How to Reduce Lending Costs, Increase Loan Margin and Multiply Productivity

The Lab Consulting

This article is part 2 of the 3-part “Big Rocks” series on how to strategically lower costs, increase operating leverage, improve customer experience, and automate what wasn’t automatable in your bank.

  • Big Rock 1: Retail branch network. You need data-driven decision-making to stop over-serving markets and locations—without damaging customer perceptions. Even without closures, your branch network represents 40% of the total savings potential.
  • Big Rock 2: Lending—commercial and consumer. You already know that all sales producers are not created equal. But you don’t know how burdened all sales producers are by “NIGO” activities: “not in good order” rework and remediation. You need to eliminate these activities without impeding the performance of your revenue engine—while improving customer experience and revenue productivity. The next 35% of savings potential—and the trickiest—lies here.
  • Big Rock 3: Back-office operations. Turbocharge speed and efficiency, while dramatically reducing costs, forever, with robotic process automation or RPA. A quarter of all savings reside here.

A guide for uncovering the trickiest—yet most powerful—cost savings: How to supercharge your bank’s revenue engine – loan sales and origination all the way through servicing.

Ask any banking executive to “cut costs in their lending operation” and they’ll look at you like you’re insane. That’s the revenue engine! You should never, ever make cuts there! It would be like shooting yourself in the foot.

That’s the common perception. Unfortunately, it’s a misperception. It’s actually quite possible to “rebuild this airplane in flight,” slashing insidious hidden costs while turbocharging productivity and revenue—at the exact same time.

So what’s mis-perceived? It’s the notion that “lending” begins with the salesperson’s (loan producer’s) intangible “sales magic” and ends with mundane, tangible loan operations. That’s myopic. It overlooks three other major components of the process—and three fourths of near-term “big-rock” cost-cut savings. The final fourth? Yes, loan producers themselves (i.e., the sales force and their admin staff). Of course producers also represent an essential—and fix-able—component for multiplying productivity. But in order to truly slash costs and simultaneously increase productivity/revenue, you need broaden your perception of “savings sources” to include:

  • Products
  • Prospects
  • Customers
  • Producers

Each of these offer rapid “big-rock” operational cost-cut savings, yet rarely come under cost-cutting scrutiny—perhaps because they fall far outside of what almost everyone—from bank execs to employees and tech providers—conventionally view as the scope of “lending operations”; see inset box.

A Conventional (and Narrow) Definition of Lending Operations in Banking

The conventional/narrow view ideally starts with market identification and the prospecting process—if you’re lucky. If not, that means that the squandering of these costs is left to the discretion of sales staff. In conventional thinking, the perception of “lending operating costs” typically begins at the point of a submitted loan application:

  • Application
  • Loan operations
  • Underwriting
  • Closing/onboarding
  • Servicing or sale of loan
  • Default management/termination

This definition is useful; these groups (why so many? false complexity?) fall within the scope of lending. And major cost reductions are available here. However, the best approach is a double play: cost cuts and productivity gains via robotics process automation (RPA). We’ll address these in detail in an upcoming overview of advanced methods for “multiplying productivity” in lending (Cost Cutting Big Rock 3: Automate Back-Office Ops with Bots).

Fortunately, it doesn’t take much research to uncover waste and opportunity within each of the four building blocks of lending: products, customers, prospects, and producers. Even simple interviews will reveal anecdotes that describe waste in each. The hard part is pinpointing precisely what costs can be lopped off. That begins with superior data and analysis.

As we discussed in our “Big Rock 1” article (“Strategically Slash Branch Network Costs, available here), a lack of relevant, detailed data—properly sourced, shaped, and combined (those terms are significant for business intelligence, or BI, technology)—will impair any cost-cutting effort. Yet compared to their retail branch networks, banks typically have far less data readily available for evaluating these four new building blocks of the expanded lending landscape.

Eliminating this blind spot is a two-step process: First, invest in a modest amount of data collection and clean up—no data lakes needed! Simple BI technologies can handle this task with minimal contribution from IT. Second, augment this data with a bit of activity-level documentation: operational observation and business process mapping. This is how you quickly pinpoint substantial, risk-free cuts in needless lending costs that are draining margin and impairing operational leverage: that is, the ability to increase income without a comparable increase in costs.

Now, with our definition of “lending” properly expanded, let’s review the cost-cut savings—and productivity-boosting benefits of each component.

Cut Lending Costs in Your Bank: Products

Amazingly, most banks fail to consider their own products when they’re looking to cut costs. That’s because “product” translates to “revenue.” And generating revenue is unquestionably a virtuous activity; any revenue must be good revenue, right? How could it be wasteful?

Not all products are created equal. Some—the “ideal” products which you must rapidly identify—provide ample revenue streams that include margin. Other products require modifications, but can be improved to generate margin levels closer to the ideal; these are the “lift” candidates. And another set of products—you guessed it—actually squander margin while delivering revenue. These products cost more to maintain, promote, and deliver than the margin they deliver—sometimes these costs exceed the revenue they deliver. These represent drag on the revenue engine.

Sure, everyone views revenue-generation as virtuous activity. However, your bank, right now, has products in its portfolio that actually drain it of margin and profit. These are what The Lab calls virtuous wasteTM products.  See the graphic below:


How do you crush the cost of this virtuous waste? How do you eliminate this drag on your revenue engine? First, you perform the analysis to identify it. Should you increase prices? No! Crush costs, not customer experience! There are numerous options:

  • Stop promoting these products.
  • Retire/discontinue them from the portfolio.
  • Trade/swap them for “ideal” products—provide customer incentives.

