As banks struggle to generate new revenue, more are increasing their focus on middle-market companies (typically $10 million to $100 million in revenues) because they are attractive clients for lending, fee generating products and cross-selling. However, insufficient market differentiation, dysfunctional organizations, overstaffing or the wrong staff and an inadequate sales management process all combine to limit bank performance in this segment.
We have found that six factors are critical for bank success in this space. Operating without a coordinated emphasis on these areas places a bank at a competitive disadvantage and results in poor productivity and mediocre returns.
Bank commitment and consistency. The great middle-market banks such as Comerica, BB&T, City National, Silicon Valley Bank, Wells Fargo, and JPMorgan Chase have focused consistently on the middle market, developing strong reputations and creating barriers to entry.
Chase and its predecessor banks, for example, have focused on this segment for at least 40 years. Chase established a clear approach to this business, knows where it wants to play and where it does not, and has limited its internal frictions and conflicts. They consistently review their approach and adjust it for market or competitive reasons. By comparison, another large money center bank we know has been in and out of this market at least six times during that period, undercutting its credibility and limiting its market impact; middle market customers have long memories.
Differentiating expertise and client experience. The middle market requires banks to develop expertise in several areas, usually industry-based. We have seen banks focus on more traditional areas such as health care and transportation as well as unusual targets such as check cashers, vineyards, independent film production and churches. Each bank needs to determine the handful of industries in which it has the interest and capability to specialize; one size definitely does not fit all.
Developing an expertise builds a market reputation, draws potential customers to the bank and often allows for some premium pricing, whether on the loan or fee side. It supports the relationship-banking concept in a concrete way that customers appreciate. Yes, you can differentiate yourself by customer service, but that is an increasingly difficult strategy to execute.
Once a bank chooses an expertise-based differentiation strategy, its delivery must be consistent and predictable. This is how “brand” is delivered to the street. Some middle-market bankers have long viewed themselves as artists or independent professionals whose highly personalized work cannot be subject to standardized checklists, consistent expectations and targeted performance metrics. Increasingly, management is rejecting this attitude, enforcing greater internal discipline. Banks are beginning to understand that “client experience” is the extension of strategy, value proposition and expertise and that this experience should be defined in middle-market banking just as it is in wealth management or other professional services environments.
RM job definition. In effect, many middle-market bankers design their own jobs and their own methods, with some deciding to concentrate on account maintenance and others on credit monitoring. Oftentimes sales and marketing fall to the wayside; in the words of one relationship manager (RM), “Selling is what I do after I do everything else.”
The best middle-market banks have recognized the need to introduce consistency and discipline to this business line. They have reengineered the RM job itself to shift credit responsibility to risk specialists and reduce or shift administrative duties to others, allowing their bankers to focus 60% or more of their time on customer sales and solution development, compared to a more typical 40% or less. They have also introduced standard processes and score cards that include specific sales, production, risk management and other elements that direct RMs to focus their efforts on activities that provide substantial customer value.
The best middle-market banks have remained focused on RM portfolio composition and consistency. Every time we analyze a middle-market portfolio we find that a substantial percentage of companies the RMs manage are in reality small businesses. While RMs offer multiple reasons to justify why these accounts should remain with them – for example, the close personal relationship they have or the potential upside – in most cases, the bank can transfer these clients to its small business group, freeing up RM time for new sales and cross-sell and reducing the cost to serve those customers.
Finally, the best middle-market banks maintain some consistency in their messaging. For example, until recently, managers of many middle-market groups instructed their bankers to concentrate on credit quality and portfolio monitoring rather than new business. Now, these same bankers have been assigned growth goals and sales targets, oftentimes without being given the tools and structure to succeed.
Sales management. Bank effectiveness in the middle market requires at least as much emphasis on team leaders (TLs) as on RMs. Too often, TLs are more bureaucrats than sales leaders, communicating the wrong priorities to the RMs. When sales performance lags, senior leaders typically blame, retrain or fire RMs rather than examine TL job design and the individual leaders who should be responsible for leading, coaching and developing their teams.
In contrast, at one well-performing bank, TLs see themselves as “protectors “ of RMs, working to remove as many compliance and other time consuming tasks as possible so that bankers can focus on being with customers and prospects. In addition, they attend multiple sales calls, review and refocus RM activities, assist in closing deals and eliminate internal barriers to sales success.
Bank sales management processes must also engage marketing, cash management, wealth management and other areas. Today’s environment of slow growth and the need to steal share demands presenting a bank’s total capabilities and generating as much revenue as possible from each customer. RMs with specialist input need to diagnose their portfolios to set cross-sell goals that can only be achieved with the close involvement of other bank groups. Once set, goals need to be revisited both to celebrate and communicate successes (that is, internal best practices) and to reevaluate and refine approaches that are not providing intended results.
Performance incentives. Compensation remains an area that is ripe for innovation and rethinking, although little of either has occurred in recent decades. When banks use performance-based variable compensation, they often base too much of the variable part on current year revenue or production. Meanwhile, too much of total compensation is salary-based with incentives/bonuses usually either a small percentage of the overall package or determined subjectively. Further, the difference between high performers’ compensation and middle or low performers’ compensation is too small.
At the cutting edge, a few banks are integrating client satisfaction or client loyalty measures – taken directly or through research firms engaged for the purpose – into bonus or incentive compensation decisions. Others are increasing their emphasis on TLs’ assessments of RMs’ adherence to and effectiveness with their banks’ prescribed sales or relationship management methodology.
Execution. How frequently does your bank follow-up on and effectively implement the decisions management has agreed to? Banks often slip back into old habits. Middle managers fail to do the hard work of setting direction, leading and shaping activities. Bankers, rather than embracing change and improved approaches, hope that “these too shall pass” and yearn to return to their own ways. Management cannot allow that to happen.
The best middle-market groups have, like other well-managed organizations, developed habits of clarity, commitment to mission and accountability. They establish formal or informal limits concerning what is expected and acceptable. They take the view that, while individuals’ drive, expertise, and self-expression are critical to success, their skills and preferences must align with institutional strategy and process. They groom and promote managers capable of leading, directing and coaching team members to “go with the program,” execute reliably, learn from mistakes and variances and improve productivity and performance. They encourage those who adapt and change; they discourage or release those who don’t.
Getting Started. Banks wishing to improve their middle-market performance should begin by determining the current status of their approach across multiple areas. This type of report card sets priorities for future focus and change. Some areas to consider include:
- What is the RM’s role and responsibilities?
- How much time is the RM spending on sales and customer activities versus non-revenue activities? How closely should the RM be involved in credit decisioning? Does consistency exist across the footprint?
- What percentage of wallet share are you capturing? Why is share being lost to other banks?
- Do you have a rigorous sales management process?
- Does the TL focus on sales management or other areas?
Frank assessment of current practices enables a bank to understand its performance gaps and gain internal consensus on required changes and the key stakeholders that need to be involved. In some cases, banks will have to face some harsh facts, for example, that they must dramatically redesign current roles or change personnel. But that should be an easy call since the alternative is lower productivity, mediocre returns and increased erosion of what should be a high-priority customer base.
Mr. Wendel is president of New York City-based Financial Institutions Consulting, Inc. He can be reached at firstname.lastname@example.org. Mr. Miller, president of Clarity Advantage, can be reached at email@example.com.