Uberization: Just a Good Idea or a Transformational Business Strategy?
Digital Lending, Commercial Credit, Small Business Credit, Enterprise Risk Management, Credit Risk Modeling
“At least 40% of all businesses will die in the next 10 years… if they don’t figure out how to change their entire company to accommodate new technologies.”
-- Cisco System Executive Chairman John Chambers
Digital disruption is here. In an era in which consumers demand instant gratification – usually via their mobile devices – organizations are faced with the dilemma of transitioning their ‘business as usual’ mindset to a more modern, innovative way of thinking.
For example, taxis used to be a staple for customers looking to get to their destinations without owning or renting a car. They were an effective service until Uber - utilizing mobile applications - entered the market to redefine the user experience. Just as Uber has harnessed the opportunity of technology, organizations such as Amazon, Airbnb and Gabi insurance have turned basic services into simpler, more efficient and enjoyable experiences for their customers.
Technology adoption is undoubtedly changing the way we do business. Shifting from traditional operational support, tech innovation is the driving force behind product and service delivery, customer satisfaction and business transformation. With the user experience top-of-mind, organizations are focusing on customer-centric business strategies rather than transaction-based operations.
Digital Impact on Business Banking Services
The traditional small business lending process takes up to 18 weeks. Typically, this legacy approach to lending – which entails finding, analyzing, booking and managing credit relationships – relies on human/manual interventions. Finding and validating a business opportunity, evaluating the business, ensuring financial capacity, creating terms and conditions, and analyzing pricing and cross-sell strategies, can cost a bank $10,000 in direct and indirect costs. And, the amount of time and resources required to tackle these processes are the same, regardless of the loan amount requested.
To make matters even more frustrating, once the evaluation is completed internally, the credit department then has to perform its own analysis – a duplication of the work done by the bank – before the bank can underwrite the loan. This is costly for both the financial institution and the private business that needs fast access to capital.
This process is becoming untenable to Main Street business customers, who expect close to instant gratification in all aspects of business planning and execution, including securing capital. Small-business lending has typically been a staple of community banking, but as private companies look to access capital quickly to get their businesses up and running, online lenders and emerging FinTechs are attracting customers due to their quick turnaround times and user friendly, digital applications.
Given this environment, banks are starting to embrace digital transformation when it comes to small business lending. Customer attraction and retention can be achieved with new services and products, including treasury management, deposit, merchant and payroll services. Such offerings – accompanied by agile internal processes – result in a much better user experience; increased productivity; improved employee satisfaction; and bottom line results.
Business Lending Trends Lead to Opportunities for Main Street America
As economic expansion continues with minimal credit risk, now is the time to invest in small business lending opportunities. However, as the rate of lending increases, so will risk associated with such loans, so banks will need to manage emerging risk on top of accelerating lending opportunities.
An article we published in the RMA Journal, To a More Profitable Future, includes data from Radon Research, showing that loans less than $861,000 fail to offer an adequate return. Supporting this statement, many bankers have reported loans under $2.5 million are not of much interest. As big banks get bigger and consolidation continues, industry-specific loans (commercial real estate & commercial and industrial) to small businesses are lagging.
Here is where banks can make a big impact. By targeting industry-specific businesses that aren’t receiving attention from bigger banks and leveraging technology that reinvents manual loan approval processes with relevant, timely and secure credit assessments, banks can mitigate risk while elevating their brand to attract and retain new customers – opening the door to new market opportunities.
Technology That Disrupts Your Competition
To transform your business and customer experience, you must leverage technology solutions that not only increase operational agility but also aligns with the type of loans and processes involved. Lending strategies should be executed based on customer need, and many times technology doesn’t require an enterprise-wide investment. Here are three high-level considerations:
Determine which loans require application only vs. lite/full underwriting.
For application-only processes a website portal can be used to collect basic information from the borrower and guarantor. Once data has been collected, application program interfaces (API), can compile a credit package within minutes.
For loans that require lite/full-underwriting, utilize credit profiles to electronically view the prospect’s financial capacity. And when it’s time for collecting and entering financial statements, employ a technology that digitalizes and spreads financials with ratio analysis.
Technology is changing how banks lend as they strive to exceed customer expectations in a fast-paced, constantly evolving environment. Banks that take a critical assessment of their operational practices and ‘uberize’ their offering will gain a competitive advantage - ultimately building customer loyalty, tapping into untouched markets, reducing costs and increasing lending ratios.