It’s important to begin your lending analysis and cost-cuts with products because these can affect the profitability and the savings potential of the other categories—especially customers and prospects.

Food for thought: If margin-wasting lending products can be misperceived as valuable revenue generators, how else might these products be misperceived? They are mistaken as falsely complex and dissimilar—“unique.” Lenders insist that C&I (commercial and industrial) loans are vastly different from CRE (commercial real estate) loans. They are not. All lending products are more alike than different— even consumer and SBA loans. Eighty percent of their underlying activities can be standardized, automated, and serviced by simplified organizations. We’ll tackle this opportunity in the next article in this series: “Cost Cutting Big Rock 3: Automate Back-Office Ops with Bots.”

Cut Lending Costs in Banking Operations: Customers

This is another case of “Don’t ever touch that!” After all, customers deliver revenue for lenders. Yet look more closely, and you’ll find more virtuous waste.

First, identify the “ideal customer”: high margins, low service costs. You’ll quickly see that they’re among the minority. Next, identify the larger segment of also-ran, moderately profitable customers. These can be improved. And, finally, define that painfully long, long-tail of “customer drag.” These borrowers pull down lending performance and profitability. They cost more to service than the margin they deliver—some even cost more than all of the revenue they deliver. See the graphic below:

How do you eliminate “customer drag” on the revenue engine? There are numerous ways:

  • Identify, prioritize, and assign them
    to a specialized team.
  • Reduce service to unprofitable customers.
  • Add fees, or increase rates for customers demanding “over-service.”
  • Encourage “erosion” (use predictive modeling).

In other words, keep the highly profitable customers, while improving the moderately profitable. Slough off the unprofitable ones—let your competitors have them!

Increase Profitability for Banks: Prospects

By now, the cost-crushing/productivity-multiplying methodology should be quite clear: Define the “ideal.” This is the “power source” for your revenue engine. Improve the moderate performers to reduce the friction. And lop off the long tail of irredeemable “drag.” All of these precepts apply to prospects, too.

Start with the “ideal.” Who are the existing ideal customers and what are they buying? These answers will provide the template for improving the “moderate” segment: the perfect prospects for upsell opportunities. This is the lowest-hanging fruit for prospecting—the “lift.”

For most banks, the next step requires extensive development. That’s because the prospecting process is typically undocumented and unstructured. As mentioned above, the squandering of these costs is left to the discretion of sales staff.

Who are the new ideal customers who should be onboarded? Identify and prioritize them for the sales funnel and marketing efforts. Equally important, identify and prioritize low-value prospects that should be screened out of costly prospecting efforts from the beginning. See the graphic below:

How do you eliminate “prospect drag”? There are numerous ways:

  • Create a standard “ideal” profile.
  • Monitor/prioritize producer pursuits.
  • Prioritize “up-selling”: existing products to existing customers.
  • Screen out D.O.A. (dead on arrival) prospects.

But precisely how do you avoid leaving prospecting to the sole discretion of the sales staff? This is a massive opportunity for business intelligence, or BI, technology. (Think of Excel and PowerPoint on steroids.) It arms your sales team with inarguable data from trusted sources: everything from FDIC info on competitors’ locations to D&B/Hoover’s data on businesses within striking distance of your branch network, to Department of Transportation information on vehicular traffic counts near individual branches! A picture is worth a thousand words:

How to Improve Lending Costs and Productivity in Banks: Producers

Now we finally get to the category where the intuitive, knee-jerk reaction might tell you to start: Producers.

The costs of producer underperformance can be staggering—so can the rationalizations from sales management for keeping under-performers. Under-management of product and customer profitability contribute to producer under-profitability. However, the failure to manage prospects does the most damage. Since this responsibility falls to senior sales management, it might help explain why they are reluctant to terminate low producers—and why they have few ideas for improving the performance of the moderate performers.

Again, define the ideal. Identify the top producers, the next-tier, moderate performers—and the long tail of unprofitable drag. See the graphic below:

How do you eliminate “producer drag”? After transforming and tightening up the prospecting process, there are numerous ways:

  • Measure individual margin. Document the variance.
  • Document and enforce the “ideal” activity-level sales process.
  • Focus on lifting the performance of the moderate performers.
  • Offboard persistent under-performers—promptly.

You already know that all sales producers are not created equal. But you don’t know how burdened all sales producers are by “NIGO” activities: “not in good order” rework and remediation. You need to eliminate these activities without impeding the performance of your revenue engine—while improving customer experience and revenue productivity. That’s another tease for the next article in this series: “Cost Cutting Big Rock 3: Automate Back-Office Ops with Bots.”

You don’t have to wait

Simply contact The Lab today, for a no-obligation 30-minute screen-sharing demo. We’ll show you how we’ve helped other banks, and can help you, too. Consider some of the numbers that The Lab has delivered to banks, typically within six months or less:

  • For a 350-employee bank, The Lab delivered $3.3 million in annual savings—roughly half were accrued in the first 30 weeks of Year One. That’s typical.
  • For a 2,500-employee bank, The Lab delivered $13.6 million in annual savings.
  • For a 10,800-employee bank, The Lab delivered $74.3 million in annual savings.

Don’t wait.

Take control of damaging hidden costs, while boosting productivity, profits, and operating leverage.

Call (201) 526-1200 or email to contact The Lab today.

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