Charles Wendel_resized
Charles B. Wendel Oct 11, 2019

Subjects of the revenue realm: Take back your bank

Back in the last century when I was a commercial banker, revenue generators reigned as the undisputed kings and queens of the bank. This group included branch managers, commercial bankers, specialized lenders and other customer-facing folks responsible for a bank’s bottom line. These men and women carried responsibility for the bank’s success—and were treated that way. Back in those days management viewed them as a higher caste than personnel in “cost centers.”

And support people were just that. They provided support for the branch leaders and relationship managers who built customer relationships, established franchises and created profits. Non-revenue producing staff treated revenue makers with respect and even some deference.

No more. In the banking equivalent of Revenge of the Nerds, the onetime kingpins now increasingly seem to fall under the thumb of support personnel, who find themselves growing in power and ability to influence line bankers.

How did relationship bankers lose their mojo? How do they get it back?

Once the Great Recession started in late 2007, lenders seemingly lost the credit and structuring discipline essential to their success. On the consumer side, they made disastrous subprime loans on the false assumption that residential real estate would always increase in value. Business bankers also stretched the limits of reasonable lending.

As the crisis evolved, we consulted on due diligence projects related to the FDIC’s shared loss deals; failing banks were absorbed by survivors. The loan files of those banks often told a tale of lender stupidity and ignorance. Bank managers approved deals a well-trained junior banker would have rejected. (Example: loans made with raw land as collateral, backed by insufficient guarantees and no long-term takeout.)

The crisis had its foreshadowing elements. Years before the downturn we visited a new consulting client and made the rounds of the bank, meeting key executives. We first went to the top floor of the building to meet the head of the commercial bank, hired to grow the loan portfolio.

But when it came time to meet the credit people we were instructed to go down to the cellar—not a basement with natural light, but a cellar. The credit group’s physical location signaled their low prestige and limited power; it was no surprise when bad lending practices forced that bank’s sale.  

One highly respected banker from a top-tier performer once described the lender-credit relationship as akin to a swinging pendulum: sometimes swinging too far toward aggressive selling, others too far towards credit constraints. He felt senior executives needed to keep the back-forth rhythm as centered as possible. But the recession betrayed reckless swinging into aggressive sales activities—producing an unfortunate, expected outcome.  

The recession sent external regulators and internal compliance staff swarming over bankers to review their lending activities and demand unprecedented levels of reporting. And as the bank’s “stars,” lenders crashed to the earth: viewed with suspicion and distrust. Bankers found themselves with reduced authority, if any, to make credit decisions or exceptions to policy.

And now, bankers must follow a chain of command that often relegates lenders to a minor, process oriented role.

Diminished scope, regulatory paranoia

As the traditional banker’s scope diminished, the industry became more complex and competitive with traditional and new competitors. Since line bankers needed to focus on paperwork—and even suffered the stereotype of rogue lenders—support groups assumed greater authority. Individual staffers gained more power.

To be fair, those groups simply stepped in to fill a gap:

  • Marketing made product management decisions that might’ve benefited from more line involvement.
  • HR established compensation guidelines that met internal requirements but sometimes overlooked market realities.
  • IT made tech decisions without meaningful line input.
  • Centralized credit took over credit processing for at least some loans though it lacked knowledge of loan complexities or client sensitivity.
  • Finance determined each line group’s profitability, adding overhead costs and making cost allocation decisions that some line units viewed as arbitrary.

In some cases support people now treat the line with condescension. What a reversal from pre-2007.

Add to this picture regulators, with their ongoing reporting demands and attitude that sometimes borders on antipathy. A senior banker at one of the consistently best performing U.S. banks commented about one regulator, “They treat us like crooks.” When I mentioned to a senior banker at another institution that this guy seemed paranoid, he nodded his head and said, “I’m paranoid about them, too.”

Time to recapture leadership?  

In many cases the rise of support groups and growth of regulator influence have resulted in customers taking second place to internal initiatives and management’s regulatory concerns. One recent interview with a middle market customer summed up concerns we’ve heard elsewhere: “I wish banks would ask us what we need instead of telling us they think we need.”

That sums up where we stand today. Many discouraged line bankers fight a constant battle with support areas for more customer-oriented solutions and minimized costs they assign to the line. And by the way, many business customers know more about these internal struggles than they should.

The line’s past underwriting and monitoring failures led us here. But if line managers do not reassert themselves, they may face greater losses in authority and autonomy. And if they show leadership, their banks and customers will benefit.

Why now? The cost reduction drumbeat sounds at more banks as they respond to the future likelihood of lower interest rates—and thus lower revenues. More banks see the need to cut costs. Fair enough. Yet the concern doesn’t center on why this gets done but how. Despite potential negative customer impact, centralization and consolidation often inform the proposed answer. Yes, this raises the possibility of taking more capabilities from the line and moving them to a central unit, where customer service may not be a priority.

Cost reduction programs require a coordinated approach between the line and staff. Too often, though, staff personnel take the leadership position in these projects with the input of young consultants from a big-name firm—one that, for economic leverage, deploys as many junior people as possible to work the project. In those cases the bank’s performance, culture and customers all suffer.

Putting it all together: Fly towards the plane

Line management can and should assert itself in these bank-wide processes. Moreover, it’s time for bank line managers—who generate the business to pay everyone’s salaries—to keep pushing the pendulum back toward the center.

In that desirable plane of balance—free from turbulent swinging—sales, credit and other staff can work together with mutual respect and appreciate of each group’s responsibilities. And as such, we need not crown new kings and queens for peace and prosperity to reign in the kingdom.

The president of Financial Institutions Consulting (FIC), Charles Wendel can be reached at CWendel@ficinc.com.

 

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