There is and will continue to be an unintended consequence of banks treating ABL as a product instead of a business. There is a real debate going on among commercial banking executives whether ABL divisions should be stand-alone businesses or simply a product to serve the commercial bank. To be fair, there are strong arguments for both sides. Commercial banking is the lifeblood of banks and has far superior product demand, assets, scale and business development capabilities, so in some ways, there is a need to have dedicated ABL support. The converse of that argument is that ABL is a fundamentally different product that can both cover a bank’s needs and operate as its own business, which has historically been the case. The answer to this dilemma is typically unique to each bank. Depending on the bank, or conversely the ABL division, there are reasons to treat it as a product, separate division or in certain cases a hybrid of the two.  

This conversation is going to be an ongoing debate over the next several years. However, what is not being talked about enough is the byproduct of these discussions and ultimate decisions. One unintended consequence of a decision to change a business model from a business to a product may lead to a change in the types of BDOs and corresponding BDO compensation. Important points for BDOs include the ability to control one’s destiny via a capped or uncapped plan and ability to call outside the footprint of their respective bank. Capped versus uncapped BDO compensation might incentivize certain BDOs to choose between very different business models. Servicing a bank’s customers versus sourcing their own deals outside the bank is a fundamentally different business development function that may or may not be valued. The biggest unintended consequence of banks treating ABL as a product might be losing the ABL BDOs who typically service sponsors or go elephant hunting for large deals. Capped bonuses also have the potential to create a disincentive to exceed budget once an annual sales target is achieved.

To be fair to both sides, it’s not clear whether BDOs who seek an uncapped compensation structure and desire to hunt outside a bank’s footprint have a place in a changing business model and compensation structure. Most large regional and national banks that are at least $50 billion in assets tend to have an incredible team of commercial banking BDOs who view ABL as but one product as part of a larger platform. From this lens it’s easy to see why highly talented ABL professionals would enjoy this exact business model of servicing a bank’s calling effort. Focusing on supporting a large commercial bank’s calling effort brings stability and other benefits that a stand-alone business unit does not always provide. Said differently, not every talented executive wants the “eat what you kill” pay package. Non-banks, more so than banks, notoriously have a much shorter rope so there is real risk to betting on yourself when you have a narrow time horizon to produce. That being said, proven bank-ABL BDOs have never had more options to jump to both bank and non-bank ABL groups that treat ABL as a business. These groups, especially non-banks, are busy arming themselves with a broader array of products and partnerships.

A truly skilled non-bank ABL BDO has never had more flexibility in terms of structuring flexibility, no bank regulatory constraints and more tools at their disposal. It’s a great time to be on the front lines of financial services if you have a known brand in the market. The demand for capital is there and the need to “add value” has never been stronger. Good BDOs know how to add value and while the term is somewhat cliché, it’s really not for the ones who know how to do it. Adding value actually exists and it’s a matter of marshalling the resources of large institutions to understand how to provide a smart solution others simply might not be able to figure out. This still exists and is driven by talented BDOs who understand it. The question really comes down to need and economic incentives under changing business models. ABL as an industry is at a pivotal time and commercial banks are going to have make hard decisions about how to manage their ABL divisions.

Twenty years ago, the majority of banks had no choice but to keep ABL groups as their own division for the sole reason that they bought them versus having to build them. ABL at the time was a fundamentally different business and was treated as such. There was really no ability to treat it as a product and most deals were sourced outside of a bank’s commercial banking clientele. That was then and this now, where years later these groups are mostly integrated and there is a real need for larger banks to provide clients with a platform and product options. This means ABL groups must spend significant time covering the bank footprint, which clearly leverages a larger bank’s sourcing engine. What this does, however, is change the nature of an ABL group that is used to operating as a stand-alone business and having compensation treated as such. The real challenge is that the prior uncapped compensation plans were designed on a legacy bank-ABL business model and today it’s creating friction. The uncapped model worked just fine when bank-ABLs were stand-alone units and sourced their own deals, but less so when the sourcing function not as vital.

The compensation differences are quite real between a bank-ABL group that is treated as a product within a bank versus a bank-ABL group that is treated as a business. Quite simply, the BDOs who have strong sourcing networks outside their respective bank’s footprint are no longer getting compensated for their value as the compensation system is typically different. This in part equates to sports team economics (i.e., do you build a team around star players or a system)? The answer will vary quite a bit, but there is a trend among banks that move toward ABL as a product to have more capped upsize programs. What’s at stake here is transition of human capital-based business models and compensation structures. The outcome will fundamentally change the nature of what a bank-ABL group does and hence transform compensation structures to align with either ABL as a product or stand-alone business. The change in compensation structures will certainly have an impact on the composition of the teams. How commercial banks handle these decisions will have profound effects on the industry and the movement of human capital. Intended or not, there will be consequences with changing business models.