The Future of Credit

Why Commercial Lending Must be Digital and Real-Time

When the Internet age arrived, banks became known for using leading-edge technology to solve complex business challenges. In the decades since, they have tried to keep pace, with varying degrees of success – but many are now coming up short. Retail banking is falling behind other sectors in the use of high tech, and commercial banking lags behind retail. Meanwhile challengers are disrupting the market.

In this blog we consider why the future of commercial lending must be digital and must be real-time. As artificial intelligence expert Ramy Nassar suggests, “If banks can’t offer something more valuable than Amazon Prime, then we’re probably in the wrong business.”

An Age of Contrasts

With working from home becoming the norm over the last year, even the most reluctant technophobes have to marvel at how digital services enable working life to continue while offices remain closed. Many will wonder how we coped before tools such as Zoom and Microsoft Teams helped to bridge the gap between our virtual and physical worlds. Companies are taking note of increases in productivity, employees in many fields wonder why they had to go to an office in the first place, and all ponder the permanence of a distributed remote workforce and alternative hybrid models. This new “blended world” offers many benefits, but it also highlights some stark contrasts.

Home tech better than office tech?

Bank employees are increasingly aware of the lackluster state of their bank platforms. In their personal lives they’re accustomed to real-time payments, engaging shopping experiences, rapid delivery, personalized communications, and a host of other real-time or near real-time services. But, ironically, their office tech actually pales in comparison. In their daily work, bank employees are constantly reminded of the limitations of their core system, which all too often runs on aging tech from a bygone age, with systems that were designed to mimic arcane processes. There are simply too many clicks, too many delays, and too many manual processes.  

In reality, many core platforms comprise complex, composite labyrinths of workarounds that are combined in an attempt to offer that vaunted “seamless” customer experience. There are many illustrations of bank platforms and processes showing their age, but none is more obvious than commercial lending.

Why Transform Now?

Commercial banking is the lifeblood of business: It is essential both to the individual companies that are served and to the wider economy at large. Commercial lending is at the beating heart of commerce, providing crucial liquidity when and where it is needed, financing “seedtime to harvest” and a host of other business support functions.

As with all aspects of banking, commercial lending is being disrupted by a wave of new competitors adopting a tech-first approach. And like its retail counterpart, the commercial banking landscape is evolving quickly into an “ecosystem” that is increasingly open and real time.

Commercial banks must transform to participate in this new environment. They need to embrace modern technologies to drive innovation, collaborate with fintechs, and to serve a growing number of impatient corporate customers who know (from their personal banking) what a good banking experience is.

Other drivers – including various government programs and the commercial customers themselves – are further accelerating the need to modernize.

The CARES Act and Paycheck Protection Program

Countries worldwide are introducing legislation to respond to the financial impact of the COVID-19 pandemic. One such program is the Coronavirus Aid, Relief, and Economic Security (CARES) Act in the U.S. As the biggest stimulus package in U.S. history, amounting to 10% of the U.S. Gross Domestic Product (GDP), the CARES Act legislated that the banking system distribute USD $350 billion in stimulus funds to small businesses, and quickly. An unprecedented volume of loans had to be processed promptly to deliver an urgent lifeline to businesses in most need.

With minimal underwriting criteria, as well as loan forgiveness if funds were used for payroll or other qualified expenses in the subsequent 8 weeks, the Paycheck Protection Program (PPP) presented a significant and pressing administrative challenge. The U.S. banking industry rose to the challenge – more loans were administered in four weeks than in the previous 12 months. But financial institutions did not benefit equally from PPP. Why? The main reason was inadequate lending technology infrastructure. Many banks and credit unions missed out because they didn’t have the technological infrastructure in place to accept, process and submit PPP loan applications via the U.S. Small Business Administration’s (SBA) E-Tran portal.

Thus, the PPP has highlighted the state of digitalization across commercial banking. Banks with automated lending solutions were able to offer an end-to-end digital lending experience, from loan application through to loan forgiveness check. They were able to help many more customers, much more quickly than those with legacy platforms. This has not gone unnoticed. Commercial customers increasingly expect service at least as good as they receive as retail customers.

Customers – More Demanding, Less Loyal

Commercial banking customers already have relationships with more than one bank. They can easily compare and contrast banking services and are willing to switch if their expectations are better met by a competitor. Commercial banks need to adopt the means to originate, decision and close loans faster, preferably in near real time. And if they don’t, others will.

Fintechs are actively disrupting the USD $1.4 trillion business lending market. As one example, they use alternative credit data to get a comprehensive view of a borrower’s creditworthiness. This speeds up the scrutinization process and reduces overreliance on traditional credit scores.

With modern technologies, including artificial intelligence (AI) and machine learning (ML), fintechs are constantly learning about their customers and able to offer additional services exactly when they are needed. There’s no reason commercial banks can’t do that too, and now is the time!