Is your financial institution using a pricing solution to consistently and more effectively price your commercial loans and deposits? If not, you should be and of the many reasons that your FI should consider implementing a pricing tool, here are the top ten:

1. Every community bank is over-pricing their largest, most profitable customers, and underpricing the smallest, least profitable customers. It is potentially the biggest challenge we face as an industry that keeps us from growing, achieving increased profitability and competing as effectively as we possibly can.
2. Do you know who your most profitable customers are? Do your lenders have easy access to that information in a form that helps them make better pricing decisions? When it comes to making better pricing decisions, it’s critical to look at profitability in the context of the rate environment that existed when pricing decisions were made for each relationship.
3. Banks that are ‘watching the competition’ are effectively allowing the competition to price their loans or making a rate concession to ‘match the competition’. If we are all paying attention to what our competitors are doing – we’re watching them, they’re watching us – how do we really know if the resulting price makes economic sense for us?  Of course, competition is an important factor to consider – but there are other important factors as well… including your bottom line.
4. Institutions that employ a technology-based empirical pricing solution win more deals, enjoy higher net interest income, and achieve higher profitability. It’s an inescapable fact. Typically, the increase in net interest income equates to 25-50 basis points. That likely equates to a bigger annual impact than any other program you may currently be working on.
5. If given our preference, we always prefer to get fees on a loan. However, it’s also important to recognize that we are operating in a competitive world. Fees have a much greater impact on profitability for some loans than others. Make sure your lenders consider that fact when structuring pricing proposals – particularly for fee sensitive borrowers. Fees are critical on lines of credit, construction. development and small loans. They have far less impact on profitability of larger term loans.
6. Deposit balances can provide pricing power on a loan depending on the size of the deposit and rate. Be sure you are accurately reflecting the average balance of a deposit and the current interest rate when evaluating profitability.
7. Use the Rate Sheet feature in Pricing Manager to build consumer loan and deposit rate sheets that consider the main drivers of profitability to establish your pricing. On loans, size of loan, term and credit risk of the borrower are essential considerations.  For deposits, size and term are also the main drivers. Too often we don’t consider the size which is critical to maximize net interest margin.
8. Run a Pricing Manager loan scenario on every commercial loan opportunity you consider and include the PDF of that scenario in your loan packet. Also, include the Relationship PDF so that you are able to consider the profitability of the customer when making your pricing decision.
9. Use the reporting feature in Pricing Manager to evaluate lender performance. Reports on average ROE, total loan amount, and loan count are available by product and by lender. Use this feature to make sure your lenders don’t just price to the target and are striving to beat your targets as often as they can by as much as they can.
10. Use Pricing Manager to ensure your adjustable-rate loans are priced appropriately – not only for the life of the loan, but for the initial fixed period as well as the adjustment periods. Too often, the rate for the initial period is inadvertently ‘discounted’, banking on the adjustment periods to achieve target profitability. But there is no guarantee the customer will keep the loan through those adjustment periods. Using the adjustable feature in Pricing Manager will allow you to ensure your loans are priced consistently and achieve your profitability targets.

Please contact Strunk at info@strunkaccess.com or 800.728.3116 to schedule a demo to learn more. Click here for more information.

Mega banks and major regional banks all have very advanced loan pricing solutions. Not only that, but they are also getting more and more sophisticated.

The complexity found within “big bank” pricing tools underscores the reason why community banks need to act and make progress toward adopting a more empirically based, formal pricing solution or they will ultimately risk getting relegated to the low end of the market. Just like the large consumer lenders ultimately pushed community banks out of the consumer lending business, large banks will do the same with commercial lending.

What does that mean?  Banks using pricing solutions are varying capital assumptions based on risk grade, and a variety of other considerations.  On top of this, they are also lowering ROE targets on the best credit grades. The ultimate result of that is the customers with the best risk characteristics are being offered more and more aggressive rates on commercial loans by these big lenders.

Why does that matter for the typical community bank?  The typical community bank is going to become less and less competitive in terms of the rates offered to their biggest and most profitable clients and prospects. Over time, the vast majority of these prime borrowers will migrate to the best offer.  The notion that service will make up the difference is a complete fallacy. We tell ourselves that is true, so we don’t lose as much sleep worrying about losing all of our prime business!  The reality is – of course service matters – but it isn’t going to offset 50, 100 or 200 basis points in price. This is particularly the case on larger loans because those basis points add up to a lot of dollars the bigger the loan gets.  We see this on the vast majority of demos we do at Strunk. Bankers are quoting rates today in the 8% range on loans larger banks are doing for 100 or more basis points less.

The math behind this notion is pretty simple, these large banks are allocating less capital to the best credits, which means the rate required to achieve their target ROE is lowered – i.e. if I lower my capital (the ‘E’) I don’t need as much return (the ‘R’) to achieve my target ROE percentage.  Then, if we lower the target ROE to boot, that’s kind of a double whammy for the community banks to be competitive.

Since the advent of credit cards and the expansion of large auto lenders, consumer lending has gradually declined to next to nothing for community banks. These big lenders found far more efficient ways to service consumer loans and to offer the most competitive risk-based rates to the consumer. As a result, community banks have been left with dribs and drabs of consumer loans – and for the most part they are sub-prime consumers. If community FIs allow the large banks to continue to get more and more technical with their approach to commercial lending without an appropriate response, the same thing will happen to their commercial business.

Pricing should be the number one priority over anything else, including exams and systems conversions. This is the portion of a community bank’s business that essentially generates all of their profit.  The time to implement a sophisticated pricing tool like Strunk’s Pricing Manager, is now!