Key performance indicators (KPIs) help businesses evaluate their performance and determine operational efficiency. In the banking industry, KPIs enable financial institutions like banks and credit unions to optimize processes such as lending, especially when using advanced loan origination systems.
So, why do KPIs matter when scaling loan offerings?
Tracking the most common KPIs can help lenders identify areas of opportunity so they can optimize their lending operations to meet their goals. A loan origination system that tracks multiple KPIs can help lending institutions remain agile as they grow so they can proactively meet customers’ needs.
Understanding the Value of Digital Banking Operations
To compete in today’s fast-growing financial landscape, financial institutions require innovations like digital lending to help them fast-track the growth of their operations and loan portfolios. Undergoing digital transformation in banks and credit unions opens more opportunities to make better decisions, optimize the customer experience, and save more on the cost of maintaining business operations.
Adopting an advanced loan origination software helps meet these goals while streamlining operations lenders implement in the short and long term. Protocols are constantly evolving in the lending industry, meaning financial institutions must remain proactive in identifying opportunities for growth and expansion.
Key Bank KPIs for Loans
What are the primary KPIs to which banks and credit unions should mind to improve customer retention? Tracking these 14 bank KPIs can make the difference between stagnation and growth.
#1 Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) refers to the investment required to turn a prospect into a customer. Costs included in CAC can include those such as:
- Researching the needs of a lender’s target customer base
- Marketing and advertising loan products to prospective customers
- Developing new tools and systems to reach more customers
- Data and tech costs associated with vetting customers
Determining the CAC helps lenders understand the value of investing in specific channels or audience bases to acquire customers. If a financial institution spends significantly more on customer acquisition than revenue generation, it may be time to reconsider the processes used to acquire and retain customers.
#2 Loan Approval Time
As the name suggests, the loan approval time is the duration between the onset of loan origination to the point at which a loan application is approved. On average, loan approval time can be anywhere from three to seven business days for personal, auto, and commercial loans, but typically longer for mortgages!
It is crucial for lenders to define a reasonable goal for loan approval time because borrowers are more likely to apply to financial institutions that process applications quickly—and approve or deny these applications instantly. Loan origination software for credit unions and banks can help expedite the process to service customers quicker.
#3 Application Completion Rate
The application completion rate on a loan indicates how many potential borrowers complete a loan application started on a lender’s website or mobile application. This rate is important because it helps lenders understand if there are barriers to customers completing and submitting loan applications.
For instance, a difficult-to-navigate website or mobile application may prevent less tech-savvy customers from completing a loan application online. Additionally, a poor support experience can deter borrowers from staying on a lender’s website to complete an application.
#4 Customer Churn Rate
Customer churn rate points to how often a business loses customers, whether it be those who do not return after their first loan, or those who refinance. Here, lenders may choose to evaluate the churn rate over any given period, such as weeks, months, or years.
In the lending industry, a high customer churn rate may indicate that a financial institution is losing more borrowers than it retains, which means the lender may need to take a look at the current customer experience they are offering or whether or not their product is competitive in the marketplace.
#5 Delinquency Rate
A lender’s delinquency rate is measured as the number of loans disbursed for which borrowers have not serviced their obligations on time. The delinquency rate is a crucial KPI for any lender because it can determine the level of risk to the lender’s loan portfolio. Delinquency rates on loans tend to be higher during tough economic environments, such as the 2008 financial crisis.
#6 Conversion Rate
For loan applications completed online, conversion rate refers to the number of customers that:
- Visit a lender’s platform (e.g., website or mobile application)
- Engage with the platform
- Complete and submit a loan application for review
A high conversion rate means potential borrowers are actually spending time on and engaging with a lender’s website before deciding to apply for a loan. This can help inform lenders whether their online experience is enticing and user-friendly to their audience.
#7 Loan-to-Deposits Ratio (LDR)
Typically reported as a percentage, the loan-to-deposits ratio (LDR) compares the number of loans disbursed by a financial institution to the total deposits held by that institution at a given time. A high LDR indicates low liquidity, meaning a bank or credit union’s assets are at risk if the institution faces a sudden loss in revenue or must weather an economic crisis.
#8 Customer Lifetime Value (CLV)
Customer lifetime value helps a lender determine the overall value to expect from an average borrower over the life of a loan. Regardless of industry, CLV is measured as the total revenue a business can anticipate per customer.
