How To Improve Your Bank'S Lending Process

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1 Unlocking Value from Lending Operations with Business Process Improvement FIS Consulting Services

2 Unlocking Value from Lending Operations with Getting Back to Basics Many banks struggle to maintain their revenue streams as pressure mounts on sources of non-interest income. In the current environment, it has become increasingly important for mid-tier banks to re-focus on growing interest income, their most important source of revenue. This source contributes two-thirds of most banks top-line growth, as illustrated in the graphic below. Lending is the area that moves the meter most in terms of revenue growth in banks. Revenue Sources Non-interest income 36% of revenue Net interest income 64% of revenue Margin income accounted for nearly two-thirds of all industry revenue in the first half of Grow Revenue or Manage Expense? To confirm that the interest income challenge is top of mind with C-level executives at mid-tier institutions, we interviewed executives and asked them which basic strategies they planned to execute upon. For the year 2012, banks do plan to focus more on growing revenue or controlling expenses. Many respondents said that they were going to give both strategies equal attention, but a majority indicated a preference for focusing on growing revenues. The mean response was 2.6 with a 1 indicating revenue focus and 5 indicating an expense focus. Focus of Financial Institution Strategies in the Next 12 Months 40% 28% 16% 12% Revenue growth 2 Lean toward revenue 3 About equal 4 Lean toward expenses 5 Expense management 4% 2

3 Ranking Revenue Growth Tactics Unlocking Value from Lending Operations with Confirming the importance of growing revenues, we then asked interviewees to rank the tactics they planned to pursue in order to grow their top-line revenue in Not surprisingly, the leading tactic was to grow interest income, with executives giving this a 5.30 out of a possible 6. The tactics were numerically ranked on a scale from 1 6 with 6 indicating the greatest area of focus. Average Ranking Six Potential Revenue Growth Strategies Insurance 2.38 Brokerage Wealth Management Deposit Charges Non-interest Income Interest Income 5.30 What Executives Say about Re-establishing a Lending Focus Below are specific comments pulled from FIS interview responses regarding the tactics they intend to execute in growing their lending revenue. Relationship building traditional C&I (commercial and industrial) lending requiring customers to bring deposits to our bank, so we are not only lending to them, but opening up deposits and relationships. A lot of initiatives are looking at deeper share of wallet. We are using credit bureau data for leads... enhancing the outbound call center using electronic channels to make it easier for individuals to see they are pre-approved. Migrate from primarily a real estate lender to more of a cash flow lender that does not require collateral dependency. We are going to do more business lending than we have had in the past will be a diversification effort for us. Given then that lending continues to be the primary focus for banks, how can savvy institutions survive the stiff competition for lending revenue? The answer lies in the old saying for U.S. Marine Corps recruiting banks must be all that they can be. In order to gain or maintain a position as a superior lender, bankers must continually look at improving their business processes supporting their lending operations. Pre- and post-closing operations must be reviewed for optimal efficiency, customer service levels and speed. With an eye toward continuous improvement, banks that can review their lending businesses with a critical outsider s eye can separate themselves from a very crowded pack. 3

