The commercial lending industry has experienced tremendous growth in the last decade. Yet, commercial banks have not been at the leading edge of industry-altering changes. Further, the speed of these changes has placed a burden on middle-market and regional banking institutions to rapidly evolve or fall behind. Non-traditional lending sources, with altogether different operating models and technologies, have unseated traditional lenders as the go-to funding sources.
In response to an eroding competitive position, some commercial banks sought to compete on pricing and introduced segmented lending groups within the commercial banking environment. These banks fundamentally altered their operating models to: (1) create specialization and promote top-line sales; and (2) implement cost control measures by running groups on independent P&Ls and allocating human capital according to skill set. Yet, results are not compelling.
Where did this model go wrong? Instead of asking themselves how customers want to interact with banks, many banks prioritized how they wanted to interact with their customers instead. This approach ignores the customers’ needs and desired interaction. To make matters worse, this compartmentalized approach can lead to operational and capacity planning nightmares. Each group looks to fill their own sales pipeline and builds teams based on nearsighted expectations. This path can lead to uncertain lead flow, lost loyalty opportunities, minimal cross-training, and a reduced talent pool, not to mention this model lends to confusing and difficult interactions with customers.
So how do customers want to interact with commercial banks? Our experience suggests that, like many things, it depends. Some customers seek a purely transactional interaction with a bank. Other customers seek a more relationship-driven interaction. The desired interaction is frequently correlated with the ask. Simple lending needs are generally more transactional while larger, more complex lending needs necessitate more relationship-driven approaches.
Change Your Operating Model
One approach to this new operating model is to form a team along the transactional-relational sales spectrum and move away from the “specialization” approach. The spectrum contains three areas with three needs:
- Purely Transactional (Small Business) This team addresses the purely (or at least mostly) transactional customer needs. These include small loans with uncomplicated terms where customers value speed and simplicity (for example, a $10k loan for a small business). These customers could enter some basic information online which is then sent to part of the team that handles your credit relationship with minimal touch and return a decision (and loan) quickly with minimal fuss.
- Somewhere-in-Between (Business Banking/Community Banking) These customers are still somewhat transactional, but require a bit more involvement than small business loans (maybe there are regulatory thresholds or enhanced due diligence requirements). Still, these loans are not grouped by “large or small” metrics but instead are categorized by complexity. The same team that services the Purely Transactional group could also service the Small Business group whose customers need to talk to a banker once or twice for additional information and then the loan is handled.
- Purely Relational (Traditional Commercial) The loans are generally larger and more complex and include collateral, guaranties, covenants, or other terms that require more attention. It is here that banks might assign a Portfolio Manager to handle more regular interactions and requests.
Banks need to adapt to a changing market and migrate their systems to platforms that allow for scalability, versatility, and customer-centric decision making. With a simplified, centralized approach, one shared service environment covers all three groups. Every customer enters the same sales channel and is then funneled throughout the team according to customer needs. The result is operational efficiency.
But before a bank embarks on a costly and time-consuming systems change, they should first address their outdated operating model. It is very difficult to demonstrate the value of new software on a per-loan basis. However, an optimized model simplifies calculating an ROI that banks and shareholders can’t ignore.