In the highly competitive banking sector, the quality of interaction between bank staff and customers can be the differentiator that gives one financial institution an edge over the others. There is a limit beyond which banks cannot compete on issues like pricing or the amount of finance that they can extend.
But, if quality is given the attention that it deserves and internalized across all levels of employees, it is possible to make it the single factor that makes one bank stand out from the others and be the preferred choice of customers.
How can a bank incorporate quality into all its processes and ensure that staff members understand its importance? Unfortunately, the attitude at many institutions is that the best service should be reserved for the biggest customers or for those clients who can provide the most business.
Banking staff across all levels do not realize that unless they give exemplary service as a matter of course, it will be very difficult for them to provide perfect service when they want to. Subjecting customers to a mediocre level of service becomes a habit and the entire system is attuned to deliver just about passable quality.
Kansas City Fed president, Esther George, a member of the Federal Open Market Committee (FOMC), favors raising interest rates, a view that is in direct opposition to that of the rest of her colleagues on the Fed’s policy-making committee. She has voted 10 times at various FOMC meetings with eight of her votes going against the unanimity achieved by the remaining committee members.
Why are her views at odds with other Fed members? She is of the opinion that prolonged low-interest rates have resulted in cheap money distorting the allocation of resources. As a result, commodity prices have crashed and real estate prices have escalated.
In a recent interview with the New York Times, Esther George explained her position, “My concern is whether we’re creating imbalances that we can’t really see today. When you have rates this low, of course money flows to interest-sensitive sectors. We saw that with commodities; you can see it with real estate.”
In the last three years, farm incomes have fallen significantly with many areas experiencing a reduction of up to 50%. But although land values have also dropped a little, the decline has been negligible. Esther George says that low interest rates are the reason for this.
The millennial generation uses technology more extensively than non-millennials in applying for online business loans and they prefer dealing with lenders who have automated their loan procedures to a greater extent than the competition. Millennials are also more likely to ask for bigger loan amounts than they actually receive, probably a sign of the confidence that they have in their business.
In a confirmation of conventional wisdom that millennials are more comfortable with technology, a quarter of the loan-seekers from this demographic applied to borrow funds using mobile devices while only a fifth of non-millennials used them when requesting finance.
There is also a marked difference between the personal credit ratings of these two population sets. Data reveals that millennials outnumber non-millennials, both in the “Challenged” category (below 579) of personal credit scores and in the “Excellent” category (700+). The comparable percentages for millennials/non-millennials are 18%/14% and 27%/24% in the respective categories.
Fundera, a fintech that advises small businesses seeking to raise finance, publishes a quarterly report titled, “The State of Online Small Business Lending.” Its latest issue is based on data collected from all the transactions that the company mediated between February 2014 and mid-March 2016. The report defines millennials as those born between the years of 1982 and 2004.
March retail sales fell 0.3% from the previous month to a seasonally adjusted $446.89 billion, continuing the current year’s trend, which has seen falling or flat sales in each of the first three months.
Weak auto sales contributed to the decline, with March retail sales at an adjusted annual rate of 16.5 million light vehicles, a sharp drop from the record 17.5 million vehicles sold in 2015. Spending on vehicles and parts dropped 2.1% in March.
In a report carried in Bloomberg, Jeff Schuster, senior vice president of forecasting for LMC Automotive, said that several economic indicators remain positive and a drop in sales for one month does not indicate a trend.
“I think we will see slower growth rates and more volatility for the rest of the year,” said Schuster. The current year’s vehicle sales are being compared to 2015, which had extremely strong numbers. “It’s nothing to get alarmed about. All eyes will be on April sales.”
Several of the largest online lenders in the country are cutting back on business volumes as investors are becoming increasingly reluctant to pour more money into financing these loans. The companies that have been affected include Prosper, Avant, SoFi, and OnDeck Capital.
A report in the Wall Street Journal says that securitizations of online loan pools in the first quarter of 2016 stood at $1.5 billion, a 21% reduction from the volume in the fourth quarter of 2015. Investor response to a recent bond offering of $278 million by Prosper is a stark indication of the changed perceptions regarding these loans.
The sale of securities, which was handled by Citigroup, saw yields of up to 12.5%, a massive increase from the 7.3% that Prosper loan packages commanded late last year. Although these yields are for the riskiest loans in the pool, the loans with lower expected default rates saw a rise in yields too.
Hedge funds, formerly active investors in loans made by online lenders, are also pulling back. With this source drying up, companies like OnDeck and Prosper need to find others that are willing to provide the money needed to maintain the growth in their business volumes.
