Author: Danny Payne, DanPayne@ProfitStars.com
Bill pay means so many things to so many people. My parents set up their mortgage payment (online) to draft from their account on a monthly basis, and as a result, they now feel they have entered the world of “online payments.” Based on my 12 years of experience in online payments, I may slightly disagree with that, but to be honest, even I think it counts.
The world of payments has evolved so much. We’ve seen the evolution from paying your bills in person to sending a check, paying over the phone, paying over the phone through IVR, and now paying by touching the information into your phone. That doesn’t even include the online evolution of paying everything on the Internet. Mobile Payments Today reported 71% of all bills are paid electronically. That number continues to grow and will grow as our addiction to “on demand” and “mobile functionality” grows. I have written previous posts about buying mobile in the past, so this won’t focus on mobile payments or mobile banking; instead, I would like a take the opportunity to focus on your financial institution’s bill pay service, what your bill pay product should and shouldn’t do, and how that affects your process of your evaluation.
Of the previously mentioned 71% of all bills that are paid electronically, 46.5% of those are paid on a bank or credit union bill pay product. Therefore, you as a financial institution are responsible for almost half of all payments being made on a monthly basis. Congratulations!
I can tell you from experience that these statistics are part of an ever-growing trend. But don’t get too excited ... depending on who you are using for bill pay, a lot of those “electronic” payments are being sent on a paper check. That’s right: electronic payments via paper check. That doesn’t sound too innovative, does it? That is just one example of my thoughts around what you need to know about online bill pay. Let’s discuss the rest below:
Do: for online bill pay
- Have a bill pay provider that wants to integrate the look and feel of your online banking product. That look and feel approach means a lot to your customers and alleviates any concerns they may have of moving to a foreign website to enter their bill pay data.
- Mobile integration is a must. You need to have a bill pay partner that has a mobile banking product or offers mobile banking integration to your product. While adoption is still low (2%), you can’t give up that service to your important customers.
- Ask your bill pay provider to give you their electronic versus paper ratio. If you are paying per transaction, that number could mean a lot of money in savings to your institution. There are bill pay providers that range from a 50/50 ratio to 80/20 ratio (80% electronic).
- Work with a bill pay provider that provides complimentary user adoption programs. Higher adoption rates cost more money, but it also means a more loyal customer base and more valuable customer to your institution. This should be a service your bill pay provider offers at no cost and can be embraced by you.
- Use a bill pay provider that has a track record of excellent customer service. Your bill pay provider should have a history of helping financial institutions and their bill pay subscribers. Those phone calls are extremely valuable to customer loyalty and continued bill pay usage.
- Look for a provider that sees you as a partner, not a customer. Feedback on functionality, customer service, and usage are all important aspects of a relationship between you and your provider. If they aren’t listening, then chances are something is wrong.
- Ask your bill pay provider what is coming next. If they are looking ahead with you and your customers, you have a solid partner.
Don’t: for online bill pay
- Don't sacrifice service for price. The second phone call is always worse than the first. If your vendor isn’t properly solving the problem for your bill pay subscriber, you have a much bigger problem when they call you.
- Don't be forced into a bill pay product based on your Internet banking provider. Most good Internet banking products have integrations to all bill pay providers. Make sure you evaluate all options independently to get the best overall experience.
- Don't allow your current provider to hold you hostage with high de-conversion fees. Most bill pay providers offer options to offset that cost and allow you to still upgrade to a new service.
- Don't fall into the “status quo” trap. Many times, it is easy for us to just keep things as they are. But, to grow your customer base, usage, loyalty, and retention rates, you might have to go out there and upgrade services and offerings. That investment could save your customers/members from going down the street to open an account for an incentive.
This is a small list compared to your average RFP or evaluation process, but it is important to know. Your online bill pay solution isn’t the reason a customer will open an account at your bank or credit union, but it very well could be the reason they stay or leave. BAI reported that consumers who use electronic bill pay and electronic bills (e-bills) are more satisfied with their financial management processes and feel a greater sense of financial control. Also, there is a proven correlation between bill pay use and deeper customer relationships; bill pay users have higher balances, lower attrition and purchase more revenue-generating products than non-users. Simply stated - these customers are normally more valuable and are the type you want to keep.
