Banks are a dying breed. Bank-to-bank rivalry comprises just a fraction of the competitive marketplace as nonbank competition from all directions continues to erode banks' market share.
Bankers know this only too well, and they are changing the face of banking in response. Those with a marketing flair probably don't even call themselves bankers anymore-they are financial service providers.
They are acquiring stock brokerage firms. They are underwriting and making markets in corporate debt and equity. They are seeking insurance underwriting partners and offering insurance products. They are developing sales and marketing mentalities. They are adding product lines that they have typically steered away from in an effort to regain some of the footing lost during the past decade.
To survive, bankers must offer not what they have but what customers want, which is more than and different from what they've offered in the past. Banks that don't cater to their customers' needs will lose those customers to the slew of nonbank alternatives that beckon.
To stem the tide, National City Corp., a $50 billion-asset diversified financial services institution based in Cleveland, has acted in several areas.
Two years ago, it added investment banking to its product line when it acquired Raffensperger, Hughes & Co., a full-service investment banking- brokerage firm based in Indianapolis. That merger allowed National City to expand its markets and become a major regional investment banker in Indiana, Kentucky, Ohio, and Pennsylvania.
Though it is awaiting regulatory changes that would let it buy a life insurance underwriter, National City already is offering insurance products developed by outside companies. In addition, it is heavily supporting its growing asset-based lending subsidiary in an effort to capture a portion of a market that it had not aggressively pursued before.
Business customers in particular want and need something different today than they have historically, because the business environment also is forever changed ... and still changing. Businesses must be able to turn on a dime, change strategic direction on a moment's notice, and have the financial capacity to do so. Managing such complexity requires companies to grow rapidly, focus on core competencies, expand product lines, join forces with the competition, or reengineer.
These activities require capital, but the very nature of the tasks at hand can make financing from traditional corporate bankers unavailable or even unattractive. For the traditional banker, it might be that acceptable financial ratios are not there and the opportunity is turned away to a nonbank competitor.
For the business, acceptable flexibility and commitment levels from the bank may not be there so that its management turns to nonbank financial providers, such as venture capitalists, equipment lessors, or asset-based lenders.
Because traditional loans come with tight covenants, businesses in the throes of change may be unable to take advantage of opportunities that suddenly appear if they are to remain in compliance. Companies enduring significant change are prime candidates for asset-based financing such as that offered by National City Commercial Finance Inc., a two-year-old subsidiary formed in response to customer demand.
Early on, National City Corp. recognized the need to generate revenues from nontraditional sources precisely due to the pressure it and all banks feel from nonbank competitors.
Asset-based lending services are a natural extension of National City's traditional corporate-banking offerings. In a stable economy, asset-based lending aggressively competes on some levels with the bank's corporate lending areas, but it enables the bank to broaden its market base and create earnings from loans it would not normally seek to make.
It is a lucrative endeavor for the corporation when the economy turns downward and banks tighten credit standards. The demand for alternative financing increases as more companies search for nontraditional sources of funding.
National City Commercial Finance was established in the midst of the stable economy of early 1995 and has always operated in an extremely competitive marketplace-one that has put pressure on the fees it receives and the margins it enjoys. This timing was strategic, however, designed to ensure that it would be in the position of having adequate experience and mass to take advantage of opportunities when the economy slows, which it inevitably will.
Although asset-based loans can be associated with higher levels of risk, National City Commercial Finance mitigates risk with portfolio growth and management. To begin with, its highly experienced marketing staff is attuned to the specific kinds of deals that make sense for this type of financing.
They can see the potential for opportunities and the pitfalls when deals are structured. While collateral is important, it is not the only decision criterion. If fundamentals such as quality of management, a strong plan, and cash flow check out, collateral values can be optimized to give the company larger loan commitments and more flexible structures than traditional bankers offer.
To ensure that only deals that meet appropriate criteria are done, National City Commercial Finance operates its own five-person credit committee, which specializes in asset-based transactions.
The committee meets as needed to respond quickly to the needs of customers and syndication partners. The credit and operations functions are set up to monitor collateral and performance daily or weekly.
After a deal is closed, account officers work closely with their customers. These officers have a thorough understanding of their customers' businesses and are focused strictly on the portfolio-not on new business goals.
National City Commercial Finance has made great progress since it closed its first loan in April 1995. It now has more than $150 million of loans outstanding and $320 million of commitments. To manage its expanding portfolio and achieve aggressive revenue goals, it recently opened its first satellite office, in Pittsburgh, and is looking for growth opportunities throughout Pennsylvania, as well as Indiana, Kentucky, and Ohio.
The unit gives National City opportunities that it may have passed on if its traditional corporate credit standards had been applied. It also gives bank customers the opportunity to remain National City customers throughout development stages, rather than going elsewhere for capital when times are tight.
In many instances, National City Commercial Finance can say "yes" while the bank would have to say "no" due to its credit requirements.
In addition to keeping customers in-house, as well as adding to its customer base, National City improves its prospects for underwriting their debt and equity needs, selling them insurance, and cross-selling a host of other products. This strategy of beating nonbank competition at its own game should breathe life back into the dying institution of banking. Mr. Poe is president of National City Commercial Finance, a subsidiary of National City Corp., Cleveland.
