Part 2: How Big Banks Make the Grade; "We Just Never Had a Name for It."
Based on Part 1, now that you have a foot in the door with a welcome basket in hand, skilled relationship managers can likely expand a relationship well beyond a consumer card program.
I’ve watched “Mad Men” several times through. It’s an incredibly well-written and produced series. Viewers see strategic product placement throughout each episode, from Hershey’s, to Heinz, Life Cereal, even Jaguar and Chevy. Yet, only once in their seven seasons did the writers focus on a banking product; season one, episode five. The creative team at Sterling Cooper pitched Liberty Capital Savings on the “Executive Account,” a “discrete” account. The bank executives chuckle and reply, “many of our clients are already doing this, we just never had a name for it.”
The idea there is repackaging. Taking an existing product or service and surrounding it with a new promotional strategy. As it might relate to your commercial banking divisions, its possible your team is missing an opportunity to repackage its services into a bundle to satisfy one of the most cash-rich industries in the world: Education. There are nearly 4,300 post-secondary degree granting institutions in the United States, and another 34,500 private educational K-12 institutions, while there are approximately only 75 banks greater than $20M in assets, likely having the sophistication of operations to handle such a client.
The leader in packaging a commercial banking, lending and services bundle and marketing it to universities appears to be PNC, and they present it well. Think of it like your Municipal Banking division, only for educational institutions; or as PNC calls it, “University Banking.” Through this channel, PNC gains an ability to market to each audience in a value chain of the education transaction; school, parent and student. PNC highlights the following benefits as its value proposition to its education clients:
• Enhanced brand value by providing convenient on-campus banking services and offering programs that add value for your students, faculty and staff
• Reduced payroll costs in the workplace through increased direct deposit enrollment
• Card services such as ID Card Linking and Co-branded VISA® Debit Cards
• Additional PNC services such as Treasury Management, Merchant Services and Student Lending
• A dedicated team of knowledgeable University Banking professionals
• Proven marketing tactics designed to support your banking program, from design and implementation to ongoing management
In the background, I imagine the commercial lending teams at PNC are available to meet the needs of these clients as it pertains to asset-based lending, commercial construction financing, revolving lines, and more.
Here’s why serving the needs of educational institutions is a unique customer segment, unlike your existing C&I customer base. Recognizing this, is recognizing an opportunity for repackaging your existing services into a C&I bundle to meet the needs of a unique customer segment just like PNC.
1) Educational institutions have sensitive cyclical income streams.
Generally, colleges and universities obtain their operating liquidity twice each year; August and January, when education loans are disbursed and/or tuition installments are due. Their operating budgets are generally fixed in advance and schools have an appreciation for the total headcount needed to cover base expenses. Generally, admissions strategy is centered around this headcount, with more selective schools having less reason to fear missing an enrollment goal. Smaller schools are more sensitive to this form of shock and can quickly find themselves in the red with a shift in macro-economic factors, an admissions gaffe, a scandal, or even drop in published rankings.
Few other commercial clients have operating budgets on the scale of educational institutions, and few are as exposed to the risk of system shock and the impact on a budget. The ability to sustain enrollment can lead to changes in credit ratings, which can affect an institutions ability to seek alternative forms of debt issuance, which thereby creates additional needs for sources of borrowing capacity to operate through cycles, or to fund growth. Despite this, tuition expense is relatively inelastic in relation to demand, headcounts are generally predictable, and therefore cash-flow is relatively consistent for long stretches. This creates some ease in the underwriting process and a lower risk profile.
2) Educational institutions are heavily dependent upon a fragile system for funding.
Colleges and universities rely principally upon two sources of income: tuition from students, and endowments funded by charitable donations. The Tax and Jobs Act of 2018 made it slightly less appealing for the non-itemizing taxpayer to contribute to non-profit institutions by way of charitable donation. Meanwhile, tuition increases each year generally outpace the FAFSA borrowing limits for those eligible for aid. Further yet, colleges and universities rely upon families – often kids – to navigate the labyrinth of financial aid and all its bureaucratic complexity with deadlines, forms, documentation, and more. Though colleges and universities may anticipate a certain amount of income, the timeliness and certainty of its arrival is commonly in question. This means revolving lines of commercial credit can be a solution for these institutions as they may allow for bridge funding to fill gaps.
3) Unlike any other customer segment, access to operating liquidity is tied directly to the ability to comply with federal law.
As noted, educational institutions are entirely dependent upon tuition income; and students are heavily dependent upon the United States government for student loans. The program is administered in accordance with the Higher Education Act. Failure to comply means failure to participate in federally funded loan programs. The compliance burden is an opportunity for banks to differentiate themselves from other service providers by serving as knowledgeable consultants in the HEA and its subparts. Those entities having commercial relationship managers with a higher degree of fluency in HEA can set themselves apart from the competition by offering a higher level of service.
4) Educational institutions have significant cash management needs.
Imagine the tuition disbursement process for a mid-size school, perhaps 5,000 students, at $20,000 per year. Each semester, $50MM rolls into the bursar. Funds arrive for 5,000 accounts from multiple sources; public, private, grant, scholarship, and individual. Accounts receivable are balanced against system credits, with any shortages or overages identified. System shortages require additional invoicing, and collection. System overages require further disbursement to a 5,000 unique financial accounts held by students, either by EFT or paper check from a pooled overage expense account. Some schools permit installment payments on a monthly basis. This is in addition to point of sale payment processing needs throughout the campus, as well as any campus-based payment card systems tying back to school accounts. I don’t purport to understand how this infrastructure works, though Part 1 touched on it a bit. Regardless, this is undoubtedly infrastructure supported by some vendor with a suite of sophisticated commercial cash management solutions ... like a bank.
5) They have gigantic employee headcounts.
This is a space for payroll companies, not necessarily banks. However, with large employee headcounts come opportunity for affinity banking programs for employees into your consumer lines of business, including access to private bankers and wealth managers. There is opportunity to deliver a higher-touch concierge service to a segment of these employee-pools.
6) They have enormous endowments requiring constant attention from investment bankers.
Again, this is space for investment banks, but the point is that colleges and universities are unique when compared to your standard commercial customer in that they’re holding anywhere from several million, to several billion, dollars in endowment funds. Though it is not the purpose of an endowment fund to cover general operating expenses, these funds are drawn down annually in amounts less than their yield for purposes of covering some expenses, such as scholarships. That being the case, they serve like a loss reserve might where one is underwriting a larger commercial loan.
The point is, there are nearly 40,000 unique commercial enterprises across the United States, with unique needs as compared to other commercial segments. And yet, there seems to be only one bank marketing directly to them with a suite of retail and commercial products and services; PNC. Though other banks undoubtedly serve this customer base, I can’t find any others that are marketing to that end. So, as the executives at Liberty Capital Savings noted, you’re already doing this. You just never had a name for it.
Building out a marketing program like PNC can improve the visibility of this niche offering.