Optimizing Member Business Lending
The last few years have shown a rapid push into commercial lending by credit unions. That has been driven, in most cases, by a need to source loans due to increased liquidity of the last 2 years. It is also a natural progression of the credit union movement as they seek to fully serve their members. Moving beyond consumer solutions to address the needs of the businesses their members own continues to deliver on the original intent of credit unions to promote smart spending and sound financial practices. As this is entirely new to many credit unions and a key area of growth for others, there are key concepts you should focus on to optimize member business lending.
3 Key Areas For Optimizing Member Business Lending
Credit Unions have been leaders in delivering a great end-user experience to their members for a long time. Living on the leading edge of technology solutions designed to provide an omni-channel, frictionless experience for members such as online account opening, member portals, and other in-branch experiences. The move to member business lending comes with unique experience challenges, but there is a lot of effort underway in the FinTech space to help solve this experience problem. It seems simple to “just integrate to the Secretary of State” to handle the Know Your Customer (KYC) type requirements, however that is very hard to automate. A simple misplaced comma can break the linkage to their systems and, even when it works, that’s only part of the battle.
Unlike consumer lending, with member business lending you have to deal with another layer of requirements. Not only do you need to know that this is a real business and that the person on the other end of the computer works for the business, you have the added layer of determining whether they can conduct financial transactions on behalf of that business. There is no silver bullet for this today so you must evaluate an entire ecosystem of solutions and plan for significant fallout to the online process and your automation.
As with all lending processes, the ability to drive efficiency through automation is critical to the ROI of your technology investment. The right technology can add capacity to your staff, enabling them to better serve your members and source new business opportunities. A lot of your automation will come from leveraging a workflow-based system that allows you to define your decision process. By eliminating the known bad credits and decisioning the ‘no-brainers’ your high valued team can focus their efforts in the gray area where judgmental processes are key to making sound credit decisions while serving all the member needs that you want to address.
Traditionally this has been done by leveraging standard score models as a prediction of credit quality, but you can take a crawl, walk, run approach to determining the set of characteristics that define a good credit for your credit union. Leveraging historical manual decision criteria in your Loan Origination System (LOS) platform combined with loan performance data can tell you what factors make a good loan in the markets you serve. These insights can be turned into rules over time so that the system can make the easy calls for you.
That leaves the other end of decisions, the credits you don’t want on your books. The reality of a credit decision is that it was made at a point in time with only what was known then. You need a way to proactively keep tabs on your portfolio and adjust your lens based on information gained over time. Ideally those insights should come from the same platform used for origination to create a feedback loop that dynamically updates your credit policy. External score models can be a valuable input into this review, but equally important are behavioral factors that can indicate a trend towards default. The added benefit is that these factors can also indicate financial needs of your members that you may be able to serve.
Most institutions leverage an annual review of their business loans (more frequent for underperforming loans) but that is too infrequent to ensure your ability to proactively manage your borrower relationships. Analyzing your aggregated data on a nightly basis with rules designed to find these anomalies will give you a leg up on your competition and put you in the best position to address your member’s needs as they arise.
Optimize member business lending with Baker Hill NextGen®
While these aren’t the only factors to success in member business lending, effectively addressing these key areas with the appropriate technology will go a long way towards that end.
At Baker Hill we’re evolving lending for all financial institutions and working with them to enhance these areas of their business. Technology has come a long way and adoption by business clients has accelerated. Reach out to understand how some of your peers are knocking down the barriers to successful member business lending by leveraging the most modern, highly configurable platform on the market!
Posted on Tuesday, January 3, 2023 at 2:30 PM
by Bryan Peckinpaugh