Lending serves as the lifeblood of financial institutions—and commercial lending, in particular, occupies a key place in most of their portfolios. But the size and complexity of these loans makes them much more time consuming to execute. As a result, they often represent a disproportionate share of the balance sheet compared to consumer-focused financing. So is the work well worth it? Yes—for when managed correctly, commercial loans can drive an outsized share of bankers’ profits.
It’s no secret that even in an improving economy bank deposits have dropped, which directly impacts the ability to lend. In fact, a recent Wall Street Journal analysis of Federal Deposit Insurance Corp. data notes that roughly half of major regional banks (10 of 22) experienced declining U.S. deposits, compared with only two the year before. Despite this, bankers remain keen to support lending in new ways. Thus they look to more secure opportunities that maximize profit and minimize risk. The commercial lending market may just provide the key.
Things are looking uptick
The commercial and industrial lending market, which stabilized at $2 trillion in recent years, began to see an uptick in activity in 2018. This increase stemmed in large part from an easing of lending standards among top U.S. and foreign financial institutions, particularly for companies with more than $50 million in annual revenues.
This relative acceleration in the market has challenged many companies to quickly access funds to support growth—and the phenomenon has extended to the bankers who serve them. Financial institutions have invested heavily in leveraging new technologies to reduce friction and improve user experience for consumer and small business borrowers; now, many expect commercial lending to follow suit.
Innovation through integration
To thrive in today’s commercial lending environment, bankers must attract and engage the borrower, completing the process in less time than the industry norm. Faster loan approvals, few-to-zero duplicate information requests and a streamlined submission process for ongoing documentation would all clearly enhance the customer experience.
Unfortunately for many banks, the legacy systems currently in use don’t allow this to happen. They consist of a disparate collection of solutions that simply fail to communicate effectively. This creates a limited environment that requires the manual input of data, translated from system to system. That only increases the risk of human error and threatens to drive up lending costs.
To succeed, financial institutions must effectively manage the process across the complete life cycle of a commercial loan and bring true integration to commercial loan management (CLM). Proper execution yields numerous benefits, which include reduced expenses (through eliminating duplicate effort); improved compliance (which lowers examination burden); and ultimately stronger topline growth (through more effective targeting of opportunities).
As bankers evaluate their technology infrastructure, key components for an integrated CLM system should include:
- Clear visibility into the loan approval process—both internally and externally
- A seamless, consistent flow of information extending from origination throughout the life of the loan
- Configurable levels of flexibility in loan functions for various users (depending on role, experience level, skill set, etc.)
- Ability to collaborate without fear of incomplete or outdated source information
- Capability to consistently enforce regulatory compliance and other internal policies across the enterprise
- Removing paper from the process wherever possible
Because financial institutions vary in unique credit policies and risk appetites—while lending strategies and policies evolve over time—a CLM system should include configurable components that drive the policy and rules engine as well.
Quests and answers
While questions linger as to whether commercial lending will keep growing as the first quarter of 2019 draws to a close, financial institutions can certainly capitalize in the near term. Yet this carries a caveat: The focus has squarely shifted towards ending friction in the process, while engaging new technologies and delivery channels to expedite funds access. Convenience now breeds success and bankers can no longer enlist 20th Century approaches for 21st Century challenges.
Those who adopt the new mantra of integrated commercial loan management will better position themselves to meet strategic initiatives and gain more significant market share. In this way, commercial lending champions will create legacy systems of a much more positive kind.
Randy Wynn is director, lending solutions for ARGO.