The Price of Everything

The Soup to Nuts principle makes sense for every business, not just deposit rate optimization software.  It even applies to banking.

My bank recently sent me an offer to increase the limit on my Home Equity Line of Credit (HELOC) by $69,000.  They worked hard to make this painless, but didn’t cover the entire process. 

The bank got 90% of the offer perfect.  They:

1. Provided good service in the past 
2. Mined their customer list to find who is likely to respond
3. Crafted a professional letter to catch my eye and give a call to action
4. Set up inbound telephone sales and a website

But this near-perfection makes the minor stumbles even more important.  The credit limit increase could have been handled in a single phone call.  Right now, we’re at one month and counting.  The bank can drastically improve results with minor changes.

1. Knowledgeable salespeople - The person answering the phone could not access basic information about my account.  Simple questions like, “will I be paying a different interest rate?”.  There were no answers ”for my protection”.  In reality, the bank outsourced marketing to people who didn’t have access to the right computer systems.
2. Make a firm offer - The $69,000 increase was based on 80% of the bank’s computer estimate of current appraised value.  But I could apply for any increase.  The bank would have to appraise the house to confirm my estimated value anyhow.Why not give a firm number?  The customer could always have the option to get a detailed appraisal later (and possibly increase the credit limit more).
3. Close the sale - I still need to go down to the bank to sign 20 pages of legalese.  Because my wife is on the loan, she needs to come too.  Which means dragging the kids down too.  Plus a 3-foot inflatable Blue doll and 4 fairy princesses (if the girls are travelling light).The bank will then close the old loan and register the new loan at the Hall of Records, racking up costs on both transactions.  Because it’s a new loan, they have to run a new title search and buy new title insurance.

   Instead, just record a large line of credit initially (without authorizing the entire amount).  No new title search, no re-recording - easily saving $200.  Best of all, instant approval - no need to visit the bank for closing.

For non-bankers: how to lend money at Prime-1% and still make a good profit:

• Low credit risk - the line is backed up by the value of your home (.51% delinquency rate last time I checked).
• Deep secondary market - HELOCs can be easily bundled together and resold into the wholesale market (gives banks a better idea what to charge and allows the bank to book profits immediately).
• Lower prepayment risk - the rate changes with the market, reducing incentive for customers to refinance (banks hate it when rates go down and customers refinance).
• Low fixed costs - computers have made everything easier and cheaper (credit check, appraisal, title search, recording the loan, etc.). Often, banks will just pay these costs for the customer.

No wonder the industry is adding HELOCs at 30% per year.

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