Digging for Data In Your Own Backyard: The Hidden Value of Loan Servicing
It’s bank earnings season, again. Earnings call transcripts are entertaining theater for those with an interest. You gain insights into the strategies of the best companies in the world through the parsing of words, and analysts’ inquiries. This one from JPMC, one of the first mega-banks to release its earnings, I found to be particularly interesting:
Dimon is correct that loan servicing is expensive, and cumbersome with respect to regulatory compliance, especially when you’re at the scale of JPMC. He’s also correct in that it’s important. Here’s why: customer relationships no longer center around mortgages, as they did in decades past. They center around the user experience, which is now driven by digital. Digital experiences are based in data, and loan servicing is a data rich environment.
In a digital age, data is the asset; not the mortgage. So when Dimon talks about “structur[ing] it in a way that we’re very happy [with] going forward.” I personally believe this structure is: (1) committing resources to a seamless digital origination experience; (2) make the loan and gain the relationship; (3) sell the asset and take the fee income; (4) service for others and leverage the digital assets in the form of the information. Often this behind-the-scenes secondary markets transaction has little direct impact upon the customer anyhow.
Meanwhile, retaining control over the access to the information and leveraging it in your CRM consistent with your contractual obligations to the owner of the asset is a good structure to follow. What information is in your possession that is useful in marketing strategy which can be gleaned from the loans you service? Here’s a short list:
- Current contact information
- FICO, especially when refreshed
- Appraised and assessed property values
- Property condition and age
- Customers who hold primary banking accounts elsewhere
- Co-borrower and guarantor information
- Past, current and future interest rates
- Rate adjustment dates
- Maturity dates
- Draw period end dates
- Loan seasoning
What metrics can you glean from this information?
- Household wallet share
- Household and customer profitability
- Refinance ripeness
- Unit and volume trendlines
- Interest income trendlines
- Fee income trendlines
- Loan to Value trendlines
- Home Equity Availability
- In-out ratios
- Run-off risk
- Migration patterns
- Delinquency patterns
- Risk of Loss Exposure per Customer or Household
- Insurance cross-sell opportunities
- Potential life event opportunities, both good and bad
By comparison, sub-servicers are great resources and are often specialists in what they do, particularly agency servicing. They can be outstanding partners for certain banks of certain sizes. However, when you cede your servicing rights, you not only lose control of access to information, you may also lose fee income opportunities.
Metrics like those above can tell you where there is opportunity to grow, or minimize risk. Without access to that information and an ability to manage it strategically, then you lose valuable insights into your customer base. These are important factors for banks, especially publicly traded banks laser-focused on the bottom line.
Additionally, many of your existing servicing vendor expenses remain. Only now, they are pass-through expenses and you have less visibility into their true nature on a line-item basis. Meanwhile, you’ve added an additional operating expense for the vendor service beyond what is already your existing wage expense. Ultimately, you may find yourself with redundant layers of expense.
Lastly, without control over the system, and once removed from the communication channel with the customer, you lose the ability to manage customer service experience. A first-party servicer owns the relationship with the customer therefore has the vested interest in ensuring a customer’s satisfaction. It also has the means to satisfy a customer through policies enacted to empower service representatives through a system of satisfaction management options, or simply by instant access to customer records.
So when Dimon talks about structuring servicing in a way that you’re “happy” with, this means – to me – a make and sell service retained model with a fee income stream with control over information, which is ultimately control over useful data. The line of business may be a loss-leader when viewed in isolation, but operating without access to, and control of, that data puts your in a far greater competitive disadvantage than bearing the cost of the line of business.