The Illusive Hunt for Revenue

Fintel.pngThe operating environment for banks is becoming increasingly inhospitable. Rising credit costs and falling interest rates threaten to squeeze profitability in a vice grip unless banks find new revenue sources.

This is why Bank Director’s second annual Experience FinXTech event and awards, hosted virtually at the beginning of May, highlighted fintech companies that are helping banks grow their top lines.

The event brought together bankers and technologists for demonstrations and conversations about the present and future of banking.

As a part of the event, Bank Director crowned fintech winners in seven categories, including Best Solution for Customer Experience, Best Solution for Loan Growth and Best Solution for Revenue Growth.

Fintel Connect won the final category: Best Solution for Revenue Growth.

The Canada-based company amplifies a bank’s marketing campaigns by leveraging an affiliate network of publishers and social influencers, as we explain on our FinXTech Connect platform, which profiles hundreds of tried-and-true technology companies serving the banking industry.

A selling point is that, instead of paying for clicks or impressions, customers of Fintel Connect only pay once a lead converts into an actual customer.

Canada’s EQ Bank has been working with Fintel Connect for years, using it to manage media affiliates — bloggers, interest rate aggregators, etc. EQ attributes the service with boosting customer acquisition “fairly substantially,” with between 5% and 10% of EQ’s new customers now coming through it.

Nest Egg was a runner-up in the category of Best Solution for Revenue Growth. The Philadelphia-based company enables banks to offer high-quality, fully digital investment services in order to increase customer affinity.

OceanFirst Financial Corp., a $10.5 billion bank based in Red Bank, New Jersey, liked Nest Egg so much that it invested in the company.

OceanFirst has recommended Nest Egg’s semi-automated money management tool to retail clients for about a year, with assets under management growing from $0 to $43 million over that time. The service is already cash flow positive for OceanFirst.

The last finalist for this category was Flybits, a fintech company based in Toronto.

Mastercard has been working with Flybits for a year now. They’re still in the early stages of implementing its product, which helps provide contextualized offers to end users of their cards for the purpose of driving usage.

The trajectory has been a positive one for Mastercard, leaving the company optimistic that working with Flybits will help their clients — mainly banks — increase card usage and associated fee income.

One reason Mastercard chose to work with Flybits is because of the way it deals with data. All data is tokenized, with Flybits only selectively accessing the data it needs. There are any number of ways for banks to grow revenue. These are three of the best, according to experienced panel of judges convened to choose the winners at Bank Director’s 2020 Experience FinXTech.

A New Opportunity for Revenue and Efficiency

Intelligence-Report.pngIn 2017, Bank Director magazine featured a story titled “The API Effect.” The story explained how banks could earn revenue by using application programming interfaces, or APIs, and concluded with a prediction: APIs would be so prevalent in five years that banks who were not leveraging them would be similar to banks that didn’t offer a mobile banking application in 2017.

Today, the banking industry is on a fast track to proving that hypothesis.

Banks are hurtling into the digital revolution in response, in no small part, to the outbreak of Covid-19, a novel coronavirus that originated in China before spreading around the globe. The social distancing measures taken to contain the virus have forced banks to operate without the safety nets of branches, paper and physical proximity to customers. They’re feeling pressure to provide up-to-the-minute information, even as the world is changing by the hour. And they’re grappling with ideas about what it means to be a bank and how best to serve customers in these challenging times.

One way to do so is through APIs, passageways between software systems that facilitate the transfer of data.

APIs make it possible to open and fund new accounts instantly — a way to continue to bring in deposits when people can’t visit a branch. They pull data from call centers and chat conversations into systems that use it to send timely and topical messages to customers. And they enable capabilities like real-time BSA checks — an invaluable tool for banks struggling to process the onslaught of Paycheck Protection Program loans backed by the Small Business Administration.

All those capabilities will still be important once the crisis is over. But by then, thanks to the surge in API adoption, they’ll also be table stakes for banks that want to remain competitive.

In short, there’s never been a better time to explore what APIs can do for your bank, which is the purpose of this FinXTech Intelligence Report, APIs: New Opportunities for Revenue and Efficiency.

