The Middle Market: How Banks Can Capture A Major Growth Opportunity

by Nick Miller, President, Clarity Advantage & Charles Wendel, President FIC

Most middle market banking groups are failing to achieve their potential in the middle market.

As banks struggle to generate new revenue and grow, more are increasing their focus on middle market companies (typically $10 million to $100 million in revenues) because they are attractive clients for lending, fee generating products, and cross-selling both to companies and their owners and employees. However, insufficient market differentiation, dysfunctional organizations, overstaffing or the wrong staff, and a poor sales management process, all combine to limit bank  performance in this segment.

At least six factors are critical for bank success in this space. Operating without a coordinated  emphasis on these areas places a bank at a competitive disadvantage and results in poor productivity and mediocre returns.

Bank commitment and consistency. The great middle market banks such as Comerica, BB&T, City National, Silicon Valley Bank, Wells Fargo, and J.P. Morgan Chase have focused consistently on the middle market for many years, developing strong reputations and creating barriers to entry for new players that need to demonstrate their commitment to this segment.

J.P. Morgan Chase and its predecessor banks have focused on this segment for at least 40 years. Chase has established a clear approach to this business, knows where it wants to play and where it does not, and has limited (but certainly not eliminated) the internal frictions and conflicts that alienate customers. They have accomplished this by consistently reviewing their approach and adjusting it when necessary for market or competitive reasons. By comparison, another large money center bank we know has been in and out of this market at least six times during that period, undercutting its credibility and limiting its market impact; middle market customers have long memories.

Until recently, managers of middle market groups instructed their bankers to concentrate on credit quality and portfolio monitoring rather than new business, an appropriate focus given the downturn in the economy. Now, these same bankers have been assigned growth goals and sales targets, oftentimes without being given the tools and structure to succeed.

Diffentiating expertise and client experience. Being a generalist lender often condemns a bank to subpar returns, intense competitive pressures, and frustrated customers. The middle market requires banks to develop expertise in several areas usually, but not always, industry-based.  In our experience, we have seen banks focus on more traditional areas such as health care and transportation as well as unusual targets such as check cashers, vineyards, independent film production, and churches. Each bank needs to determine the handful of industries in which it has the interest and capability to specialize; this is an instance in which one size definitely does not fit all.

Developing an expertise builds a market reputation, draws potential customers to the bank, and often allows for some premium pricing, whether on the loan or fee side. It supports the relationship-banking concept in a concrete way that customers appreciate. Yes, you can differentiate yourself by customer service, but that is an increasingly difficult strategy to defend.

Once an expertise-based differentiation strategy is chosen, banks must deliver it consistently and predictably. (This is how ‘brand’ is delivered to the street.) Many middle market bankers have long viewed themselves as artists or independent professionals whose highly personalized work, unlike bankers in other business lines or other professionals, is not subject to standardized checklists, consistent expectations, and targeted performance metrics. Increasingly, management is rejecting this attitude, forcing greater internal discipline.

Slowly, banks are beginning to understand that “client experience” is the extension of strategy, value proposition, and expertise and that “client experience” can and should be defined in middle market banking  just as it can be defined in wealth management or other professional services environments.  This is not a new concept. In earlier times, IBM sales people or J.P. Morgan or Chase Manhattan Bank corporate bankers delivered unique and recognizable client experiences through the people they hired, attitudes, clothing, tangibles such as stationery, and work methods as well as their products and services.  Since long-lasting product differentiation is increasingly difficult, differentiation based on experience becomes significantly more important.

RM job definition.   In effect, many middle market bankers design their own jobs and their own methods with some deciding to concentrate on account maintenance and others on credit monitoring.  Oftentimes sales and marketing fall to the wayside; in the words of one relationship manager (RM), “Selling is what I do after I do everything else.”

The best middle market banks have long recognized the need to introduce consistency and discipline to this business line.  They have reengineered the RM job itself to shift credit responsibility to risk specialists and reduce or shift administivia to others, allowing their bankers to focus 60% or more of their time (vs. a more typical 40% or less) on customer sales and solution development.  They have introduced standard processes and score cards that include specific sales, production, risk management, and other elements that direct RMs to focus their efforts on activities that provide substantial customer value.

