According to Tom Farin of Independent Banker, “Community banks generally fall into two camps — those that price by the seat of their pants based on competitor rates, and those that use loan-pricing models.” Both arguments have merit.

On the one hand, markets have a strong influence on rates, so basing one’s rates on the rates of one’s competitors is a logical argument. On the other hand, market rates do not necessarily represent profitable rates (your business may be leaner or fatter than your competitors), nor do they reflect the unique risks your bank faces. The real question is whether market rates or loan pricing models provide you with the information you need to manage your bank effectively.

In any business, the goal is to be profitable. Generally speaking, you need to be competitive in order to be profitable. While the average consumer may not realize how competitive the banking world really is, it’s your job to have a thorough understanding of the competitive market in which you operate. In order to understand your place in the marketplace, you must have information about your current position, your competitors’ positions, and the positions within the marketplace that you could occupy.

The use of a loan pricing model provides you with a more thorough understanding of the responsible positions you could occupy within the market place than pricing your loans by the seat of your pants. For example, you may learn that a responsible price for your loans is not competitive in the marketplace. There may be many reasons for that, including the nature of the risks you’ve taken on and the relative fatness of your costs. So, you may have to remain uncompetitive in this particular market until you correct these problems. You may also learn that you are especially competitive in a different loan market, in which case you can choose to invest more heavily in a different sector.

The Hurdle Group provides resources that help banks just like yours overcome their pricing hurdles. Our PULPS Loan Pricing System can help you to develop an effective, accurate pricing model for your loans, while also delivering the information you need to position yourself competitively within the lending marketplace. Contact us to get a free trial or personalized demo to see how our pricing system can improve your competitiveness.