4 The Lending Improvement Process Unlocking Value from Lending Operations with How do banks start to improve their lending business processes? An understanding of the bank s unique experiences, perspectives and culture must first be documented. Executives from key areas of the bank must be involved from the beginning in the planning of the improvement initiative. Executives should be included from the following areas: Senior management Operations Information technology Consumer lending (pre- and post-close) Commercial lending (pre- and post-close) Mortgage lending (pre- and post-close) After collecting and analyzing background information, action teams (small groups of subject experts/leaders within the bank) should be established, and they should follow a process such as the following: Step 1 Establish the Action Team An initial organization/kick-off meeting is held to establish ownership for each major business process improvement initiative. A steering committee comprised of the bank s senior executives governs each initiative. Action team members should be selected by the executive team and should be the bank s subject matter experts in their respective areas. Action team members, along with any third-party experts, actively participate in the improvement projects and assist in implementing approved recommendations. Step 2 Engage the Action Team The action team conducts a series of meetings to clearly identify, explore and dissect major and minor issues. The team then develops a series of solutions, recommends a set of decision criteria and measurement factors, and explores business improvement scenarios. Often, outside experts, along with the bank s senior managers, lead and facilitate multiple working sessions. All bank participants become actively engaged in the process and are able to articulate their needs and ideas, whether in the team sessions or in the background. Moreover, team members must have sufficient stature and responsibility in order to facilitate recommendations. Step 3 Presentation of Implementation Plan Based on analysis and the team consensus, the action team presents the following to the bank s senior management and staff: Analysis alternatives Preferred solutions, benefits and cost estimates Recommended solutions Step 4 Implementation Upon receiving management s direction and approval to move forward with the recommendations, a detailed implementation plan is developed. Key components of the plan should include: 4

5 Action items Ownership assignment Projected start and completions dates Key requirements Unlocking Value from Lending Operations with Institutions will often employ outside consultants to facilitate the action team development work and to support the implementation efforts. They can assist where required and routinely apprise management of the project status, along with any projected time frame changes, budget issues or other issues. As the project proceeds, communication tools and change management controls became critical to its oversight. They allow performance measurements to be implemented with the goal of meeting management s expectations and objectives. Change Management During the daily running of a bank, managers often forget how difficult implementing change can be. A business process improvement effort likely touches many areas of the bank, some outside of lending. Bank executives must get their staff on board with the changes confronting them by having them participate in the change process. It can help if executive staff is taken through an exercise to explain decisions made regarding process changes and what they need to contribute to the success of the overall effort. An experienced facilitator can lead the executives through such a discussion to help determine their needed level of involvement, the visibility of their support and the time required of them and their staff. Typically the executive session addresses the following critical concerns: Strong sponsorship (ownership) High involvement The championing of specific action items/recommendations Clear focus on objectives Monitoring improvements Strong focus on a business approach to people issues Change occurs in the smoothest manner when everyone is involved at the right time, doing the right thing. The changes banks go through are not business as usual ; instead, everyone must work and cooperate to enable business transformation. Change management becomes essential to successful process improvement. Communications Planning Beyond managing change, the bank must effectively communicate its plans to all stakeholders in a new lending initiative. Development of an effective communication strategy becomes critical to keeping all participants on the same page. Carefully designed communications pieces, addressed to the staff, can have a significant, positive impact on the outcome of the overall effort. Through experience, outside experts can offer insight into the issues that most likely need to be addressed and provide the bank a number of approaches to assist. 5

6 Unlocking Value from Lending Operations with Case Studies on Lending Process Improvement Projects Banks can leverage business process improvements in their lending areas at different points in time. The first of these two case studies highlights a bank that streamlined lending processes as part of a broad strategy to remove paper from their bank. This enterprise content management (ECM) effort resulted in streamlined lending work flows and, ultimately, significant cost savings. Another bank was undergoing core processing conversion including implementing new lending origination and servicing technologies. Their business process improvement project was tightly coupled with new enabling technology. A closer look within their case study reveals similarities in results, but differences in the bank s situations. Case Study 1: Lending Process Improvements Integral to an Enterprise Content Management Effort When a $5 billion bank in the Midwestern U.S. contemplated reducing and removing paper from their various operations, they knew reviewing and re-engineering business processes in their lending area would be a key to the project s success. They also knew that benefits could be realized faster if they worked with an experienced outside resource that could help them quickly identify and implement new business processes integral to the initiative s success. So they turned to a trusted advisor, FIS Business Consulting, in early 2011 to help them out. The project engaged all staff at the bank affected by potential changes, encouraging them to collaborate on these process changes. The collaboration created new business processes that effectively harnessed the power of imaging technology, while also creating a blueprint for future improvement initiatives. The bank wanted automation to create a better experience for customers. At the same time, they also wanted bank staff to develop a mindset of continually looking to improve the bank s current business processes. The Helix facilitation methodology FIS leveraged helped focus cross-functional teams at the bank to design new business processes for consumer, mortgage and commercial lending, both pre- and post-close. Importantly, it has imparted a blueprint for ongoing process improvement efforts. Collaboration breeds improvement The bank formed action teams with representatives from areas affected by paper processes. From lenders to lending operations to compliance to information technology, these representatives gathered to flowchart current work flows. From that assessment the teams evaluated the need for processes and procedures, and if unnecessary (and not required by compliance), they were sunset. With a road map developed by the action teams as a guide, new processes were developed, driven by the objectives of reducing cycle time and improving the experience of the bank s customers. The action teams created new ways of doing business that improve customer document turnaround while at the same time saving the bank money. The benefits from the comprehensive approach to paperless banking include: Improving customer service Increasing processing speed and processor capacity Reducing the time from application to closing Increasing speed and handling of trailing documents from customers Eliminating or reducing courier, postage and delivery costs Eliminating printed reports and routing logs 6

