Baseball fans know who hit the most home runs in a single season. Depending on your age and the purity of your perspective on the game, the established home run leader is Babe Ruth (154 games), Roger Maris (with an asterisk denoting 162 games), or Barry Bonds (73 home runs with an asterisk denoting likely steroid use). Most fans probably know or guess that the all-time singles leader is the somewhat infamous Pete Rose. However, only the most dedicated fan will remember that Ichiro Suzuki holds the season single hit record with 225.
Other than that we are at the beginning of the baseball season, why this digression? Because, despite most bankers’ desire for a “secret sauce” (namely a product, a system, a channel, etc.) that will solve their small business problems and the willingness of technology salespeople and consultants (not moi) to offer a home run solution, today more than ever, small business banking – in fact, banking overall – involves a game of singles. The great bank players know this and focus on multiple related improvements rather than taking the big swing that usually results in a miss.
A bank’s success in the small business space requires decisions in a myriad of areas that together add up to a sustainable competitive position:
Definition. I have worked at banks where the head of small business could not concisely tell me the parameters of his marketing focus. Either the bank kept changing its definition or it operated without one, neither a likely prescription for success. When the definition focuses on loan size, that bank is probably not pursuing the segment with the holistic (business, owner and employee) approach required to maximize returns. In fact, some of the more targeted banks in this space are focusing on small businesses as deposit generators that can provide funding for loans to other segments.
Communication, consistency and discipline. One of the reasons for poor banker productivity is the banker pursuing deals that are unacceptable to the bank from a risk or structuring perspective. In some cases, the credit people have failed to communicate the specifics of their risk appetite and the necessary criteria for a deal’s acceptance to the bankers. In other cases, the banker is ignoring reality and hoping he can sneak a deal through. The “rules” need to be communicated and then enforced with consistency. Neither the banker nor credit department should surprise their internal partners. Credit should set clear and consistent criteria, and business bankers should work within those bounds, other than for extraordinary reasons.
A centered pendulum. Years ago, a senior credit officer discussed the tendency of banks to operate like a pendulum that swings too far toward an emphasis on sales and then swings too far the other way back to credit when trouble appears. Before the downturn of the last decade, the swing to the sales side was apparent; credit people were often beaten down by “masters of the universe,” even if that universe consisted of a Miami suburb. The pendulum has now swung in the other direction, encouraged by regulators who are focused on preventing the last crisis.
People. Managers continue to complain about the capabilities of a significant portion of their small business bankers, often stressing their mediocre sales skills and lack of proactivity. The good players will not tolerate this level of performance but, too often, banks allow their paternalism and the tenure of their employees to cloud their decision-making. This fundamental constraint continues to hold many banks back.
Products. Remarkably, to this day, most bank small business groups remain loan-focused despite the limited risk appetite of most banks and the limited appetite for borrowing of most customers. Since forever, the majority of small businesses have been non-borrowers; since forever, the majority of small business bankers have focused on loans. Fee-generating products are important now and will only be more important going forward. Some of the banks that have moved to a fee emphasis have done so after analyzing small business loan profitability and realizing its returns are value destroyers.
Branch focus. Most banks continue to struggle with branch performance related to small businesses. There are sizeable banks in which some branches generate zero small business loans annually. You almost need to try to accomplish that low level of performance. Branches have to be part of success with small businesses whether on the deposit or loan side. Too many managers tolerate mediocrity in small business branch sales.
Compensation. Compensation-at-risk (bonuses and incentives) often drives top performance. However, I know one relatively large bank in which blowing through sales goals will increase after-tax compensation by maybe 5%. So, why bother to go through the pain and discomfort of selling for so little reward?
Working with product partners. Bankers can recount negative stories of working with outside product partners in which the effort did not pay off. Increasingly, however, leveraging partner capabilities in lending, technology and other areas offers great value to banks in meeting the needs of current customers and in broadening a bank’s marketing focus to capture new targets. Many banks have no choice but to do so. Working with outside players may be particularly important in meeting the small business credit needs of Gen X, Gen Y and Millennials, many of whom are not bank-ready credits.
Analytics and Big Data. As a late convert to appreciating the value of applying complex analytics to small business, I now understand the returns this analysis can bring. However, unless the areas outlined above are also addressed, Big Data will turn into a big and expensive failure. Big Data facilitates success once a basic foundation has been established.
None of the items listed above per se constitutes the “home run” that most banks are looking for. But putting together all of these “single” hits in one package will do the trick. You just have to have the discipline to focus on each one.
Mr. Wendel is president of New York City-based Financial Institutions Consulting, Inc. He can be reached at email@example.com.