Understanding Why Small Businesses Accept – But Don't Use – Credit

Transcription:

Stu Richards (00:08):

Yeah, good morning everyone, and congratulations. You guys are the marathoners of the small business bank and conference. You've made it to the end. You're going to get every last drip of value from the conference. So the bad news you probably heard Mon from Microsoft had to cancel because of covid, but the good news is that means you get an early start on the line at Hattie B's hot chicken across the way. But the really good news is we actually get to close with Nick Miceli from TD Bank and to start things out on the conversation around why small businesses accept credit and don't use it. Just a little bit of context. So Braden is a research firm and one of the questions that we've been asked by some of our financial services clients is around how to optimize the application process really specifically for line of credit or for business credit card and how to support activation of both of those or utilization of a line of credit. And so that's something that we wanted to delve into with this particular topic. So on that note, Nick, I'd love if you could start with an introduction of yourself and your role at TD.

Nick Miceli (01:19):

Sure. Thank you. And I think I actually want to bet because we were talking to a colleague and I said, it's the last session before everybody has to leave. And he goes, you'll be lucky if it's you and the IT folks. So I think I did all right. So thank you for hanging in there. I appreciate it.

(01:36):

So my role at TD Bank is, I guess the best way of describing it. As president for the state of Florida for TD Bank, we were a relatively flat organization. There's five presidents across Florida through Maine reporting to a head of retail bank and a head of commercial bank that reports to our CEO. So I have the responsibilities for really anything and everything that happens in the state of Florida as we build and grow. So that includes small business, community, middle market, ABL consumer lending, and we obviously have a great team staff behind that in order to make it run smoothly. So that's where I come from. And we were talking about why small business is important to the bank and is it important to TD. We view it as almost an incubator. And the idea behind that is we're growing our future regional bank, community bank and middle market large corporate customers, and we treat it that way. I think most of you who have all had an experience of a customer that tells you their story about how they got their first loan and they remember it vividly. They remember the importance of the handshake that they got, someone believed in their idea and they have tremendous loyalty. And so if you can bring them in at the early stage of their business life and then take them on this journey alongside, they will always remember that you were that bank, you were that person that believed in them and created that trust in that alliance.

(03:05):

A good example that we share in the Florida market is, and I can share it now, it's all public, but those of you may be familiar with Firehouse Subs, anyone familiar with that organization? So 21 years ago, a relationship manager at TD believed in two firemen that they were brothers and they had this concept of wanting to open up a daily, a sub shop. And so they had started it a little bit and she gave them a million dollars to open up three locations and they recognized the importance of that. And as they built this organization, we provided more and more additional services and we provided in help. And before you know it, they have 1200 locations across North America and they still bank with td and they bank with TD because the relationship they had with Cindy Stover, who is their relationship manager, who was now a team leader running the North Florida for the bank.

(04:04):

And about a year ago or so, I guess a year and a half ago, she approached them and said, I'd really like to bring out TD Securities to talk about bring our investment banking arm, talk about your game plan, your end game. And they said, we're not interested. The company is doing really well. We explored selling and they think it's worth about half a billion dollars and that's a lot of money for two people, but we're still having a good time. And she said, please, can you just please allow me to bring out TD securities? And they regrettably said, Cindy, if it will make you look good in front of your bosses, fine, we'll have them come out. Okay. So as a favor, right to the relationship manager they've had for 20 years, we brought out our TD Securities group and six weeks later after introducing them to our customer, RBI Restaurant Brands International, they announced to sale the company for 1 billion.

(05:04):

It also then became the largest single wealth management referral that the bank had ever made as these two individuals brought north of 775 million into their personal wealth accounts at TD Bank. And so the story we share, and as I share with our relationship managers today is which one of you are going to make that loan tomorrow that 20 years ago may be the next Firehouse subs? And it's an extreme example, but it's exactly the core of what we try to do, why small business is so important for us. And you don't have to be selling a company for a billion dollars. What you need to do is just be there when the customer needs you. And then we have hundreds and hundreds of, and I'm sure all of you have hundreds of stories of those small businesses that will never leave you because the loyalty that you've created because you provided that small business loan.

