How Banks Can Think Differently About Optimizing Margins

Net interest margin is a central measure of a financial institution’s long-term success and viability. In an industry that is currently seeing abnormal trends of lower loan originations, excess liquidity, global staff shortages and supply chain issues, closely monitoring margins is of even more importance for banks wanting to avoid falling behind peers.

The long-term impact emergency pandemic policies will have on financial institutions is still yet to be seen. The question is not if costs can be reduced, but how to best accomplish this. Financial institutions were already operating on thin margins, but they’re going to continue to tighten.

Financial institutions are now in need of ways to optimize margins without adding any FTEs. Perhaps it’s time to go beyond number-crunching and discover new ways to reduce FTEs without piling more work onto existing team members. Harnessing the right technology partners can be this solution.

Technology can help you optimize margins to not only benefit your bottom line, but also can provide greater transparency into the information you need to better manage risk.

A few tips and strategies to consider when crunching the numbers and considering your options:

☑️ Identify the areas in your bank that could benefit from more efficiencies

Make a list of manual tasks that are currently a part of your team’s day-to-day processes. Brainstorm areas like how long it currently takes to close a loan, how much time is being spent gathering paperwork and documents from the customer, and which manual tasks could be automated. All too frequently, when the workload is too much or is taking too long, it is just assumed that adding another staff member is the solution. Writing out each step of the process is a great way to visualize the bottlenecks in the process and where technology might help. Keep in mind, anything that can be automated by technology can also be done with more staff, but it’s the technology that allows institutions to operate on tighter margins.

I recommend identifying the top 3-4 areas you’d like to improve first before beginning the search for a tech vendor. Partnering with a financial technology vendor is usually the most financially affable route for community institutions, rather than having products built in-house. Starting the process with a concise list can help you more quickly narrow your vendor search and allow you to better communicate the problems you’re trying to solve and the questions you have.

A good vendor will also be willing to get down in the weeds with you and help you identify those problem areas that are wasting time and resources, and ways individuals can be retooled to boost the efficiency of the team.

🚫 Don’t look for a silver bullet

As a FinTech company, we frequently run into institutions that want a one-stop-shop kind of solution, and understandably so. But honestly, most vendors specialize in one particular area, and you will likely find yourself liking and disliking certain aspects of each and every one. You won’t find one vendor who solves all your problems perfectly.

It is completely normal and common for a financial institution to utilize multiple vendors. There is no silver bullet in the marketplace. Many people try to pick one vendor and hope to make it work to fit their unique problem set, but this can lead to poor adoption by employees or people wanting to revert back to old ways because the system doesn’t quite do what you need it to. This can wind up costing more in the long run than the cost of selecting multiple vendors to meet different needs.

It can also be helpful to keep this in mind when speaking to referrals. Hearing referrals from peer banks is always helpful, but the key problem areas you’ve chosen to focus on are likely different than the problems of the bank down the street, so the technology they chose may not meet your needs the same.

💡 Adopt an innovation mindset

Approaching the topic of margin optimization with an innovation mindset can make all the difference in your outcomes and success.

There’s no way to successfully adopt technology in your financial institution without a staff member who supports and encourages the “high tech, high touch” mentality. You can’t just buy a bunch of technology and it expect it to work without time investment and a learning curve. Purchasing and implementing software will not instantaneously fix everything, there are things more intrinsic to the operation than that.

Community institutions have primarily focused their attention on serving the community and not so much on the internal processes in which they do that. As a byproduct, other industries are passing them by with innovation and technology.

Innovation has skyrocketed so much in the past 40 years that 20-30 year old processes have become archaic and antiquated to the outside world. Your institution will fall even further behind if you have not changed your processes since then. Your customers probably do not think of or consider the internal processes lenders are using, but they definitely notice the implications of it. They notice when the decision process is slower than others, when they have to physically go into the branch for you to get a copy of their I.D., etc. These are now things technology can and has eliminated.

Deciding the best way to reduce costs requires a lot of planning, forethought, and weighing options. With the right mindset and proper planning, your community financial institution is sure to find a great solution to operate with maximum efficiency on tight margins.