In the lending industry, financial institutions can assess CLV as the total interest and fees a loan product will deliver throughout the duration a borrower services that loan (assuming there is no cross-selling of other products offered by the financial institution).
#9 Efficiency Ratio
When evaluating an institution’s operational efficiency, the efficiency ratio points to how well a lender leverages its resources to attract borrowers, offer them loan products, and retain them over the life of these loans.
Typically, an efficiency ratio compares an institution’s revenue to the expenditure on specific assets, such as software, marketing, and human capital.
#10 Return on Equity (ROE)
Another crucial KPI in the lending industry—and banking at large—is ROE, which measures the ratio of a financial institution’s net income to its total equity. ROE compares the total net income and profit to the equity currently owned by shareholders, indicating a lender’s ability to manage a loan portfolio wisely and deliver value to shareholders.
#11 Return on Assets (ROA)
A lender’s return on assets (ROA) determines how well the institution invests in the resources necessary to generate profit and remain competitive. Although it is often used as a KPI for investors to determine a business’s profitability, ROA also shows whether a lending institution invests in the right areas to maximize institutional growth.
#12 Net Interest Margin (NIM)
Net interest margin (NIM) compares the difference in profit generated from the loan products a lender offers to borrowers with the interest paid out to parties that own assets held or managed by the institution (e.g., savings accounts, investment portfolios). A positive NIM ratio indicates a lender’s profitability, whereas a negative one points to a lender making suboptimal returns on investment.
#13 Book to Equity
Also called a book-to-market ratio, the book-to-equity KPI points to a financial institution’s value based on what the books say versus what the financial markets determine.
The book value is assessed by subtracting the institution’s total number of assets from liabilities, whereas the equity value is evaluated by the price of each share on the market.
Leveraging KPI Insights with Fuse Loan Origination Software
Lenders looking to outcompete other players in the lending market can do so with the help of KPI insights, which offer guidance on which operational areas can be optimized for prime efficiency. By integrating tools like an advanced LOS from Fuse into their existing digital solution suite, lenders can track the most important KPIs required to meet their loan origination goals.
And as lenders expand their loan portfolios, reach more customers, and boost engagement, these KPI insights can help them stay on track to maximizing productivity and efficiency. Our loan origination software enables lenders to track KPIs over time, providing opportunities to implement agile processes to quickly adapt to market changes and proactively improve the customer experience.
Customizable Dashboards in Fuse
For lenders who partner with banks to offer their customers loan products, Fuse provides customizable KPI dashboards to help these lenders track data as it moves across the institution. Such dashboards minimize the need for additional training to bring staff up to speed on performance tracking and opportunity identification.
By enabling teams at financial institutions to create personalized KPI dashboards, Fuse boosts the efficiency of data visualization and analysis at each step of loan origination. For a bank or credit union, such capabilities can improve decision-making, increase revenue, and create a pipeline for long-term business relationships.
Future Trends in Digital Banking Performance Measurement
As the digital banking industry evolves, financial institutions must stay up-to-date with the latest technologies and leverage metrics like KPIs to streamline their business operations. Using innovative loan origination software like Fuse, lenders can better understand their lending operations, evaluate their performance and optimize for success in a competitive market.
Ready to check out Fuse? Schedule a demo today.
Business Insider. Return on Assets: How Roa Can Help You Assess How Much Bang a Company Is Getting for Its Buck. https://www.businessinsider.com/personal-finance/return-on-assets
Forbes. How Long Does It Take To Get A Personal Loan? https://www.forbes.com/advisor/personal-loans/how-long-does-it-take-to-get-a-personal-loan/
Forbes. What Is Churn Rate & How Do You Calculate It? https://www.forbes.com/advisor/business/churn-rate/
Oracle. What Is Customer Lifetime Value (CLV) & How to Calculate? https://www.netsuite.com/portal/resource/articles/ecommerce/customer-lifetime-value-clv.shtml
Oracle. Top Efficiency Ratios: Operational, Asset, Inventory and More. https://www.netsuite.com/portal/resource/articles/accounting/efficiency-ratios.shtml
Statista. Delinquency Rate on Consumer Loans of All Commercial Banks in the United States From 1st Quarter 2007 to 1st Quarter 2023. https://www.statista.com/statistics/1325074/delinquency-rate-on-consumer-loans-at-commercial-banks-in-the-us/