Daryl Jones Apr 10, 2015

Return to consumer lending for community banks

It’s not a stretch to say the typical experience for a customer getting a consumer loan through their trusted community bank is only slightly more appealing than working with the sleazy finance desk at the local car dealership.

The consumer lending capabilities of community banks significantly underperform that of most credit unions, as well as newly emerging alternative lenders. In fact, according to The Cornerstone Performance Report, the median community bank has zero loans coming through its online channel and zero loans automatically approved through automated underwriting. This is dramatically different from credit unions, which originate nearly a quarter of their volume through the online channel and about one in five loans immediately decisioned via automated underwriting. Credit unions also have a distinct advantage in productivity as they fund nearly five times as many consumer loans per month with the same number of staff.

As if the competitive curve against credit unions isn’t steep enough, alternative lenders are aggressively and silently stealing consumer lending business from community banks. Utilizing robust automated decisioning, these lending platforms offer 24 x 7 service to customers, something most community banks just can’t compete with.

Community bankers know they have a problem. In our recent Consumer Lending Survey, a majority of them identified improving their consumer lending process as an important strategic initiative this year. In addition to evaluating their processes, a number of them are also considering selecting a new loan origination system to more effectively offer direct to consumer loans. Good idea.

Along those lines, here are three key areas where community banks need to be more effective in the consumer lending game:

Robust loan origination technology. Banks’ consumer lending systems need to be assessed for their ability to effectively deliver a customer friendly lending experience. Mostly, this means providing a quick, accurate turn-around on consumer loans. While the definition of a quick turn-around can vary from institution to institution, it certainly is not a next-day closing on a used auto loan, which is unfortunately quite common.

The biggest deficiency in most traditional community bank consumer lending processes is that staff is required to work in multiple, non-integrated systems. Historically, credit union loan origination (LOS) solutions have offered far greater functionality in order to handle higher volumes. These systems typically offer integrated online applications, new account opening, third-party integration and imbedded documents, all within the LOS solution. This dramatically minimizes the need to reach out to other systems and re-key work. While such functionality is deployed at some community banks, the robust technology to support an efficient process is not the norm. If community banks want to be more competitive, they must have the technology to quickly execute and close a loan as seamlessly as the competition.

Improve front-line sales. Most community bank consumer LOS solutions do not provide front-line sales staff with the robust tools needed to do their jobs. A strong LOS should offer the capability to proactively prompt the end-user with customized sales scripts and cross- and up-selling tools. Today, these efforts are usually manual, relying on the underwriter or branch-based lender to comb through trade lines to identify potential opportunities.

Another shortfall for community banks, in contrast to credit unions, is the inconsistent offering of GAP and Mechanical Breakdown Protection Insurance. These products are frequently not sold effectively in the community banking space as the branch-based lenders are not comfortable with or fully trained to sell them. This is obviously a big miss in potential income. Branch-based lenders should be well trained and have the appropriate certifications and tools necessary to confidently sell all add-on products and provide a boost to the bottom line.

Alternative lending partnerships. Over half of the financial institutions that participated in our Consumer Lending Survey said they do not view alternative lenders as an immediate threat, but roughly 75% cited having lost business to Quicken Loans. Alternative lenders such as Lending Club, Prosper and LendUp have been making quick inroads to the consumer lending space with their ability to leverage automated decisioning. Community banks have always had strong customer relationships and are typically able to offer attractive financing options to their customers, but they struggle to efficiently deliver consumer loans.

A co-branded partnership with an alternative lender may be the best path to scaling up consumer loan volume without the necessary investments to fully support in-house delivery. In 2013, Titan Bank and Congressional Bank started buying loans direct from Lending Club. At the time, Titan also began offering personal loans direct to its customers through the Lending Club platform. Just a few weeks ago, Lending Club announced a partnership with BancAlliance to offer co-branded consumer loan origination to more than 150 community banks in their network. This clearly reinforces the fact that community banks need more efficiency in consumer loan delivery.

While some bankers might suspect that partnering with these disruptive lenders may not be in their best interests, the fact remains that most community banks just don’t have the robust systems and processes in place to quickly provide a consumer loan to their customers. Now is the time for them to install those systems and put themselves into a position to compete effectively in consumer lending.

Mr. Jones is a director with Cornerstone Advisors, Inc., a Scottsdale, Ariz.-based consulting firm specializing in bank management, strategy and technology advisory services. He can be reached at djones@crnrstone.com.

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