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The Battle To Build Small Biz
BY KENNETH CLINE
Our roundtable of small business bankers addresses cost control pressures, employee retention and shrinking spreads.
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SYNOPSIS | Small business bankers, our roundtable says, face key challenges: employee retention and a shortage of trained bankers, slowing revenues and cost control pressures. On the plus side, remote deposit capture has opened up new avenues for acquiring customers, deposits can be obtained with the right kind of teamwork and good working relationships with branch managers can build business.
Life for the small business banker is far from easy. In the roundtable conversation that follows, our participants deal with a litany of issues, including employee retention and a shortage of trained bankers, slowing revenues and cost control pressures. ?The model is moving in the wrong direction, with diminishing spreads and increased costs for employees,? says Todd Hardy, senior vice president with Huntington Bancshares Inc. in Columbus, Ohio.
Yet, there are opportunities as well. Remote deposit capture has opened up new avenues for acquiring customers. Deposits from small business customers can be obtained with teamwork. And developing and fostering working relationships with branch networks can build business.
Q: What do you consider the most pressing issues as you compete for small business today?
Doherty: For me, one of the biggest is incentive compensation. We’re spending a lot of time talking about incentive compensation for the business bankers and for the branches.
I don’t know if it’s a local issue or a nationwide issue, but base salaries continue to rise with the market. You can’t bring the base salaries down to increase the variable comp because your top skilled people kind of want both. And because all the banks aren’t in line on incentive compensation, it’s tough to create the type of incentive plan you really wanted. It’s a very competitive market.
Hardy: Coupled with that, you’ve got your expense structure increasing while revenues show compressed yields. The model is moving in the wrong direction, with diminishing spreads and increased costs for employees. In most markets today, it’s probably 30% more expensive to hire a good relationship manager (RM) than it was three years ago and if you want to retain your best people, it can be equally expensive. Given those problems, the business model within business banking is not as sound as it was three to five years ago.
The other part of it is finding good people versus developing good people. We have standardized programs that we take advantage of at the bank to develop from within. But that takes time and resources are limited. Inevitably, that process may take as long as two to three years, and oftentimes, that investment is hard to make, considering how long it may take to develop a strong RM.
The alternative is to go across the street and find a banker looking for a better opportunity. One can find experienced and talented bankers with a built-in contact base who are ready to roll immediately.
Q: Is it difficult to attract people to small business banking? Do new employees see commercial banking or other areas of the bank as more glamorous?
Sakaguchi: I think that a lot of people look at small business as the stepping stone to commercial. Once they spend a little time in our market, there’s a tendency for them to want to move up in the commercial field. Since the commercial bankers experience the same problems finding talent that we do, they take these people on. The Compass corporate bank recently hired two of my people for corporate RM jobs, even though they were pure salespeople.
A recent study by the Business Banking Board found that a business banker, or a business RM, can find a job in 30 days. Yet it takes a bank 30 to 120 days to fill an opening. That tells you there are four times more jobs than there are people to fill those jobs, which explains our situation.
At the same time, going back to the original question about important issues, revenues are compressed, as Todd noted. Free checking, for example, is becoming a given in almost all of our markets. When you can’t earn fee income off these accounts, then you have to find other sources, which is a huge challenge for us.
Doherty: Because of the flat yield curve and other things going on in the industry, we have to focus so much on the efficiency ratio and expense control that we lose focus on the revenue generation side. We don’t look enough at sales management practices.
Expense control can become such a big issue that it creates constant reorganization, which hurts revenue growth even further. We keep changing models and reorganizing to try to improve efficiencies.
Hardy: As Chris said, it’s been a little bit challenging to in-crease your revenues. Therefore, where do you go? There is a fair amount of pressure to reduce or at least contain expenses.
In order to accomplish this, we’ve standardized our annual merit compensation process. Since we’re holding the line on expense structure in the 2% to 3% range, we don’t have many people get too excited about their salary adjustments. This can be a problem, especially when you want to adequately reward your “superstars” for long-term, great performance.
