In the past two years, banks have focused on building their equipment finance and leasing groups. Faced with slow and low margin growth in traditional commercial and industrial (C&I) lending, many institutions have turned to leasing as a source of sustainable earnings and a differentiated market approach.
Some bankers also understand that leasing can provide internal best practices that can benefit other groups within the bank. Consider, for example, the following common attributes of leasing groups:
Sales-driven. At the beginning of each year, leasing staff must generate sales orders to build their personal income; no new sales, no or little income. Leasing groups, while ensuring that they provide quality customer service, operate as sales organizations. Typically, bankers are NOT salespeople. They tend to be customer service-oriented, almost to a fault. Equipment finance personnel know that the customer needs to be fully satisfied, but they also know they need to sell.
Provide a differentiated product. Too often I have heard small business or middle market bankers say, “We all sell the same thing.” They mean that a loan is a loan and a deposit is a deposit, basically generic products. Equipment finance providers do not see themselves as vanilla product pushers and neither should bankers. Leasing companies specialize in everything from aircraft to taxi medallions to boats. They provide a level of industry, product, and/or structuring knowledge that differentiates them from other players and demonstrates value to the end customer.
Paid for value provided. Many C&I lenders operate in a world of request for proposals (RFPs) in which the low bidder wins. Frankly, this is a losing long-term strategy in which banks cut their margins to the point of pain. Of course, equipment finance margins have also eroded, given the increased entrance of new bank competitors into the business. Nonetheless, equipment finance margins typically exceed C&I loans and lessors focus on fees to boost the yield. Equipment finance bankers often get paid in part based on the yields of the deals they generate, focusing them on booking deals that are as profitable as possible. Commercial bankers often bemoan the competitiveness of pricing but accept it as a fait accompli.
Positive energy. Years ago, I met with a commercial finance client team late in the evening for a dinner. One sales person was literally bouncing up and down in his chair talking excitedly about how much money he was going to make that year and how he had blown through his goals. A banker would never do that. First, most are not that sales-oriented and, second, the upside banks provide is usually not large enough for bankers to get excited about; the bonus paid to a great bank performer is often not that much more than that paid to a mediocre banker. That is not true of leasing groups, where pay-for-performance remains the standard.
Bye bye bad performers. Banks are encumbered by too many mediocre people who are meant to sell but either lack the skills or DNA to do so. These bankers provide lots of excuses: too much paperwork, too many regulatory requirements, too many compliance requirements, bad internal processes, too many competitors, etc. But still, they fail to perform. In many cases, bank managers are simply too patient and too nice, hoping the banker will improve despite all evidence to the contrary.
Leasing executives are also nice, mostly, but they operate as business people who expect a certain level of performance. They set clear expectations and if those expectations are not met, the implications are clear. Too often, banks operate with a mix of objective and subjective metrics that result in a lack of clarity. Additionally, many banks fail to accurately evaluate their bankers, overgrading them and making the removal and upgrading process more difficult because of an insufficient paper trail. The leasing execs I know tend to be straight shooters in evaluating staff.
Distinct culture. Leasing execs work hard to create a coherent and unified culture that is distinct to their organization, such as can be found at Signature Financial, First American Equipment Finance and 1st Source Bank. In contrast, banks often operate with cultures that permit civil wars within the ranks rather than a unified approach aimed at defeating the external competitor.
Why don’t banks take greater advantage of the capabilities and experience that their bank-owned equipment finance companies offer? In some instances, they believe that the leasing group is too different from the “core” bank to provide best practices. They are wrong about this. In other cases, senior management really does not know what the leasing group is up to or how they do what they do. They are pleased with the quality numbers the group generates, but they fail to understand the disciplined process and unique culture involved in doing so.
The crisis in banking appears to be over, as provisions reverse and the bottom line is steady or growing slowly. So why try to graft a leasing approach onto the rest of the bank? In fact, a revenue growth crisis may be coming in banking but many bankers simply do not know that the ground is shifting under their feet. In our view, leasing can provide one path to long-term survival if bankers allow the sales emphasis and positive culture of equipment finance groups to permeate their institutions.
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