Efficiency Ratio: A Focal Point for Change In Lending

By J. Brian King, Benchmark Consulting International

One of the greatest challenges faced by financial institutions is sifting through and processing data in order to extract meaningful information on which to base their decisions, according to a whitepaper by BenchMark Consulting International (Atlanta). Understanding and properly leveraging internal data as well as appropriate external data can allow lenders to confirm where they are performing well and identify possible areas for improvement.There is an important distinction to make between data, information, and true business intelligence. While all of these elements are critical to managing a business, recognizing those distinctions and understanding the strengths and limitations of each of these components can help drive success.

As competition and consolidation in the banking industry have heated up over the past two decades, the need for operational efficiency has encouraged banks to look for opportunities to better leverage their data. Banks have taken great strides to turn their own data into information so they can identify opportunities to eliminate waste and redundancy in their operational processes. Banks have leveraged evolving technologies to make the capture, processing, storage and analysis of data into a streamlined process.

Many users today have incorporated graphical representations of performance data to provide management with a dashboard, scorecard or monthly management report package that allows them to assess performance at a glance. These internal dashboards typically measure the company's performance against last month, against this same month last year (to accommodate for seasonality), as well as against forecast.

Once banks have these internal reporting capabilities, they soon realize that looking at just their own performance allows them to see only a part of the picture. To unlock the decision-making potential of this information, the question naturally arises, "How do I compare to my competitors?" Unfortunately, an internal dashboard often does not include the external industry data necessary to make those comparisons.

Publicly available external data is a natural first step beyond the company's own walls for broader comparisons of performance data. For purposes of this review, external public data is information available for free, or at a relatively low cost, possibly as part of a membership in a trade association or through a subscription to a newsletter or other publication.

While internal data may also show a negative trend in delinquency, without the industry data, there is no way to tell if the improvement in the delinquency performance is a function of ineffective collections efforts in this shop, or if the organization is performing well-above others based on market conditions.

Moving beyond data that is publicly available, there are also external private data sources. This data may come from the same industry and trade associations discussed above, or research and consulting firms. The four key differentiators of this type of data are:

o It is generally available exclusively to participant organizations o The data is generally more robust, allowing for segmentation and filtering o There is typically an investment made in submitting the data with more robust data integrity o Often there is an explanation as to the "why" behind the numbers

The good news is that this external data is enabling a new approach to industry comparative metrics. While any organization is free to process its own internal data as it sees fit, publicly available data is much less malleable. Private external data goes beyond information that is publicly available, enabling organizations to get to successively higher levels of business intelligence maturity.

Since few institutions target average performance, greater detail and richer sources of data are required. While external private data requires an incremental investment, many banks are realizing that the value it can provide far outweighs the cost. Offering a richer source of data that goes beyond industry averages, external private data allows banks to leverage their internal data to gain knowledge and wisdom about the competitive landscape, thereby enhancing their decision-making capability. By adding this outside perspective to information available internally, banks can turbo-charge the value of investments in data management and reporting technology.

J. Brian King is SVP and consumer, mortgage, and retail practice executive at BenchMark Consulting International. He has extensive background in mortgage and consumer lending, strategic planning and product development.