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Why Is Primacy so Popular at Commercial Banks?

Over the past year or so, the term “Primacy” has come up more and more often in our daily conversations. Banks are investing more time (and more resources) in efforts to become the primary financial institution for their most valuable customers.  

We recently talked with Dallas Wells, PrecisionLender’s EVP of Strategy, on the Purposeful Banker podcast, to get his thoughts about what primacy really means to banks, and why it’s so high on many of their to-do lists heading into budget season. Several of the questions were based on a December 2020 article by Novantas, “A New Focus on Primacy in Commercial Banking.”  

If you’re in a rush, here’s a list of the topics we cover in the conversation. You can skim down to the ones that matter most to you. 

  • What does “Primacy” actually mean to bankers? 
  • Is the payments account the key? Or is it about credits? 
  • Why is Primacy such a hot topic right now? 
  • Has the pandemic created a sort of opportunity to win more primary relationships? 
  • What are some steps banks can take to move Primacy from buzzword to reality? 
  • Where do actual deal conversations factor in? 

Q: What do you think of when you hear bankers say, "We want to be the primary bank for our clients"?  

A: If you asked 5 members of an executive team at a bank, you would probably get 5 different answers. That’s part of the issue here. Banks feel primacy is important and they want to pay attention to it and invest in it, but they are not totally clear on exactly what primacy is. 

What they are after is to be the most important bank to their best customers. They understand their commercial clients, as well as retail clients, are going to have some scattered relationships, with accounts at other places. But they want to be at the top of the list. When someone says, "Where do you bank?" They want their clients to mention their bank first. 

But if you’re just making a judgment call on whether you “think” you’re the primary bank for a client, you’re likely going to overestimate it. Your relationship managers will be particularly guilty of this. They feel they are the first stop for most of the clients in their portfolio, and often that is just not true. But without creating some quantifiable, measurable ways of defining primacy, you are never going to pin it down and see if you are making progress. 

Q: Novantas defines a client’s primary bank relationship as being based on payments business and the operating account, instead of the traditional connection to lending. Agree? Disagree? Too simple? 

A: They're probably right, but there is some nuance to it. This is a definition that has changed over time. 

Let’s back up though and compare it to how you would treat retail banking. If someone asked you where you bank, you would answer with the institution where your paycheck gets direct-deposited. That is what you think of as your bank, even though you probably have different accounts at half a dozen to a dozen financial institutions. Between mortgages and savings accounts and retirement accounts and 401(K)s etc., it gets spread all over the place. Even though the balances may not justify it, where you say you “bank” is your checking account, where most of the transaction volume happens.  

For a long time, the commercial side of the business did not treat it that way. It has always been a credit-centric business model, so in classic bank fashion, we thought of it as, "Well, if it's the most important thing to us, it's the most important thing to the customer, so the primary bank is wherever the big loans are." That has shifted over time. Now we are seeing it’s much more in parallel with the retail side of the business; the primary commercial bank is the one with the operating account, the one that does most of the transactions - where you have the core payment flows in and out for that company. The credit may be elsewhere. 

Q: I doubt banks are suddenly saying, "Holy cow, maybe we should be focusing on becoming the primary bank for our clients!" as if this was something that had never occurred to them before. So why then, is this topic so hot these days? 

A: It is sort of a Captain Obvious thing. But I think it's so hot for a couple of reasons. One is this 50-plus-year trend of shrinking margins and shrinking credit spreads. It's harder than ever to make money on the credit side of the business, so primary status is more important than ever. Credit is very profitable, but it's very resource heavy, both in terms of people involved and the capital you tie up in lending money. 

You don't have to do that on these treasury services. They take very little capital allocation. Again, even at modest profitability, you are talking about pennies of capital to support that revenue. It's a way to generate profits without that capital constraint that is going to limit the size of everything else.  

I think it's just part of a trend. We have reached that tipping point/. Before banks kept saying, "Yeah, it's important. We'll pay attention to it," but now it's like, "Okay, it's no longer a nice-to-have. We have to have this to survive." Banks can't really say they are just going to try to maintain their business model and live off credit spreads; that's a bad business to be in right now, just because all the trends are in the wrong direction. The competition is tough, and especially in this current cycle, in this current environment after the pandemic, you have got to win some of that fee business. To win that fee business, you're going to need to be the primary account. 

Q: We previously talked about Greenwich Associates’ research on customers switching banks more often during the pandemic. Has this current environment created a moment where you can say, "If we put some focus on primacy, we can make some headway"? 

A: Yes, and there are a couple of reasons for that. 

One was this forced digital revolution, where you couldn't drop by the branch and sign papers and drop things off. You literally couldn't. The bank had to invest in the infrastructure to facilitate that stuff, and customers had to get comfortable using it. All those digital tools heightened the competition a bit, where now you have some feature discrepancy between banks. If you’re a customer and your bank didn't invest in those things, and made life hard on you over the last few months, and you grew accustomed to all this digital interaction everywhere else, you're saying, "I'm tired of messing with this stuff. I'm going to move somewhere where they have the newest capabilities, and I can handle all this stuff from my office chair, instead of having to constantly go to the bank or send couriers or all that kind of nonsense." It was a tipping point in that regard. 

