Banking Technology Solutions for Standing Out in a Commoditized Marketplace

Mitch Woods: Welcome back to Baker Hill’s podcast, Lending Made Easy. 

Today we’ve got Bryan Peckinpaugh and David Catalano again, and we’re discussing really a fun topic: How can you use banking technology solutions to stand out as a financial institution? 

And, to start off, I’ll just call out the elephant in the room. Every bank offers the exact same products, right?

Everybody has online banking. They all have mobile apps. They all offer checking and savings. They have mortgages and business accounts. 

Also, everybody has a bank and nobody enjoys the process of changing banks. 

So, really, the first question of the day is: How do you—if you’re a community bank or credit union—use banking technology solutions to stand out in the marketplace today and compete?

So Brian, we’ll start with you on this one.

Bryan Peckinpaugh: Yeah, so—and I’m curious about your thoughts, David—but, I think, very broadly speaking, that at the end of the day, there’s only three ways for a financial institution to truly differentiate and compete.

One is on scale, and that’s limited to the very few at the top end, right? I mean, what what a Chase, Bank of America, or a Wells-Fargo (and others like them) might be able to provide to their clientele is going—by nature of their size, scale, and reach—differentiate them from a small credit union in the middle of nowhere.

They [community banks and credit unions] just don’t have the same product sets, right?

So, there’s that top end of the market that can differentiate from the more regional community banks based on just overall breadth of offering. When we start thinking about the community banking space, I really see it in one of two ways. 

First, there’s expertise. As an example, maybe I am very focused on something like nursing home lending. In that scenario, I can build based on my expertise that allows me to approach that market differently than others might and, thus, become the lead competitor for that type of business. You could apply that to any number of niche businesses across the banking sector.

Second, there people. Especially in the commercial banking space, my allegiance and desire to do business is based on the relationship manager or lender that I’m working with. It’s not necessarily with the brick and mortar financial institution. How you empower your people to do what they do best on behalf of your bank becomes one of those primary driving factors of differentiation and competition. 

What do you think, David? Am I missing any, or are those three good buckets to think about?

David Catalano: Those are ideal buckets to think about, really. Expertise really hits home with me. For 11 years, I ran a niche lending company. We had five different niches. 

One of our niches, for example, was dentists. We would make a loan—typically a term loan or real estate loan—to a dentist somewhere across the country. And, we were always higher than the local bank, probably 200 basis points higher on every single loan.

Why was that? How could we get away with that? The reason was the expertise. 

We knew the dentistry business inside and out. We knew what their overhead levels would be. We knew what their lab expenses had to be. We could have conversations with them about their business and global cash flow, which—in that particular small business niche—includes their lifestyle, ability to borrow, ability to sustain their business longer term, and plans for when they want to retire and all that. 

At that point, You’re really becoming at that point an advisor. Not just someone who gives them the capital that they need.

Whenever I look at a lot of bank financials and whenever I look at someone who’s got a really large balance sheet of commercial and industrial loans and they’ve got really strong yields relative to their peers, I’m always looking around for a niche. Do these guys have a niche? I bet you they got a niche.

Bryan Peckinpaugh: Yeah, what did they figure out that nobody else has?

David Catalano: You can add value through advice because you’ve seen a thousand of [ other clients like ] them.

If I work with a thousand people in any niche, when I see the next person in that industry, I’m gonna be able to discern qualities, weaknesses, and, potentially, what could make things better. 

So, yeah, I do believe what you just said is dead on. 

You don’t need to offer the lowest cost of money or any of that if you add advice. That creates tons of value. 

Then, there’s people empowering them, right? But there’s a lot of folks inside the bank that are processing the work and how do we help them get their work done faster?

We talk to community banks, and often, if they don’t have banking technology solutions, will enter the same information ten times to create a commercial loan.

Can you imagine that? If you’re an employee there, and you’re thinking, why are we doing this? It’s gotta dawn on them that this doesn’t make a lot of sense because there’s no value-add there for the employee when you’re doing that, right?

