The Importance of Loan Categorization and Segmentation for Financial Institutions

loan categorizationLoans are the lifeblood of financial institutions. While a healthy loan portfolio is the primary source of an institution’s revenue, it’s also the most challenging to manage. To operate a successful lending division, institutions need to know where they are earning and where they incur costs. This requires sophisticated loan categorization, which enables staff to view—and report on—their loan portfolio in more meaningful ways. With JOHO OneSource™, it’s now possible to achieve greater insight into this critical information.

Standard Views are Inadequate

Most analytics methods offer fixed, standard loan portfolio views, but, in many instances, these are inadequate for providing management with a true “birds-eye” viewpoint. For example, a loan portfolio purchased from another institution might be profitable, but by using it as an entry point for growing your base of deposit account holders, you can maximize profitability several-fold. Software that isolates accounts according to criteria avoids wasting time and money approaching people who don’t match your ideal customer profile. This can be invaluable for institutions that are obligated to track and report acquired loans separately until their maturity.

Importance of Trending

Then there’s the concept of trending. It’s great to know you purchased a loan portfolio that’s performing, but wouldn’t it be better if you could identify account holders in the portfolio who shifted their banking to your institution? If so, what are common criteria between those who moved and those who haven’t? This will enable you to understand trends affecting customers, and where to spend your marketing dollars.

What about market trends? When you know what your customers use loans for, you can apply business intelligence to marketing as well as new product development. If a notable percentage of your portfolio used loans of a certain value to purchase RVs during summer, for example, you might develop a new loan product aimed at RV buyers and target them with your promotions.

Those Difficult Questions

Financial boards, too, are typically populated with directors who ask difficult and diverse questions. These range from “What about those loans we bought two years ago? Did we get any new customers from them?” to “How much profit are we making from loans to RV buyers?” Regulatory reporting doesn’t allow for many of these distinctions in the data, and questions like this often give rise to frenzied efforts to track down numbers manually. In the time it takes to obtain, check and extrapolate the data, it’s already out of date!

Solutions that Serve Your Interests

Data warehousing using sophisticated technology offers the capability to “break out” different types of loans, pull reports based on almost any filtered criteria, and to discover the right questions to ask when segmenting the portfolio or performing other analytics tasks tailored for your business. It takes a particular type of data management, however, to deliver a solution that enables a financial institution’s executive team to create additional loan category views that serve the organization’s interests, rather than settling for standard reports delivered by their operational systems.

It’s time to ditch the spreadsheets and develop loan categorization and data warehousing systems that are commensurate with your performance in your market. Or, at least, with the way you want to perform!

What to Look for In a Core Evaluation Consultant

A bank’s core processing system is one of the largest single capital outlays for financial institutions and should not be a purchase decision that’s made overnight. Banks’ executive teams need to start looking for new processors 18-24 months before their current contract expires. Given the price point for new systems, even companies satisfied with their current vendor are conducting extensive due diligence before deciding whether or not to renew or move to a new provider. This is an exhaustive, time-consuming process, and unless your bank has all the requisite skills in-house, you’re likely to outsource the management of the many required tasks.

Here are attributes you should look for in a core consulting provider:

An Objective Position

Your core processing consultant should take a neutral position when it comes to vendors, instead of holding predetermined notions of what vendor you should use. Unfortunately, many consultants have preset notions surrounding which vendors you should choose. A better approach is to identify your specific needs through discussion and interviews. Once the consultant understands your pain points and long-term business strategy, they are more likely to find a vendor to meet your needs. Look for a consultant with no affiliations to potential vendors and ask them how many different vendors and products they have recommended to other clients. This will ensure whether or not the consultant conducts an objective assessment process.

Expertise in Core Banking Applications

Banks typically work with a core processing vendor for 10 to 15 years. Finding a new vendor is complex, and the more experience your consultant has with core banking applications, the better. Choose a core consulting advisor with enterprise software experience who understands the intricacies of the banking environment. This will provide the resources that can help your organization identify your requirements and provide guidance on finding and implement the correct solutions.

A Well-Developed Process

Performing the due diligence required to select a new core processing vendor isn’t a task for just any project manager. To secure expertise in areas where you need it most, select a business partner with a well-developed process comprising formal planning, project management, identification, and implementation of core banking applications.

Extensive RFP Experience

Appoint someone with extensive experience in managing the RFP (Request for Proposal) process. Make sure they are capable of:

  • Developing required documentation and sending it to vendors with the right capabilities
  • Reviewing and scoring responses according to predetermined weightings
  • Presenting the financial institution’s project team with appropriate options
  • Conducting thorough due diligence to identify two or three vendors to make presentations onsite to your leadership
  • Reviewing detailed pricing and proposals revisions, re-scoring, and making appropriate recommendations

Once a vendor is selected, your consultant should also be equipped to handle contract negotiations with the vendor on your behalf.

Knowledge of Ancillary Systems

Every financial institution is different, and that means different approaches and different ancillary services exist. If you have a specific need for mortgage processing, for example, and the best option for you is a specific ancillary system, then your consultant should be prepared to direct you accordingly.

Finding the right core consulting professional is challenging, but if you contract a professional firm with prior enterprise application experience in banking, you’ll have a seamless transition to your new system.