Doherty: It fuels the turnover issue we talked about earlier.
Hardy: When you can go across the street and get a 10% to 20% jump in pay fairly easily, it makes up for a lot of years in the 2% to 3% range.
Q: So, everyone’s hungry for good employees, right?
Sakaguchi: They’re hungry for trained employees. There are a few banks that still have some significant training programs, but we don’t and most of the competitors that we are up against don’t.
Small business banking is a good industry to be in if you’re willing to pay your dues for a little while. A lot of the college people we interview aren’t willing to do that. They’ve got their college degree and want to be making large dollars right off the bat. That’s high risk for us.
Hardy: And the entry level positions aren’t that glamorous while compensation levels are often less than in other industries.
Doherty: You can home grow your talent, but that’s expensive because they leave after you train them. It’s almost easier to hire somebody who’s already been trained because the training that these people need has to be fairly structured.
Sakaguchi: It goes back to the merit increase issue. You spend one to two years training someone, give them 3% bumps in pay, and all of a sudden, they’re moving on.
Q: Let’s talk about emerging opportunities that you see. Remote deposit capture has been taking the industry by storm. To what degree do you see that as an acquisition tool for attracting small business customers?
Sakaguchi: It’s still a little cost-prohibitive for many of the clients in our markets. But as the technology becomes more affordable, you will be at a competitive disadvantage if you don’t offer it. It won’t be long before everybody has it. The convenience of not having to go to the bank to deposit checks is going to overcome virtually all of the other issues.
Doherty: It’s a critical strategy, at least for community banks, to be able to compete in areas where you don’t have branch coverage.
Q: Does Park National offer it?
Doherty: Not yet.
Hardy: At Huntington, we introduced it about six months ago and it’s been a wonderful product. It’s gotten us into a lot of different markets where we don’t have traditional banking office locations. So we’ve used it from an aggressive standpoint, trying to acquire new clients.
Q: BAI, as you know, recently did a study that found a lot of interest among small business customers for some of the newer payments products, such as remote deposit capture (see “The Small Business Customer is Ready to Switch—for Payments Products” in the May/June 2006 issue of Payments Strategies). Is payments a top-of-mind issue for you?
Sakaguchi: Yes. But the problem many of us have is we’re not sure where payments are going. Remote deposit capture has established itself, but things like business-to-business payments are still open issues.
The BAI survey kind of alludes to the fact that businesses want to become more self-sufficient. Even though their bank facilitates payments, clients don’t want to have to go to the bank. They want to be able to initiate these payments themselves.
If you have a robust online product right now, you probably have a slight competitive advantage. But very soon, that will just be table stakes. You’ll be at a competitive disadvantage if you don’t have it.
Doherty: Having an online product, or a simplified online product for small business, is important. One of the problems I’ve seen is that you can have a good product but bad process. In other words, a good product but poor process of enrollment can work against you.
Q: Small business banking, in the past, has been focused more on lending than the deposit relationship. There has been recent research indicating that deposits are what drives the profitability of small business banking. Are you more focused now than you used to be on deposit relationships?
Sakaguchi: We’ve always believed that the deposit is king. Loans are important, but when I meet with my new hires, I remind them that focusing on deposits is a lot easier than trying to lead with loans. Ninety-eight percent of all businesses have a checking account. But depending on what survey you read, less than 50% have a borrowing relationship, other than a credit card.
So, if you’re leading with loans, you’re going to strike out half the time. Whereas, if you lead with deposits, you’ve got a virtually 100% hit rate. Our compensation plan focuses as much on deposits as it does on loans.
Hardy: At Huntington, we have a similar focus. We’ve got two very specific job families that assist in our ability to generate deposits. One is called a “business development officer,” which I liken to a junior business banker. They work side by side with our banking office teams within a designated geographic marketplace, normally a market with greater business concentration. They’re developing their skill set on the credit side, but also originating calls to deposit-only types of businesses, like dry cleaners and convenience stores. They tend to be more into deposit-gathering than the traditional business banker.