I will be the first to admit that I don’t have all the answers. But I have listened to financial institutions, bill pay subscribers, bill pay companies, and many industry experts. The recurring theme is that bill pay is growing and will continue to grow. Regardless of the mechanism, your customers want access and want a quality product with quality service. I hope this provides you with enough information to ask the right questions when reviewing a product. And here is my one company plug, I hope you will consider iPay Solutions as a part of your evaluation.
Author: Jennifer Geis, JGeis@jackhenry.com
Tech Crunch recently published an article, No Check In Required: Foursquare Starts Rolling Out ‘Proactive’ Push Recommendations On Android. The article announces a new version of the Foursquare app that makes a big move toward offering a ‘post-check-in’ experience, one that doesn’t require the user to officially and proactively check in to a specific merchant. Instead, the new feature automatically beeps or buzzes a user’s phone with targeted and personalized recommendations based on that user’s physical location, without needing them to check in at all.
For example, you could walk into your favorite Starbucks location, and because it is officially fall, it may buzz your phone to let you know that the pumpkin lattes are now being offered. Or, you may visit a new restaurant that you’ve never frequented before, and as you walk in, it may buzz your phone to let you know that they give away a free side salad to all new customers.
How does this relate to mobile banking? And, does it really tie into financial services? The link to financial institutions in this scenario is the potential to inject FIs into the buying experience by putting mobile deals in the hands of consumers and letting them not only select extra savings from their mobile device, but also select how they want to pay, from which account the money will be deducted AND provide real time information on available balances AT THE FINANCIAL INSTITUTION.
What if, you entered into Nordstrom’s to buy the newest pair of Citizens of Humanity jeans, not officially ‘checking in’ on Foursquare, but just entering the store, and as you shopped, you received an email or text that said ‘Today only, Citizens of Humanity jeans - 25% off’! You know you just got paid yesterday but aren’t sure if the $220 pair of jeans is within your budget this week. So as you get the offer, you also check in with your bank to see if the available balance in your checking account will cover the purchase. And, sure enough – your checking account (and your financial institution as your trusted resource) tells you to go ahead take the plunge and make the purchase!
And then, because you’re so happy with your purchase, you posted a comment on FaceBook that said ‘Great sale at Nordstroms today! Love my new jeans!’. The merchant gets a purchase that otherwise may have not been made and the bank gets an extra login to mobile banking that may not have been made and both receive a happy customer. That match of consumer behavior and technology capability is the future direction in shopping and cash flow forecasting.
Customer voice and personal recommendations are the best form of advertising. It kind of reminds me of the digital version of the popular Geico Insurance TV commercials, where the Geico Gecko, says ‘I just saved $500 on my car insurance by shopping at Geico’’! Love that commercial!
Author: Karen Crumbley, email@example.com
“Hey, look here…” as Uncle Si from the Duck Dynasty TV show would say, “I live by my own rules (reviewed, revised and approved by my wife)…but still my own.”
Si’s quote reminds me of Social Media: Consumer Compliance Risk Management Guidance: Proposed Interagency Guidance, an OCC bulletin released in January of 2013 that outlines proposed guidelines for Financial Institutions (FIs) communicating via social media channels. Similar to Si’s comment, FI personnel will soon be required to follow social media communication standards that are reviewed, revised and approved by FI management. The OCC bulletin [Docket No. FFIEC-2013-0001] provides straightforward insight for managing risks related to social media. However, even with the detail provided there is still much to learn about this guidance. For example:
- Will there be significant changes from the proposed guidance?
- What will examiners choose to focus on after the guidance is available?
- When can we expect the official release and date for compliance?
