in 2022 and 2023 companies of this size were growing their top line revenue 12 percent year over year, and that's substantially above publicly traded companies that were sort of in the low mid single digits. And so you know, when you think about that, and you've had this You know, two year run of Hey, yes, inflation is going up. My overall cost base is going up, but I'm finding a way to be adaptive and being able to grow my top line revenue along with that.
And so I think there was that optimism.
From the American Bankers Association, this is the ABA Banking Journal podcast. Welcome back. I'm Evan Sparks. Today's episode is presented by Agri Access. And we're here to talk about the middle market. The middle market does not get the press that the Fortune 500 gets, and it doesn't always get the love from Capitol Hill that small businesses receive. So that's why we might talk about it as kind of in the middle here, but the middle market is a critical element of the American economy.
And we, and that's so one reason we like to focus on this periodically here at the ABA Banking Journal podcast here to talk with us a little bit more about the outlook for the middle market businesses is Ken Gavrity. Ken is president of the commercial bank at KeyBank, a regional bank based in Cleveland, Ohio. Ken, welcome to the podcast.
Thanks for having me, Evan.
Before we get into the nuts and bolts of the work that y'all have done on the middle market outlook, would you mind kind of introducing yourself and your background in banking?
Yeah, sure. I'm president of the commercial bank at Key. And inside the commercial bank, that really includes two major segments. The first are these middle market companies that you were just talking about. Companies that are 10 million in revenue to about a billion in revenue.
And surprisingly, I think to the point that you just made, it's not as well known out there and maybe not as well covered in the press, but those companies are a third of private sector GDP and employ roughly between 45 to 50 million people throughout the country. And so it's an incredibly important part of the overall economy. And as we get into some of the depth of it.
I would also tell you very resilient through cycles and growing pretty substantially both in the revenue side and the employment side so that's a component of the commercial bank.
The other side of the commercial bank is the commercial payments organization for us So it serves directly that customer base we were talking about but also goes up to the large corporate sector as well And so that's providing the traditional banking services around core treasury and cash management But also the digital payment areas, some of the new and emerging areas, software automation, some of the activities around cross border and FX as well.
So really dynamic part of the organization where a lot of innovation has been.
That's exciting. And just for a frame of reference here, about how much of the of Key's overall asset base does the, or loan base does the commercial bank account for?
Well, I'd probably say it this way, Evan. I would say of about the, call it six and a half billion of revenue of Key, about two billion of it falls inside the commercial bank. And so that, that's split between the middle market area and the commercial bank.
Well I'd love to talk dig a little bit more into this critically important segment that y'all that y'all are that y'all cover at the In the commercial bank, you know one third of private sector GDP as you mentioned. How do you define the parameters of what constitutes a middle market company?
There's some of our customers You know, they came into the bank. Maybe they were 100 million in revenue. They've grown over the years and have gone past that billion dollar mark. We like to believe that we're, we're there as a strategic advisor, financial advisor for those companies. We're helping them scale, but generally that's how we define the middle market.
And the reason is because once you get to 10 million in revenue, you're really a company that needs more sophisticated solutions on the banking side. So you're no longer just using your small business credit card to finance your company. You're looking at credit facilities. You need analyzed operating accounts. You need more sophisticated liquidity management. You're starting to think through more strategic actions. Are you going to take an outside investor?
And so I think those are the type of things that generally you know, qualifies the criteria for somebody that's getting into that middle market and needs more of a partner in the space.
Well, I want to come back to some of those bank strategies that serve the middle market in a little bit here. But I'd love it if you could kind of give me an overview of where what, what, what is the outlook of these these businesses in this critically important slice of the economy?
Yeah, well, you know, Evan, we had you know, we released about a month ago our, our survey for the middle market. We do it twice a year, and it's just getting a pulse of how these companies feel. And I think what was really interesting is really over the last two years, You had this upbeat mentality of the group where you had sort of low seventies in the percentile that we're saying they were optimistic about their next 12 months.
And in this last survey which I believe was taken primarily in June, we just, you know, we're able to synthesize the material. You know, over the month or so following that you look at this massive jump up a five point jump to 78 percent of those companies being positive about the outlook. And that's a little bit different than maybe what all of us see in the headlines when we pick up the Wall Street Journal every day. There's a little bit more around the uncertainty of the future.
And what's the next shoe to drop? In the economy, is it gonna be a hard landing or a soft landing? But very few people are talking about, Hey, maybe it doesn't land. Maybe it continues to grow the way that we've seen. And so I think if you were a middle market company, what you've seen is it's something, there's some really good data out there from national center for the middle market.
