The new year is just around the corner, and with that comes new goals and resolutions. Finding new ways of achieving growth amidst the complex banking landscape is going to be a top goal for many financial institutions. Due to new and emerging technologies, changing regulations, and ever-evolving customer expectations, banks and credit unions across the country are taking an assortment of different strategies to achieve their growth goals in 2020. Here are a few we think show the most promise:
New Year’s Resolutions to Grow Your Financial Institution in 2020
Grow loan portfolio
Some financial institutions aim to grow their bank or credit union by growing the loan portfolio. Growing the loan portfolio seems fairly straightforward: book more loans. If only it could be that simple. To book loans more quickly, financial institutions must create efficiencies and increase loan turnaround – without sacrificing quality.
In 2020, we will likely see financial institutions putting more emphasis on automating time-consuming, manual processes that bog down lending decisions. To grow the loan portfolio, financial institutions are automating the entire life of a loan, starting with the application and origination process, to underwriting and credit analysis, all the way through loan pricing and onboarding process.
By automating these mundane, laborious tasks, lenders and credit analysts are then able to focus their time on the borrower or member and make faster, more efficient lending decisions.
Develop a disciplined loan pricing model
Among the challenges that institutions are facing include today’s unique rate environment. Today, the demand for retail deposits is keeping deposit rates higher than they typically stay when wholesale rates begin to drop, explains Darryl Mataya, Senior Advisor at Abrigo. “In short, a nasty squeeze is being applied to your net interest margin,” he said. To negate that squeeze, financial institutions must be proactive in effectively pricing loans.
Utilizing a disciplined loan pricing process enables financial institutions to achieve the best return based on the risks that your bank or credit union is assuming. Not only should your loan pricing model consider the credit risk of a loan, but also interest rate risk and liquidity risk.
According to Mataya, to get the most out of each loan, your financial institution should employ a model that assesses three different risk components:
- Assess all risks and costs: This includes regular amortizing payments, prepayments, operating expenses, and a credit loss projection
- Analyze rate risk and option risk: This is accomplished by leveraging funds transfer pricing techniques to calculate the hedge necessary in order to eliminate interest rate and option risk
- Consider the relative value of relationship bundles: Relationship bundles calculates the value of adding deposit accounts with loans, or possibly discounting loans when multiple loan types are originated with a single borrower
If there’s one overriding theme of growing financial institutions in 2020, it is improving efficiency. Financial institutions shouldn’t simply aim to book more loans, but also become more efficient throughout the entire process. An effective loan pricing process helps financial institutions to evaluate and weigh various loans and risks to get the most out of every single loan – something that is especially important when considering our current rate environment going into 2020.
Attain growth through M&A, new partners
Throughout the decade, one of the biggest changes occurring within the banking industry has been the consolidation of financial institutions. In 2008, there were 7,061 FDIC-insured commercial banks in the U.S. In 2018, the number of banks declined by almost a third to 4,708 institutions.
A significant driver for the decline is the growing number of bank mergers. For many community and regional banks looking to compete with larger financial institutions and grow their bank, the answer has been mergers and acquisitions. Some financial institutions view mergers as a way to tackle gaps within their own products and offerings, as well as expand into new areas of business or geographic markets. Mergers become a more viable option for smaller banks struggling to secure more deposits.
Look to expand your digital footprint
While some banks may choose M&A to expand product offerings and compete with larger financial institutions, other banks and credit unions are looking towards technology to level the playing field.
“[Many legacy companies] are often simply ill-prepared to develop new products and services in the midst of uncertainty,” said MIT Sloan Management Research. “Rather than attempting to go it alone in such circumstances, some companies reach out to partners with an eye toward building a broader ecosystem that will boost their competitive strength.”
In line with other efficiency gains your financial institution can aim for in 2020, new digital products and offerings can help grow your bank or credit union in the new year. Online loan applications, for example, are no longer just for online-only banks. Community financial institutions that once solely relied on borrowers coming into a branch can increase revenue through digital channels, make the institution more competitive with faster response times, and ultimately expedite loan turnaround.
Savvy community financial institutions looking towards partners to boost competitive strength through digital offerings, such as automated processes, also consider the bigger picture. If your financial institution is considering leveraging a third-party for a new product or offering, it should also consider how the new product or offering fits into the broader goals of the institution to navigate hidden costs of managing multiple vendors.
Regardless of the strategy your financial institution chooses to take in the new year, the underlying goal to grow the bank or credit union will likely be to become more efficient to stay competitive with larger financial institutions. To grow your financial institution, it must become more agile, more accurate, and more customer-centric. The banking landscape has changed dramatically this decade due to new and emerging technologies. Will your financial institution leverage these technologies to adapt and grow in 2020?