The report unpacks APIs — exploring their use cases in banking, and the forces driving adoption of the technology among financial institutions of all sizes. It includes:

  • Five market trends driving the adoption of APIs among banks
  • Actionable API use cases for growing revenue and creating efficiencies
  • A map of the API provider landscape, highlighting the leading companies enabling API transformation
  • An in-depth case study of TAB Bank, which reimagined its data infrastructure with APIs
  • Key considerations for banks developing an API strategy

To learn more, download our FinXTech Intelligence Report, APIs: New Opportunities for Revenue and Efficiency.

Six Ways to Grow Treasury Department Revenue


retail-6-6-19.pngBankers looking to grow revenue from their treasury departments will need the support of branch staff to drive the effort.

Banks large and small sometimes struggle to maximize the lucrative opportunity of their treasury departments. To increase revenue, it is vital that employees in the branch discuss treasury products with new and existing customers. Here are six steps to get started.

Step 1: Create a Top-Down Directive
Everyone from the bank president to newly hired employees should understand the importance that treasury revenue plays in overall operations. Banks should not rely on branch staff to execute this initiative. Leadership must prioritize discussing and promoting treasury products if they hope to see a pickup in demand and improvement in revenue. All employees should be on board, and there should be a top-down directive from upper management on the importance of cross-selling treasury products.

Step 2: Set Goals and Metrics for Employees
After bank leadership has discussed the importance of treasury products and how they can serve customers’ needs, they should set measurable and attainable goals for branches and staff.

Banks should monitor and track the actual performance against the set goals over time and follow up on them. Recognize bank employees that meet or exceed expectations, which will boost motivation.

Step 3: Run an ACH Report
Tap into existing customers by mining Automated Clearing House data. Merchant services providers can provide a list of ACH descriptors that allows banks to identify customers who are using processing services outside the bank. From there, executives will need to determine what other products their existing customers are using. These leads are invaluable, and this is an easy way to identify cross-selling opportunities for existing customers who already have a trusted relationship with the bank. Banks should assign an employee to follow up with all the customers on these reports.

Step 4: Incentivize Referral Activity
Executives should incentivize their employees to promote treasury products through referral bonuses, commissions, referral campaigns and recognition. Use these campaigns regularly, but change them so they remain enticing for employees. One place to start could be with a quarterly referral campaign partnered with the current merchant services provider, which can be mutually beneficial and bolster excitement about treasury department offerings.

Step 5: Require Treasury Products with New Business Loans
Banks can also require customers to add certain treasury products as a loan covenant on new business loans. However, they should take pains to consider the needs of the prospective customer before requiring a product.

Adding this requirement means it will be vital to have treasury management specialists involved in initial meetings with prospective customers. After a proper needs assessment, they can craft a customized proposal that includes treasury products that will be of most use to the customer.

Step 6: Educate Staff
Bank employees will always be hesitant to bring up products that they do not fully understand, and may be concerned about asking questions. Education is central to combatting this, and the success of any effort to promote a bank’s treasury department.

Banks should implement cross-training seminars to educate all employees about product offerings. It should also be ongoing to keep employees engaged, and can include webinars, lunch-and-learns and new employee boot camps, among other approaches.

The Secret to a Low Efficiency Ratio


efficiency-5-31-19.pngOne of the most important metrics in banking is the efficiency ratio, which is generally viewed as a measurement of how carefully a bank spends money. Following this definition to its logical conclusion, the more parsimonious the bank, the lower its efficiency ratio should be.

But this common understanding fails to capture the true nature of what the efficiency ratio actually measures. It is in reality a fraction that expresses the interrelationship between the two most dynamic forces within any business organization: the growth of revenue and expenses.

Looked at this way, the efficiency ratio is actually a measurement of effective spending—how much revenue does every dollar of spending produce. And embedded within the efficiency ratio is a simple but extraordinarily important concept that is the key to high profitability—positive operating leverage.

But first, let’s look at how the efficiency ratio works. It’s an easy calculation. The numerator, which is the top half of the fraction, is expenses. And the denominator, which sits below it, is revenue. A bank that reports $50 of expenses and $100 of revenue in a quarter has an efficiency ratio of 50 percent, which is the benchmark for most banks (although most fall short).

However, not all 50 percent efficiency ratios are created equal.

Consider two examples. Bank Cheapskate reports $40 of expenses and $100 of revenue in its most recent quarter, for an efficiency ratio of 40 percent. Coming in 10 percentage points under the benchmark rate of 50 percent, Bank Cheapskate performs admirably.

