Ever watched “It’s A Wonderful Life”? If you’re a banker, you really should.
If somehow you haven’t heard of this movie, then you must not have turned on a television during the month of December. The 1946 film by famed director Frank Capra is a classic; so much so that, 70 years later, it remains a staple of the Christmas holiday movie circuit.
“It’s A Wonderful Life” is perhaps the ultimate feel-good movie, about a man who is talked out of suicide by a guardian angel who takes him back through his life, pointing out all the good he’s done.
The lead character is played by Jimmy Stewart, an actor whose face and voice just scream Main Street America.
Oh and Stewart’s character, George Bailey? He’s a banker.
So to recap: An actor everyone likes plays a movie character so beloved he has a guardian angel in a movie with so many good vibes that it’s still in heavy rotation 70 years later. And he’s a banker.
Scoff if you want, or call it mere coincidence, but know this: Hollywood is all about reflecting current society. So the fact that George Bailey was the heroic head of Bailey Brothers Building and Loan, a man whose loans helped make hopes and dreams come true for the people of Bedford Falls, should tell you how highly regarded bankers once were in America.
George Bailey was a stereotype in its most positive form: the banker as a pillar of his community, a person whom customers trusted and relied upon to help make their lives better.
Nowadays? That stereotype is not a flattering one. This past holiday season, while “It’s A Wonderful Life” was playing on various cable channels, “The Big Short” was showing in movie theaters. It’s about Wall Street investors betting against banks – and winning – during the financial crisis of 2008. A few years earlier, HBO made the movie, “Too Big to Fail,” about the government assistance banks received during that same time period. It was, to put it mildly, not a flattering piece.
Both movies – and the books they’re based on – paint a picture of the banker as the Bizarro George Bailey. Bankers are portrayed as greedy, incompetent and focused much more on some form of a financial shell game than they are on actually helping customers improve their lives.
Perhaps most telling, much of the language is about “the banks,” not “bankers.” They’re portrayed as faceless, monolithic institutions, on the absolute opposite end of the empathy spectrum from George Bailey and his family-owned Bailey Brothers Building and Loan.
Not that bankers have time to worry about what their image is like in Hollywood. They have bigger, real-world problems, on their hands. According to the Federal Financial Institutions Examination Council, the number of U.S. commercial banks is down from 14,400 in Q1 of 1984 to 5,309 in Q4 of 2015. Meanwhile, net interest margins have fallen from 4.91 percent in Q1 of 1994 to 3.02 percent in Q4 of 2015. (Source: FFIEC)
The Sad Story of WaMu
Washington Mutual could serve as posterchild for what’s gone wrong with banking over the last couple of decades. Opening as a sleepy little thrift on the west coast in 1889, Washington Mutual embodied George Bailey in many ways. They made home loans to individuals and families on a case-by-case basis, growing slowly in both large and small communities. Things suddenly changed, though, when the company “demutualized” in 1983 and converted to a capital stock savings bank. With that conversion came an aggressive new growth strategy.Following nearly a century of slow and steady growth, Washington Mutual – often identified by its nickname, “WaMu” – doubled in asset size in the next six years, and then embarked on a spree of more than 30 high-profile acquisitions between 1990 and 2006. As WaMu careened past a quarter trillion dollars in size toward an eventual high of $325 billion, organic growth at rates sufficient to please Wall Street became ever more difficult. Until, that is, the management team found a product type that sold literally as fast as the loans could be processed.
Almost overnight, WaMu became one of the nation’s leading producers of Alt-A and Subprime mortgages, including the now infamous option ARMs. These magical loans seemed to have unlimited demand, which should have been a blinking red light that something was terribly wrong. In short, WaMu, like much of the rest of the mortgage industry, had badly mispriced their risk in search of outsized growth.
The aftermath was fairly predictable once the marketplace realized what was happening. Keep in mind just how scary September of 2008 was in the financial markets. That was the month of Bear Stearns being rescued by JP Morgan Chase, Fannie and Freddie entering the protection of conservatorship, and the bankruptcy of Lehman Brothers, just to name a few. Amid that chaos, investors realized that WaMu was in big, big trouble, and funding started to dry up.