The other job family that I really consider a differentiating factor is the “treasury management product specialist.” When we’re pitching business, they ask questions focusing on the cash cycle and information needs of the company, like, “How do you receive your payments? How do you keep your records and reconcile your checkbook? How do you pay your bills?”
That helps us win more business.
Doherty: With small business customers, upwards of 80% of the profitability of the relationship is driven off deposits. But the flip side is that you don’t want to diminish the lending activity because that can often lead into a new piece of business. For example, an accounting firm can call and say somebody needs a loan and deposits come with it. But you don’t usually get a call that somebody needs a new deposit account.
Hardy: It is more difficult to find those deposit-only customers.
Doherty: You’ve really got to focus. It’s tough to get your lenders to think on those terms, of going after deposit-type businesses.
Q: Do you use much customer segmentation in the small business area?
Sakaguchi: I think that we have found some niches that we are able to service very well. But there are too many segments in the small business arena to say you’re going to focus on just a few.
I think everybody loves print shops, for example, because their lending needs are fairly significant and they have high resale value. And you can certainly be successful trying to pick those niches. But the general strategy for small business is that you have to be able to service many different clients.
There are always going to be areas, specifically on the lending side, that you don’t want to get involved with. And some areas on the deposit side have compliance problems, like check cashing operations, jewelry stores and pawn shops. There are certain industries where banks are now asking clients to leave because of the risks associated with compliance.
Hardy: I agree with Chris. We can’t afford to specialize, just because there are so many different industries. While we might have a banker who does a great job of handling contractors, you can’t exclusively go after contractors. You can’t build enough mass in that one portfolio typically to be profitable.
Doherty: Segmentation has been a big buzzword over the last few years. I think it’s been, in a lot of cases, completely overdone. I’ve seen cases where a bank had 10-plus segments just in small business, with different direct mail pieces going to each one. Then you have to track it all and see the results. It ended up getting too difficult and expensive to make it worthwhile.
So, segmentation is important, but simplify it as much as you can. In other words, understand, if you can, what industries carry larger deposits or loan balances versus other industries. You can build a simple profit model based on those industry segments, but don’t over-analyze it. It has just been way overdone.
Q: How do you get your branches to help you bring in business?
Sakaguchi: I find that to be fairly simple. If the branch gets paid for working with the business specialists, they will be great partners. If the branch does not receive benefits from bringing in referrals, then they are less likely to do it. It’s a simple fact of life: people do what you pay them to do.
Doherty: Accountability and incentives together create a real partnership. If you don’t do that, it won’t work. You can’t force people to partner just by management. If they’re not paid to do it, and bring a partner in, it’s not going to work.
And it’s not a one-way street. You can’t just say, what can a branch do for me? You have to require your business bankers to give business back to those branches in the form of the business owner’s personal accounts, home equity line, mortgage, etc. This creates a win-win situation.
A lot of finance people have a hard time with double accounting, but it’s okay with me if used for referrals and incentive systems.
Hardy: We’ve done a better job in the last two or three years, largely due to the fact that we have had the right kind of incentive comp. We are a part of retail and I report in to the head of retail. Everything we book, whether it’s originated by a banking office manager or a business banker, is booked within the banking office.
Business banking can bring in big loans and big deposits and retail banking officers are judged by how well they grow their balance sheet. So both can get a lot of leverage out of our small business customers.
Sakaguchi: The business banker has to develop a relationship with the branches based on trust and respect. For the branch manager, the business banker is an extra full-time employee on the manager’s staff.
So if we position ourselves as a partner the branch can rely on, they forward their referrals to us year after year.
Doherty: Some of the top-performing business bankers that I’ve seen can generate more than 40% of their business off their branch partnerships.
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