7 Unlocking Value from Lending Operations with The above areas of benefit translated into decreases in cycle times, with lending cycle time reductions of 2 12 days preclose and up to 15 days post-close. Cost reductions accompany the cycle time reductions. Courier costs of $1 million can be eliminated, and overall, $3 million in annual net savings is projected from the bank s paperless and lending business process improvement initiative. Case Study 2: Lending Process Improvements Integral to a Conversion Effort A $10 billion bank has been working with FIS Business Consulting to identify and quantify gaps between the bank s current lending environment and the new environment. The new environment will exist after the transformation of technology, processes and people is enabled by converting to new FIS technologies. Significant savings identified From the discovery project conducted with this bank, the financial benefit of improved lending productivity available to the institution ranges from a low estimate of $3.5 million annually to a high estimate of $5 million annually. More effective use of new lending technology will enable the savings, streamline work flows and simplify processes and procedures. Action teams led by FIS consultants identified and refined these savings in the areas of commercial lending (pre- and post-close) and consumer lending (pre- and post-close). The benefits were consolidated and presented to the bank s senior management. Standardized and centralized processes key The discovery effort uncovered that various units of the bank process the same types of loans in different ways. A new origination and servicing platform will be optimized as origination practices are standardized for the same loan types across the bank. Attempting to accommodate the current variations would compromise the effectiveness and efficacy of the anticipated technology transformation, reducing the value of the investment in new technology. Origination processes will be standardized prior to conversion. Elimination of manual effort The current lending environment is very manual and characterized by extensive use of spreadsheet applications, duplicate data entry and reliance on paper files. This environment is labor-intensive and more prone to error than desirable. The new environment will eliminate the majority of paper moving through the processing queue, while eliminating the duplication of data entry and the maintenance of spreadsheet applications for balancing and/or loan accounting. Shorter loan processing cycles identified The new environment will shorten processing cycle times with an effectively implemented document imaging integration at the point of first receipt and the development of automated data interfaces between the loan origination, document preparation and loan operations platforms. The new environment also has the potential to enhance the effectiveness of compliance and risk management controls with the addition of tracking and tickler applications available in the new platforms to be installed. Staff will also have more time to focus on all requirements of their positions once greater automation is realized, since their time will not be fully consumed by completing basic processing steps each day. The bank plans to move forward from the discovery assessment to a thoroughly detailed analysis regarding all the lending process improvements initially identified. 7

8 Summary Unlocking Value from Lending Operations with Lending business process improvement efforts can help banks operate more effectively and efficiently in an environment that s crowded with competitors trying to grow interest income. These efforts can start at any point in time and can produce immediate benefits for the financial institution. Contact Us For information about FIS Consulting, call or visit 8