As you evaluate a community or small regional bank with assets from $1b to $10b you will find that most of these types of banks are running 10-12, revenue or fee generating lines of business. As you can imagine, this is a difficult proposition, but it's done to be able to deliver banking products and services to support a business owner, the needs of the underlying small business and the individuals that are working for that small business.
The best place to start is with the origination of credit (i.e., the loan). This is where most commercial or business relationships begin (and in some cases end, but we'll get into that in a second). To the extent a bank can support the credit and capital needs of the business, and the bank is comfortable after extensive underwriting in making the loan, the relationship will generally start with the extension of credit. If that bank can't or won't extend credit to the business that is usually end of conversation in the context of a relationship and the business owner will move on to a bank that can and will extend credit. Assuming the bank approves the credit, the business owner is willing to entertain the idea of expanding the relationship to other areas of the bank.
As mentioned, the relationship starts with the loan. However, it doesn't stay there for very long because often there are significant cash management and money movement needs of the business. Often referred to as Treasury Management, the bank is interested in delivering ancillary services like Treasury where they deliver a white labeled digital banking platform (like Q2, Alkami or Apiture). Alongside the digital banking products, which assist with things like money movement and all the administrative requirements to move money safely and efficiently, the bank will deliver a suite of other products like positive pay. The other products beyond digital, are intended to provide tools to assist the business avoid risk of loss, make the reconciliations associated with money movement easier and many other things that impact the day-to-day of the folks that sit in the finance and accounting areas of a business.
Beyond Treasury Management, there are several other products and services a bank can offer that help a small or midsize business manage the business, mitigate risk and move money faster and more efficiently. These products include things like interest rate derivatives (ex. SWAP's), payments products that help a business take payments via a card or card network, account receivable insurance and so much more. The point is that each of these unique products generally constitute a line of business with its own P&L and responsibility for generating fees for the bank and in some cases new deposits for the bank.
The individual needs of the business owner are extremely important to the bank alongside the needs of the business. This is because the individual needs of the business often constitute an opportunity to generate additional fees and/or deposits for the bank.
Once the relationship is established on the commercial side, the bank generally moves to attempt to support the individual business owner and possibly the other executives of the business. The products offered by each bank certainly tend to vary, but are often products we've all used like residential mortgages, auto lending or plain vanilla consumer lending.
Beyond the basic consumer financial products we are all familiar with, things get more complex and more lucrative for the bank. In many cases, the business owner of a small or midsize business meets the requirements for an introduction to the private wealth division of the bank. These needs are much more complex and often include both lending and asset management catering to the needs of the business owner or their family. With many small and midsize business owners the line between the business and individual is blurred and a significant portion of the asset base is tied up in the value of the business. Private wealth management teams help manage these assets, in some cases provide personal lending against personal assets (including the business) and assist with asset management beyond the business. As you would expect the private wealth division of a bank is yet another line of business with its own set of needs, regulatory requirements and financial expectations.
Given the complexities of running 10-12 different lines of business that generate revenue for the bank, there are a number of lines of business that help the bank manage the risk of fraud, the risk of loss, manage regulatory and compliance requirements and many other things.
Operations is of critical importance inside a bank and touches nearly all areas of the bank to include both the front office and the back office. Often, the COO is one of the most important leaders in the bank and certainly someone that will have a significant influence on decisions that get made (especially product decisions where those products present a need for new FTE's or where additional operational resources are necessary).
Finance and accounting is clearly another area the bank relies on from a strategic standpoint. Banks tend to be very numbers driven especially where regulators and supervisory agencies are involved and where peer group comparisons are made. The financial and accounting team is managing the hundreds of inputs that drive a banks CAMELS ratings and a key influencer of product related decisions.
Managing risk and auditing adherence against policies and procedures is obviously a big part of what a bank does. Virtually nothing happens inside a bank without the influence of risk and audit. Risks present themselves in so many ways from the obvious risk of loss and fraud to the less obvious business continuity risks and data security risks that present themselves in product oriented decisions.
Think of banks as having two distinct sides to the organization, the revenue generating side and the risk and compliance side. With respect to the revenue generating side, these lines of business (many of which have been discussed above) and primarily focused on generating top line revenue with goals tied to this objective. For example, a banker is compensated, evaluated and ultimately promoted based on their ability to generate assets that generate revenue for the organization. To that end, other businesses like treasury or merchant services generate fees and other sources of revenue for the bank alongside the assets that the bankers generate.
However, on the other side of the equation, banks have a significant obligation to produce assets that are within a certain risk profile. Risk presents itself in many different forms and so therefore banks have infrastructure and FTE models built around these forms whether it be the risk of fraud and associated loss or the risk present in underwriting a loan. Regardless of the type of risk, the other side of the bank opposite the revenue generation side is critical in insuring the bank doesn't lose money from a loan portfolio, get fined by a regulator from having poor risk management processes or get sued for mismanagement.
As it relates to selling to banks, the best place to start is by developing a deep understanding of the lines of business that exist within a bank and the personas and people that run those lines of business. Asking the question of how will my product, fintech or otherwide, help the bank produce a balance sheet or P&L outcome is the right first questions. However, it doesn't stop there and to be effective in selling to banks the next question to ask is how will my product impact the back office in the context of risk, operational resources and adherence to internal policies and procedures.
C-suites make strategic decisions on what will impact the balance sheet in the context of asset yields and deposit costs. The makeup of the balance sheet is what drives profitability through a bank. The assets generate revenue, but the deposits and the liability side of the balance sheet generate offsetting costs. Further, the bank still has to cover OpEx beyond what is generated in costs through interest expense. Understanding the impact of the fintech product to the balance sheet and to the P&L will help streamline the sales process and help a bank immediately understand what to buy.
Setting aside the impact to the balance sheet and P&L, the impact to the back office in the context of risk, compliance and regulatory guidance is also critical. The risk-return equation drives bank decision making. To the extent a fintech product can make an outsized impact to the P&L, but also present undue risk from an operational or regulatory standpoint the bank will pause and likely look for another solution to produce revenue with a lower risk profile.
As with anything the people and the personas are the ones making the decisions. Understanding the personas that exist inside the bank, both in the front office and back office are critical to success. Understanding the personas involves understanding the job and agenda of each persona. Risk managers are going to have a different view as compared to a revenue producer and likely be compensated differently. Audit is going to have a different view than that of a risk manager and needs to be at arms length internally. Understanding what's important to each persona helps streamline the sales process and makes the fintech more effective in selling into a bank.
While there are numerous considerations as it relates to the topic of "lines of business" one must understand the existing infrastructure of the bank in the context of technology stack. It matters greatly the core, digital banking provider and other technology vendors the bank is using to run the different lines of business. This matters primarily because each vendor and each technology stack are different, each with their own strengths and weaknesses.
In the context of lines of business, it is important to evaluate which line of business you are supporting with your product. Understanding front office vs. back office and the personas that go with them. It's one thing to be a "disruptor", but if you are building a product that doesn't have a home it's going to be a slow death. Get clarity on where you want to fit in and who you'll need to influence as a critical first step in bringing product into a bank.
Finov8r is a leading embedded advisory consultancy that supports banks, fintechs, and privately-held corporates. Bridging finance and technology, Finov8r provides tailored solutions that foster profitable growth, simplify technology complexities, and deliver 5x ROI through fintech innovations. With hands-on advisory, Finov8r works within teams to achieve long-term results, unlock new revenue streams, and modernize operations. For more information, visit finov8r.com and follow on LinkedIn.
Bank executive, fintech founder or business owner and want to get in touch regarding Finov8r advisory? Email me at allan@finov8r.com.
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