Bank Topline reports $50 in expenses and $125 in revenue in its most recent quarter. This performance also results in an efficiency ratio of 40 percent, equivalent to Bank Cheapskate’s ratio. Again, an impressive performance.

While the two ratios are the same, it is unlikely that most institutional investors will value them equally. The important distinction is how they got there.

The argument in favor of Bank Cheapskate’s approach is simple and compelling. Being a low-cost producer is a tremendous competitive advantage in an industry like banking, which has seen a long-term decline in its net interest margin. It allows to a bank to keep deposits costs low in a tight funding market, or back away from an underpriced and poorly structured credit in a competitive loan market. It gives the bank’s management team optionality.

The case for Bank Topline’s approach is probably more appealing. Investors appreciate the efficiency of a low-cost producer, but I think they would place greater value on the business development skills of a growth bank. In my experience, most investors prefer a growth story over an expense story. Bank Topline spends more money than Bank Cheapskate, but it delivers more of what investors value most—revenue growth.

To be clear, the choice between revenue and expenses isn’t binary—this is where positive operating leverage comes in.

Positive operating leverage occurs when revenue growth exceeds expense growth. Costs increase, but revenue increases at a faster rate. This is the secret to profitability in banking, and the best management teams practice it.

A real-life example is Phoenix-based Western Alliance Bancorp. The bank’s operating efficiency ratio in 2018 was an exemplary 41.9 percent. The management team there places great importance on efficiency, although the bank’s expenses did rise last year. But this increase was more than offset by strong revenue growth, which exceeded expense growth by approximately 250 percent. This is a good example of positive operating leverage and it’s the real story behind the bank’s low efficiency ratio.

The greater the operating leverage, the lower the efficiency ratio because the ratio is relational. It is not solely a cost-driven metric. At Western Alliance and other banks that focus on creating positive operating leverage, it’s not just how much you spend—it’s how many dollars of revenue each dollar of expense creates.

To understand the real significance of a bank’s efficiency ratio, you have to look at the story behind the numbers.

12 Questions Directors Should Ask About New Bank Activities


governance-3-18-19.pngA bank’s board of directors must answer to a variety of constituencies, including shareholders, regulatory agencies, customers and employees. At times those constituencies may have competing interests or priorities. Other times, what may appear to be competing interests are actually variations of aligned interests.

One area where this is particularly true is the board’s responsibility to strike the right balance between driving revenues and ensuring the bank adheres to its risk appetite established as part of its enterprise risk management framework.

The failure to strike this proper balance can be devastating to the institution, and if widespread, could result in consequences across the entire industry, such as the 2008 financial crisis. As technology and innovation accelerate the pace of change in the banking industry, that balance will become more critical and difficult to manage. And as banks explore ways to increase profits and remain competitive, especially with respect to noninterest income, bank directors will need to remain diligent in their oversight of new bank activities.

Regulators have offered guidance to bank boards on the subject. For example, the Office of the Comptroller of the Currency (OCC) issued a bulletin in 2017 that defines “new activities” to include new, modified, and/or expanded products and services and provide guidance related to risk management systems for new activities. While it is management’s role to execute strategy and operate within the established risk appetite on a day-to-day basis, the board’s role is to oversee and evaluate management’s actions, and the board should understand the impact and risks associated with any new activities of the bank.

To exercise this responsibility, directors should challenge plans for new activities by posing the following questions to help them determine if the proper risk approach has been taken. Questions may include:

  • Does the activity align with the bank’s strategic objectives?
  • Was a thorough review of the activity conducted? If so what were the results of that review and, specifically, what new or increased risks are associated with the activity, the controls, and the residual risk the bank will be assuming?
  • Is the associated residual risk acceptable given the bank’s established risk appetite?
  • Is the bank’s infrastructure sufficient to support the new activity?
  • Are the right people in place for the activity to be successful (both the number of people required and any specific expertise)?
  • Are there any new or special incentives being offered for employees? If so, are they encouraging the correct behavior and, just as importantly, discouraging the wrong behavior?
  • What are the specific controls in place to address any risks created?
  • How will success be measured? What reporting mechanism is in place to track success?
  • Will there be any impact on current customers? Or in the case of consumers, will there be any disparate impact or unfair or deceptive acts or practices (UDAAP) implications?
  • What third parties are required for successful implementation?
  • What limits on the amount of new business (concentration limits) should be established?
  • Are the applicable regulators aware of the bank’s plans, and what is their position/guidance?