The best middle market banks have also focused on RM portfolio composition and consistency. Every time we have analyzed middle market portfolios we find that a substantial percentage of companies the RMs manage are in reality small businesses. While RMs offer multiple reasons to justify why these accounts should remain with them (for example, the close relationship they have or the businesses potential)  in most cases, the bank can transfer these clients to the small business group, freeing up RM time for new sales and cross-sell and , if done correctly, reducing the cost to serve those customers.

Sales management. Bank effectiveness in the middle market requires at least as much emphasis on Team Leaders as on RMs. Too often, Team Leaders are more bureaucrats than sales leaders and coaches, communicating the wrong priorities to the RMs. When sales performance lags, senior leaders typically blame, train, or fire relationship managers rather than examining team leaders who should be responsible for leading, coaching, and developing their team members and team leader job design.

In contrast, at one well-performing bank, Team Leaders see themselves as “protectors “ of RMs, working to remove as many compliance and other time consuming tasks from them as possible so that they can focus on being with customers and prospects. In addition, they attend multiple sales calls, review and refocus RM activities, assist in closing deals, and eliminate internal barriers to sales success.

Bank sales management processes must also engage marketing, cash management, wealth management, and other areas. Today’s environment of slow growth and the need to steal share from other banks demands presenting a bank’s total capabilities and generating as much revenue as possible from each customer. RMs with specialist input need to diagnose their portfolios to set cross-sell goals that can only be achieved with the close involvement of other bank groups. Once set, goals need to be revisited both to celebrate and communicate successes (that is, internal best practices) and to reevaluate and refine approaches that are not providing the intended results.

Performance incentives. Compensation remains an area that is ripe for innovation and rethinking, although little of either has occurred in recent decades.  When banks use performance-based variable compensation, they often base too much of the variable compensation on current year revenue or production (because it’s easier to measure than multi-year or lifetime value) and too much of the total compensation is salary-based with incentives/bonuses usually being either a small percentage of the overall package or determined subjectively. Further, the difference between ‘high performers’ compensation and ‘middle’ or ‘low’ performers compensation is not sufficiently large.

At the cutting edge, a few banks we know are integrating client satisfaction or client loyalty measures – taken directly or through research firms engaged for the purpose – into bonus or incentive compensation decisions. Others are increasing their emphasis on team leaders’ assessments of relationship managers’ adherence to and effectiveness with their banks’ prescribed sales or relationship management methodology.

Execution.  How frequently does your bank follow-up on and effectively implement the decisions management has agreed to?  Too often, banks slip back into old habits. Middle managers fail to do the hard work of setting direction, leading, and shaping activities.  Bankers, rather than embracing change and improved approaches, hope that “these too shall pass” and yearn to return to their own ways. Management cannot allow that to happen.

The best Middle Market groups have, like other well-managed organizations, developed habits of  clarity, commitment to mission, accountability, and consequences.  They establish formal or informal limits to what is expected and acceptable. They take the view that, while individuals’ drive, expertise, and self-expression are critical to success, individuals’ skills and preferences must align with institutional strategy and process. They groom and promote managers capable of leading, directing, and coaching team members to ‘go with the program,’ execute reliably, learn from mistakes and variances, and improve productivity and performance.   They encourage those who adapt and change; they discourage or release those who don’t.

Banks wishing to improve their middle market performance should begin by determining the current status of their approach across multiple areas. This type of report card sets priorities for future focus and change. Some areas to consider include:

  • What is the RM’s role and responsibilities?
  • How much time is the RM spending on sales and customer activities versus non-revenue activities such as compliance? How closely should the RM be involved in credit decisioning? Does consistency exist across the footprint or are bankers emphasizing different activities?
  • What percentage of wallet share are you capturing? Why is share being lost to other banks?
  • Do you have a rigorous sales management process?
  • Does the Team Leader focus on sale management or other areas?

Frank assessment of current practices allows a bank to understand its performance gaps and gain internal consensus on required changes and the key stakeholders that need to be involved. In some cases, banks will have to face some harsh facts, for example, that they must dramatically redesign current roles or change personnel. But the alternative to doing so is lower productivity, mediocre returns, and increased competitive inroads into what should be a high-priority customer base.

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