That showed in 2022 and 2023 companies of this size were growing their top line revenue 12 percent year over year, and that's substantially above publicly traded companies that were sort of in the low mid single digits. And so you know, when you think about that, and you've had this You know, two year run of Hey, yes, inflation is going up. My overall cost base is going up, but I'm finding a way to be adaptive and being able to grow my top line revenue along with that.
And so I think there was that optimism. And then when you look at the first half of this year, their revenues grew 12. 9%. So while inflation is coming down, all the moves that they took over the previous two years to really build this resiliency inside the businesses is showing up in a way where they're continuing to grow the top line. And now they're starting to see some of that margin build on the bottom line.
So I think those are some of the reasons that you know, there's an optimism within this group right now. And then you have that forward looking view that says, Hey, And I've got inflation starting to get under control. I'm still worried about it, but generally the consistency of that over the last couple of quarters is starting to build into this narrative. I think my expense base is going to go down. You have a view that the cost of borrowing right interest rates overall starting to go down.
What pace? You know, we're going to see that I think is a bit uncertain, but I think there's a pervasive view rates. We're going to go down. The survey was taken before the Fed cut in September. We saw that 50 basis points. The future, you know, the forward showing another, you know, potential two to three cuts by the end of this year, whether you believe that or not, there's more of a consensus view that's going down and not going up.
So if you're a middle market company, another one of the cost levers you have likely to be reduced. So I think there, I think those are the two things, you know, generally top line. Maintaining that resiliency bottom line feeling like you've got some tailwinds behind it.
So, you've got rates expected to come down and inflation under control. So you're at your cost basis is in better shape for these, these companies. And what other economic trends are you, did you see in your survey that that middle market managers are really paying close attention to in terms of how they do their financial planning and grow and they're, they're planning for growth in their, in their enterprises?
Well, you know, I'd say this way, really talent was another interesting observation that we saw within the group. Are people still worried about finding and retaining talent? Yes. But this was the first time that we saw from survey to survey a drop in that. So it, the, the direction ultimately changed there. So there's a 12 point improvement from this time last year in finding talent and a six point improvement in retaining talent.
And so that's a, that's a good signal of, yes, we've got a tight labor market. Unemployment is is ticking up a barely. So you still have to fight for that talent, but you're finding the ability to to fill the roles that you have open just a little bit easier. And you're likely to keep the a talent that you have in seat inside the organization. I, so I think that macro trend is something that when you think about the next incremental dollar that a middle market company wants to spend.
A number of companies were citing we want to hire the next person and now the likelihood of being able to do that in a high quality way feels a little bit better.
Well, I want to take a quick moment here and thank our sponsor for this month. Our, this podcast is presented by AgriAccess. AgriAccess is a secondary market financing participant that delivers capital solutions to a nationwide network of lenders, enhancing their agricultural portfolios with tailored and transformative solutions.
By providing higher lending capacity and long term fixed rate lending products, AgriAccess helps reduce risk for lending partners while they maintain the direct relationship with their ag borrowers. For more information, you can learn more at agriaccess. com. That's A G R I hyphen access dot com. And thanks to AgriAccess for sponsoring this episode of the podcast. So back to the conversation with Ken Gaverty at KeyBank. Ken, you know, this is we talked about talent.
We talked about, you know, some of the economic economic trends affecting the industry, you know, one of the What are some of the what are some of the operational challenges that the middle market is facing and what are some ways that banks can kind of help address some of those those Operational challenges that may that the middle market companies may be may be seeing?
You know, look, I mean, I think, you know, some of the survey responses that I've both seen in the data, but I also hear when I'm talking to, you know, customers, you know, as we're out in the markets, is that the two year period, a little bit of what I was saying at the beginning, the two year period where we went into the pandemic and all of a sudden, you know, the resiliency of your supply chain was tested and, you know, You know, you had
to look at those processes end to end and figure out where can I get my inputs? Where can I, you know, be able to drive in some of the raw materials that I need in a different way? But they also found opportunities to be much more efficient, right? They had all of the inflation you know, costs coming in. It was eroding their margins. And so in addition to rebuilding the supply chain, they had to figure out where can I take out costs in these processes end to end.
So, It was a shock to the system. It wasn't one that anybody wanted to go through as quickly as they had to, but the becoming more efficient, both in an operations and technology standpoint, are the two cited reasons for companies are most optimistic going forward. So I think you're, you know, you see that companies got fit, they got tight. And I think that's component one. And then when you look at the response.
