Daniel Kravitz: Hi everyone. My name is Daniel Kravitz and I’m a principal at the Alexander Group. I’m here with Dave Eddleman, who leads our Financial Services practice. Today, we want to share some key learnings in project findings based on the changing market dynamics in the financial services industry.
As you’re likely aware, the Fed has raised interest rates 10 times since March 2022, leading the federal funds rate to be over 5% for the first time since 2007. These dynamics are expected to decrease the volume of bank loans in the short term. This decrease has the potential to be dramatic.
As a result, banks are reevaluating their go-to-market strategies. Dave, based on what you’ve observed with your clients, can you give a rundown of the short-term issues that this interest rate environment has created?
Dave Eddleman: Yeah. Thanks Daniel. Thanks everybody for joining the podcast. Dave Eddleman with the Alexander Group.
That’s exactly right. All these fed rate increases have caused a lot of disruption in the go-to-market model and incentive compensation for banks and financial institutions. Whether you believe in the soft landing or not, a 30-year fixed is up around 6 to 7%, which is really causing a drop off in loan volumes. And loan volumes, not just in retail banking, but in business banking, commercial banking across the board. We just had a pretty in incredible change in the environment. So the folks that are involved in this, the loan officers and the customer-facing folks that are securing loans, most of them are paid in loan volume. So a significant portion of their pay is going to be impacted. So that really leaves the banks and the financial institutions with a pretty compelling question. What are we to do? We need to retain our top performers. We need to maintain a pay-for-performance type environment.
We need to stay within the market prevalent practices in this world, as well as the regulatory issues that we still need to comply with. So there’s kind of a dilemma, especially in the high performers where they’ve been making a lot of money and it’s a big proportion of their pay. So the first remedy that we typically see is looking at incentive compensation changes.
I think the strategy has to be sort of formulated: are we going to do anything? And what are sort of the indicators that we will do something and win?
Daniel Kravitz: Yeah, that’s a really good point. You kind of bring up some important issues of, hey, what do we think about from a short-term perspective, as well as what do we think about from a medium-term perspective?
So, when we’re looking at this and we’re evaluating, hey, what are the changes from a strategy standpoint, and it is that going to be short-term, long-term, medium-term? What’s it can look like from a soft landing to a new normal, current state? You know, Dave, how do you think about balancing those priorities of what banks or your clients are doing from a short-term perspective versus how they’re thinking about that from a more medium to long-term perspective?
Dave Eddleman: Yeah, great question Daniel. I think there’s really two areas here. One is in business and commercial banking where you have a little more forecast of what’s going to happen and bank activities and loan activities within these accounts. There’s usually sometimes CRM involved and there’s a hopefully a good pipeline to look at.
In the retail environment, not nearly as much, but both of those environments are going to depend mostly on lagging indicators, like how do we do last month, and what are we doing currently? So I think, there’s a lot of macroeconomic evidence out there to see what loan volumes will do, but you know what your bank or financial institution will do in the short term, but it may be too late.
So therefore, you gotta get ready. You gotta say, well, if in the next three months we see loan volume here, in the next six months, if we see loan volume even farther down here, these are the remedies, these are the changes that we’re going to implement. This is an important message to these loan officers and customer-facing professional that says, we will act. We will try to make your environment better. Or in some cases, there’s no action. It’s like, we think it is going to be a relatively soft landing and we’ll make it up next year.
So I think those are really the two dimensions that a lot of clients are looking at. Some of our clients are ready. They have a contingency plan. They may say, well, when we do this or if we do this, it will look like this. In terms of incentive compensation.
Daniel Kravitz: Companies are thinking about the short term of, you know, where can they tweak, where can they flex and tor from a compensation standpoint? And then we think about the medium term. How have you seen your clients balance that short-term compensation change with maybe more medium to long-term go-to-market adjustments?
Dave Eddleman: I think we saw a lot of this during the pandemic, as well as the market conditions are almost an excuse to do some other things in the go-to-market model, right? We want to make a coverage change now this is a good time to do it. We want to have some terminations, for example, and that’s not the best remedy, but sometimes it’s a way to reduce our go-to-market model. This might be a good reason to do that. So, mostly it’s about retention of top performers. To tell you the truth. Those folks that typically perform for the bank, perform for a region, whatever it is, those are the ones that get the most attention and they’re trying to protect in this downturn.
Daniel Kravitz: That makes a lot of sense. Given these market dynamics and, Dave, given what you’ve talked about, it sounds like companies are not just adjusting commission compensation in the short term, but they’re leveraging the situation to think about the term of never miss a good crisis to take advantage of all the other good opportunities to reevaluate and adjust their go-to-market.
So 12, 24, 36 months down the road they’re able to really best position themselves for success based on what they see.
Dave Eddleman: We’ve worked with a lot of clients on formulating these remedies or formulating a plan to get ready. And I think in large part what we’re talking about too is as we look into 24 into 25, what are the go-to-market changes? What are the sort of incentive plan changes that we like to do anyway? It does combine with other pieces sometimes.
Thanks for listening. If you have any other questions, please reach out to us at www.alexandergroup.com and thank you for joining the podcast.
