While much has been written about Quicken Loans and Warren Buffet’s billion dollar NCAA men’s college basketball bracket challenge, there are important lesson in both marketing, customer acquisition and data collection for bankers that we will get to in a moment. By way of a quick recap, you go to Yahoo, enter for free, pick all 63 games correctly (you don’t have to pick the winners from the play-in round!) and you get $1 billion dollars paid in 40 annual installments of $25 million each or choose the lump sum for $500 million.
Banker To Banker
If you are feeling unlucky every time a loan prepays early then this will help. When banks originate a loan without a prepayment penalty or yield maintenance provision they are giving away economic value to the borrower – on average 7.2% of total loan value to be exact. While banks don’t take a principal hit, the impact is the same because the bank could be as much as 7.2% more profitable if they were to utilize a reasonable prepayment provisions.
Knowing where we are in the business cycle is a key input into looking at projected probabilities of default for loan credit underwriting as well as future loan prepayment speeds. If done correctly, banks want to tighten underwriting standards as the economy inflates and loosens them during the troughs of the cycle. Unfortunately, most banks do it the complete opposite loosening standards due to competition when things are overheated and tightening them at the trough.
After four years of testing, Bank of America introduced its “Safe Balance” account last week that is targeted at low-income customers and is set to compete against accounts at competitors that are based on a prepaid card. The account is designed to target those that cannot meet minimum balance requirements, carries a $4.95 monthly fee that cannot be waived and gives customers the ability to utilize online banking, mobile and bill pay.
Sometimes, a company or real estate project with higher debt levels means less risk, not more. This concept is counterintuitive as credit underwriters have been historically taught that more debt means higher risk. However, the statistical evidence does not bear this out.
While we are big fans of digital and email marketing, traditional advertising in banking still has its place. Being quantitatively inclined, one of the easiest traditional advertising methods to track is direct mail. Next to email marketing, direct mail also has one of the best returns – better than digital, social media, print, radio and TV. Today, we present our data on our direct mail efforts with the goal of helping all community banks improve their marketing effectiveness.
What is your bank’s strategy for keeping good loan customers? If you are like many banks, you may not have a formal strategy and with prepayment speeds averaging 24% for fixed rate loans. That is a tremendous amount of value running out the door.
It is a testament to your marketing when your bank’s promotion is traded in the secondary market. Chase is currently offering a $200 bonus when you open a savings account with $15,000 or more (for 90 days minimum) of money not already at the bank.
While a $200 cash bonus for a new account is on the high side of deposit account cash promotions, it is not unheard of. What is different is that Chase correctly chose to do this with a targeted mailed coupon instead of an open offer, as most banks would have done.
Lots of banks try to create a customer experience that is unique. While many succeed, more fail.
A look at 134 commercial real estate loans that were just sold last month with recent appraisals reveals some interesting data points for banks. The sale price was higher by about 10% than the appraised value. In looking at the details, appraisers placed a heavier weight on current capitalization rates versus investors that tend to look more forward. This begs the question – how accurate are commercial real estate appraisals and should banks be basing loan amounts on them?