Stu Richards (05:57):

Yeah, yeah, that's a great story. So they are obviously no longer a small business. How does define small business?

Nick Miceli (06:02):

It's funny, I was listening to the folks earlier. Banks tend to use their internal terms not only on their websites, but even in their marketing. And I think it was, I might even American Express that did it really well a couple of years ago with a commercial that they talked about what business wants to be called small, who are you calling small? And that was what their campaign was about small business and you just went from customer to customer. Who are you calling? Small. I'm not small and I just don't like the term personally and I'm trying to pull it out all of our marketing and just like we want to service your business because a business owner doesn't think, oh, I'm 5 million and under so I have to go to Susie or I'm 15 million under and I'm going to go to Johnny. That's not how they operate, it's the relationship that they build.

(06:54):

However, within the bank we have to create these silos. So we do. So small business for us today is either defined as less than 15 million in annual revenue or less than a million dollars in borrowing need. And so it kind of just works through those two lenses to try to figure out to put the right person on the right transaction for the right reasons. We are increasing that up to 5 million over the next year and a half. And we've found that by doing that, it does allow us to create a little bit of specialty and it does allow us to be able to use technology to speed up the process. And we will talk in a little bit about why there's an abandonment rate within applications and why people don't use the credit. But we're now able to approve loans up to $250,000 in four hours or less, which is speed to market that people are really looking for today and then up to a million dollars. It's generally within 48 hours that we're able with a completed application, which is always part of the journey for sure.

Stu Richards (07:59):

And how for context, you're managing quite a portfolio, but how important overall is lending specifically line of credit and card to your portfolio?

Nick Miceli (08:11):

Line of credit is I think part of the reason that we're seeing such an increase in lines of credit. It is sort of twofold. One, the covid really had an impact and quite a lot of businesses shortsighted where they never needed a line of credit, they never needed working capital. They funded it themselves and then all of a sudden they found that there's this emergency and what am I going to do and I have no resources. And so that has created I think a significant amount of interest in lines of credit and I think banks have made it much easier to get lines of credit, especially at the lower end, whether it's just an application, if you can make it a digital application, that makes it even easier. We talked earlier today, we heard about how businesses, they're working seven days a week, they don't have time to walk into a store.

(09:06):

We call them stores, not branches, but walk into a store at nine o'clock in the morning on a Monday they need to apply Saturday night after they finish closing up the shop. So we created an application that's digital that allows them to go in and then come back to it and then go in and come back to it so that they can complete the application. They don't have to do it in one sitting. And that's been a convenient factor that's helped us bring in a lot of digital applications into the bank. And so as we follow them in that journey, what we try to do is make it as easy as we can for them to apply and receive and then close the credit.

Stu Richards (09:44):

That's great. And what do you do if it's a multi-step process? If you see someone pause for an extended period of time, are you actively encouraging them to complete the application?

Nick Miceli (10:00):

We assign at the small business, the two 50 and under small business specialists to work alongside of our store managers to support that. And we assign them today it's a business specialist will have three retail stores reporting into them and they'll physically sit in those stores and they'll go from store to store to store. And the idea is to harvest. We've got a lot of business customers, we've got a lot of business customers that have deposit only and they don't have lending with us. And so the idea is that their main focus is to call those existing non borrowing customers to talk about products and services and how they can help them in the process. But once an application comes in digitally, then it gets assigned to that small business relationship manager. And as we go through the process, they're the ones, if the application isn't complete, if we need additional information, if it kicks out of the system and our underwriters have some questions as it relates to let's get a account receivable aging, or let's ask them a little bit about this concentration that they have, they're following up and they're driving that.

(11:05):

So that's probably the simplest way is just by assigning a real person to the application. Most people like to apply digitally. It's just simpler. It's easier these days, but it doesn't mean that they want to have their whole experience, be it digital experience that's their entree into the bank. It's simple, it's easy. I think about myself, I'll never open up an account at a bank in person. I'm going to go online. I know how to spell my name. I know that it's one L, not two Ls. I know that my real name is Dominic, it's not Nick. I go by Nick, but it's Dominic. So I can fill all that stuff out. I don't need to go through that whole explanation. But then I do want a real person to speak to at some point in that relationship. And it's usually when an event happens, something's happened, there's fraud on my account, I need advice on something. I don't want to talk to a chat box. I want to go in, sit down, talk to a real person. So that's where we've been converting most of our retail stores into more of these advice centers.

