The Dichotomy of Commercial Banking

“It was the best of times; it was the worst of times” Charles Dickens once said about the United States Commercial Banking landscape or close to it. Although Dickens may have been referring to the societies of 19^th century Europe, a similar dichotomy exists if you’re a commercial banker. Can technology help you in you commercial lending processes through good times and the bad?

A Tale of Two Lenders

J. Lorry Partners, a real estate holding firm, comes into your bank to speak about obtaining a loan on a new project. He has a dozen accounts with the bank and even more loans so the lender is digging up files and having to look at at five different systems and using his clouded memory to remember all the details.

The good principals at J.Lorry are horrified at the amount of time they are spending at the bank and even more upset a week later to find that the status of their loan request is unknown. “I will reach back out to you tomorrow to verify what else we may need” the lender says apprehensively as he simultaneously tracks down checklists and staff who can tell him where they are in the process.

After a quibble or so on pricing, the loan is closed in person and the whole experience has left the signers at J.Lorry feeling disappointed. Your loan ops staff is even more disgruntled as they slosh through the mire of menial tasks of booking the loan manually and adding financial statement and insurance to their preposterously large and ever-expanding tracking items spreadsheet.

On the Other Side of Town

Executives at Sydney’s Carton Company have an on-site visit from a lender representing a bank with a reputation for getting things done in an effective manner. The lender brings only a tablet. During the 30-minute meeting the needs for a new lending facility to build their new plant just outside of town is smoothed out. Notes, details on the relationship, and deposit and loan balances are all at the fingertips of the lender.. She starts the loan request right away and sends it to the underwriting phase. The client can send their financials directly to the underwriting team using a secure online portal.

Underwriters and loan ops work simultaneously with the information in one place and financials are spread, appraisals are ordered, and regulatory items are put away. The client continues to upload documents as requested and a decision is made before the signer at Sydney’s Carton Co. has even thought about calling the bank. Docs are signed, completed electronically and automatically stored, tracking items are pushed out to the next time period, and monitoring of deposit balances and loan performance is done automatically. The lender and the executives at Sydney’s go out to dinner to celebrate breaking ground on their new facility.

A Difference of Process

Before the COVID-19 pandemic, commercial lending activity, a leading indicator of American economic growth and GDP, had rebounded from the financial crisis in 2007 to historic highs. According to FRED, Commercial Real Estate loans in the U.S. totaled a whopping $2.3 Trillion and Commercial and Industrial loans floating around that same number as of January 2020. With almost $5 Trillion worth of commercial loans on their books, business was good for the banking sector, but it came with a price.

In my previous life as a bank examiner, I would find myself sitting across the table from the president of the bank and more often than not he would say something like “banking just isn’t as fun as it used to be.” The evidence suggested that banks were making more money than ever, so what could he have meant? A study from Rice University’s Thomas Hogan cites that since 2010 noninterest expenses in US banks have increased by $64.5 billion per year! Regulation probably can’t foot the whole bill, but the correlation between that increase and Dodd Frank is staggering. Even worse, Hogan cites the proportionate spend on auditors, consulting, and data analysis was statistically significant to small banks compared to their large bank counterparts.

In true Dickensian fashion, you can never have one without the other so the hard work done by bankers continues to increase. The good loans in the portfolio need monitoring, fresh financials, and renewing while the bad loans need workout procedures, constant communication, and loss calculation. As the workload and regulatory burden pile on, what can bankers look for in a solution that can help them manage?

Data Aggregation

The amount of information coming in and out of our banks, inboxes, and phones is staggering. For those in commercial lending, underwriting, and operations it can be extremely difficult to manage the amount and quality of the data coming in. Commercial teams need to understand what type of information is coming in and how it’s organized. The old way is to do this manually with a dangerous mixture of spreadsheets, shared files, and disparate systems. Bankers must get a handle on this data and find a way to organize this information to make it accessible, secure, and useable in their process. If it’s entered somewhere once, no member of the banking team should have to enter it again so they can focus their efforts elsewhere and avoid the frustration of duplicate data entry.

Workflow

Deals get stuck, it’s a given. The why and how can be different every time. Workflows that are built for each loan product and segment can help tremendously with transparency. Team members can see what tasks are yet to be done, what documents they need, and how to move it through to completion. Your clients can see what you are asking of them and keep track of their progress. Transparency is the king here.

Organization and Reporting

Regulation is rarely appeased by verbal commitment or an impressive memory. The board at the bank is probably not all that much impressed either. Organizing the information that is already going through the bank in a way that is reportable is a key foundation of effective risk management. If you have a system that can house the data more often than not you can make it organize that data for you as well. If you could, would you want to automate items such as pipeline, concentration, compliance reporting? That would free up your data and operations folks to address policy and processes rather than reducing them to data miners.