How many times have you seen this – you present a proposal to one of your bank’s potential customers and you go back and forth on a particular term or set of terms. For loans, the discussion is often over amount, rate, term, amortization or guarantees. For deposits, it is often over fees, services or rates. More than 60% of the cases that we have observed, the seasoned business development officer bargains when they should be negotiating. Worse yet, they don’t even know the difference, and as a result, they lack a major tool in relationship development. In this article, we clarify the difference between bargaining and negotiating and provide bank commercial development officers some tools to arrive at a win-win outcome.
Bargaining is a one-dimensional discussion over a single point or a series of points. It is a back-and-forth verbal exchange with the goal of both parties to arrive at a mutually agreeable point in between two starting positions. Bargaining is about what both sides desire.
Customer A contacts their banker and wants to prepay his commercial real estate loan on investment property but doesn’t want to pay the 2% prepayment penalty that is contractually due. The loan has a low loan-to-value (LTV), and the Banker wants to keep the footings. They go back and forth and agree to 1%. The Banker, by not understanding the difference between bargaining and negotiation did everyone a disservice. The conflict started and ended with Borrower vs. Banker.
In contrast, negotiating is a discussion about each side’s motivation. It’s the “why” they want it combined with some priority. At CenterState, we talk about the “energy” around each point of desire. A point with “high energy” is one that has deep emotional roots and is a high priority. On high energy points, in particular, your probability of success, however, defined, is less until you understand why your borrower or depositor wants it so bad. Once you understand the “why” in negotiations, many options emerge. Deal-making goes to another level.
Customer A contacts their banker and wants to prepay the loan but doesn’t want to pay the 2% prepayment penalty. The Banker smartly takes her time to find out more information. She is genuinely curious, and that curiosity drives a series of investigative questions. It turns out that Customer A sees a better opportunity on a warehouse property out of state. Customer A didn’t think his bank would be interested in making the new loan. The Banker does some work, and the Bank agrees to make a second mortgage on the first property to free up capital plus make a new loan on the out of state property. Both properties now have a 75% LTV, the bank has more than doubled the profitability of the relationship, has increased diversification and has kept the customer. The Banker successfully turned a Borrower vs. Banker paradigm into a partnership.
Putting This Into Action
Anyone can bargain, but it is the true relationship-driven banker that understands how to negotiate well. Negotiating is about seeing the whole chess board and having enough love for both the Bank and the customer to invest the time to understand all the options. It is about using creativity to brainstorm solutions to solve the borrower’s problem.
Like driving, most bankers believe they are above average negotiators. In reality, they are above average bargainers. Train your bankers how to apply product knowledge, finance, sound decision making and creativity to solutions that benefit both the bank and the borrower and your bank can structure more profitable relationships due to the value that you can impart.
Submitted by Chris Nichols on January 24, 2018