Even without the formal release of the guidance, FIs can start their strategic approach to address forthcoming social media initiatives, beginning with employee education on social media communication usage. The following bulleted item is a minimum expectation that FIs can anticipate:
- An employee training program that incorporates the institution’s policies and procedures for official, work-related use of social media, and potentially for other uses of social media, including defining impermissible activities.
Regardless of how an FI uses social media, it should address social media communications for employees within its Acceptable Use Policies and Procedures. Bank management should review relevant points in these employee policies and consider enhancing the content. In addition, each FI will need to document the training deployed to personnel that participate in FI-related social media communications as part of their job description. These individuals will need to understand the legal, compliance, reputational and operational aspects associated with social media so that they can carry out their job role accordingly. Having the ability to demonstrate employee participation regarding social media training through automated activity reporting would also be beneficial.
Another point to consider as you review existing policies is that the proposed guidance defines social media as “a form of interactive online communication in which users can generate and share content through text, images, audio, and/or video.” The examples they provide expand beyond the typical list of micro-blogging sites (e.g., Facebook, Google+, MySpace, and Twitter). Other areas of concern include forums, blogs, customer review websites, and bulletin boards (e.g., Yelp); photo and video sites (e.g., Flickr and YouTube); sites that enable professional networking (e.g., LinkedIn); virtual worlds (e.g., Second Life); and social games (e.g., FarmVille and CityVille). Consider all of the outlined examples when developing your training program and address the risks accordingly.
In summary, training employees to understand the appropriate use of social media can benefit your FI’s ability to protect non-public information and also has far-reaching aspects for mitigating risks. You will not regret planning for the inevitable roll out of the impending social media regulatory guidance, and remember….
“There are two kinds of people in this world…the educated and the unducated.” – Uncle Si, Duck Dynasty TV show
Author: Tom Edwards, firstname.lastname@example.org
As a Lending Solutions Product Specialist, I devote much of each day discussing business challenges with credit union and community bank clients.
Margin compression comes up time and again. Is that any wonder? FDIC and NCUA call reports consistently show that net interest margin is a significant profitability indicator. Is there a Lending, Financial, or Credit Officer who’s not feeling the squeeze between what a financial product costs, and its marketable value?
Yet when asking these managers how they price their loans and establish their deposit rates, the sincere reply follows: “We have to monitor our local competitive market.” My mind’s eye immediately sees Bank A peeking through narrowly parted blinds toward Credit Union B (across the street), hoping to glimpse the lobby Today’s Rates board. All the while, Credit Union B hasn’t yet posted daily rates, because its lending team is still scanning the morning edition for Bank A’s specials. Sound familiar?
A credit union website in Washington, D.C., explains to their members how they set rates:
We consider a number of factors, including the cost of funding the loan, the security offered, the repayment term and the general level of market rates.
I agree! Cost of funds, credit risk, and loan terms should lead the list as fundamental decision support data – prior to referencing market rates. Your balance sheet and income statement do not rely on other players; and neither should your pricing proposals. Yet these factors are complicating and difficult, without an effective system. This is exactly what Portfolio Pricing Solutions can do for your institution.
Until lately, however, Portfolio Pricing Solutions for consumer and small business financial products were accessible typically only as add-on modules for more pricey full-featured commercial solutions. This forced the smaller, consumer-focused banks and credit unions to keep peeking through the blinds. Web-based technology is changing that, enabling easier deployment for smaller, highly focused software projects.
“Rate sheets” are commonly used to guide standardized pricing for consumer loans, small business loans, mortgages, transactional deposits, and non-transactional deposits. Rate Sheet Pricing Solutions suggest rates for a product’s target ROE (Return on Equity), fully supported by a relevant retail assumption set for important profitability drivers such as product capital allocation, origination and maintenance expense, credit risk, duration, and size – plus benchmark funding curves and updating loan pricing indexes:
Monthly usage fees (rather than large up-front licensing) mean smaller banks and credit unions may now access such critical decision support data for pricing their retail rate sheets with the assurance of targeted returns, based on real numbers.