(12:06):

Why do we call people tellers? What's that all about? See platform people. It goes back to Roman days when banking was created. And so we're moving into this more universal banker is really the idea. And they're trained to do transactions. They're trained to provide advice and guidance. They're trained to help with conflict resolution of issues that folks may have. And we've even changed the physical locations or the footprint of the store. There's no more teller line. We have these high low desks that we have with teller service managers, so we can take cash, we can deposit cash, but if someone comes in and wants transact, it's fine. They stand up and they transact. But if we want to have a deeper conversation, they want to have a conversation about getting a loan, we push a button, the desk drops down, we pull up two chairs, and now we're having a conversation and we're doing it in separate little pods so that they do have some sense of comfort and they're talking about confidential information. They want people hearing it over them, but we're finding that we're having a lot of success in taking that approach of creating more of a universal banker approach than to a typical retail store.

Stu Richards (13:18):

Well, it's working. If you were here for the JD Power presentation yesterday, I was not. Yeah, you scored very well, especially in terms of convenience. It's paying off.

Nick Miceli (13:26):

Well, I'm glad to hear that. In Florida, we're close to bringing back the trophy. Wave one and wave two only have us 15 points behind Fifth Third Bank, and so it's within our grasp. I've been down in Florida now for six years and my predecessor, who today is my boss, reminds me that when he was in charge, they had had the trophy year after year since this new guy came in from New Jersey all of a sudden, no pressure. It's within our grasp. And it's really been a focus on providing advice and guidance, saving customers time and money. And in the retail stores, as silly as the sound using customer names, the customers want to be heard and using their names. And we've put a program in place and it's amazing how just in two waves we've increased pretty significantly.

Stu Richards (14:19):

That's right. You had a question.

Audience Member 1 (14:22):

Oh, I was just saying that thinking that if it takes you four hours to close an application.

Nick Miceli (14:29):

To approve an application.

Audience Member 1 (14:30):

Someone wants to approve an application if it's completed. But the main problem is that people fill it out half and then embedded it or fill it out, and then we need a bunch of documents that we need to collect, but we're relying on the relationship manager to follow up with them. But if someone fills out an application in the evening, which is when they generally do it, or on the weekend as you said, then the relationship manager is hopefully at home playing with this kid and probably taking a long time to hindsight, I did a little bit of the math and the statistics on this. So it takes four to 10 hours on average during the work week and way longer on the weekend to respond. And so if we're going for a fast digital process, we have literally lost that lead to someone else who followed up faster.

Nick Miceli (15:13):

No one at the bank has their business phone number on their card. Everyone's got their personal cell numbers. Our business relationship managers, they work seven days a week. It's not a nine to five job bankers hours. We all get criticized for that, but we all realize no one has bankers hours. So they are working 24 7. I look at it as like they're almost like a realtor, right? If anyone has been a realtor or married to a realtor or knows a realtor, that job is 24 7. It doesn't matter what's going on. We've taken the kids to soccer practice, client calls, we got to figure out a way to help them. And so our business specialists and relationship managers are getting calls on a Saturday and answering or waking up Sunday morning and saying they got an application in their file and they're reaching out and having the conversation.

(15:59):

The idea is you got to get it closed before the next person does. And so that's really where the abandonment rate finds generally, not generally, but for a good portion of customers will apply to multiple banks at the same time. And so the first that you can do to get that answer to them the better and get that approval to them and make it streamlined is generally where they go. Rate tends not to be as important at that level. It's about speed to market. Now the other thing you got to be careful about is folks that apply too quickly to everything is perfect because the amount of fraud that we're seeing in small business right now is at astonishing numbers and they're using the digital applications. And we've worked out, think about this, you can open up a digital account to deposit a DDA online, you can apply digitally for your loan.