These threshold questions will assist directors in becoming fully informed about the proposed new activities, and the answers should encourage follow up questions and discussions. For example, if third parties are necessary, then the focus would shift to the bank’s vendor management policies and procedures. Discussions around these questions should be properly documented in the meeting minutes to evidence the debate and decision-making that should be necessary steps in approving any new bank activity.

If these questions had been posed by every bank board contemplating the subprime lending business as a new activity, it may have averted the challenges faced by individual banks during the financial crisis and lessened the impact on the entire industry.

In the future, if boards seek the answers to these questions, the following discussions will help ensure directors will give thoughtful consideration to new activities while properly balancing the interests of all of their constituencies.

Focus On Two Key Areas to Capitalize on Overdrafts


overdraft-10-16-18.pngBy all accounts, the outlook for overdraft programs is encouraging for community banks.

Increasingly more consumers are choosing to access the service as a short-term funding solution, while regulatory burdens are easing. Banks that manage their customers’ overdrafts with outdated programs—those that do not put their account holders’ best interests at the forefront or utilize outdated technology and procedures—cannot capitalize on this real opportunity to improve service and compliance, as well as fee income.

The Overdraft Landscape
According to Moebs Services Inc., an economic-research firm, overdraft revenue increased 3 percent industry wide from 2016 to 2017, the largest increase since 2009, and is on pace to an all-time high above $37 billion by 2020.

One reason for this increase in overdraft fee income is more consumers are making the decision to access the service when funds fall short. Moebs Services reported there were approximately 1.12 billion overdraft transactions in 2016, up from nearly 1.09 billion in 2015. According to a 2017 Wall Street Journal article, these numbers suggest many consumers consider overdraft a safety net—a convenience—for which they are willing to pay a price. Analysts said in the WSJ article that the increase in overdraft revenue should be expected, since rules and regulations have been in place for some time now.

In addition, the Consumer Financial Protection Bureau withdrew overdraft rulemaking from the agency’s spring rulemaking agenda in May after having been on the agenda for years, signaling that no new overdraft regulations will be forthcoming.

With this landscape set, how should your bank capitalize on it?

A Data-Driven, Automated Solution
The first place to start is to review your current overdraft procedures and software capabilities to ensure you are using a modern, data-driven solution—one that automatically manages risk and strives to meet customer expectations. Although there are several essential components of such a system, two are listed below.

Intelligent Limit-Setting
Updated automated overdraft programs should enable your bank to set individual overdraft limits that align with an account holder’s ability to repay the overdrawn balance. The software analyzes the key risk variables of your accounts, identifies the accounts that have the highest probability of charge off and calculates individual “intelligent” limits. It then reassesses that ability to repay daily.

Providing these dynamic limits helps to serve customers better than employing fixed overdraft limits (where the same overdraft limit is assigned to every customer of a certain account type) by granting higher overdraft limits to those customers whose ability to repay warrants it, while pulling back on those who have more limited repayment capacity.

Just as important, using intelligent limits addresses the Federal Financial Institutions Examination Council (FFIEC) 2005 Joint Guidance on Overdraft Protection Programs, which states, “Institutions also should monitor these accounts on an ongoing basis and be able to identify consumers who may represent an undue credit risk to the institution. Overdraft protection programs should be administered and adjusted, as needed, to ensure that credit risk remains in line with expectations.”

Reg. E Outreach
Eight years have passed since most banks conducted a formal outreach program in response to the 2010 Amendment to Regulation E, or Reg. E, which requires affirmative consent from customers for banks to charge an overdraft fee on ATM and one-time debit card transactions. Does your board know the number of customers who did not provide a decision back in 2010 or at a subsequent account opening?

Without consent, banks do not extend overdraft privilege through these channels, which can result in multiple unexplained debit card declines. Customers may not recall making a Reg. E decision or are unaware it is even an option, which leads to confusion and irritation for the customer.

Data-driven overdraft software allows your bank to identify these denied transactions and sort them by a customer’s Reg. E decision. With this knowledge, you can reach out to those customers who have not provided a decision and explain the reason for the denial, offer overdraft alternatives and obtain a Reg. E preference. Customers appreciate this level of communication, which provides assurance your debit card will consistently help them meet their liquidity needs.

