We recently worked with a bank that was closing a multi-million dollar commercial loan. Exactly one day before the scheduled loan closing we met with the borrower to discuss the final steps to closing and funding. We were astonished to learn that the borrower did not know how the loan would be priced or what index would be used to set the rate. Except for the short commitment letter, the borrower had not reviewed any marketing materials from the bank. The borrower did not know the conditions or covenants for the loan and knew only the amortization and fixed rate terms. One day before the scheduled closing, the borrower had not received documentation. This is an extreme and unusual example, but bankers must decide if they want to practice transparent marketing or hide their business process and pricing from clients.
There is much talk about transparency in marketing. Some define transparency in marketing as the degree to which a company shares its leaders, employees, values, culture, strategy, business processes and the results of those processes with the public and customers. Recent studies have demonstrated the impact of transparency on perceived company effectiveness and success (HERE). Further, a recent report concluded that customers do value transparency from companies and are more willing to purchase products and service from those corporations they consider more transparent (2014 Edelman Trust Barometer).
However, it is not a forgone conclusion that banking is (or should be) heading in the transparency direction. Consider the application of the bank model to a restaurant experience. You walk into a restaurant and there is no menu. Instead, the server asks what kind of food would you like and you have a conversation with your server about various meal, the different sauces, and beverages that the restaurant might carry. Then after you agree on the appetizer, main course, dessert and beverage, the server will not quote you the final price until you start your meal. Then your stated price is increased and you cannot figure out why and are given long statements with numbers that most people cannot understand.
Banking, as it exists today, is anything but a normal client experience for most people. The branch experience with no prices, scores of pamphlets, marble floors and wood paneling is strange and has become normal only to those that frequently use bank services and only because that is what banks have done for hundreds of years.
Lack of Transparency in Banking
We believe that there are two main reasons why some banks are not moving to more transparency. First, there is a belief that margins will suffer through increased transparency, and second, lack of organizational and marketing support to break down the complex products of banking into component elements for simpler presentation to customers.
Many bankers believe that they can obtain better margins if pricing or terms of the product are hidden or disclosed only after intense negotiation. However, in the world of the internet, most borrowers can typically compare terms and pricing options across different products, geographies, and providers. Further, this argument is spurious because there are many banks that currently practice transparent marketing. From our experience and observation, bankers that resist transparency in their business become unwittingly self-selected by customers that have reason to accept less transparency. This is not always a good result for a credit-intensive business like banking.
It is true that the sheer number, complexity, and combination of our products and services can paralyze bankers (never mind customers). With ten different savings accounts, and five different checking accounts, college savings accounts, dozens of loan options and treasury management services, it is hard for consumers to figure out which option is best for them. Furthermore, many bank marketing departments have not done a good job in creating a clear and detailed explanation of all services available to various customers. Without this decomposition, bankers are left guessing along with customers about how bank products are structured and priced. Some bank executives have been squeezing marketing dollars out of budgets leaving little resources for marketing transparency projects.
Ultimately, the borrower in our recent meeting chose not to refinance his loan – to his determinant because his existing loan terms were not as favorable as those proposed. The bank in this instance lost the loan and probably a long-term relationship because of lack of transparency. While this specific example is unusual, bankers continue to rely on opaque pricing and structuring in hopes of widening margins. Long-term that strategy has not been successful in any other industry that we are aware of and we do not believe that the strategy will be successful in banking either. In a future blog, we will help bankers with a small toolkit that will explain one bank product (commercial term loans) and how bankers can share this information with customers to help them better understand their banking needs.
Submitted by Chris Nichols on March 22, 2017