Lean Principles in Banking – Commercial Lending Operations Transformation in Without New Technology
This case study of a recent lean initiative implemented by The Lab Consulting concerns the commercial and small-business lending businesses of a Top 5 Canadian bank.
When their Executive Vice President of Commercial Banking—our sponsor—reached out to us, the bank’s market share for commercial lending had been shrinking for 16 consecutive quarters. Certainly, competition had been on the rise. But many of the challenges faced by this 1,500-employee organization resided on the inside. These included:
- Confusing and redundant customer servicing issues.
- Under-performing loan-origination staff.
- Excessive back office operations cycle times for underwriting.
All of these factors—the very opposite of lean banking principles—contributed to the organization’s subpar performance and lackluster growth.
Scoping out a lean banking principles implementation initiative
The bank brought in The Lab to devise a lean approach and immediate lean implementation. The scope of the project included numerous facets of the bank’s small-business (customers under $5 million) and mid-market commercial/corporate (customers in the $5 to 50 million range) lending operations, including loan origination and back office operations.
In just six weeks, The Lab identified 250 lean non-technology improvements in the bank’s small-business and commercial lending organizations. During the subsequent seven-month transformation initiative, The Lab was able to reengineer the bank’s loan operation into a lean banking knowledge work factory. Here are just four of the lean banking principles we implemented:
Implementing lean principles in banking – Improvement Area 1: Quality of inbound loan applications
When we stepped in, the bank’s commercial lenders lacked lean operating discipline and the back office lacked the tools needed to help. How did we know? We mapped the end-to-end processes from the front to the back office and conducted voice-of-the-customer interviews. The resulting analysis clearly demonstrated that more than 30 percent of the back office daily workload was dedicated to fixing the poor quality of the data they received from the front-office commercial lenders.
How bad was it? To put it bluntly, lean principles were nonexistent. Loan application packages lacked information required for underwriting nearly 40 percent of the time. This was not a lean approach. It was wasteful. It was avoidable. And it drove customers crazy. Back-office staff were forced to contact the loan officer to get the needed customer info—multiple times per loan. We tracked the number of “rework touches” per loan as a result of missing data, and it turned out that each loan required an average of five additional data requests from the back office to the front office to get the information they needed to complete their work. Clearly, this wasn’t their job. Equally clearly, this was not a lean operation.
If you think it was bad from the back-office staffer’s perspective, consider what the customer had to endure. It was even worse. More often than not, loan processors were forced to contact customers directly, repeatedly. Customers were suffering through eight to nine different data requests from the front office or back office before underwriting could be completed. Not surprisingly, customer satisfaction was at an all-time low.
Following a lean implementation plan, The Lab was able to reduce this back-and-forth between the bank and its customers by 50 percent within a couple of months. The following lean banking principles were implemented to reduce customer touch points:
- We established a single point of contact for the customer, eliminating the customer being called by 5-6 different bank employees.
- We implemented lean standardized loan underwriting data submission checklists and procedures for the front office and borrower to fill out before submitting application information to underwriting.
Implementing lean principles in banking – Improvement Area 2: Consistency (or lack thereof) of loan-origination processes
Here’s an eye-opening fact we uncovered for the bank while scrutinizing their operations in order to instill lean principles: Its most successful loan officers followed a fragmented, non-standardized/non-centralized set of best practices. This helped them generate more than 80 percent of the organizations’ loan revenue. The rest of the loan officers? Without any best practices at their disposal, they lagged far behind.
In fact, these 83 percent of loan officers also followed a non-standard/ad-hoc sales process. But it was neither best practice nor lean. The results were predictably dismal: Bottom-quartile sales performance, and lost loan sales.
The Lab changed that. We introduced a lean improvement plan. We implemented standardized best practice procedures for loan origination. We introduced KPIs (Key Performance Indicators) to ensure adherence to best practice. We even helped the top 17 percent of loan officers: By taking a lean approach to “know your customer” process improvements, we helped to boost their closure rates an impressive 22 percent.
Lean loan originations principles which we implemented included:
- Standardization of the “know your customer” (KYC) compliance process was implemented by creating a best-practice new customer “orientation” program that also helped loan officers to cross-sell products beyond the original loan. Performance KPIs were implemented to ensure adherence to the KYC compliance process implementation. And productivity metrics monitored the cross-sell effectiveness.
- Loan officer use of available customer incentives was not easily accessible nor frequently used by the bank’s staff to aid in closing customer loans. The Lab implemented standard operating procedures and updated online resources and desk aids to increase the loan pull-through rate and closures by the loan officers.
Implementing lean principles in banking – Improvement Area 3: Lengthy underwriting cycle times
Lean improvement often hinges upon increasing speed. That was sorely needed here. When The Lab first stepped in, the average time required to underwrite a commercial loan exceeded that of competitors by nearly 40 percent.
Without lean principles to retain them, the bank was losing customers at an alarming rate. The lengthy cycle times were a major source of customer dissatisfaction. Thirty percent actually withdrew their applications, half-way through the underwriting process, due to the multiple requests for data and excessive delays. And as the customers bailed, the costly underwriting resources which had contributed to their unhappiness were squandered.
By implementing lean standard banking principles in the back office, The Lab was able to reduce cycle times for underwriting by 60 percent. The Lab’s lean transformation team developed and standardized underwriting triage processes to ensure that more routine files were processed via existing (yet underutilized) automated systems or entry-level underwriters. At the same time, the triage routine ensured that more complex, higher risk files would be assigned to experienced underwriting staff—reducing risk, rework and cycle time.
Implementing lean principles in banking – Improvement Area 4: Capacity planning
When The Lab was engaged to create a lean implementation plan, no capacity planning mechanisms existed to quantitatively match lending resources to workload within the client’s operations. There was no way for management to hold the appropriate staff accountable for operating and revenue results. Managers were simply hiring as many back office staff afforded to them in the annual budget. The productivity disparity between employees was huge: some employees were processing 80 percent more loans than others – and the work was identical. Fixing this imbalance of effort and headcount needed to process the work yielded huge savings.
Using workload measurement and balancing capacity planning methods, The Lab was able re-allocate underutilized staff. This increased sales uptime. It also cut down on the number of lost potential customers.
Bottom-line results of this lean banking case study
The numbers speak for themselves:
- Underwriting headcount requirements dropped 20 percent.
- Inbound NIGO (not-in-good-order) submissions fell by half.
- Loan officer average revenue improved 12 percent.
- Recurring annual savings hit $12 million.
The entire engagement broke even—that is, it paid for itself—in just four months. And by Month 12, the bank’s investment in The Lab paid for itself four times over. That’s what happens when you take a lean approach, bring a lean implementation plan, and follow lean principles in banking.
Does your bank follow best practices in lean operations? Might it benefit from a truly lean banking transformation? If so, contact The Lab. Between our unique self-funding engagement model and irresistible money-back guarantee, we’ll help your organization star in a lean banking case study, too.