Skip to Main Content
PCBB Banc Investment Daily February 05, 2014
Banc Investment Daily
February 05, 2014

Top Secret - Do Not Share Inside Information

There was an era not so long ago when banks gave away toasters or even a jumper cable set with an official bank logo (think of Bank X when you are stranded by the side of the road with a dead battery!). These gifts were incentives for customers to open an account at the bank. The cost of the "gift" was more than offset the by value of the deposits received, which the bank could then lend out and generate earnings. So by putting a small amount of money in the customer's pocket, the bank benefitted over all.
Most bankers would not consider walking across the street into a competitor's lobby, leave $1,000 on the president's desk and say - use this to undercut me on the next loan deal. I just wanted to give you a little present to give you an incentive to kick me in the seat of my pants. We imagine you think we have lost our minds with the absurdity of this scenario, but in reality, many community banks are doing just this. Banks outsource many operations and there is no criticism from us on that. We are a big fan of using the limited resources of your bank to grow your business with your local knowledge and expertise, rather than to perform operations that can be more efficiently accomplished outside the bank.
However, banks should be very careful of the vendors they use. We've sung this song before but want to explore a bit more the danger of outsourcing to organizations that offer small business clients loans or take deposits. The simple math in this situation is that it is just a really bad idea to put money in your competitor's pocket so it is time to stop.
True also, management and board concerns should go deeper. Consider the information they will gather about you, your clients, your strengths and weaknesses. What also about conflicts of interest? Consider how odd it is for the bond brokerage firm that sold you the bonds in the first place to then manage your ALM and price the value of your bonds on the back end. Wouldn't it always seem to make sense that they would recommend increasing the size of your portfolio or selling bonds to "monetize" something? This is such an obvious conflict of interest that we are really surprised regulators even allow it or that bankers even want it. Apathy and simplicity are two likely reasons, but they are not good ones anymore given such conflicts and extreme market competition for loans and other services.
Now take a moment to think about how your bank calculates the profitability of loans or deposits. Is this outsourced too, are you using software, are you sharing information with another bank here or a vendor that doesn't compete with you for your very same customers? This is a core profit driver and yet some banks still send data to other competitor banks that take deposit or make loans - now they can see how you price your loans, as they decide when and how to compete.
Finally, consider loan hedging. Here again it is important to be 100% sure the firm you are talking to isn't another bank that could come into your market and take your best customers. It is highly risky to share your underwriting documents with another bank because when you think about it, these are the keys to the kingdom and they can now see not only your process, but also your rate structure. Chances are that your hedge customer is one of your most valuable, a larger credit with quality collateral.
It doesn't make sense to share information with any competitor if it can be avoided. PCBB exists to help you with all of these issues as a non-competitor and we want you to win. Perhaps it is time to review every vendor your bank does business with and look at their other lines of business. If they are buried inside a bank, in active merger mode or are offering services that are "free" or included if you do other business be skeptical. Keep the $1,000 buck tip and give these spies another tip - they aren't going to get any information on any customers on your watch. You will be glad you did and we can help you protect your business because we don't compete ever. All of our customers are community financial institutions and we are standing by to help you succeed.