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Tuesday, September 15, 2015

Digital Lending Case Study Shows First Year 10.8% ROA!

The CEO of a 10-branch bank reviewing our business digital lending said:

"I just checked and we only made 25 small business loans last year less than $50,000.   Our process today requires a full credit write up from an officer, a complete review from our credit review team, and several visits from our customers. Our branch managers are intimidated by this process and our commercial officers have more profitable customers to serve.  Frankly we are really not having success serving this market segment. What can digital lending do for me?”

Our case study for this CEO shows a profit contribution improvement of $121k and a 10%(!) pre-tax ROA the first year while better serving and winning customers!  You can adjust up or down your pretax profit for your branch size, but here is the quick math.

1.      The bank was applying the same underwriting steps for a $15k loans as they were for a $250k loan.  As a result, even charging prime plus 2 and with only 1% loan losses, the cost to book, serve and monitor the loan was $2,600.  That cost is fine for the $250k loan, but for a $15,000 loan it was unprofitable even with low charge offs.  As shown in the spreadsheet below lines 5 through 11, digital lending kept their same strict underwriting for these loans but lowered the cost of underwriting, delivery and risk monitoring to $449 per loan.

2.      More importantly, as the CEO admitted, they were less than successful serving the demand for business loans under $50k, and were doing small volume. Yet 40% of all business loans are made for less than $50k.,  The bank had 2,300 small business checking accounts, of which 81% had no lending relationship with the bank while having loans elsewhere. By offering digital lending, even retail staff with no lending experience could offer fully automated loans.  Penetrating just 2% of their checking accounts in the first year adds 50 loans with broader proven underwriting of credit scores from 680 to 750 and higher but competitive pricing.  Even assuming 4% charge offs based on proven risk history, profit contribution is up $67k as shown below in lines 12 through 16.  While highly profitable and driving revenue growth, this loan portfolio presents no ALLL risk, as it totals less than 1% of loans.

3.      The net benefit to the bank after the first year is $121k in profit contribution or a 10.8% pre-tax ROA.  You can see while we say compliant digital lending with our proven underwriting is your best revenue growth opportunity as illustrated in the spreadsheet below.

Let us show you the details on how our digital lending platform, MinuteLender, delivers and services loans for $449 each and drives new revenue and relationships.


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