Bankers need to be in a position to offer what the market demands. If for instance, borrowers ask for loan terms of 10 years or even more, a product should be developed to fulfill this need. But loans of 10, 15, or 20 years throw up very different risks as compared to standard five-year offerings.
In addition to factoring in an increased level of credit risk to take the longer time period into account, the financial institution would be required to build in the interest rate risk and the operational risk as well. As a result, the product could get priced out of the market. In these circumstances, the bank would be required to strike a fine balance between meeting customer needs and protecting its profitability.
Banks should consider the greater risks resulting from a longer loan period and would need to closely monitor the amount of finance they extend by way of this product. Large volumes of 10 and 15-year loans would have ALCO implications. Restricting loan amounts under this category would alienate existing customers and prevent some new ones being added to the bank’s portfolio.
An appropriate solution could be to predecide the dollar amount to be extended within a specified time-frame. This would ensure that the bank would have the product available for those customers who specifically want it and also prevent an asset-liability mismatch.
Investment in financial technology has risen from $1.8 billion in 2010 to $19 billion in 2015 with almost three-fourths of it directed at enhancing the consumer experience. But it is estimated that so far, only 1% of North American consumer banking revenue has moved to digital business models. According to a Citi report, this will increase to 10% by 2020 and 17% by 2023.
As fintech grows its market share, traditional banks will need to reposition themselves. In fact, this process has already started. Banks have been reducing staff at the rate of about 2% per year since the financial crisis of 2008. As a result, employee strength has already fallen by approximately 12% from its pre-crisis peak.
The Citi report, prepared by its Global Perspectives & Solutions team, predicts another 30% reduction in staff between 2015 and 2025, most of it due to retail banking automation. With the reduction in employee strength, there will be a corresponding fall in the number of bank branches, which are expected to fall to half their peak levels.
While fintechs have yet to make a substantial impact on the business volumes of American banks, the position in China is quite different. Alipay’s total payment volume at $931 billion is thrice that of PayPal. China has the biggest Peer-to-Peer lending market in the world. At $66.6 billion, it dwarfs the American ($16.6 billion) and the UK ($5.4 billion) markets.
A recent survey found that 94% of small businesses applied to banks for their fund requirements in 2015 compared to 20% who approached online lenders and 9% who sought finance from credit unions.
Small banks are the favored option for private businesses. They approved 76% of applicants for at least some of the amount being requested. Large banks had a lower approval rate of 58%.
Additionally, 75% of private firms said that they were satisfied with the services of small banks while only 51% held a similar view of large banks. On this count, online lenders performed poorly with only 15% being able to meet the expectations of borrowers.
These were some of the findings of the 2015 Small Business Credit Survey: Report on Employer Firms, an annual exercise conducted jointly by seven Federal Reserve Banks (New York, Atlanta, Boston, Cleveland, Philadelphia, Richmond, and St. Louis). The current survey drew responses from 3,459 employer firms across 26 states.
Recently SBA published its monthly “Lending Statistics for Major Programs” as of March 31st, already marking the end of the first six months of FY 2016 loan approval volume. This report provides rolling year-over-year loan approval statistics for the 7(a) and CDC/504 loan programs broken down by the respective categories of policy-targeted penetration.
The 7(a) program continued to progress into FY 2016 with a robust showing of total loan approvals of $10.97 billion, a jump in excess of 10% over the same period at 03/31/15 ($9.94 billion). Even more stark is to compare this volume to FY 2014, which began with a 17-day federal government shutdown. This year’s volume is more than 35 percent ahead of the YTD loan totals recorded that year ($8.10 billion), although leveling off from what the first 120 days of this FY were comparatively.
The number of approved 7(a) loans was 30,329 through the first six months, over 10 percent ahead of the number in YTD FY 2015, and 35 percent ahead the same period in FY 2014. And interesting that the YTD average loan size is $361,719, practically the same as it was last year.
A graphical illustration of all SBA monthly loan approvals is found at Capital Views.
Identifying new business opportunities in commercial lending is not an easy task. While cold-calling could turn up the occasional new customer, this method for prospecting business usually does not yield results in proportion to the effort and time involved.
A vastly superior approach is to use references to get leads for new business. Your current and past clients can be an excellent source for identifying prospects. But you have to develop the ability to stay in touch in a meaningful manner. Find useful information to share with your customers. They will appreciate the effort that you are making and will reciprocate by helping you.
When your reference does give you a lead, it is a good idea to say thanks thrice. The first thank you should be communicated immediately after the lead is received. The second, after you have met the prospect. And the third thank you goes out if your deal finally materializes.
In maintaining a relationship with your customers, you have to find the right balance between contacting them too often and not often enough. The periodicity will differ with individual customers, but each time you interact with one of them, you should have something relevant to discuss.