However, we cannot disregard market competition. Companies like RateWatch, the industry’s largest provider of rate data, are able to provide rate surveys, product comparisons, financial strength reporting, local/regional/national averages, and fee reporting.
Maybe the next time you find yourself peeking through the blinds, it will be to enjoy a contented look at the sun setting on a confident day.
Read our recent press release to learn more about our web-based Rate Sheet Pricing Solution. To learn more about RateWatch visit their website at www.rate-watch.com.
Author: Evan Thomas, EvanT@gladtech.net
Retail and commercial account takeovers are a major threat to the relationship between a financial institution (FI) and its customers. Once a cybercriminal has taken over one (or more) accounts, the ensuing fraudulent transactions and theft of personally identifiable information (PII) can deal a fatal blow to the confidence a person has in your online banking service. It has been well documented through regulatory requirements (FFIEC’s 2011 Supplemental Guidance on Internet Banking Authentication) and court cases (Patco Constr. Co. v. People’s United Bank) that FI’s must have “commercially reasonable” countermeasures in place to protect online banking customers. The commercially reasonable standard for security procedures means that user IDs, passwords, and challenge questions are no longer enough to protect online banking customers. Additional security layers must be put in place to protect both your customers and your FI’s image in what Cisco calls the “internet of everything.”
That being said, fraud prevention technologies in the marketplace today must be capable of reducing fraud without impeding the customer experience, which could ultimately lead to customer attrition or a decrease in the use of cost effective delivery channels like online banking. Customer frustration can become a problem when countermeasures are too obtrusive. This is where having agentless malware detection can make a big difference. It can improve the security of online banking without end users needing an agent on their PC. Many solutions in the market today require end-users to install monitoring software which often requires the fraud departments’ time to enforce and manage the download process. This management time increases the total operational expense associated with the fraud tool being used.
Agentless malware detection gives visibility into online banking session indicators commonly associated with malware infections. These indicators include login location (IP address), Internet browser and operating system versions, and many other data points collected through numerous threat intelligence feeds and research efforts. With new variants of malware coming out each day designed to defeat both two-factor authentication methods and deactivate protection software, agentless malware detection is able to detect malware infections at the destination of the session instead of at the source. Thorough insight into attack patterns and behavior matched with end user PC activity has been a proven success in detecting and foiling fraudsters’ attempts in the early stages of attack.
All of us ‘good guys’ should be excited for this new innovation in online attack detection and prevention, for both the decrease in fraud management headaches and, most importantly, for the assurance it brings to online banking customers who are advised of impending attacks.
Author: Mark Messick, MMessick@profitstars.com
Is it just me or does it feel like there’s more to this healthcare thing than meets the eye? Make no mistake, all eyes are on the controversial legislation that’s come to be known as ObamaCare. Lots of questions surround the Affordable Care Act (ACA): Will people sign up for coverage? Which states will offer the exchanges? What happens if the government can’t hold up its end of the deal? Will the penalties actually take effect? …and many more. The big question is how we’re going to pay for it? And one of the answers is by controlling cost. More on that in a minute.
The one thing we do know for sure is that healthcare as an industry continues to grow at a rate of 6-7%*. As the Baby Boomers come of age, retirement age that is, this number is expected to jump accordingly. This is primarily because folks over the age of 65 spend 85% more on healthcare than those who are under 65*. More people means more demand and that begs the question: who will meet that demand and how? Since this segment is primarily covered by Medicare and Medicare supplemental plans, the ACA shouldn’t have much of an impact on them in the near term; or will it?
What the financial industry should really be concerned about within healthcare is the population wildfire that is set to break out. Over the next twenty years there will be 50% more people over the age of 65*. How will the industry provide the products and services that will be required for this expansion? Whether existing providers grow their operation or new businesses pop up, they will be in desperate need of working capital. And while most lenders would jump at the chance to loan money to the local hospital or physician’s group, there is another significant segment of companies that gets largely ignored. Namely, the businesses that provide the goods and services after the patient has left an institution’s care.
