How do you know if your financial institution is achieving its risk management goals? The answer is key performance indicators (KPIs). KPIs are metrics that allow a financial institution to measure, monitor, and assess performance to understand how close the institution is to achieving its strategic objectives.
KPIs are an important part of corporate governance and risk management, helping shape strategic goals and risk appetite. Without information on performance, the board and management have no way of measuring the success of a program or making truly informed decisions.
Read on to learn more about risk management KPIs.
Table of Contents
Why financial institutions need key performance indicators
How banks and credit unions use benchmarking to decide on KPIs
Benefits of technology in establishing KPIs
What are KPIs in banking?
KPIs offer financial institutions a way to measure the success of their business objectives. Unlike key risk indicators (KRIs) which look forward, KPIs look backward, evaluating the success of past performance, revealing successes, struggles, and areas of risk.
Financial institutions with clearly defined KPIs are better able to assess performance, understand and manage risk (including operational, compliance, financial, strategic, and reputation risk), and evaluate consumer needs and satisfaction. They are able to quantify performance, set benchmarks for achievement, and make adjustments when shortcomings are identified.
Without information on performance, the board and management have no way of measuring the success of a program or making truly informed decisions.
Key performance indicators can measure:
Revenue, expenses, and operating profit: Financial KPIs are mainly determined by the revenue banks and credit unions bring in, the costs incurred, and their profit. At its most basic, profit is determined by subtracting expenses from revenue.
Consumer satisfaction with a financial institution: Banks and credit unions should also measure consumer satisfaction through KPIs such as consumer acquisition rate, consumer churn rate, and cross-sell ratios.
Compliance with laws and regulations: Understanding the key areas of compliance financial institutions need to address plays a vital role in their success. Noncompliance puts profits at risk through regulatory actions and fines. Some of the key metrics used to measure a bank or credit union’s compliance efforts include the number of findings and the number of days it takes to remediate findings.
The performance of individual employees and branches: When banks and credit unions regularly evaluate the performance of individual employees and branches, they ensure that everyone is working together to accomplish defined strategic goals. KPIs that measure the performance of employees or branches might include the completion of training programs, the turnaround time for loan applications, and the total number of processed transactions within a given period.
Why Financial Institutions Need KPIs
Key performance indicators are essential tools for financial institutions, helping banks and credit unions measure progress toward their strategic goals. Setting objectives is only the first step — a risk management KPI provides a framework for ongoing evaluation and improvement, ensuring that every team and initiative stays focused on measurable, strategic outcomes.
KPIs are most effective when they are tightly aligned with strategic objectives. To get the most value, financial institutions should carefully document the purpose of each KPI and how it contributes to their overarching goals.
Related: What Are Key Risk Indicators (KRIs)?
KPIs shouldn’t be chosen at random. Just because something is measurable doesn’t mean it’s valuable. For instance, a community bank may aim to increase its social media footprint by adding 50 new Facebook followers each month.
The question they need to ask first is why this is a goal.
Maybe they want to increase brand awareness. But why choose 50 new Facebook followers as the goal? Does research demonstrate that 50 new Facebook followers boost brand awareness? How does this goal tie into other strategic objectives for a financial institution?
Once an institution understands it's objectives, it can create and oversee KPIs using a structured process.
- Define Relevance: Understand why each KPI matters and what it measures. A good KPI is SMART: sustainable, measurable, actionable, relevant, and timely.
- Set Monitoring Cadence: Determine how frequently each KPI will be reviewed.
- Assign Responsibility: Identify who is accountable for monitoring and reporting.
- Establish Thresholds: Define benchmarks or thresholds that trigger action or reporting.
Examples of KPIs in Banking
Executing a solid strategy means breaking down objectives and specifying how they will be achieved. Financial institutions can better monitor and assess their KPIs if they are clear about their goals and reasons for pursuing them.
Strategic objectives must be attainable and offer specific actions banks and credit unions can take to drive results. KPIs measure the goals that financial institutions set out in their strategic plans.
A financial institution's strategic goals are intended to increase profitability and customer satisfaction or decrease risk and the likelihood of compliance-related issues.
Some examples of strategic goals with measurable KPIs a bank or credit union may pursue include:
- Increasing revenue by 5% over the next 12 months
- Bringing an online loan origination platform to market that will generate a 5% ROI within a year
- Decreasing expenses by 10%
- Growing deposits organically by 7%
- Decreasing consumer churn by 20%
- Developing a new business line that increases consumer product adoption
- Reducing loan processing times by one day
- Responding to all customer emails within two hours
- Opening a new branch in an untapped market that adds $25 million in new assets by year’s end
- Opening 100 new accounts per month for the next 12 months
- Hiring two new loan officers
Assuming the above goals are achievable, a bank or credit union can implement KPIs to track progress toward a particular goal. For example, if a financial institution wants to open 100 new accounts per month, this is easy to track.
Related: How to Build a Strategic Plan That Evolves with Your Institution
Key performance indicators give institutions the ability to hold employees accountable. Reports need to be delivered to someone who has the power to shift direction or make changes if necessary so banks and credit unions can meet the strategic goals they set for themselves.
KPIs have no value if there is not someone at a financial institution who can move the needle and push projects forward.
How Banks and Credit Unions Use Benchmarking to Decide on KPIs
KPIs measure progress toward a goal for an individual FI. But determining a strategy means looking both inward and outward. Every financial institution should benchmark itself against its peers.
From rate shopping to the FDIC’s peer reports, banks and credit unions should set goals and KPIs by first looking next door. It isn’t about copying another FI’s success but about leveraging intelligent insights that can work toward an institution’s competitive advantage.
For instance, an institution may conduct benchmarking and a community needs assessment and discover that many of its consumers live paycheck to paycheck and rely on payday loans when they experience a financial emergency. Banks and credit unions can charge more reasonable interest rates for short-term, unsecured loans, making them an attractive source of increased revenue.
Lacking benchmarks for peer institutions, banks and credit unions wander around in the dark in setting strategic goals. Once financial institutions possess the intelligence to understand the needs of their consumers, they can set goals to measure with key performance indicators.
Effectively utilizing KPIs requires FIs to first leverage the knowledge of the areas where their competitors have failed or succeeded.
The Benefits of Using Technology in Establishing KPIs
With the many strategic goals that an institution could set for itself, going through the process of manually conducting intelligence on peer institutions to establish KPIs can be a time-consuming task.
Nrisk is a great partner in discovering what peer institutions are doing. With its call report feature, CFOs and banking leaders can quickly examine call report data from several peer institutions to compare with their own KPIs.
This feature allows banks and credit unions to make more informed choices in setting financial goals, considering the risks involved in any strategic pursuit. While Nrisk enables FIs to proactively manage risk and protect assets, it doubles as a powerful intelligence tool for financial institutions to explore strategic options, fostering more enlightened decision-making in setting KPIs at the board level.
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