Author: Tom Edwards, toedwards@profitstars.com
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. 