Lead Bank in Garden City, Mo., is a survivor. The bank was founded in 1928, yet made it through the stock market crash of 1929 and the Depression that followed. A local family bought it in 2005, just in time to help it struggle through the 2008 financial crisis and the Great Recession.
But merely surviving isn't enough. Staying relevant is a constant challenge for a $132 million-asset bank, and now Lead aims to differentiate itself with a bold new approach to small-business banking. It is offering an unusual array of fee-based services — strategic planning, capital raising, even bookkeeping — along with the typical loan and deposit services.
Serving small-business customers more holistically is a goal that many community banks aspire to. But few are truly making a transition from the lender role to an adviser one, and there is a lot of revenue upside for those who do, according to a recent McKinsey & Co. study.
Josh Rowland, the vice chairman and a member of the family that owns the privately held Lead, says he had to act fast following the financial crisis. The bank had some "huge problems" in the form of a lot of nonperforming loans, and was being poorly managed.
"We had $25 million in negative retained earnings in 2009," he recalls. "As a newbie to banking, I looked at this and said, 'What is the reason for acquiring a bank? It's to serve the community. And right now the community that needs us is the small businesses of Kansas City.' So we sat down and figured out how we could serve that community, and how we could do that without creating more risks."
Rowland admits that not all of the advisory services are profitable yet, but says that the services are helping the bank build loyalty with existing customers and attract new ones. "We see this business banking services strategy as a long-term project."
One of its new services is a private "angel" fund, Lead Ventures, which buys equity stakes in promising local companies. Lead Business Advisors, another subsidiary of the bank, is providing business services to a rapidly growing number of local companies, ranging from mom-and-pop enterprises to an energy company that has $20 million in revenue.
Brian Higgins, first vice president for products and ebanking at First Financial Bank in Cincinnati, says that Lead Bank and others offering advisory services are on to something. "There's a mindset out there that banks are just about lending, and that small-business customers don't like to talk about being charged for services. But we've found that actually, what small-business owners really value is their time, and if they can get help from a bank with things like cash management, they're happy to pay for it," he says.
His own bank also is courting small-business customers with services. One example is a minimalist cash management service, which moves a company's cash to a higher-return investment whenever its account reaches a certain trigger level. It's a small firm's version of the daily or weekly automated sweep system used by larger firms.
Higgins says while the front-end costs of offering such services are not too serious, refocusing the bank on an effort to market business services, and getting loan officers to look beyond just growing assets, can be a challenge.
"You need to view meetings with a small-business owner or executive not just as a transactional occasion but as a consulting visit," he says. "Use them to find out what services they need, and then figure out how you can provide it." He suggests coming back with a proposal, not a bunch of options, "because small business people appreciate not having to spend time analyzing which option to go with."
The benefits to the bank, in terms of new fee income while interest rates and spreads are low, will become apparent, and the deeper relationships will pay off when rates eventually start to rise and banks need to start lending more again, he adds.
A new McKinsey study suggests that even regional banks could be missing out too, by not doing more to offer services to small to midsize businesses. According to Nils Hoffmann, partner in the corporate and investment banking practice at McKinsey, there is a "significant performance gap" between top regional banks and the rest, with the high performers outperforming other banks by a factor of two in terms of fee revenue versus lending.
Hoffmann attributes this performance difference primarily to the failure of many banks to engage in cross-selling of services, "especially services like cash management." These services, he says, can bring in significant fees from business customers. "Lending is, of course, the entry point for a relationship," he says, "but banks are looking for more from a bank's relationship manager now. They want a sparring partner, someone who can be more of a business advisor, and not just a lender."
Offering these services will mean spending some money, Hoffmann says. A bank needs a product platform in place, for example, and a typical investment in cash management software can run into the tens of millions of dollars or more. But he says the evidence is that the expenditure and retraining of staff will be worth it in the longer run, not just in terms of higher fee revenue, but increased lending business too.