a geographic focus, why not switch to one of knowledge? Many banks pick an industry specialty in order to extract value. Getting to know the hospitality sector, cash flow lending, 1031 exchanges, home improvement loans or franchisee lending, are all areas where banks can differentiate themselves on knowledge. Community banks hold themselves out to be flat organizations and pride themselves on flexibility. If this is true and your bank creates value, then perhaps you should be charging more for it. However, if customer service is just talk, then it may be time to pick another business model. To thrive in banking over the next 3Ys, it is clear that bank management is going to have to be on top of their game.
Banks must revise their 2008 plan to take into account increasing credit issues, rising risk and lower customer profitability. It is now more important than ever to understand how much risk your bank will take for quality clients you want to retain. This means having a client acquisition plan and executing against that plan. Banks have to know who their most profitable customers are and focus on what other profitability can be obtained from those customers.
Getting your staff the training needed to negotiate loan pricing with a customer is a good idea. In this market, there is still intense competition for some customers and certain loan types. Many of these opportunities may be worth pursuing, but many more are not. Having the tools to understand the value in a loan, within the overall portfolio and based on customer profitability can make a world of difference.
Banks should have a solid plan to create an organization that can compete on price or that is structured to extract value through defined customer service. Lest you think we forgot, of course, the third alternative is to change nothing. In that case, the choice is to ride the winds of change buffet your margins. As mom would say, this is a sure path to end up a victim.