Reduce Redlining Risk

Redlining is not dead. We know the story of where the term began, lenders would draw red circles or lines around certain neighborhoods and make it an unspoken policy not to lend to anyone within the circle or past a certain line on the map. These lines were usually drawn around struggling or distressed areas, and more often than not, a majority of the citizens in these neighborhoods were minorities.

Then there’s Reverse Redlining, these are instances where minorities and other protected classes are offered loans, but at a higher cost than those offered to non-minority applicants. This practice was chief among major factors that led to the 2008 financial crisis.

Whatever form redlining takes, it results in harm to groups of a protected class by either denying access to credit or offering credit at exploitative rates with a much greater chance of default.

HMDA, CRA, the Fair Housing Act and other regulations have provisions contained within them which prohibit this behavior. If a pattern or practice of redlining is found through the examination process, it could have a profound negative affect upon the offending financial institution.

It is a primary responsibility of the compliance officer to identify and report redlining risks before they become an issue.

The Cost of Non-Compliance

Over the years, compliance examinations have yielded less redlining enforcement than in other fair lending areas; however, there has been a recent uptick, and it’s an uptick more than anyone should be comfortable with. If an institution is found liable for redlining, remediation efforts, fines and penalties can be tremendous.

Monetary loss is not the only concern. Redlining can also lead to loss of integrity, reputation and, ultimately, customer abandonment. What happens if word gets out that Anybody’s Bank has had a redlining enforcement action levied against them? Will today’s consumer, deeply concerned with brand identity and community, initiate or maintain a relationship with a bank they don’t trust? For larger financial institutions, this could be a speedbump that heals over time. But for local, mid-size and smaller institutions, the reputational hit from a redlining accusation and enforcement can be devastating.

Preventative Measures

When working to identify and mitigate redlining risks, nothing is more valuable than routine monitoring. By taking quarterly or at least bi-annual looks at the geographic dispersion and penetration patterns of originations within the institutions loan portfolio, a determination can be made of where the institution is making its loans to help determine if there are areas where loan volume could be improved. More importantly, this will allow pro-active targeting of risk areas to try and improve performance and also allow time to determine if the methods employed are working before regulators start asking questions.

Get the right tools.

If your institution’s Compliance Management System (CMS) does not include automated data management and collection as well as a way to map the data, human interpretation and error can cloud the issue. In today’s connected world, compliance software is everywhere and can be found at all price points. Compliance personnel must make sure the systems used will provide reliable data that is easy to use and interpret.

For Instance, Marquis’ CenTrax NEXT software provides immediate access to all lending performance metrics through easy-to-read reports, maps, and exam tables. We also offer Compliance Professional Services, where our seasoned compliance experts conduct file reviews, risks assessments and more, ultimately delivering a comprehensive report you can take to your board with confidence.

With all this information at your fingertips, you’ll be able to easily identify redlining risks and tell if the steps taken to identify and mitigate the risk were effective. Collecting and organizing this data manually, or with a less robust system, can cost you in objectivity and accuracy.

Bottom line? Monitor your loan data at least twice a year, although quarterly is better.

Conclusion

Redlining is still an issue in the financial community. CRA, HMDA, and the Fair Housing Act are consistently evolving (think HMDA 2018) to aid in the prohibition of biased approaches to lending. Now, it’s up to compliance officers to identify redlining risks, report them, and be on the ball with helping to resolve any issues that may be discovered. Staying informed allows time to adjust and respond through peer analysis, mortgage credit demand analysis and other methods. Without intermittent monitoring and automated data collection and analysis, risks can go unnoticed right up to the last minute – making it too late to adjust or respond. With the right tools and consistent monitoring, your financial institution will be able to identify, respond to, and mitigate redlining risks.

Making Data Analytics Work for Your Financial Institution

It’s the latest buzz word, trend and essential marketing must-have – data analytics. Big brands use it to inform their marketing decisions, from loyalty programs to customer communication, and they’ve seen remarkable results. According to Gartner, Inc., marketing analytics accounts for the largest piece of the marketing budget pie – 9.2%*. OK, it works for Macy’s, but how does that translate into the financial realm?

What Is It, Exactly?

Data analytics is the process of examining and analyzing data in order to draw conclusions so you get answers you can work with. Let’s say you want to determine which clients enjoy a profitable relationship with your institution. You’ve got the data – the number of accounts, balances, rates, fees, costs, etc. – and a way to pull it all together. Now all you need to do is add a data element (or two!) to your analysis and it becomes very clear where these profitable relationships live and what products and/or balances make them valuable. You have the information you need to plan an effective course of action.

What Do You Learn?

Basically, you don’t want to sell a personal loan that funds education to a retiree, and you wouldn’t ask the owner of a low-balance account to open a high-yield Money Marketing Account. Today, consumers expect you to know them, and they feel unappreciated if targeted with the wrong message. Without analyzing your data and keeping it clean, much of your marketing efforts will be lost.

Learn From Every Department.

Collecting data for use in analysis is the easy part. Think about all the data available that would enhance your marketing efforts.

Customer Relations – A young couple just opened a joint account. How can you establish your institution as a trusted financial resource? Maybe a link to your money management services?

Sales – Another couple bought a 30-year-old house 6 years ago. It could be time for an upgrade and a HELOC would interest them.

Now you can send them targeted messages that make sense.

