Is Discretion a 4 Letter Word in US Banking?

     

I recently saw a comedian who said that Trump was right about the wall, but he just got the country wrong, and yes Canada would pay for it.

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We have a significant presence in Canada and if you haven’t been of late, it continues to be one of best-run countries in the world…and they actually aren’t trying to keep Americans out. Interestingly though, every year there is a competition for the best run governments on the planet and invariably Canada is duking it out with Singapore. The folks we work with in the banking sector echo this excellence. They are incredibly smart and work with us to innovate their full portfolio of consumer offerings every day. 

In Canada, discretion in everything from loans to deposits is commonplace. Discretion is not common in the United States.

What do the Canadians know that we might be missing the boat on in the United States?

In Canada, it is more common to negotiate a mortgage, which happens there every five years for homeowners. Traditionally, branches could give discounts to customers that they generally reserved for their “frequent fliers.” Innovative banks there are putting the right incentive system in front of the branch banker so they can see exactly what wiggle room they have without approval, what competitive offers are, and what their commission rates would be at each rate level. Further, this approach allows regional and national management to see how every branch and region is performing vs. any other. And finally this approach facilitates branch bankers recording why they won or lost so that the bank has instant feedback to continuously help make the their offers more competitive.

In the US, varying rate does not generally happen at all as pricing is generally indexed to your underwriting characteristics. You have certain scores and a certain financial profile, you therefore get a certain rate. We do help banks in the US vary the price of home equity loans, for example, based on segment, but there is generally not further discretion in the contact center or branch. Some banks have cracked the code though. A quick Google search gets you to people talking about creating discretion policies as obviously the use of discretion has to be fair to consumers. Nonetheless, discretion remains a little used technique here.

Big_D_vs_little_d.jpegHerein lies the opportunity that we really should be taking at least the first page from our brother to the North. We actually do have a form of what I will call “small d discretion” available to banks in the US that is very straightforward that I believe US banks aren’t taking advantage of. I am going through a refi right now. It turns out the bank has many potential configurations of my loan that they could offer me, but instead of this being up to the banker to offer me choices, this control is held by the underwriter even though all of the choices could have been pre-calculated.

The “great recession” clearly made banks very cautious. In the days leading up to this earth shaking event, some unscrupulous players, that are largely all gone now, funneled people that couldn’t actually afford mortgages into programs with low monthly payments and big back end balloon payments. People lost homes is record numbers, banks and institutions with too many of the securities made up of these shaky mortgages went under. It was ugly.

This is absolutely NOT what I mean by discretion. In the case of my refi, when I pulled it out of him, my banker actually had several choices he could offer me after pre-approval. He could change the term to change the rate, he could finance the refi fees to make the loan zero out of pocket for me, he could offer impound account that would pay my taxes and insurance that thus offer a larger closing credit for the privilege of the bank using my money in that account throughout the year. The problem was that he had to run back to the underwriter for any change, even though all of these options could be pre-calculated to be additional offers to or choices he could have offered me 

Although he closed me on this refi, it was touch and go. The bank didn’t really arm him with the best tools to easily put me into the right program. These tools essentially amount to a form of discretion. It was also pretty clear that the bank wouldn’t have known why they lost, which in my case, would have been the impound account I didn’t want.

If the ultimate goal is to maximize the sales of any product the bank offers, having the tools to tailor a product to the consumer, like a fine Canadian suit, should be what banks in the US are also striving for.

Real-Time Banking for Nomis Deal ManagementWhile big D interest rate discretion may not be part of the American banking experience today, we believe banks could strongly benefit from small d discretion as described.

When you are ready to consider how to better arm your front line, we are here to help. Start by reviewing a page from how a Canadian bank does it. This infographic gives you a bit more insight into how thousands of branch bankers manage discretion to make their banks more competitive and close more deals. I think you will thank our colleagues to the North for sending this wise thinking about discretion over the wall.

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About The Author

Ken is our CMO at Nomis Solutions.