Also, there were a lot of banks that used PPP and, to some degree, the Main Street Lending Program as a beachhead with new customers. There's the old joke that bankers love to lend you their umbrellas, unless it's raining. In other words, they're happy to extend you credit when you don't really need it. But when times are tough and you actually need credit and liquidity from the bank, they're going to pull the rug out from under you. 

Well, the pandemic was a tough time for a lot of commercial customers and a few industries, in particular. Some banks really leaned into it and decided to lend through the cycle. Granted, it was with the backstop of the federal government and PPP, but they did proactively lean into that. They didn't just passively take applications when their customers asked for it; they went out into the community aggressively pushing these programs, asking clients, "Hey, did you know you were eligible for this amount?" These banks used this as a way to win some new business. 

Let’s say you were a customer who was struggling during the early months of the pandemic, and your bank was not very accessible and did not have a lot of digital tools. Then, suddenly, some new bank called on you and said, "By the way, you're eligible for some help through this, through a forgivable PPP loan, and we'll help you process it all digitally.” That's probably going to score some points with you. Now those proactive banks are coming back through and trying to pick up some of the primary accounts from those customers. They’re saying, "Hey, we were the ones that were there for you in tough times. Why don't you move all your business over here?"  

That’s pitch Is working. It’s been a good strategy. Customers are more apt to reevaluate their relationships and switch. The banks that have been willing to invest in digitization are reaping rewards from that. 

Q: Obviously, it can't be as easy as simply saying, “We’re going to shift our focus to a version of primacy that’s centered more on treasury and payment accounts.” What are some steps to make this go from a buzzword to a reality? 

A: This is another place where this is an opportunity. Rewind 10 years, even five years. If you wanted to become a more treasury-focused bank, that was a daunting undertaking. There was not a lot of off-the-shelf capability back then and you would have had to piece this stuff together. A lot of community and regional banks were heavily reliant on their core provider. If you wanted to add payments capabilities and things like that, you had to take what they could offer you. A lot of stuff just wasn't that great, which meant if you wanted to stand out, you had to build your own. It was a big investment, and you had to have the expertise, the technical skills, and the resources to pull it off. 

That's why a lot of banks just didn't do this stuff. That's why correspondent banking used to be such a big business; it was community banks funneling that business upstream, saying to their customers, "Well, we're too small to really do that kind of stuff, but we have this partner that'll do it for you." Really you were just taking the most profitable part of your relationships and farming them out to what, essentially, was competition. 

Now you don't have to do that. Even the small banks can compete on this stuff. There's more off-the-shelf capability, from lots of SaaS-type providers. They'll let you white label it, brand it as your own, and it's pretty darn good. It's also a pretty lightweight setup compared to what banks once had to do. You can pick a calendar year or a budget cycle and say, "We want to make a big dent in this, this year," and you can do that. It would cost some money, but you can absolutely make a demonstrable difference there. 

It's doable now and the market pressure has picked up, creating some needed motivation at the upper management level. Because investing in the tools to promote primacy is expensive, there are some risks involved, and you're going to have to get some new expertise on the payroll. This is a big undertaking. To be blunt about it, before there were a lot of bank executives who were not willing to make that kind of bet late in their career. They just weren't willing to step out on a limb and take on a hard project that could fail. 

Well now, I think they're motivated, because you not only have increased competition from the bank across the street, but this is also where the fintechs are coming. Look at what Square's done over the last couple of years; if you're not losing some sleep over what they're doing, you should be, because they are coming for your business customers. They're starting at the small end and working their way up the scale. They have capabilities that you don't, and they have some marketing prowess that you probably don't. 

The conversation is no longer: "Well, it's a big bet. I don't think we really have to do it, too." It’s shifted to: “It’s not as big a bet, and we probably need to do this to stay relevant.” That's a long way of saying, it's doable now, but it's going to take some focus and some intentionality. 

Q: Also, the actual conversation you can actually have now as a relationship manager, because of tech, has changed. You can take what might start as a loan conversation, expand it into a conversation about the full relationship, and suggest cross-sells that will move you closer to primary status. That can happen through credit, if need be, or the other way around, if you have a treasury account and want to add on loans. It’s a type of conversation that wasn't really possible a while back. 

A: That’s true. A lot of what we’ve talked about to this point has been around infrastructure. But once you have that, the next piece (one that surprisingly few banks are able to pull off) is actually to have that global view of a customer, to really understand what business do they have that's not within my silo? The bigger the bank is, the harder it gets to have an understanding of, for example: “How much payments business is there? How profitable is it? Is there payments business that they likely have that's somewhere else that we should have?"  

You see the Amazons of the world pulling it off with what looks like such ease in the consumer world and in your personal world. Those same capabilities are there in the commercial banking world. Those banks that are able to pull it off, they're the ones that are going to win these primary accounts, because they can see it. They can see the value of it. They know when, and where, and who to ask for what. That's how you build those actual deep-core relationships that all of this stuff stems from. It's an equally important part, and again, one that is now doable. The banks that want to invest in connecting that data to the RM’s conversations will get a pretty quick payback on it.