This hidden segment within the marketplace is grossly undercapitalized. Yet, these are the very providers who are positioned best to deal with the coming expansion. In fact, they are by far the most necessary part of the care chain because they largely provide their services outside of the institutions. As Medicare and other insurance providers try to control cost, they continue to limit the amount of money they will pay for “institutional services.” That means that patients will be shown the door earlier and more often. There are already measures in place which are designed to reward Primary Care Groups called ACO’s (Accountable Care Organizations) by keeping their patients out of institutions and sharing some of the cost savings. That leaves the non-institutional healthcare companies as the provider of goods and services over the long term of a patient’s care.
Target the ancillary providers like Home Health, DME (durable medical equipment), Physical Therapy and Rehab, Medical Transport, and Specialty Pharmacies and you’ll reap the rewards ahead of the curve. Not only will you be helping to provide working capital that creates new jobs in your community, you’ll be positioning yourselves as the go-to source for financing in the local healthcare marketplace.
*Statistics from The Centers for Medicare and Medicaid Services
Author: Jenny Roland, JeRoland@jackhenry.com
As part of the ProfitStars Gladiator IT Regulatory Compliance group, I have had the opportunity to have some interesting conversations with customers, and I have noticed there is one topic in particular that seems to keep popping up: Incident Response Plan testing. The questions that I am most often asked regarding testing are the following: “We don’t test our Incident Response Plan, can we remove the section on how to test it?”,” Is testing something that we are supposed to be doing, since we already test our Disaster Recovery Plan?” and “The Senior Management personnel of my institution just asked me how we plan to respond to a particular attack, what do I tell them?”
The first few times I had those questions posed to me I was genuinely surprised. Unfortunately, hearing those types of questions on response plan testing have become more routine. However, as a former banker myself, I realize that community bankers wear a multitude of hats and incident response plan testing probably is not at the top of their priority list. If we are being honest with ourselves, it’s probably not the most exciting thing either.
Having said that, testing of your incident response plan is something that should become a top priority for any financial institution. Why? How else will you know that your plan will work during a real incident and do so in the manner that you need it to, if it has never been tested? Having a plan in place is an absolute necessity, but it has to go beyond that. You have to ensure that when the time comes for your financial institution to follow your response plan that it will actually be of benefit to you. Discovering that it doesn’t quite work the way you hoped will certainly complicate matters even more for you and your team. Not only can it complicate your response actions, but think of the potential damage to your financial institution’s reputation. Assurance of effectiveness aside, there is yet another driving factor in why financial institutions should be testing their plans: FFIEC guidance strongly encourages at least annual testing of your Incident Response Plan to ensure proper correspondence with business continuity guidelines.
So, for those readers that may have never tested their Incident Response Plan, or maybe it has just been a while, what is the best way to go about testing? Your first step is going to be to assemble your Incident Response Plan team members together. If you have never put one together, now would a great time to do so. Each team member should have certain responsibilities during an incident and testing provides you with a chance to validate their response capabilities. Next, decide what types of scenarios you want to cover in your test. Generally, it is a good idea to include scenarios of varying severity levels and types. For example, you could have a scenario where a file is stolen from a CSR’s desk, or a malware attack on your network. Given the increasing attention, using a DDoS attack as an example would also be a viable scenario. I have worked with financial institutions that have also used real scenarios they have experienced in the past for their testing purposes.
Once you have all the appropriate folks involved and you have decided what type of scenario you want to test, you can move forward with the actual testing. Follow the steps laid out in your Incident Response Plan, just as you would for a real scenario. Remember to note any issues that come up during the test such as, perhaps some of your steps need to be reorganized (are you trying to proceed with remediation activities before you have contained the incident?), or if you discover that you are missing a step. These can all be addressed after you are finished to better enhance your plan for the future. If you can, utilize some sort of worksheet to help you notate the entire test. Evaluate what worked, what didn’t work and what could be done differently.
Hopefully Incident Response Plan testing doesn’t sound that painful to you anymore. Remember that testing your plan on at least an annual basis will make life much easier for you in the long run. As always, feel free to leave comments on your experiences, or questions you might have.