Capturing just a few percentage points more Reg. E opt-ins can result in a tangible increase in both interchange and fee income as well. A qualified third-party overdraft provider will offer employee training, best practices and scripts to ensure your Reg. E outreach program is successful and compliant.

Is your bank positioned to capitalize on the opportunity for better service and income that a well-run overdraft program represents? With the right technology and procedures, you can.

Four New Revenue Streams for Banks


revenue-10-10-18.pngCreating a healthy bottom line is the biggest goal for most financial institutions. If your bank can’t consistently turn a profit, you’ll quickly be out of business.

Maintaining a profitable bottom line requires a consistent flow of revenue. This can be difficult, especially for financial institutions that rely on both retail banking and enterprise customers to generate revenue.

Why is that? Because 40 to 60 percent of all retail banking customers are not profitable, according to a report by Zafin. Combined with the fact enterprise customers are consistently asking for a more robust product suite with high-tech payment options, turning a profit becomes difficult. Banks can alleviate the pressure by finding new ways of generating revenue that will improve the organization’s profitability.

Here are four ways you can create new revenue streams:

1. Reloadable Cards
If revenue has stagnated, it may be time to reinvigorate your product offerings. A good place to start for retail customers is reloadable cards. A report published by Allied Market Research, titled, “Prepaid Card Market – Global Opportunity Analysis and Industry Forecast, 2014 – 2022” predicts the global market for reloadable cards will reach $3.6 billion in 2022.

The benefits customers receive from reloadable cards are exceptional—fraud protection, no credit risk, and spending limits—and the profits financial institutions can reap are even better.

With reloadable cards, financial institutions can charge customers a variety of fees, including a fee to purchase and use the card, and a fee to withdraw funds for PIN-based transactions. Reloadable cards can also provide depository income.

2. White Labeling
White labeling can be a great way to generate new revenue streams by letting bank treasury departments resell funds disbursement platforms to their business customers. This makes payments more convenient for customers by speeding up and streamlining the process.

By reselling the right platform, banks can gain a competitive advantage by offering multiple emerging payment methods, such as virtual cards and real-time payments, to business customers. These high-tech payment methods are becoming more and more popular, helping financial institutions win new customers and retain established accounts.

3. Mobile Device Payments
The demand for mobile payment capability has been steadily growing since early 2000. Now, with digital natives like Gen Z entering the workforce, financial institutions have an opportunity to create mobile payment strategies that focus on customer satisfaction and retention.

This is a still an emerging space, but one that holds many possibilities for delivering products and services customers want and need. White labeling and reselling a funds disbursement platform, including mobile payment options, can help treasury clients in this area.

4. Improve Data Analytics
While not a revenue stream per se, analyzing data more effectively can help you identify new ways of increasing revenue unique to your business. For instance, if your analytics reveal many of your customers are small businesses struggling with treasury management, consider launching products and services that help.

The more you know about your consumers and the way they interact with your organization, the better equipped you’ll be to address their needs. Advanced customer data analytics will allow you to improve performance and add products in multiple areas of your financial institution, including:

  • Credit revolvers
  • Credit cards
  • Lending programs

Thoroughly analyzing customer data can also improve your ability to target new services and products to customers who want them.

Find New Products and Services that Appeal to Your Customers
Use your data and experiences with current customers to find areas where they’re struggling. Can you step in with a new offer that solves their problems? Options for improvement with existing customer accounts are the best new revenue streams for your financial institutions.

We’ve seen many banks succeed specifically by optimizing fee collections, delivering white-labeled products to improve customer convenience, and taking advantage of emerging payments technology. Use these revenue streams as a starting point, customizing them for what’s right for you and your customers.

What Banks Need to Know About Fintech Partnerships


The idea that banks and fintechs need to compete with each other is unfounded and restrictive to both parties.

Both fintechs and banks have a lot to gain by collaborating, and very little to lose. For fintechs, the most widely cited reasons for partnering with banks, according to Capgemini, include enhanced visibility by partnering with established brand names, achieving economies of scale and gaining customer trust.

fintech-reasons.png

For banks, the benefits are much more tangible, and their impact on the bottom line can be immediate.

The European Business Review explained it well: “By tapping into expertise, traditional banks stand to move much more swiftly and effectively than they otherwise could to introduce new products, streamline processes, enhance customer experience, and increase revenues.”

