Title: Helping Handoff: More Profitable Than Vanilla Lending, but More "High Maintenance," Specialty- and Consumer Lending Thrive with Outsource Partners
Abstract: When the housing market is flush, it generates good bit of business for the banking industry. But in less expansive times, mortgages produce on the edge of razor, so to speak. It's good thing, then, that banks change up their business models to compensate. Specialty which includes areas like commercial real estate and asset-backed can be cash generators--with the right treatment. Banks get into these areas, because, as rule, each is more profitable than plain vanilla lending, notes John T. Weisel, senior managing director, specialty finance, Accenture, New York City. ABA's own statistics back this up. As highlighted in the 2005 Home Equity Lending Survey Report, banks with home equity lines of credit, as one example, earn 1.5% on those products on average, compared with 1% return on assets overall. While the need to cut down on cost and complication through outsourcing has long been true in other areas of banking, it is also increasingly the case with niche areas on the retail-lending front. areas include post-origination back office work related to issuing auto loans or offering leasing services. In these areas, business costs can be higher because the technology is fragmented and the business process knowledge required is significant. These loans require particular processing expertise to manage them throughout their lifecycle, Weisel adds. To cope, more banks are working with outsourced partners at every phase, post-origination, to enjoy the upside without all the burden of back-office management. At the time of the ABA survey, the HELOC market was concentrated (the top five banks in HELOCs took 51% of the total outstandings and their holdings grew 100% from 2003 to 2004). Quality was also shifting. An apparent decline in underwriting standards was indicated, in part, by the rising share of the sub-prime and alt-A market. An alternative to commercial real estate? In 2006 concerns over cost have become heightened. Moreover, costs are increasing geometrically among community bankers, notes R.W. Christensen, Jr., president and CEO Enhanced Technology Financial Services, Inc., Olympia, Wa. This is happening at time when regulators are expressing concern about credit quality and about overconcentration in real estate. What's his thinking? With credit quality concerns, banks need to make each in the pipeline more profitable by trimming costs. ET, as it's known in lending circles, is in position to know. Founded in 2004, it originates, services, collects, and reports on private label consumer loans for community and mid-sized banks using its proprietary OSCAR system. Put together by a guy in finance who saw the need for an improved back-office process for lending, Christensen says ET functions under the dual premises that banks have an overreliance on commercial real estate and that they will have an eventual need to shore up their deposit base by building deeper relationships with consumers. Christensen, who for 26 years was head of Bank of America's loan factory in the Arizona market, notes that shifting market dynamics have brought more business to its door of late. The Fed and others are applying enormous pressure to banks to diversify their portfolio and it's during times like these when getting all the operations costs reduced and well managed becomes more critical, he explains. Christensen adds that in the origination aspect of the lending cycle alone, ET can reduce the net costs to the consumer by 100 points even as it carves out costs of 200 basis points to typical lender. Other partners, other options days, even specialty lenders that have the expertise are turning to business process outsource partners so that they can devote their resources to adding business by functioning as marketing and sales pipeline. In this role, lenders determine product features, pricing, and rates as well as conducting credit risk assessments, but otherwise stay out of operations, which are handed over to partners. …
Publication Year: 2006
Publication Date: 2006-10-01
Language: en
Type: article
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