Lending Strategies That Generate a Quick Return (Part 1 of 2)
If a credit union finds itself with a budget surplus and ROI is a must, where should it look to invest in the short term? I’d suggest two primary strategies to produce a quick return. The first would be to optimize existing systems, and the second would be to invest in self-funding initiatives.
When optimizing existing systems, there are three areas that immediately come to mind: automated credit decisions, marketing and collections.
It’s no secret that instant loan approvals provide a better experience for everyone involved and drastically improve operational efficiencies and pull-through rates that result in more funded loans. By investing modestly in a review of your loan performance and automated decision rules, such as debt-to-income ratio, small tweaks can be made that have immediate results. Cornerstone reports that less than 20% of indirect auto loans, and only 30% of direct loans, on average, are system-decisioned. In my experience, even a modest increase can improve underwriting productivity by as much as 20% without materially increasing risk. This gives underwriters more time to analyze the more challenging requests for approval, and approve more cross-sell opportunities. Likewise, a CU Direct study of indirect auto loan applications for the past year reveals that the probability of funding a loan rose by 37% on average when the application was system approved versus manually approved.
Marketing campaigns are much more effective when supported by outbound calling. Sometimes credit unions have the data available, or can subscribe to it through a third-party, but lack the resources to make effective follow-up calls. A simple solution to employ is to pool the information into a central repository, and then have branch staff make calls during slow periods or offer voluntary overtime after normal business hours. Couple this with a fun and creative incentive campaign, and the ROI proves out rather quickly without an increase in staff.
Loss mitigation can be overlooked, since it does not generate revenue, but can still impact the bottom line. Employing a more sophisticated collection call prioritization strategy will increase payment velocity and improve member service. For example, perhaps you have a member who is not on automatic payment and is consistently more than 10- days late, but never goes 30 days past due; while another member has never been late with automatic payment, but cancels it and is 14 days late for the first time. The first member is best served with an automated reminder, while a timely call to the second member could provide an opportunity to find a solution before the problem snowballs out of control, and the credit union may be able to offer a loan that would both assist the member and increase loyalty. Many collection systems have the data and workflow capability to support dynamic queuing, but are underutilized. Investing the time internally, or in an external consultation, can immediately impact collection efficiency and impact.
In part 2 of this article, we’ll discuss key strategies for investing in self-funding initiatives that help drive ROI.