(16:54):

And during PPP, we actually move to e-signature so that it allows you to sign digitally so you can sign a loan digitally and never see a person and get your loan. That sounds like a great convenience factor, but if you're a criminal, that's also a great way to go in and get a fraudulent loan through the bank. And we're seeing increased levels of that today. And some of the things that were sacred, some of the things that we all viewed as using the IRS to verify a tax return is that's it. If you can't get any better than that, we're finding that that's not the case anymore. We're finding that these criminals are inventing tax returns, they're filing these tax returns with their IRS. They're paying the taxes, penalties, and interest for this. And so when we go to verify and we get this verified tax return and feel comfortable that this is who it is, it's not who it is, it's this corporate identity theft that's starting to happen where they're taking advantage of dormant companies, they're making them current, they're finding a tax preparer willing to put together a fictitious tax return file, it pay the 30, $40,000 of penalties and interest on the income that they fabricated, but then they go and they get three or four or $500,000 loans from five or six different banks. So that's becoming a big issue these days.

Stu Richards (18:22):

I'll bet. Yeah. One of the other, kind of the follow on is you approve a loan application, but then someone doesn't activate it, take advantage. And obviously as you mentioned, there's a lot of context for that around covid and a lot of people realized having a safety line of clarity.

Nick Miceli (18:42):

So two things I think folks recognize having a backstop is important, but I also think that we've made it really easy for our relationship managers to sell the product. When you think about how do we compensate a relationship manager at td, it's by closing the line and they get credit for if it's a hundred thousand dollars line, they close a hundred thousand. They don't get credited based on the usage of the line. They don't get credit. They get pissed on income and revenue, certainly of the primacy that we were talking about earlier, trying to get the entire relationship. But it's very easy for them to go out to a client says, this doesn't cost you anything. It's a line of credit, it's a back stock. You know what happened during covid, get the line of credit. We can approve it in four hours and then you just save it if you need it, you need it if you don't need it.

(19:31):

So we've actually incented our people to be able to provide a really easy solution that can result in lines of credit that aren't really for a business purpose today, but they're for a future. Now, I don't necessarily mind that effort because if you can do it fast, quickly and efficiently, it becomes somewhat of a low cost provider. We don't call people loan officers anymore. We call them bankers, relationship managers. They shouldn't be go out selling loans, but if they can establish that, then they can establish the operating account that goes along with that. And then when we think about primacy at td, it's not just the business and the treasury management or cash management services that go along with that. It's also the individuals that own the business and providing their personal banking and then the residential mortgages, the wealth management that we can provide to help them manage their wealth as they start to accumulate it.

(20:30):

It's the accounts for their children, for the employees, the employee banking piece, and one of the, we call it the secret sauce of td, it's not so secret, we talk about it, is that all of the deposits for any customer, whether it's a consumer small business, middle market customer, a large corporate, they all get booked into the store where it's being serviced. There is no cost centers. And so when we encourage a relationship manager and a store manager to go out hunt and packs and go and call together and bring in a relationship together, and we call it one TD approach, we deliver the bank to the customer instead of a person to the customer. It eliminates your customer walked into my store and created this issue or it's our customer. And so it sounds like a little subtle accounting issue, but it really changes the whole philosophy of your organization to be working together to do one thing.

(21:31):

And so the reason I share that is because the stores are empowered to go out and bring in new consumer relationships, and it's difficult to convert a couple to move their relationship over. And it takes a lot of time and effort and they get two accounts. If they can work with a small business or a business owner with one of our relationship managers and they go out together and they harvest the account together. Well, the DDA that business has in the services all go into the store that help bring in that relationship. Then they go and they talk to the owners of the company and they bring in their relationships. And then we go talk to the leadership staff of that company and we bring in their accounts and then we offer banking services for all the employees as a benefit of banking, of working for this company. You get the following banking services, the reductions on loans, the increases, CD rates and all of that. Then when you think about what you've now harvested for that one sale of one customer, you've developed 30, 40, 50 different relationships that you can then continue to build. And so that's our approach and that's why I'm okay with selling a line of credit as long as we can get our foot in the door and then start to deepen the wallet sharing and become the prime account for that entire relationship, not just the owners of that corporation.

Stu Richards (22:54):

That's great. And what are you seeing in terms of loan demand both in Florida and across the bank footprint?