Author: Chris Sutherland, CSutherland@jackhenry.com
Time flies by these days, it seems. I still remember those summers when I was growing up and it seemed like days, weeks and months would last forever. But as we advance in years, time gets away from us, and before you know it … things are just not the same.
In the information technology (IT) realm, this can be a scary thing to realize too late. How long is too long to have those old servers still sitting around? We are quickly approaching the end of life of what most IT Administrators and Technicians consider one of, if not the most, stable and well running Windows Server operating system yet. Windows Server 2003 R2 has been “solid like a rock.” Being an installation and support technician, I am surprised how many of these “rocks” still exist. What are you going to do when July 14, 2015 rolls around? And why July 14, 2015, you may ask? This is the end of life for Windows Server 2003 R2 and I know that a year and a half from now seems like a long time off; but is it really in the scheme of things? When Windows Server 2003R2 was released way back in 2006, do you think the technology and architecture may have changed? Now with the latest release of the Windows Server 2012 server operating system, and the soon-to-be-released Windows Server 2012 R2, customers still holding onto these earlier releases of Windows Server are at least three – and about to be four – versions behind in technology updates. So maybe it is time to explore something new. Let’s take a look at a couple of the new features that might make it worth stepping into the current and out of the past:
- Server Management Improvements – Adding to the redesign of Windows Server 2008, the Server Manager is really a place that you can manage all features and functionality of the server. All your tools are in one location.
- File Services – De-Duplication – While I am sure there were no times in any server that has multiple copies of the same document in different directories, just in case, there is a full de-duplication that will help save you storage space.
- Simplified Licensing – Now you have two options, Standard or Data Center Licenses. All is based on the processors used in the servers and simplifies what is needed for virtualization, as well.
So is your FI / IT Department still holding onto the past? Maybe you have that one server to which you keep applying “duct tape” or you are keeping a stash of parts, hoping that the server holds on just one more year. While there are many things to consider in updating to the latest operating systems, like application compatibility and migration of data, now is a good time to look toward the future of IT and come into the present decade of technology.
Do keep in mind that with each technological advance in server architecture, we have enjoyed a material improvement in what we receive in return for our dollar.
Author: Deborah Phillips, email@example.com
I recently visited the community bank down the street. While waiting on the branch employee to generate my paperwork, I noticed information on her desk about rates and the required minimums to open accounts. I asked her about the $100 minimum to open a savings account, which also came with a $5 monthly fee. “Do many people open savings accounts with those conditions?”
I was unprepared for her response: “No, that’s why I haven’t been able to open one. Although I’d like to.” I had to wonder about the commercial viability of account design when a bank’s own employee believes that opening a savings account is out of her reach.
Many financial institutions have turned to account fees to help replace lost revenue streams. Non-interest income is vital to their sustainability, but at a time where most Americans are not saving enough, does it make sense to create barriers that discourage beneficial behaviors like saving?
After years of average consumer savings
barely hitting 1% of annual income, the recession reinvigorated the level of personal savings to 4%. While the economy appears to be improving, according to recent data from the Federal Reserve the average American has yet to experience the economic recovery. In tough times old habits are hard to break, and consumers once again are unable to plan for the proverbial rainy day.
Consider some startling statistics from recent research:
- Roughly three-quarters of Americans are living paycheck-to-paycheck.
- 26% of households are “net worth asset poor,” meaning that the few assets they have — such as their home or car — are outstripped by their debts.
- 22% had less than $100 in savings to cover an emergency, while 46% had less than $800.
- 27% had no savings at all.
- About a third of consumers admit they aren’t familiar with the basic savings options available to them.
- 35% confessed they don’t have any idea where they should put their savings if they had any.
This dire picture extends beyond the 42 million below the official poverty line. Others are walking a financial tightrope, too. 25% of middle income households earning $55,465-$90,000 have less than three months of savings. Given this lack of a safety net, it comes as no surprise that 7% believe they will never retire. With today’s low interest rates, many people believe there is little gain by saving; yet, having a nest egg offers advantages well beyond peace of mind.
