Preparing for another Board meeting, studying the most recent Income Statement and reminiscing about the margins of days gone by...It used to be a lot easier to meet or surpass the board and/or shareholders' expectations.
The Federal Reserve rate was just reduced to 2.25% and as of August 1, 2019, the discount rate for institutions to borrow funds is 2.75%; however, all indications lead us to believe that there will be no further reduction this year. Presently, community lenders are paying customers approximately 3% on certificates of deposit as short as 12 months, charging below 4% on 30-year mortgages, and an average of 3.25% on 15-year notes. Margins are very thin, and it appears they are going to stay that way.
Today’s community lenders are challenged with providing the best programs and services with their limited income. Failure to do so will cause a loss of market share and a downward spiral. Most lenders have embraced lean operations to do more with less, and the successful ones have also taken advantage of non-interest fee income opportunities. By increasing their revenue stream, these institutions are able to afford appropriate staffing to provide world-class service, maintain present customers, attract new customers, and grow their assets.
While “fees” is considered a four-letter word, successful lending institutions understand that the nominal fee paid by the customer for a valuable loan or protection product that provides essential benefits for the customer and the lender. For example, protecting your customers from the stress of still having a balance to pay when their car has been in an accident and determined to be a total loss is very helpful for families living paycheck to paycheck. A lender can facilitate this protection by offering a GAP product to its borrowers. Further, protection from unforeseen involuntary unemployment, disability, or some other negative life event will allow your customer to walk away from an auto loan they cannot pay while maintaining a positive credit profile for a borrower and a paid-off debt for the lender. Another way to increase revenue while helping your customers is to offer warranty coverage to help carry the burden when they experience a vehicle break down. By offering these types of programs, stressful, life altering events can be made easier allowing the community lender to have a positive impact during these critical moments and keep a loyal customer for life.
Lenders have known for years that the more products and services a customer keeps, the greater the likelihood they will remain a customer. The benefits of a GAP or VRP or Warranty Policy far outweigh the cost and can provide that little extra boost in non-interest income. The income from these fee products will not only make the board meeting go a little smoother but also aid in maintaining positive relationships with customers. As we all know, this is a relationship industry.
Let’s talk about how you can improve your institution’s financial position with increased fee-income while providing world-class products and services that deliver real value to your customers.