August 15, 2016
Moody’s: How Banks Can Raise Their Game in Small Business Lending
By Nancy Michael
Senior Director, Enterprise Risk Solutions
Although the demand for small business credit remains high, banks the traditional providers of financing for this segment have continued a long and steady decline in small businesses lending. Small loans to businesses are down about 15% at banks since the financial crisis. Small business loans represented just 20% of business loan balances in 2015, continuing a consistent downward trend from 34% in 1995 (Figure 1).
The Alternative Lending Landscape
Marketplace players have the advantage of being unencumbered by legacy systems and old technology. These lenders are disrupting the small business lending industry by changing customer expectations with high speed, technology-facilitated loan decisions, more accessible credit information, and vastly improved customer experiences. They are scaling up quickly to tap into unmet demand, and they are doing so profitably. However, their rapid growth makes them vulnerable on several fronts – their methodologies haven’t been tested by a credit cycle, regulators are promising increased scrutiny, and alternative lenders lag banks in customer satisfaction after a loan is approved. This makes it an opportune time for traditional lenders to shore up their capabilities to remain competitive in the small business space.
Banks often collect customer and third-party information on paper or through static files that require data to be manually keyed into bank systems. Compounding the problem, data often has to be re-keyed multiple times because systems used in different parts of the origination and back-office processes are not integrated. Together, these approaches contribute to labor-intensive and time-consuming processing, incomplete process tracking, and increased probability of errors. For the bank’s customers, it means a time-consuming, frustrating, and opaque process for applying for and getting a loan.
Organizations that focus on streamlining their internal processes and offering customer tools that match the experience provided by online lenders will be the ones that win market share and fill the financing gap. This will require active divestment in legacy systems, not just the introduction of new tools overlaid on dysfunctional or inefficient processes. To avoid legacy problems, banks must design new, modular systems and processes that leverage cloud technology, APIs, and web tools, and require less customization and implementation to prevent them from becoming obsolete and weighing down lenders as new technologies continue to emerge.
Raising the Game
Strong demand for small business credit is expected to continue unabated, and banks have the advantage of being the primary and most trusted sources of information for small business borrowers – 73% of applicants asked their bankers for financing advice, according to research from the Fed. Bank lenders have an opportunity to solidify their position as trusted advisors to their business customers and prospects by providing a better experience while leveraging their strengths in credit management, loan processing, and customer service.
It is critical for banks to modernize the small business lending process now to remain competitive. This means divesting of heavy, obsolete, customized systems and adopting modular cloud-based technologies for rapid deployment and agility. It means automating processes that are typically done manually and leveraging workflow solutions that speed the process. It means buying into automated scoring solutions and innovative use of data to inform rapid and consistent decisioning, while maintaining a position of strength in traditional credit and risk management.
And most of all, it means investing in the customer experience to make it easy, fast, transparent, and adapted to the way small businesses operate.
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