It’s a tedious task, and you’re cranking out the same information over and over. How many times do I type “Bryan Peckinpaugh” to do his commercial loan? 

Bryan Peckinpaugh: Well, you definitely don’t want to do that. That’s a long last name. That’s a lot of letters to type. 

David Catalano: Right, but you could have a digital workflow where you’re entering data once—like someone with a long last name— to use it over and over. That will allow you to do your work faster, which then translates to what I call a “wow experience” in particular for commercial customers.

If you think about the commercial lending process, the borrower doesn’t have much to do relative to the bankers.

Bryan Peckinpaugh: Yeah, well, relative to the overall workflow.

David Catalano: Yeah, exactly. Digitizing the commercial borrowers experience doesn’t excite me. But if you want to excite me, create digitization banking technology solutions for people underwriting, creating loan documents, tracking items, and collecting information for originating loans and servicing them on the back-end. 

That is where the lift comes. That will differentiate you.

Bryan Peckinpaugh: Yes, absolutely.

David Catalano: When you can take your loan process from 74 days to 32 days and your commercial borrower says, “I don’t want to close that fast.” Now you’ve got something.

Bryan Peckinpaugh: Yeah. I probably should have qualified, right, that we’re talking about valuable ways to compete. I can always compete by racing to the bottom, right? I can offer an interest free commercial real estate loan, and I’d probably win a lot of business, but I’m going to go out of business pretty quickly that way, too. 

Like you said, David, it’s not just the speed. Because I can be fast, right? I can get to “yes” or “no” in ten days. But, was it the right yes? Was it the right “no”? That factors into it as well. 

So, as you were talking about with the expertise and the niche and the technology, putting those things in place that allow you to do the right things faster, certainly can help in winning that business and competing in the market. Because, like I said, it’s all about the valuable ways we differentiate, not just differentiation for differentiation’s sake.

David Catalano: Right, right, right.

You’re looking for ways to enhance the value of the business while at the same time enhancing the customer’s experience.

You’re trying to create a moat around your business. Something that others don’t have. That’s going to be predicated on the culture you build as a leadership team and how you empower employees because they’re never going to treat the customer any better than you treat your team. That’s just a fact.

Bryan Peckinpaugh: Absolutely. 

David Catalano: So you absolutely want to treat them very, very well because then they’ll in turn treat that customer well and give them the tools required to do their work efficiently. You need to use the right banking technology solutions to keep them from having to do tedious work and allow them to do value-add work.

Bryan Peckinpaugh: That keeps those people with you, too, right? It builds loyalty.

If I invest in my staff and bring new banking technology solutions in to help them do their jobs, I’m acknowledging the challenges that they face in their day-to-day work. That builds loyalty to your financial institution. And, again, your employees are one of the biggest differentiators you have.

If I’ve got, Sally the relationship manager who’s got a book of business that makes up five or ten percent of my commercial portfolio because she’s my top performer, and I’m not listening to the challenges that she’s facing, I’m not solving her challenges.

If I’m not making her day-to-day job easier, her job still has friction.

So, Sally may leave if she sees that things are better at a financial institution down the street because they have automated lending processes and digital footprints that can be accessed and used by the borrowers. She may be lured away by a competitor with banking technology solutions that create a more friction-free experience for the lender. 

If Sally jumps ship and takes any portion of that business with her, that’s a huge hit to the balance sheet because, like I said—especially in the commercial space—people tend to follow the relationships, not brick and mortar groups.

Customers don’t care necessarily what name of a financial institution is on their relationship manager’s business card or what lapel pin they might be wearing. Customers care about their relationship manager Sally. They want to do business with Sally because she understands their business and markets

Like you were saying, David, you can charge higher on a basis point perspective because of the person that is doing the lending, almost acting as a defacto financial advisor. Right? 

I understand your business. I know you need this loan, but you need these other things, too. If you do these things, you can maximize your operations. 

