The Brutality of Commercial Lending and the Promise of Automation
If you’re reading this, you probably work in commercial lending. And if you work in commercial lending, you already know that you work in a brutal business.
The process of issuing a loan is manual, lengthy, and thankless: margins for most lenders are razor-thin. Pricing—and therefore value—is often disconnected from risk. That means that cost must be squeezed out of every part of the loan process. Further, there’s just too much capital in the economy today. Consider that there are 5,000 banks (including 60-70 “mega” banks), savings & loans, fintechs, and increasingly more online lenders all competing for a piece of the pie.
Because of this environment, loan terms are often based not as much on a borrower’s risk factors as on the number of competing banks in play with capital to offer. Therefore, pricing of loans is nearly upside down. Lenders may be willing to practically “give the loan away” to freeze out competition. It’s bad business and ultimately benefits no one.
And then there’s the ever-present pressure to be perfect. A decision on a borrower requires perfection in all areas of the lending operation: credit judgment, deal structuring, and supporting operational processes. Even post-close, other variables arise and costs to service the loan pop up everywhere. It’s stressful to everyone involved, but why? Why is this such a frustrating process?
Many of these headaches are based on a few major issues. First, the process of issuing loans is often antiquated and not helpful to the lender or the borrower. There is a big trust factor in lending, and in the banking culture there is a desire to keep the human element as part of the loan process. Lenders like to be with the client; they want to create a relationship and assume the role of a “broker” of sorts. A lender may go out of their way to cultivate a potentially valuable client, but disconnected, inefficient systems and processes in other parts of the bank cause the relationship to devolve into repeat phone requests for information needed to complete a loan application.
The noise and clutter of the loan approval process often overwhelms the relationship-based aspects, and the lack of digitalization weakens a lender’s position, adding cost and time to an already bloated process.
These issues, along with a confluence of new technology, new competition, and uncertain regulations has redefined what it means to be a lender.
The importance of perfecting liens is something that will remain constant. Vehicle titling and real property recordation are other areas of asset securitization that can be perpetual headaches for lenders. However, all those areas of lending can be streamlined with the right kind of digitalization.
The good news is that technology is not just for the consumer crowd. Advanced digitalization can reinvent the commercial lending landscape and remove obstacles for growth. Digitally-savvy companies are borrowing billions of dollars to invest in automation. The principals of those organizations aren’t interested in spending an entire evening being entertained just so their account manager can find the right time to ask for financial statements. And remember that the generation most interested in automation currently makes up the largest group of working-age people in the world today: millennials. It’s true. Millennials are thought to be “youngsters,” but the first of the millennial generation will be turning 40 in 2020. Many millennials have a distaste for “traditional” financial business schmoozing. Maybe it’s time to try something different to grow a customer base.
Liens, whether for a commercial asset, a vehicle or a building, are things that have a well-defined lifecycle. But what if we could automate large parts of managing that lifecycle? We can monitor a lien portfolio and have reports on its health sent to us periodically, or even on-demand. What if a lender could bring all their liens, no matter where or when they were filed, into one interface for complete visibility? These are significant steps but they are possible today through tools like Portfolio Sync that help manage a complete lien portfolio.
In the vehicle titling space, digitization is increasingly critical with vendors, especially when each DMV has its own required information, data storage and retrieval processes, etc. Some states require electronic titles, others still require paper. There are 50 departments of motor vehicle in the U.S., and they all manage their processes differently with varying levels of technology. At times DMV work isn’t even handled by state DMV’s, but instead at various counties or other entities. One of the things that service providers can do for lenders is to show the benefits that come with technology adoption and, where possible, help with implementation. What if there was a way to bring all vehicle title work regardless of state into one digital interface to manage? It’s possible with tools like iLien Motor Vehicle.
When account managers and lenders can shift away from work that can be automated and instead move toward being a trusted advisor to their borrower, both sides can benefit.
Rather than just being a loan committee advocate, an account manager could instead provide advice about how to handle interest rate fluctuations or currency exposure. Perhaps they could educate borrowers on how to avoid phishing scams and security breaches. These would be true value-add concepts that go above and beyond the traditional commercial lending transaction.
And what about the operations teams? All the automation and transparency that is available to them can make their work cleaner, clearer, and able to stand up to the most stringent audit. Gone are the days of “sticky notes” telling someone when to continue a lien. The modern ops team can automate those tasks and use their time to identify other client opportunities, making their role far more valuable than ever before.
In an industry with such a low margin for error, automation can change the game. In some ways, it already has.
Want to learn more? Watch our recent webinar, co-presented by Wolters Kluwer’s Lien Solutions and Aite Group, that further explores the current state of commercial lending, including the threats that make this business so difficult, as well as the opportunities that come to the sector via innovation and automation.