Regional banks and commercial lending: The push to digital

Dec 09, 2020 - 6 min read
Noel Webster, US Managing Director at Sopra Banking Software

In recent years, the commercial lending market has undergone a noticeable shift. Fintechs and smaller independent players are now competing in the space and winning market share from traditional banks via new offerings, better customer experience (CX) and quicker delivery. 

Relative to these new players, and indeed some of the bigger banks, many of the smaller, regional banks are moving slowly with technological transformation. Combine this with the complexity of the commercial lending processes and rising client expectations, and you get challenging conditions. Indeed, some smaller banks and credit unions are at risk of being left behind.  

Unique challenges 

Commercial lending is a primary revenue source for smaller banks, yet related processes are often slow, inefficient or fragmented. Such Institutions are hamstrung by legacy technology, frequent manual processes, the widespread use of paper documents and a lack of visibility. 

It’s also common for them to suffer from outdated underwriting and warning systems. They’re slow to respond to portfolio performance changes, and by relying on manual, paper-intensive underwriting processes, they prolong approval times. 

Outdated credit risk models are another issue, making it difficult to assess the creditworthiness of clients. Finally, community banks often struggle to make the most of their data, which hinders their ability to deliver unique value. But change is here, whether these institutions are fully prepared for it or not. 

Customer experience 

In the past, the personal client relationships that credit unions and regional banks enjoyed with their customers was a primary advantage. But today, many are leaning too heavily on existing competitive advantages and do not understand what disruption really means for them. 

Things have changed, and Covid-19 has supercharged the need for digital transformation. In the past decade, the top 25 U.S. banks managed to maintain growth while reducing their branch footprint by 15 percent, according to a 2019 study by McKinsey. It’s evident that physical branches don’t factor in the way they used to. Technology has rendered geography significantly less meaningful. 

While relationships will always matter, and local branches remain a part of the banking business model, the real growth is in digital banking services. This is true on both the retail and commercial side. As banking customers get younger, there’s a growing focus on taking the mobile banking model and refining it with sophisticated data collection capabilities. This data can be used to fuel artificial intelligence engines, which in turn can deliver more personalized and engaging experiences.

Customers increasingly expect this, and such trends are forcing the transformation of the back office in regional commercial lending. There is growing recognition that for smaller lenders to remain competitive, they need to rethink what community means and offer better experiences. Smaller banks need to start strategically using technology to retain long-time customers regardless of where they live. And digital is no longer a desire. It’s the minimum requirement to keep pace. 

Complicating factors

The financial technology adoption curve will always look different than other industries due to factors such as security and compliance. But there are other issues that make the digitization of commercial lending less straightforward for smaller banks than a large corporate or a startup. 

Regional banks tend to have unclear digital strategies; they often haven’t made sufficient investment in research and development; and they are slow in terms of product innovation. Many of them don’t have the capital to fully invest in technology. As a result, some have turned to mergers to pool digital investment resources and accelerate technology adoption.

The CX for commercial lending is also entirely different from retail experiences. With bigger loan values, the process is naturally more complex. There is never a quick “yes” for a $5M line of credit. Hence, making a better commercial CX is focused on streamlining the many steps involved and giving customers a better view of the process. It also means enabling disbursements or payments online or payoff quotes.

To achieve this, banks can combine the multiple systems they currently use to manage leasing, vendor finance and commercial lending, therefore creating a more complete platform and a single (digital) point of entry for all types of customers.

They can build an engine capable of fueling the required flexibility. They can also merge the numerous portals they may have gained from acquisitions of smaller banks. And finally, they can enable connectivity to the institution’s ecosystem through the bank or vendor web services, thus exposing their financing platform to customers via a self-serve portal. 

Looking forward

In a global economy reeling from the devastating impact of Covid-19, commercial lending is a key source of revenue for banks and other financial institutions.  But smaller banks and credit unions face stiff competition and rising customer demands. As U.S. consumers enjoy more seamless experiences, banks that lag behind in digital adoption will have a harder time keeping their clientele.

To remain competitive in business lending, smaller banks need to focus on ramping up the digitization of their processes. They must evolve beyond manual procedures and adopt a sustainable, digitalized, enterprise-wide approach to commercial lending — one that provides real-time, value-added experiences to business customers. 

To succeed in the dynamic, competitive market, lending solutions need to be as transparent and hassle-free as possible. The technology that enables smaller banks to streamline their customer experience and leverage valuable customer data is here. And increasingly, doing so is a matter of survival.