What happens when the unexpected happens and an infusion of cash is needed for an emergency? Without savings, choices are limited. Many that previously relied on credit cards have watched as access to unsecured funds dried up: “Analysis by the investment bank Jefferies concluded that since 2009, approximately $122 billion in credit availability to Americans with scores of below 660 has been removed from the market,” according to a recent article in American Banker.
Many consumers with an urgent need will resort to a payday loan. Today, there are more payday lending storefronts in the U.S. than McDonalds and Starbucks locations combined. While some states are capping allowable interest rates, some of these lenders charge more than 400%. And as online and mobile access become ubiquitous, so has internet-based payday lending. By 2016, Internet loans will make up roughly 60% of payday loans, many of which are not governed by U.S. regulations.
While representatives of the payday lending industry state they are providing a needed service that their customers willingly purchase, a growing number of voices are challenging that position. “They are stripping the wealth from our communities,” admonished Iowa State Senator Matt McCoy. In an American Banker report, Kat Taylor, CEO of One PacificCoast Bank in Oakland, California said payday lending, “is a death trap that ruins individuals, households and whole communities and is the scourge of our time…We need to be in the business of creating bank customers, not destroying bank customers."
I think we can all agree that there are a number of social benefits derived from helping consumers avoid a cycle of debt, prepare for emergencies, and establish and cultivate solid credit habits.
So what can an FI do? Here’s a short list of ideas:
- Offer a savings account as an adjunct product for all checking accounts.
- Address barriers to opening and growing savings, such as high minimum balances and punitive maintenance fees. Establish reasonable entry requirements and monthly fees that won’t dis-incent saving by diminishing the account balance.
- Educate customers and prospective customers about savings options at your FI.
- Offer financial literacy assistance.
- Get creative - consider innovative programs designed to make savings easy.
- FIs that offer cash back rewards for debit or credit card transactions might consider a program where the rewards earned are deposited into a savings account; it’s a painless way for customers to start building that safety net, and may incent participation in the rewards program. (Coincidentally, it may help position your card top of wallet.)
- Greater Texas FCU offers a Safety Net Savings Program, which provides incentives for members to prepare for the unexpected by reaching savings goals.
- Remember Bank of America’s Keep the Change® Savings Program, where transactions made with debit cards are “rounded up” for the next dollar and the difference is deposited into the accountholder’s savings account? This program encourages participation by matching the savings for the first three months. Even though the amounts deposited may be modest, the program is an effortless way to start a savings habit.
- Some FIs are exploring small dollar, short term credit programs. (These are not to be confused with Direct Deposit Advance programs that have been recently targeted by regulators as bank sponsored payday loans.) For example, BankPlus in Belzoni, MS offers $500 and $1,000 loans for terms of one to two years, with a 5% interest rate. Applicants are required to complete a financial literacy course to qualify. With more than 12,000 CreditPlus loans totaling $9.3 million, this $2.3 billion bank has found a profitable niche, gained customer loyalty and engendered community good will.
Doesn’t it make sense to design products that consider the overall customer experience, including products and services that support your members’ and customers’ fiscal fitness? What are other ways FIs can help address these issues? After all, isn’t it possible for FIs to do well by while doing good?
Center for Financial Services Innovation
FDIC’s Economic Inclusion Site
The National Federation of Community Development Credit Unions
Jump Start Coalition
National Financial Educators Council
Visa’s Practical Money Skills for Life
Author: Jon Kozlowski, firstname.lastname@example.org
At most community financial institutions, deal pricing is typically set by loan officers, and approved by loan committees, in a process that essentially lets the institution’s competitors price their deals; experienced lenders generally have a good sense for what rate/fee proposals will work on different types of deal structures in their markets, and look to meet or beat what competitors are likely to bid on the same deal. One of the biggest revelations institutions implementing a pricing model for the first time have is how frequently competitors misprice deals. This could mean either “giving it away” and not being adequately compensated, or realizing there were quality credit opportunities the institution could have bid more competitively on and still enjoyed strong profitability.
