Banks today are suffering from an ancient predicament. The only people we want to lend to are those with no need for the money. The only people who seem interested in borrowing are poor risks. What’s a banker to do? Speaking with a banker recently about business lending, I was assured that ample funds are available, but there are no takers. At least none worth an ounce of salt. He wasn’t interested in lending to crazy high risk businesses. Later, a Commerce employee lamented to me that there seems to be no way to encourage lenders to lend. Even with 90% guarantees on SBA loans, he said financial institutions won’t step up.
Part of the real problem here is that the ranks of traditional business lending customers have grown thin. We all know of businesses that have closed in the past few years. Many of those were fundamentally weak and unprepared for a downturn. Others were over-capitalized, leveraged to grow in a growing economy. Sadly, either their plans didn’t pan out or faced with poor prospects, their bank called their loan or line of credit. Either way, the remaining business owners are now pretty cautious. Until the economic outlook picks up, few surviving businesses are likely to put the fate of their business on the line. This is a risky environment to take a loan.
There are various ways to incent lending: advertising and effective sales people, to name two. Advertising can help, according to the J.D. Power and Associates “2011 U.S. Retail Bank New Account Study”, but it can only incent behaviors the prospect is open to. High pressure sales can also be effective, but the problem is that the people who excel at balancing a till or caring for a customer (customer service representatives) are not necessarily great salespeople. We recently got a visitor to Zoot’s website who asked Google for a “bank job without cross-sell”. Clearly this poor CSR was being forced to offer so many irrelevant cross-sell offers that they got burned out. You can read more about that in another blog post, but the point is that banks don’t hire sales people on the front line. In fact, you might argue that the best sales people are rarely the best at accounting for their spending.
A marketing incentive (read: bribe) can be effective. While toasters are a less common promotion today than in days gone by, Capital One has embraced the concept with their Venture Card promotion. After watching the Visigoths for years, I found their offer of 100,000 miles hard to pass. Not that I needed, or even wanted, another card in my wallet. Since my balances were all paid off, I was the perfect example of a customer who didn’t need a loan. Their sweet offer got me to accept and use the card, along with 10,000 others who qualified. The no risk trial and nearly $1,500 in reimbursed travel expenses was certainly enough to get me to sign up. The question now is how their retention efforts will pan out. Will my fellow Visigoths pay $60 a year for a card we don’t really need? Please don’t miss my point; it is a great program, one of the best websites in the industry, easy redemption, etc. The thing is, many of the people who don’t need credit, don’t need it because they manage their finances carefully. While the incentive was strong to sign up, keeping the card is a very different decision. I do hope that Capital One is rewarded with a strong new base of customers as a result of the campaign.
The same problem applies to business lending. Businesses that are cautious about the economic outlook and are generally cautious spenders are unlikely to take on risk without a strong incentive. Given low rates, it’s hard to imagine how to provide greater incentives. Google, with $33 billion in cash recently extended credit, just because it was hard to pass up on the low rates.
Unfortunately, economic policies are not engendering confidence in future growth. Financial reform has increased capitalization levels and seems set to penalize risky lending, although that is what is needed. In this environment, every objective measure discourages looser standards. So we’re left in the same situation. Only those who don’t need the money are likely to receive loans and government policy is further enforcing this standard.
For now, the choices are simple. 1) Wait out the downturn until stable businesses are ready to borrow again. 2) Market aggressively to stable business and hard sell them into credit they don’t want. Or, 3) find a way to lower the bar and allow riskier businesses to participate in lending programs.
Let me know if you’ve found an approach I’ve missed. I’ve be happy to share it.