Looking at increased revenues, Accenture claims banks can potentially gain three to five percent by partnering with fintechs, with gains coming from enhanced customer acquisition, more fee-based revenue, better pricing accuracy, and a lower cost of risk.

When approaching a partnership with a fintech, there are a few things banks should be cognizant of in order to ensure success:

1.  Serve your customers first
First and foremost, your customers should be at the center of everything you do, including your partnerships with fintechs. How well you are serving your customers dictates your success more than anything else, and every fintech partnership represents an opportunity to further build and solidify customer loyalty.

For this reason, it’s important to partner with fintechs that will address customer pain points the most effectively. There are a lot of fintechs for banks to choose from in the process of finding partners, and the degree to which a partnership with a fintech will improve the life of customers should weigh in heaviest in your decision making.

2.  Think holistically about your partnership
If you want your partnership with a fintech to be a success, you need to think deeper than your initial partnership agreement. Especially in sell-through partner channels, setting time aside to have your sales and support teams familiarize themselves with the typical FAQs and support procedures will ensure your go-to-market strategies are aligned, and you are promoting the product or service as effectively as possible in the smallest amount of time.

3.  Ongoing collaboration is necessary for success
The nature of your fintech partner’s business is bound to change and evolve. For this reason, it is essential to keep up with the best ways to sell their product or service to your customers.

Many fintechs host training and workshops for the banks they partner with, and offer marketing resources to help banks promote the value of their service. Take advantage of these things to ensure you are getting the most out of your partnerships.

Accounts Payable (AP) Automation is one example of a way a fintech partnership can become a strategic advantage for a bank.

MineralTree has seen banks build customer loyalty while simultaneously driving interchange revenue due to a few core changes, which include:

  1. The private-labeled solution streamlines a workflow for bank customers that has traditionally been very manual, paper-based, and filled with frustration.
  2. The updated workflow simplifies the process for bank customers to pay vendors through the commercial card program run by their banks.
  3. Banks are able to integrate with their customer’s business at a deeper level by addressing pain within the operations of their customers’ businesses.

Also, with AP Automation still approaching a tipping point in adoption, banks have an opportunity to drastically differentiate themselves by offering a solution that is truly disruptive.

Regardless of which types of services or products you believe can bring value to your customers, the opportunity to partner with fintechs makes the process of introducing them and quickly realizing their benefits much easier.

Five Reasons Why You Should Reconsider Short-Term Loans


lending-7-16-18.pngFor the better part of a decade, regulatory agencies have placed obstacles in front of banks that all but prohibited them from offering short-term, small-dollar lending options for their customers. Now, at least one major regulator has signaled a shift in its opinion about those products, which should inspire banks to reconsider those options.

Here are five reasons banks often cite when discussing why they don’t offer short-term, small-dollar options, and a case why they should rethink those ideas.

You don’t think your customers need it
Perhaps many of your branches are in affluent areas, or you believe that your customers have access to other types of short-term liquidity. But the statistics regarding American personal finances may surprise you:

Nearly 50 percent of American consumers lack the necessary savings to cover a $400 emergency, according to the Federal Reserve.
The personal savings rate dipped to 2.8 percent in April 2018, the lowest rate in over a decade, according to the St. Louis Fed.
Each year 12 million Americans take out payday loans, spending $9 billion on loan fees, according to the Pew Charitable Trusts.

Based on these statistics, it’s likely that a portion of your customer base is affected by the lack of savings, or has a need for better access to liquidity, and chances are good that they’d be receptive to a small-dollar, short-term loan solution.

It’s Cost and Resource Prohibitive
For most financial institutions, introducing a traditional small-dollar loan program is cost-prohibitive–operationally, and from a staffing standpoint. From the cost of loan officers and underwriters to the overhead, the reality is it would take time and resources many banks do not have.

Enter fintech firms, bringing proprietary technology and the application of big data. The right fintech partner can manage the time, human and financial resources you may not have, such as application, underwriting and loan signing processes. In some cases, the whole thing can be automated, resulting in a “self-service” program for your customers, eliminating the human resource need.

Underwriting Challenges and Charge-Off Concerns
Another challenge is the loan approval process and how to underwrite these unique loans. A determination of creditworthiness by a traditional credit check does not adequately predict the consumer’s current ability to repay using recent behavior instead of a period of many years. Today’s fintech firms use proprietary technology to underwrite the loans, incorporating a variety of factors to mitigate charge-offs.