Loan and deposit pricing models vary in their methodology, but all attempt to quantify the various costs and risks of extending credit or raising funding in the current rate environment and generate projected rates of return. A conceptually sound and analytically robust pricing model can bring pricing errors to light. Most of these errors fall into one of several common categories:
- One size fits all pricing
Many of the costs of extending credit are proportional to a loan’s size. However, operating expenses are inelastic. While in many cases originating and servicing a $100 thousand loan is less than a $1 million loan, it is not 1/10 the cost. This leads to progressively higher required rates/fees to maintain a consistent rate of return on the portfolio.
The mark-ups achieved on smaller versus larger loans varies widely by institution, but in most cases don’t approach what is required for consistency in rates of return. This is unavoidable to some extent: “relationship pricing” is often used to justify sub-optimal pricing at the loan level to ensure the retention of valuable customer relationships. But while this may often be justifiable, the larger point here is that many institutions are largely ignoring this critical variable entirely.
- “Personalizing” Assumptions
When implementing a pricing model and quantifying the variables for the first time, the temptations are to think of these in terms of the institution’s experience: its funding costs, its credit experience, and its operating costs. This is a mistake, as pricing assumptions should always reflect marketplace norms for competitors in the institution’s footprint. To not do so would lead to systemic over- or underpricing based on whether the institution is worse, or better, than its competitors.
To illustrate, let’s assume an institution suffers from unusually high operating expenses. The consequences of using these in their pricing model could only be that because of these higher costs, the institution will need to charge higher rates/fees than its competitors to recoup them. The likely result is getting out-bid on most deals. Customers cannot be expected to be sympathetic to the institution’s cost problems, and be willing to pay more. Conversely, if the institution out-performs its peers by whatever metric, the result of embedding this experience as a pricing assumption will lead to overly aggressive bidding, ending in passing along the benefits of this out-performance to its customers rather than to its shareholders.
- Under-Valuing Customer Options
Most financial products contain embedded customer options. Interest rate floors and caps, as well as the ability to prepay a loan or call a time deposit, are common examples. The value of these options are often either ignored or quantified in rudimentary ways, e.g., a 3%-2%-1% penalty structure for prepayment within one, two or three years. While any attempts at quantification are (usually) better than none, most institutions under-value the risk these options create for financial loss.
The problem with most customer options is that they are notoriously difficult to quantify. Most institutions don’t have the resources to do such analyses in-house, nor do many pricing models perform this level of analysis. But since such valuations are being performed daily in the financial markets, an acceptable solution may be to receive indications on option valuation from the institution’s securities dealer or other service providers.
- Rosy Scenarios
Calculating a projected return necessarily requires making numerous assumptions. Some of these require individual judgment calls: for example, how long will a commercial mortgage with a 20-year term really stay on the books, or how much will a line of credit be utilized? Human nature being what it is, there is usually a bias towards the optimistic when making these assumptions, leading to unrealistically high projected returns, and ultimately underpricing. There are two potential solutions to this problem. First, with some factors management can provide standardized guidance for how to handle subjective variables. The second is an audit process to provide assurance of the reasonableness of assumptions used in preparing proposals.
- Stale Assumptions
All of the assumptions going into a rate of return calculation are subject to changing conditions. Assumptions such as capital requirements, loss experience and operating expenses should be evaluated and adjusted at least annually. The trend for all of these assumptions has been upward (more capital, higher expenses) so the more stale these assumptions become the more of an upward bias they place on results, leading to underpricing. As rate of return goals are another important input in a pricing model, these should be reevaluated along with the other inputs.
Evaluating pricing decisions in a financial model will always be an inherently subjective, and thus error-prone, process. The ultimate insurance against costly errors being made is the knowledge and objectivity of the practitioners building, calibrating and using it, as well as the reasonable and effective controls and guidelines put in place by the executives who will ultimately be held responsible for the results.