The commercial side of your bank plays a massive role in the overall profitability of the institution. According to the world’s largest banks, more than half of their annual revenue is now generated by their commercial lines of business. Across the industry, commercial loans now make up more than 43% of bank loan portfolios. And commercial pricing — your ability to win and broaden relationships through negotiating and structuring commercial loans, as well as cross-selling additional profits — is central to your commercial bank’s performance and risk profile. Yet the vital cog at the centre of that all-important asset is… a spreadsheet?
Indeed, most banks are content to stay with spreadsheet technology that’s changed little in the last quarter century because, frankly, it’s cheap. While that may be true initially, the shortcoming of spreadsheets can cost your bank dearly, every day. Here’s how.
1. Mistakes multiply
A pioneering study by IBM found that 88% of all spreadsheets contain at least one error, making them unreliable when working with large datasets performing complex calculations.
JP Morgan experienced this first-hand when it lost more than $6 billion in their London Whale disaster — thanks to a time-pressured employee who copy and pasted an existing formula into a new Value at Risk model. Barclays bought 170 more contracts than they intended during their purchase of Lehman Brothers assets in 2008 because someone hid cells rather than deleting them.
Pricing spreadsheets are no different. A simple error can prevent you from knowing whether you’re charging the right amount for the level of risk you’re taking on. The prize for this is reputation damage and the risk that clients take their business elsewhere.
2. Spreadsheets are not truly automated
Excel spreadsheets cannot be properly automated unless you’re creating code using third-party software. Even then, it’s not very effective. That means bankers must manually enter data to get an up-to-date picture to properly understand the level of risk. There’s simply no way to incorporate real-time changes such as cash balances or declining credit. Without real-time data it’s near impossible to know when danger is on the horizon — and certainly don’t expect it to send out an alert.
3. Excel is not designed for testing or compliance
Spreadsheets by their very nature are built around manual processes, and that makes it very difficult to troubleshoot or test if something goes wrong. Often, pricing spreadsheets are built up over many years, with data taken from multiple different sources, even including different geographies. So, when it comes to understanding how one formula or cell connects to another, the challenge is immense, time-consuming, and costly.
It’s even worse when you consider the raft of regulations such as GDPR that now need to be accounted for. According to the UK government, spreadsheets are among the biggest unaddressed threats that put an organisation at risk. Spreadsheets can be saved as duplicates and lost in the wilderness of a server. To be GDPR compliant, data must be secure. Is yours?
4. Not designed to aid bankers
The whole point of a pricing tool is to support finance workers in their goal of pitching the right deals to the right customers. When that tool is complex and cumbersome, requiring a special kind of mind to understand the intricacies of spreadsheet formulas, what incentive do they have to keep coming back? Bankers need a tool that they can trust to give quick and accurate up-to-date information. They need a tool that can tell them if a deal they’re about to do requires special approval. A static spreadsheet cannot deliver any of that.
Ultimately, a pricing spreadsheet is something banks can afford to replace — but they can’t afford to lose business brought about by outdated technologies. In Q2’s new eBook, “4 Ways Your Pricing Spreadsheet is Failing You”, we explore how pricing spreadsheets are costing you every day, with a focus on the areas of Banker Coaching, Risk Mitigation, Cross-Selling, and Scalability.