Could digital automation for lending be the next wave of growth for community banks, and if so, what is the best way to get there?
The digital lending market today is estimated to be a $1 trillion opportunity. With fewer people willing to visit bank branches and more people using mobile banking products, customer expectations for community banks are evolving. Add in millennials who are looking for digital lending solutions to meet their needs as they launch the small businesses that are the engine of U.S. economic growth, and community banks could be missing growth opportunities if they are slow to adopt fintech for lending.
“Bankers are notoriously slow to adapting to new technology and new ways of doing things,” said Ty Glenham, Senior Lending Consultant of Profit Resources Inc. “However, there is a big opportunity for community banks to be a better source for small businesses. While small businesses are the backbone of the economy, they have difficulty getting small business loans. Community banks can do it better.”
Historically, small loans have been cost prohibitive for community banks, with too many people touching the loan and a customer unfriendly process. A manual process on small business loans can require three to five hours at a cost of up to $5,000. A digital lending solution cuts the time to process to under an hour, costs much less and is more friendly for customers who are comfortable with and expect fintech from their other banking experiences, like mortgage lending.
“Digital lending solutions bring the cost of the loan down and do it more efficiently,” Glenham said. “To manage risk, the platform trusts predictive analytics instead of using traditional underwriting analysis.”
There are three typical approaches for community banks when looking for a digital lending solution.
- Partnering with a vendor to issue a co-branded lending solution. The bank is not funding the loan but acts as a delivery channel, which means entry is low cost, but the bank is potentially sending their customers to the outside solution. The bank gets a referral fee.
- Partnering with a digital lender to issue a white label solution. The digital fintech is behind the scenes, but the product is in the bank’s name. This option is more expensive to enter, and the bank is invested in that solution for the long-term.
- Utilizing a third-party tech service provider. This partnership with a fintech company allows the bank to continue to use its own funding and risk rating decisions. The bank pays a per usage application fee.
“When we talk to CEOs about their top business challenges in 2019-20, they tell us that they are concerned with increasing loans and keeping up with technology needs and advancements. Digital lending responds to both of those challenges,” Glenham said. “Banks must ask themselves what they are doing to distinguish themselves from others and stay relevant in the current digital transformation. Digital lending allows banks to increase efficiency and scale with volume. Higher dollar and more complex commercial loans can then get more attention by spending less time on smaller business loans.”
Profit Resources specializes in identifying profitability improvement areas for financial institutions through revenue growth, cost control, streamlining processes, and effective use of technology. Contact us to learn more about our personalized approach to strategic planning to propel growth and improve profitability.