The OCC recently released a bulletin outlining “reasonable policies and practices specific to short-term, small-dollar installment lending.” It stated such policies would generally include “analysis that uses internal and external data sources, including deposit activity, to assess a consumer’s creditworthiness and to effectively manage credit risk.” The right fintech partner will apply big data solutions to assess creditworthiness using the OCC’s criteria and other factors.

Compliance Burdens
There’s no question short-term loan options have been heavily regulated over the past eight years. The CFPB placed predatory lending and payday loans under scrutiny. In 2013, the OCC and FDIC effectively ended banks’ payday loan alternative, the deposit advance. The CFPB cracked down even harder in October 2017 with their final payday lending rule, which had the potential to devastate the storefront payday loan industry, forcing consumers to seek alternative sources of quick liquidity.

The pressure is easing. The OCC was the first agency to encourage banks to make responsible and efficient small-dollar loans. If history has taught us anything, it’s that the other regulatory agencies likely will soon follow suit.

Concern About Cannibalizing Overdraft Revenue
Exclusive data collected by fintech firms experienced with overdraft management has shown there are two distinct groups of consumers managing their liquidity needs in different ways:

The Overdrafters
These are consumers that struggle with transaction timing and incur overdraft or NSF fees. A significant portion of this group might have irregular income streams, such as small business owners or commissioned salespeople. In many cases, these consumers are aware of their heavy overdraft activity, and will continue to overdraft, because for them, it makes financial sense.

The Loan-Seekers
A second group includes those consumers who simply lack the cash to promptly pay their bills, and either can’t obtain adequate overdraft limits or failed to opt-in to overdraft services. These consumers are actively seeking small-dollar loans to avoid the double whammy of hefty late fees and negative hits to their credit score for late payments.

Savvy financial institutions will ensure they have the programs in place to serve both groups of consumers, and fill the gap for the second category by using an automated small-dollar lending program with sound underwriting from a trusted fintech vendor.

Driving Profitability by Keeping Score


profitability-2-19-18.pngTwo thousand and seventeen proved to be a pretty good year for banks, and 2018 promises to be even better. While the economic environment of lower taxes, rising rates and promises of deregulation have driven up valuations, the secret sauce that produces results still eludes many. The answer lies deep within banks and can be realized by implementing balanced scorecards throughout that hold people accountable for performance and provide targets for success that drive the bottom line.

Developing benchmarks by individual business lines to enforce accountability can help them improve their staffing, processes and strategies, and often exposes low performers and manual processes that negatively impact profitability. Although this seems logical, in practice few banks have had success in figuring out these scorecards.

The following best practice tips will help in creating these metrics, setting appropriate goals and designing an effective overall performance management strategy.

Keep it Simple: Every department should be working with five to seven (not 20) easy-to-track metrics. Too much detail can cause confusion as well as create more work than it’s worth to calculate. For example, tracking the average time customers wait in line in branches is next to impossible and non-productive, but tracking call center hold times is much easier and most likely exists in a canned report today.

Take a Balanced Approach: A mixture of efficiency, quality and risk benchmarks provides a good balance. The following example of a balanced scorecard in mortgage lending illustrates risk metrics including approval rates, average credit score, client service metrics for turnaround times and efficiency metrics for production of loan officers, processors and underwriters.

metric-chart.pngFocus on the Outliers: Tracking performance is only the first step in developing a scorecard system. As the performance culture matures and as data trends become clearer, identifying outliers and improving performance in those areas is the key. Becoming a high performer sometimes means changing an underlying process or technology. But it can also come down to one or two individuals who are driving either high or low performance. Digging in to understand those variants can pay significant dividends. For example, in our sample scorecard, one loan officer was doing 15 loans per month while others were doing three to four.

While compensation structure can account for some of this variance, the opportunity cost to get those lower performers up to at least average can be significant. It turns out that the officer doing 15 loans per month had reached out to marketing for lists of clients new to the bank that had mortgages at other institutions and was cross-selling those in his market while the others had no idea the information was available.

When it comes to revenue generation, most banks have squeezed expenses and capitalized on the low-hanging fruit. The next step is to drive the bottom line through well-thought-out business line scorecards that produce actionable data to improve performance. The goal is to use these key performance indicators to drive better processes, strong customer service, less risk and higher returns to shareholders.