On Sept. 15, the holding company received a credit rating downgrade, and over the next 10 days, the bank experienced a run on deposits of more than $16 billion. The Office of Thrift Supervision (OTS) had no choice but to shutter the bank and place it in receivership with the Federal Deposit Insurance Corporation (FDIC). They sold the salvageable pieces to JP Morgan Chase for pennies on the dollar, and the once proud and powerful Washington Mutual was erased forever.
Ending With a Whimper
Of course, not all of the decline in banking charters has been driven by spectacular flameouts like Washington Mutual. Thousands of small banks have disappeared with a whimper instead of a bang, throwing up their hands and selling when they realized that they didn’t have the capital, the skillset, or the motivation to rebuild their business models for the new information age.
It’s sadly reminiscent of what’s happened in the world of newspapers. At one point, journalists were heroes, like Woodward and Bernstein, and the papers they wrote for were community institutions. But when the landscape shifted from print to the Internet, newspapers spent years focused on trying to squeeze out the same profit margins rather than putting their resources into finding new ways to generate revenue. So far they’ve succeeded only in slowing down a decline that looks more and more inevitable with each passing year.
How can banks avoid going down a similar path? How can they not only survive but also thrive, and return to their status as Baileyesque pillars of the community? They can start by listening to Peter Drucker.
Drucker, the famous business management guru, declared that: “The purpose of business is to create and keep a customer.” Profit, Drucker argued, is simply the proof that the business is fulfilling its purpose.
Banks do this when they create value for their customers by forging strong, lasting relationships with them.
To do this, banks must rethink pricing: The value they place on it; the strategies they use; the people and the tools they use to execute those strategies.
Pricing is where the risk management and strategy from the back of the bank meet the sales process and customer interaction in the front of the bank. There is a massive disconnect between these two functions that has led too many banks to choose one or the other. They either go the route of Washington Mutual, and forgo sound risk management and discipline in favor of sales targets, or they watch the world pass them by as they try in vain to serve customers using outdated pricing methodologies and sales techniques.
Put simply, pricing is where the rubber meets the road when it comes to relationship-centric banking. To get pricing right, banks have to begin with the lender/customer interaction and work backward from there, always keeping the process focused on strengthening the bond between the banker and the borrower.
That’s what we believe at PrecisionLender. It’s something we feel so strongly that we were compelled to put our philosophy into words, in this book.
You’re welcome to treat this book as a guide, picking and choosing the sections you want to read, but we’ve also written it to function as a narrative, with each successive section building off the previous one. The full story, from start to finish, is an important one. It applies to every key player at the bank – from the CEO, to the credit analysts to the lenders.
We’ll start by making the case for the importance of pricing to the future of banks. Then we’ll look deeper into the two dimensions of pricing: price setting and price getting.
Next we’ll talk about where pricing decisions are currently being made in the bank versus where they should be made.
Once we’ve gone through our philosophical approach to pricing, we’ll then turn to the practical side of things, and talk about how to turn this thinking into action – action that leads to stronger relationships and increased revenue.
It begins with putting someone in charge of pricing at your bank – your Chief Pricing Officer. Why do you need one? And what qualities should you look for in a CPO?
A CPO is only as good as the people who can “get the prices.” So next we’ll talk about what makes a great lender. We’ll follow that by making the case for bank transparency when it comes to the lending process.
Then, we’ll get down to the nitty gritty. When you’re ready to look into loan pricing software, what should you take into account when choosing a vendor? What do you need from the software itself? And once you’ve made those decisions, how can you make sure that your lending staff actually takes advantage of the new tools you’ve given them?
Finally, with all your pricing ducks in a row, we’ll explain why pricing must be an iterative process, both at the individual lender level and at the institutional level.
But enough previewing. Let’s get going with getting back to the days when being a banker was truly a wonderful life.
Join the Mailing List
The key to creating stronger customer relationships with customer is pricing. But why? Just how much can improvements in pricing impact your bank? Where can those improvements be found? And what does it look like when you start to move the ball forward on pricing?