Nick Miceli (23:00):

Yeah, Florida is, it's this crazy outlier, right? Covid didn't happen in Florida apparently. And the amount of new people continuing, it used to be a thousand people a day, so now it's 1200 people a day. It's this new statistic that for people who are not coming to retire and die, but live, work, play, raise families. And covid really just escalated that because people realize they can kind of work from anywhere that they want. I mean, I see it just in our employee base in Florida. We've got 3000 employees in Florida. We've 800 over the last four years, but 50% of them came from other markets of the bank. They work in New York, they work in Boston, but they physically now live in Florida because they've chosen to come here during Covid and work. And so there is a significant outpouring or outpouring of business owners that really does help make the Florida job easily.

(23:59):

But don't tell my boss that because tell them it's our hard work and it is our hard work. It's how we go to market. The rest of the bank also, we had a good year. Our fiscal year is October 31st, so we're already into our new year. And overall small business was a big generator of opportunity for us. Just in Florida alone, we've got about 69,000 small businesses that bank with us, and we increased by 500 last year net. And so 4 99. So that's telling us that we're doing something right, that by providing these servers quickly, by closing, by having dedicated people that they can talk to and talk about their plans, and then deepening that wallet share. And the other thing is that we also have specialists in certain areas, whether it be franchise, whether it be veterinary, whether it be doctors, dentists. Those are areas that they're looking for advice and guidance from someone who knows their industry, who has specific products for their industry. And we've seen a lot of success there by sprinkling across our footprint, these business development officers that don't hold portfolio, they assist our relationship managers. And so if a relationship manager comes across a franchise, they bring in the business development officer for the franchise group who knows the business, who knows the multiples, who knows the services they need, they help shepherd that. And then we close that and then again it sits and resides within the relationship manager on that team.

Stu Richards (25:34):

That's great. So the crosscurrents that Bernardo mentioned where he's seeing some softening in the small business, it sounds like Florida growth is offsetting that.

Nick Miceli (25:43):

No question. Now the other piece of why I think folks aren't using their lines as much is they used to be really cheap sources of capital. They're not so cheap anymore. And as rates have risen, it becomes more of a decision, do I really want to have this additional cost and overhead associated with my business? And I think that's also impacting, and when we first were talking about this topic, I said, I'm less worried about the folks that aren't using the line of credit. I'm more worried about the folks that shouldn't be using their lines of credit and are using their line of credit and how are we going to get repaid? And would you use that line of credit for it? You did what with it? You always wanted to go to Italy. I get it, but was it a business purpose? And that's probably the bigger challenge is as we look to do renewals on this portfolio and say, hold on. And now that interest only component is becoming twice as expensive as it was a year ago, and that becomes a challenge.

Stu Richards (26:45):

Yeah, absolutely. And I know we're winding down on time, but we're biased in addition to research. We're a content shop, but I'm always interested what you're doing with education to support small businesses. And specifically one of the things we're always surprised by is the number, especially a very small businesses don't understand, for example, the difference between a loan and a line of credit. So a lot of basic education has to happen. How are you guys providing that?

Nick Miceli (27:10):

It's a big part of who we are. Our employees are encouraged to become involved in the communities in which we serve. All of us have that desire for sure, but we really take it to heart. And we have financial literacy seminars that we put in place. We go out into the community. We work with a lot of actually business incubators that a lot of the local colleges and universities we'll have. We become part of their program to help small businesses navigate credit, understand what credit is. It's nothing new. It is kind of funny. A colleague of mine was resigning who I used to work for, and he was cleaning his desk and he found a business plan that I wrote in 2020, in 2001, I guess. And he sent it to me, and I'm looking through it at this business plan and I'm saying, it's amazing how in 20 years we haven't really changed.

(28:06):

We still approach a lot of these things the same way. And the top 20 prospect list was on there. And as I look through it, and nine of those customers that were my top 20 list back in 2001 are still customers or now customers of the bank, which says that what we do matters and it does work. But even some of our stores that we've been opening up, we opened up one in Jacksonville, and it was an old bank that we acquired to open the store and we realized it had a lot of space. We don't need that much space as we used to have these big branches. So we decided we were going to dedicate that to a community development. It was in a minority majority minority neighborhood. And so we now are utilizing that and actually curating it and having events and bringing the community into our store to teach them about banking, to teach them financial literacy, to have first time home buyer seminars.

