Do you know how much it costs your bank to process a loan? If the answer is “no,” then how do you know if you are making (or losing) money on the loans you originate?

Banks of all sizes experience pressure on profits. Certainly a variety of forces are contributing to any bank’s relevancy in its particular market. Non-bank competitors providing online working capital, personal loans and residential mortgages are forcing local banks to strive for stricter efficiency in all internal operations.

The “how” to increasing efficiency is the million dollar concern. How do you cost out any process? The easy answer is: Know and utilize formulas that quantitate the rate for completion of each loan with and without errors — and rework. Quantitative metrics can be applied to any internal operation to determine how much time it takes one person to complete one error free task.

Why aren’t all banks doing it?  

Instituting efficiency quotients requires training, supervision and managerial awareness of the best process method for each internal operation. Costing-out requires managers to identify which part of a loan progression is slowing the process, how to remedy the operations of that station, and how to motivate staff to be on board to value positive changes. Until the cost is determined for each loan, any process remedy will be as effective as shooting at a target blindfolded. This is more complicated when consistency is not instituted in all branches and among the various staff impacting a particular process.

Versatility may be highly valued for marketing strategies, but can be a serious detriment when initiated by each branch manager or input staffer.

One proven technique is on-site mapping, or “Work Flow Visualization” as a tool to analyze any internal process. Team members’ input is essential. Measuring the following data will provide the framework for costing-out a loan:

  • Current number of days it takes to process a loan.
  • How many loans can be completed with the current process that includes rework.
  • How many loans can be completed without rework.
  • How many work hours are involved for processing one loan.

When thorough evaluation of cost per process is made apparent, the volume of waste may indicate that the bank’s internal operations strategy is primarily throwing more and more personnel at an out of control operating process.   

Most loan processes are only 10 to 20 percent efficient, which means the majority of time involved in processing a loan by staff members is consumed with costly rework and errors.

A methodology to facilitate visualization through a mapping of the current state, which identifies wasteful areas within the process, results in significant savings in manpower utilization, time required for loan completion and efficiency with digital information.

Understanding the “how” of costing-out a loan has allowed bank officers to visualize, and realize significant increased profits within weeks. Typical results reduce loan costs by more than 50 percent and generate increased capacity with the same staff to process 50 percent more loans.


Jerry Wells and Tom Guerdet are principals of Diamond Point Analysis. You can reach them at [email protected] or [email protected].

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