Act On What You Learn.

Throughout your institution – product development, strategic planning, pricing, sales calling/closing activity – all departments can utilize and benefit from data analytics. Many companies use custom software tools specific to the needs of that department. The data is gathered, analyzed and translated, but remains siloed. No marketing insight is gained. No marketing action can be taken.

And that’s the key to all analytics – Action. Many collect data. Some even analyze it. But few really leverage the data to drive meaningful marketing programs. Do you have an action plan for your institution’s analytics?

Marquis Can Help.

Whether you work at a bank or credit union, it is vital to both understand and embrace the value analytics plays in financial institutions. At Marquis, we can unify your data sets and translate them into answers you can use. From there, we can guide you on which actions are proven to drive results. Isn’t it time your institution generated more value from your analytics?

Resources

*https://lab.getapp.com/marketing-analytics-data-analysis-in-marketing/

Michael Bartoo Featured in ABA Bank Marketing Article

Michael Bartoo, SVP, Marketing Client Relationships, was featured in the ABA Bank Marketing article,  Small Banks, Big Data and the Personal Touch. He describes the attitude toward data at many of the banks he works with. “We get overwhelmed with big data,” he says. “The term ‘big data’ frightens us. And it should—because it can be incredibly overwhelming.”

Click here to read the full article.

How Do You Segment Your Market?

The ability to reach current customers is often cluttered and complicated from a marketing perspective. In order to match the right offer and product to the right customer, various segmentation methods can be deployed. Interestingly, the process of segmentation is decades old, but this discipline still holds merit and has advanced dramatically with today’s analytical tools. These tools give marketing teams the ability to divide a client base into many micro-segments based on a variety of data elements. From a practical perspective, a firm can deploy multiple segmentation methods (geographic, demographic, psychographic or behavioral) depending on the strategy to be executed.

Geographic Segmentation

Geographic segmentation is beneficial for a large-scale campaign execution when the product to be promoted is largely understood and needed by a wide and diverse group of consumers. Segmentation of this type generally focuses on locating a center point, for example a branch, and radiating from that center point in terms of miles, census tract, ZIP Code, or a predetermined radius. This approach is also beneficial when the socioeconomic status of the individuals within the geographic segment is similar. The negative aspect of geographic segmentation is the assumption that everyone with the geographic footprint is identical, displaying the same predictors of behavior. Exceptions to this rule are the banks which use geography as part of their SEO/SEM strategy and highly target based on radius plus the appropriate demographics. This strategy can focus on the collection of email addresses in exchange for email offers where the direct response can be tied specifically to the marketing channel.

Demographic Segmentation

Demographic and socioeconomic division are perhaps the most widely used forms of marketing segmentation; however, these methodologies focus on the descriptive nature of an individual as opposed to making a prediction regarding the desire to purchase a specific product. One of the largest benefits of demographic segmentation is its simplicity and cost. It can easily be explained to frontline staff and tends to be relatively inexpensive to acquire. The downside of this methodology is the assumption that everyone within the same demographic behaves identically. In other words, there is little understanding of customer differences if one views demographics only. Recognizing that demographic and socioeconomic segmentation play an important role in purchase patterns of financial assets, one must also recognize the importance of psychographic attributes to increase a firm’s knowledge of the consumer.

Psychographic Segmentation

Psychographics build a mental model of consumer buying patterns in the context of the consumer’s life cycle. This form of segmentation allows marketers to gain deeper insight into the desires of the consumer beyond simple facts such as age or income. In other words, psychographic data defines why consumers do what they do. This is important particularly from a financial marketing perspective as the use of psychographics, combined with demographic data, provide the organization with the ability to develop the appropriate products and marketing strategies to gain trust with the customer. If an organization is to adapt psychographics as part of their overall segmentation strategy, they must be aware that elements such as lifestyle, interest, attitudes and personality are fluid over time and may not be practical for a small- to medium-size institution lacking the in-house analytical power to constantly monitor and validate psychographic model assumptions.

Behavior Segmentation

Banking is a mature market. In large part, there are only two ways to significantly increase market share. One, acquire a competitor, or, two, take business from one’s competitors through aggressive marketing strategies. From a marketing perspective, the use of behavioral data is a superior tool both in its ability to increase sales as well as its ability to do so at far less cost than broad-based communication approaches. No longer can a financial institution simply target by socioeconomic factors, demographics or psychographics; it must use behavioral cues to further differentiate between consumers within a demographic. Practically speaking, behavioral segmentation for banks focuses on tactical analysis of credit data, propensity models and data gleaned from ACH, online banking or credit card transactions. Armed with this knowledge, financial institutions can create specific marketing communications based on recent transaction data. The nature of behavioral segmentation provides the opportunity for real-time communication across a wide range of marketing channels, including direct mail, email, point-of-sale devices and mobile channels, as well as personal contact at the branch or call center level. The downside of using behavioral data as a marketing driver is that it does require detailed, in-depth data sets, models and market testing. The importance of action when using behavioral data is critical. In order for the use of behavioral data – and its considerable expense – to make financial sense, an organization must act immediately on the triggers that are produced with this type of analysis. This means near real-time marketing reaction to behavior events that will drive product purchase.

Once the optimal segmentation strategy has been agreed to, and the expectations of performance have been defined, the marketer must turn attention to the next most critical piece in the communication equation: the message.