(29:10):

Now, one of the things I didn't think about was the overhead that's charging. And so to curate that particular store, we've got to have an extra FTE that we normally wouldn't have had to have because they're constantly having events. And so right now it's running a negative ni a, but when we dug into, it's because of the fact that it's the FTE compliment. So you got to think about these things when you're making this investment in a community that it's going to cost you more to run that store because it's not running our normal hours and you're going to need an extra person or two to make sure that it's managed and it's handled correctly.

Stu Richards (29:44):

That's great. So we're winding down. Any questions?

Audience Member 1 (29:49):

Nick? Just one because it hasn't come up. Are there any refinements or tweaks that you made to your coverage model based on the fact that you have these business owners who done in Jersey, New York, where and then come work there or whatever, maybe originated New Jersey office, how you make any?

Nick Miceli (30:17):

The worst thing you can do to someone is change their relationship to a business owner is change their relationship manager. They know this person, they've gotten to know this person. They've got a relationship, they know their business, they remember I love going on occasionally I still get to go on calls with customers and it's probably the best part of my day. But when you get out there and you just watch the relationship that exists between the relationship manager and the owner of the company and they're completing each other's sentences and Oh, don't forget to tell them about this. And you're like, how do they even know that the supply chain issue that happened four years ago and how they dealt with, I love it, right? It really helps cement for me the importance of our people in that relationship. And so the last thing you really want to do is strip that out and, oh, here's your new relationship.

(31:07):

Congratulations. You're over a hundred million dollars. Here's your new relationship manager stranger that you now have to start all over again and tell them your story. We hate doing that, but as businesses are really moving in, we do try to make the transition and we put a joint team together, here's the Florida relationship manager, and then let that develop over time versus the hard bandaid, rip the bandaid off and start all over again. That is one of the ways we've been successful at transitioning those relationships the other way. It's amazing how many relationship managers from New York want to work in Florida. So we just bring them down with their customers. It's perfect.

Stu Richards (31:44):

Any other questions? Yeah.

Audience Member 2 (31:49):

Nick, you mentioned about the small business specialist. Nick have a couple branches that they're supporting. What's the difference between a branch manager's role in small business versus the small business specialist?

Nick Miceli (32:02):

So we use our store managers like the mayor of the town. So they're the quarterback. So anything that's happening in the town in which they operate, they better be on top of and they need to know it. We try to hire store managers from born and raised in that town. They know everyone. They've maybe worked at another bank in that town and now they're moving over. And so they have everything on their plate, the consumer, the commercial or the small business, the financial literacy, the outreach. And so what we were finding is that they were doing a really great job of bringing in harvesting relationships, but there's no portfolio manager in the store to help with that. So can they really do their job of being out in the community, being community focused at the same time that they're deepening wallet share the existing customers that are in the bank.

(32:58):

And so that's why the business specialist role was created was to start harvesting primarily the non barring business DDA customers. And wait a minute, we see that your merchant services are being provided by somebody else, but you bank with us. We can provide merchant services, we should provide that to you. So it's not just looking for loans, it's looking for additional services, loans being one of the products that they can go after. And so we then had this tremendous backlog of SBA loans that were approved but not closed, and the time it takes to close an SBA loan does a store manager, should they really be the experts in closing SBA loans? And the answer at the end of the day was, we've got 1200 store managers. The answer is no. But if we can get some, let's use the specialist to be Houston for all kinds of things. They clean the bathrooms.

(33:54):

So it's like this cool little elite Salesforce that we can put and move towards other things. When PPP came, we grabbed this group of folks Bank-wide. They were driving PPP loans. For us, when we get this report of high cash depositors, like why were they depositing $40,000 at an ATM machine and on a Tuesday? Okay, I didn't even know you could do that, but apparently you can. We put them at that. It is just little force that we can move in direction as the business entails. And then they became the experts in closing SBA loans. And so they really, together, the store manager is still the leader of the store. The business specialist is there to help support them in those efforts so that they can take some things off of their plate.

Stu Richards (34:47):

Great. Any other questions? Awesome. Well, congratulations. You made it to the end of other conference.