In a recent article, we highlighted why community banks should differentiate themselves from competitors by offering better service, and we discussed the five crucial steps that banks must take to improve service. In that same blog, we identified four attributes that most community banks possess that can be used to differentiate their brand against competitors in the market. In this blog, we explain how community banks can position these four attributes to provide superior service that most borrowers would find valuable.
Four Attributes for Superior Service
While no bank can provide superior service to every customer and for every product attribute, we believe that there are four attributes that most community banks can emphasize to effectively differentiate themselves from competitors. These attributes are highly valued by many borrowers, and they are attributes that community banks can excel against competitors. The table below shows the four attributes and the possible positioning of these attributes against six common competitors.
Responsiveness: Responsiveness is the time a bank takes to accomplish an action that has an impact on the customer. That action can be the time to underwrite a credit, to produce a term sheet, to draft closing documents or to fund a loan. Here community banks have a distinct advantage against much of the competition. Being smaller and nimbler, community banks can typically react faster than credit unions, conduits, insurance companies, and government agencies. Borrowers value certainty and a quick decision-making process. Community banks should benchmark timelines for each of the tasks listed above based on competition in their market. On the high-performing end, we work with banks that can produce a term sheet within a business day of receiving the necessary borrower financials, take four business days to underwrite and approve a CRE or C&I credit (subject to necessary appraisals), take one business day to generate internal loan documents and can fund a loan within five business days from acceptance of the term sheet. On the other end of the spectrum, we see community banks that take three months from a commitment to funding. Your biggest competition for this attribute is the regional and national banks that have become very quick to commit borrowers and fund loans, as long as the loan fits neatly in their lending “box.”
Influencer: Influencer describes how the borrower can advocate and be heard for their credit needs. If the borrower can sit down and describe their business plans and needs to the decision maker of the bank, or take the credit officer on a tour of the factory, then the influencing factor is high. Here community banks have a tremendous advantage over most of the competition, but credit unions and some national banks may also have some power in this attribute. Community banks excel at understanding their borrowers because they are so close (geographically and communicatively) with their borrowers. Borrowers like the local nature of a community bank decision-making framework and community banks need to broadcast this attribute to their customers and prospects.
Flexibility: Flexibility describes the potential of the bank to work with a borrower even if the relationship does not fit perfectly into the bank’s business model or if the relationship changes because of credit issues. This is an essential attribute that community banks must not squander. One of the identified competitors is “Crazy Bank.” What we identify by this term are banks that make non-rational credit decisions. Those banks are currently in their comfort zone making 30-year amortizing loans, at 85% LTV, on 5% cap properties, without individual recourse, and nine years into a business credit cycle. But situations and the economic environments change and when they do, will the Crazy Bank be able to show flexibility? Community banks can be flexible working with borrowers in good times, and if credit is soundly underwritten, community banks can be flexible working with borrowers in downturns.
Continuity: Continuity describes the consistency of the relationship between borrower and lender. Here again, community banks can have an advantage. Borrowers like to deal with lenders that understand their business and with whom they have a comfortable rapport. Borrowers do not want to educate a new lender on the job every couple of years because the bank is fond of rotating employees, or worse yet because of employee turnover. National banks are notorious for this mistake for middle-market lending.
Further, if the economy, in a particular geography, takes a downturn, national banks, insurance companies, and conduits have the luxury of re-allocating capital to other geographies that demonstrate better returns. However, for better or for worse, community banks are tethered to a local community and do not move to other states. This certainty of relationship and consistency creates substantial value for borrowers, especially in difficult economic times.
While many community banks emphasize their superior service as a differentiator, few can define what that service is. Banks must be able to measure the service they deliver and set up benchmarks for these services. Finally, community banks must motivate employees to deliver a high level of service consistently. We see four important attributes where most community banks can excel over their competitors and differentiate themselves to borrowers. These attributes give community banks prime advantages over many of their competitors.
Submitted by Chris Nichols on April 22, 2019