To when you think about you know, the next investment dollar, 54 percent of survey respondents saying they were going to look at AI as a potential way to expand operations or expand product. That's a very high percentage for a middle market company to be talking about artificial intelligence. And so I connect those two points to say, Companies got fit. They drove automation in, and yet we still aren't feeling the impacts yet of artificial intelligence.
So those 54 percent of customers, as you then have the live conversation with the CEO, the CFO, they're dipping their toe in the water. They're at the very early stages of figuring out Can I pull it across customer operations? Can I put it into my supply chain with more predictive maintenance or a better understanding of how to optimize my setup? And so you're seeing the very early stages of, I know it can impact my industry.
It used to be 12 months ago, an educational thing of I'm going to learn about it. I'm going to understand if it's going to impact my industry to now broad based acceptance that it does impact my industry. I have to find out where, and if you're private equity owned, your owners are saying, show me your operational plan of where you think you're going to be able to deploy it. So I think if you were to put it in the baseball analogy, we're in the first inning.
But I think there's a lot of excitement around what this can do for the industry, both on the revenue side, because you're looking at in content development and areas of focus on the growth side, but also certainly the efficiency and backend office optimization.
So, you know, one of the things I've. Heard from other banks, other particularly regional banks that are very active in the middle market space is the importance of the payments franchise and supporting this in supporting this drive for efficiency in the, at these companies and these clients. Can you talk about how your commercial payments business at key integrates with the with your support and service to the middle market?
Yeah, no, it's a It's a great question. And I would say, you know, 10 years ago, we really started this journey at key of saying, Look, if we really believe that we are a relationship bank, and you know, it's something that's core to who we are, then we need to be able to get the operating account of that customer and be able to help them with their financial operations. That's how they run their business every day.
Certainly being able to provide them capital and giving them you know, the growth capital and growth advice really important, but But when they go to work every single day, it's the financial operations that allow them to be able to offer products and services to their end customers. And so we wanted to get better there. And when I think about, you know, the, the general revenue that we had in that business back in 2016, it was about a half billion dollars of revenue.
This, you know 2023, we finished about a billion and a half. So a billion dollar growth in that part of our franchise. By going into these companies and saying, we're going to help you with your cash management. We're going to help you with liquidity as interest rates. We're going up at that time. Now they're coming down, being able to have strategic advice around how to think about their liquidity matters. And then, you know, what really started back in that, you know, 2015, 2016 timeframe.
Was the notion of software being entered into the working capital cycle. So whether it was accounts payable, whether it's accounts receivable, banks historically were a little bit more focused on just moving the money from point a to point B for the end customer. Now that conversation is much more focused on. Okay, the start of the accounts payable cycle. You're really thinking about am I procuring from the right organizations?
What and do the right people within my organization have the approval to do that? Am I getting the concentrated? Purchasing power by making sure that I'm looking across the organization and buying like products and services In a concentrated way so I get the economic power that once I'm I'm making that order.
Am I able to bring it back into the organization, confirm that I was delivered those products and services and does the invoice I'm getting invoice for reflect that, and then ultimately I got to go through the rest of the payables process, make the payment, and if I make the payment, I want to do it in an economically advantaged way. That's all workflow. And I think historically banks weren't as focused on that.
And I think we really tailored our business towards saying, no, no, that that's got to be part of the solution that we're bringing to a CFO or bring to a CEO. So accounts, payable automation accounts, receivable automation, along with some of the liquidity points I was talking about before, that's a much more holistic answer to helping.
a business owner understand where they're, where's their margin, where's their resiliency, where they're, where's their data visibility that we can help you with in your business.
Right. Well, Ken, this was a very, very illuminating conversation, and I really appreciate hearing, hearing from you and on this, this critical topic. And as well as the you know, the, the insight that I think our, our members will our listeners will benefit from. Thanks so much for being on the show.
Yeah. Thanks for having me. I mean, I just think these are crucial topics. Thanks. For our industry and so I appreciate you shining a light on it.
Absolutely Thanks again to agri access for sponsoring this episode If you want to find more, episodes of the aba banking journal podcast Just search for our name may be a banking journal podcast in any of your favorite podcast apps or platforms or you can go to aba. com banking journal podcast We'll have a link to on the on the show page for this show to the survey that ken discussed and we'll and you can find more information about what, what KeyBank is doing in the, in the middle market space.
So, Ken, thanks for being on the show. And for our listeners, thanks for listening. We'll be back with you again very soon.