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The Case for an Industry Bank

For independent agents, choosing between a local bank or an industry bank for banking needs can be difficult. Here are some reasons in favor of choosing an industry bank.
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the case for an industry bank

When an independent agency or a prospective agency buyer needs banking services, particularly lending, the question often arises about whether to use a local bank or an industry bank.

This question of local bank or industry bank is a common one in the insurance business because the principals of most agencies are prominent players in the local and regional economy, and most of them know the local bankers well—they probably play golf with them. Indeed, many agency principals serve on community bank boards.

So then, what is the case in favor of agency owners choosing an industry bank instead of a known bank in their community? 

The answer has several parts but first an important clarification: The most common reason for the questions arising in the first place is the decision by the agency to borrow money. That's usually a significant and non-routine event. Industry banks, such as InsurBanc, offer a whole range of other banking services whose development and delivery are based almost entirely on its expertise and experience in the independent agency business.

The first part of the answer to why choose an industry bank is professional competence. Most borrowers are pleased with the lending officer's familiarity with the agency business. This is more than warmth and fuzziness. It's efficient and effective.

The information sought in the loan underwriting process, and the questions that follow a review of that information, are right on the money—no pun intended. The agency or borrower has the information being sought and can generate it quickly; it can readily respond to the lender's follow-up questions because it's obvious that they are pertinent.

The underwriting process with a community bank can be slow and tedious because the agency or borrower is often dealing with a lender who does not know the agency's business with any degree of depth.

A further point: In the general press, insurance agencies are usually treated as part of the landscape known as “small business." It has a cozy ring to it. That smallness may be true of independent agencies when compared to Fortune 500 companies, but in the world of private business, agencies have become sophisticated players in both the financial and risk-management skills demanded by their clients and in the use of technology. And as industry people know, that is getting truer by the month in this digital, post-COVID-19 world. They need bankers who are game-ready about the realities of their business.

A part of the professional competency, industry banks not only know how to lend on cash flows and intangible assets but they also embrace the idea as central to its business model and reason for being. This is often not the case with community bank lenders, who are generalists by their very nature and who are often brought up in a world of tangible-asset-based lending.

Connecting with the professional competence of a loan underwriter at an industry bank provides another benefit that is not often considered: When the loan application is denied, it usually comes quickly.

We are not being cute here. Few things are as maddening for a borrower as going through a several-month application process only to get a “no" based on information that was knowable back in week one.

Another part is the set of services that inevitably follow after a loan is approved. These days, at least with serious bankers, a lender and borrower relationship will almost always involve additional services and functions—accounts, remote depositing, cash management, investment insights, regulation expertise, and so on. At industry banks, those services have been developed specifically for the independent insurance agency. Understanding contingent-commission timing, the difference between agency-billing and direct billing, premium financing, non-standard markets, and co-brokerage are just a few examples among many.

An oft-overlooked aspect is that the information disclosed in loan underwriting for private businesses is usually highly confidential and personal. A borrower's confidence in the respect for and maintenance of privacy is often higher with an industry bank than with a local bank. The local bank's appeal to the borrower that, “Hey, we all know each other in this community" is sometimes received with the borrower's silent thought of, “Right, and that's just what I'm afraid of."

Everyone looks at the price in every transaction. And in borrowing, that always involves the interest rate, either fixed or variable. Nothing new to insurance agency principals—they deal with the price question all the time. Successful agents know how to overcome small price disadvantages with expertise, service, good listening and reputation. 

Sometimes there is no price disadvantage. But when there is, the industry bank's entire value proposition is usually more than enough to overcome it.

Brian H. Burke is a semi-retired agency management consultant and serves as a director of InsurBanc's holding company. He is the founder and former controlling owner of BH Burke & Co. Inc., based in Cheshire, Connecticut.

Thursday, December 3, 2020
Agency Operations & Best Practices