Those are the people they wanna do business with, and they’re going to follow them no matter where they go.

David Catalano: Yeah, I agree with you because, if you think about the relationship manager, they’re trying to make their borrower’s life easy. If you’re an impediment to that too many times, you’re going to lose them.

There’s no question about that. It’s their support team that supports them, and it’s their support team that has to get their work done to keep them happy, which keeps that commercial customer happy. You’re right there. You start losing people if you don’t have that technology in place or that digital experience.

Now, we’re in 2022, so anybody born in 2000 or later really grew up with some type of device in their hand. They know what a good experience is and what a bad experience is. They’ve gotten new phones, and they know what Amazon and Google deliver.

I’m not suggesting a community bank has to deliver that level. But you can’t expect somebody working at a community bank that doesn’t have banking technology solutions (who has been brought up in that environment) to reenter the same information ten times to do their work. Right?

We know every lending process is eventually going to convert to digital, but the question is: When will you do that? And, I would argue, the sooner the better.

Mitch Woods: You know, David, you bring up a good point. The impact that the Amazons and the Googles have had on every industry has disrupted a lot.

I’d like to tie it back to Bryan’s point about scalability. Community banks and credit unions aren’t just competing with the big four when it comes to scalability. They’re also competing with fintech startups and online-only banks that aren’t brick and mortar-centric. 

What’s the play there? Where do we go when we start thinking about empowering our employees with the right types of technology to compete, not just with the bank down the street, but maybe these unknown factors that are popping up every day?

David Catalano: In my experience, when it comes to any non-bank lender, recessions will wipe them out because no one is going to fund their loan production. That kind of clears the deck every time, or at least it historically has. I don’t see that ending anytime soon.

I don’t worry too much about them for the community banks who are serving the local developers and the local businesses or buying and building and investing in real estate, commercial, and industrial lending at a local, community level.

There’s a certain element that fintechs focus on. A lot of times they’re niche or they're willing to take a credit risk that, say, a traditional bank may not want to take. They’re able to charge a rate that’s commensurate with their cost of funds. 

But, community banks and credit unions have a cost-of-funds advantage that keeps them in a unique spot from a competitive perspective. 

Now, if we wake up tomorrow and Amazon is a bank? Well, I don’t think that’s ever going to happen because then it’s a whole different world. Amazon’s never going to fall under the regulation of a bank.

If you’re a banker and you think there’s a technology play out there from a competitor, sign up for their service and see how it works. 

You may not be a borrower on the commercial side, so that might be tough for you to do. But you can experience the consumer side of it. 

Then, you can talk to a provider of banking technology solutions to see if they have a solution like that, what the cost is, and what the ROI would be, and, how that would impact your brand by adding that type of technology to it.

Mitch Woods: Awesome. Brian, do you have any final thoughts?

Bryan Peckinpaugh: One thing I'd like to leave everybody with is this: we talk a lot about forward thinking technology. At times we get—as David was saying—hung up on the newest and shiniest option, especially, as we see what the true fintech providers are looking to do and where they might focus.

I would encourage people to not forget to get the basics right first. It’s easy to jump to the flashy. You have got to get a good foundation in place supported by banking technology solutions. You must have something that you can build on top of, and then you can grow from. 

For example, it’s hard to go from being completely out of shape, never working out a day in your life, eating whatever junk food you want, and then trying to train like you’re going to be in the Mr. Olympia competition next year. 

You have got to work your way there. You need a good, solid foundational base in place, right? You have to address your diet and behaviors. Then you can start worrying about the fine-tuning to do the more fun, exciting stuff. 

Don’t forget that because that goes right back to this competition. If you let the others focus on the flashy (and the things that may not pan out at the end) but you get the basics right using banking technology solutions, then you’re going to keep winning the business you want to win—and, winning it at margins that you can successfully grow with.

Mitch Woods: Awesome. Brian, David, great conversation today—a lot of great takeaways.

Thank you both, and thanks to you and everybody else for tuning into this episode of Lending Made Easy.