An Agile Approach To Better Lending, Deposit and Fee Products

NEW PRODUCT DEVELOPMENT
NEW PRODUCT DEVELOPMENT

In past articles, we have talked at length about using agile methodology for application development, for technical product innovation, and for your risk processes. We are fans of forsaking the traditional “waterfall” approach for new products whenever possible and getting to marketing in a pilot program as quickly as possible so you can learn and iterate to success. In this article, we point out that even in the banal world of commercial banking, opportunities exist to create new products that customers want. Unfortunately, many banks simply do not have the framework to understand how to innovate traditional products or change product features to address demand.  Community bankers should study the agile methodology to understand how to increase service levels and create products that customers desire.

What is Agile Methodology

Agile methodology is a way of building products that customers really want, using short cycles of work called “sprints” that allow for rapid production and constant revision. The Agile methodology was developed in 2001 by 17 people in written form and was originally used for software development.  However, Agile methodology can be used in manufacturing and service industries, including banking.

When it comes to product development, instead of going through a lengthy process of writing up requirements and then going through countless product committees followed by a due diligence process, the goal of an agile approach is to get to market quickly under limited and controlled conditions and then test under a pilot program. In this manner, the risk is reduced by learning about the product – its customer acceptance and the operating risk – under live conditions.

While bankers often think about agile methodology in terms of technology-forward products such as digital account opening or payments, it can also be used to tweak traditional products to drive revenue.

Agile Methodology

 

Testing For The Customer

Bankers would use Agile methodology to design products that customers want by asking three basic questions:

Is it desirable?  Here the banker interacts with the customer to explore needs.  Most customers will tell you what they need, but it may take hard work and exploration to understand what customers truly need.  Sometimes, customers may not know what they need, and the need discovery becomes a collaboration between the customer and the banker. 

Is it feasible?  Here the banker must answer if the product opportunity is something that the bank can and should undertake given resources, capabilities, and capacity.  The banker will identify the direct costs and opportunity costs of offering this product. 

Is it viable?  Bankers look at the financial models for the product in the short and long term.  The size of the market, competition and potential market impact of the product are measured.  Bankers will analyze the resources required versus the goals attainable.

In Agile methodology, the bank asks, “what do we build or offer to solve the customers’ problem so that they want to buy our product.”  The process of testing and assessing the desirability, feasibility and viability are repeated (or iterated) until the product or service is optimized. 

The elegance of this methodology is that it provides bankers with a structured format and logical timeline to introduce additional layers of research, data modeling, analysis, and testing to validate assumptions about a product or service and prioritize potential solutions.

Live Case Example

We recently witnessed two banks compete for a customer who was financing an extensive real estate project.  Bank A has maintained the relationship with the customer for almost a decade.  Bank B was a participant in Bank A’s credit facility for the customer.  The customer asked Bank A to restructure the existing credit facility into a 20-year fixed-rate loan.  Bank A refused to do so because it was a product that the bank did not offer.

However, over a few months, we witnessed how Bank B apply the Agile methodology.   Bank B concluded the following:

Desirability:  When the yield curve is flat, and interest rates are low, borrowers want the protection of long-term fixed rates.  The outcome of such a structure is a benefit to the customer in the form of interest rate certainty, and a benefit to the bank in credit risk mitigation.

Feasibility:  Most banks will offer fixed-rate loans for three to five years.  Few banks have the internal ability to manage low-yielding assets with 10 to 20-year maturity.  However, Bank B identified a third-party provider that allowed Bank B to receive variable rate of interest on the loan, but with the borrower paying a net fixed rate.  Under this arrangement Bank B would manage the customer, bill the customer, cross-sell the customer and continue to build the relationship.  Bank B needed no special software, no additional expertise and did not need to enter into a complicated contract nor incur additional costs.  In fact, Bank B would generate additional fee income by offering such a 20-year fixed-rate loan.

Viability:  Bank B concluded that offering a 20-year fixed-rate loan product allowed the bank to differentiate from the competition, helping attract better customers and enhance margin.  Bank B also found that in today’s interest rate environment, the specific product was providing the customer with better service – which is what Bank B touted as its core strength.  Further, the longer commitment allowed Bank B to develop a longer and deeper relationship – more time to cross-sell, upsell and gain more share of wallet. 

Bank A concluded that the customer wanted the 20-year fixed-rate loan (the desire was real), but the bank did not assess the feasibility or viability of such a product.  Bank B, using agile methodology, concluded that the particular product was desirable for the customer and feasible and viable for the bank.  The banking industry has some characteristics that impede innovation and change.  However, a simple framework like agile methodology can help bankers break free from long-standing industry inertia.

Putting This Into Action

While we have shown how to use the agile approach for both customer-facing technology and traditional commercial lending products, this framework can be used to improve thousands of aspects within the bank to include deposit structure, marketing, pricing, fees, sales approach, trust products and much more. The key here is to determine your pain points, be clear on a use case and then offer variations of your current product in the market to a select set of customers.

If the product has acceptance and the risk is as anticipated, then you can go through the traditional due diligence approach of creating a business case and putting together a new product risk review before you offer it to your entire service area. Not only will this agile approach reduce your risk, but it will improve your success rate and result in a much better allocation of resources.