Lenders typically are thrilled when they bring new customers to the bank. However, some of your most profitable customers are already at the bank. Bankers are often surprised that, all else being equal (credit quality, loan and deposit size, etc.), existing relationships are more profitable than new relationships. While part of most lenders’ responsibilities is business development, retaining and enhancing existing accounts is the most important and efficient way to boost your portfolio’s return on assets. At our bank, we spend as much time and resources maintaining our existing relationships and growing our share of wallet with existing customers as attempting to attract new ones.
Why Existing Customers are Important
There are four important reasons why existing customers are more profitable than new customers (all else being equal):
- The acquisition, processing and onboarding costs for commercial transactions are high compared to annual revenues for the products that banks sell. So on the first day that any loan is booked, the ROA is very negative and improves every day thereafter (but not in a linear fashion).
- The bank understands the borrower better over time. After seeing multiple years of the borrower’s financial statements and performance, the banker can understand where the risks are to the business, how to mitigate those risks, and where to obtain additional revenue with the customer.
- The intent of any commercial relationship is for the lender is to maximize share of wallet and cross sell as many products as possible. The longer a banker can maintain the customer the more products the customer will buy (given the right sales effort and the right products and services). Cross selling takes time.
- Banking is a personal relationship business, and gaining that relationship and becoming a trusted advisor to the customer takes time. Once this relationship is established, a good lender should be able to reduce competitive offers and garner better pricing for the bank.
Monitor your Existing Book
We recommend that lenders review their existing portfolio on a quarterly or monthly basis. Lenders should be paying attention to the following opportunities:
- Largest accounts must have the lender’s particular attention;
- The accounts with the higher credit sensitivities must also be closely watched;
- Identify customers with your higher credit exposure that you believe may be a candidate to go to a competitor (more on that below);
- Mark each customer that you know has already approached competitors on your existing loan or other credit facilities; and
- Identify all of your customer’s business that you do not have and learn which of your competitors have that business.
Identifying Your Poachable Customers
When identifying customers that have a higher likelihood of being poached by competitors we look for the following:
- Any expression of dissatisfaction with the bank,
- Loans maturing within the next 2-3 years,
- Borrowers that are paying above-market fixed rates,
- Borrowers with no, or weak, prepayment penalties,
- Term loans with variable rate structures,
- Borrowers with low switching costs (no treasury management, wealth management or investment management services),
- Customers with only one product with the bank.
Your customers that demonstrate any of the above parameters should be emphasized for cross sell and possible restructuring. Your advantage as the existing lender/relationship manager is that you know the borrower’s business well, you have the customer’s financial information and any amendment or add-on business can benefit from a quick closing. The documentation should also be simpler.
How to Measure Existing Customer Satisfaction
Some banks do a good job at measuring customer satisfaction by conducting periodic questionnaires on existing accounts and providing surveys post-closing. We learn more from negative feedback than positive feedback but customers are hesitant to provide negative information directly to the banker. We recommend that top relationships are periodically surveyed by independent firms. These professional firms will solicit objective feedback from customers and their protocol is to ask both anonymous and identified answers. Anonymity on questions ensures that borrowers are objective and honest about their experience. Identified answers allow the bank to identify which relationships are in jeopardy and the opportunity to defend those relationships.
If your bank chooses not to conduct independent surveys, you as the lender can still do so yourself. A simple set of questions delivered to your customers via email can elicit important and actionable information. The question that we find most useful for our lending business is this: Where can I or my bank improve in serving your needs? Because everyone is striving to improve, your borrower will not view a response to this question as a criticism.
While banking is very competitive, there are opportunities to create additional value and increase ROA within your existing portfolio by cross selling additional products and increasing customer stickiness – this will lead to increased profitability for the bank and greater reward for the lender.
Submitted by Chris Nichols on April 13, 2016