ENDANGERED SPECIES

The Threat That Could End Community Banking (And What to Do About It)

COMMUNITY BANKING

FINANCIAL INSTITUTIONS

DANGERON ALL SIDES

Small and midsized banks are at tremendous risk Not just at risk of running out of customers and therefore money not just at risk of being bought out by a larger bank

CBFIs are also at risk of losing their core business to the companies innovating in the paytech and lendtech spaces Small business lending is ground zero for this imminent disaster

But the problem is also the solution

Introduction

ARE IN

On the surface things are going well for community and regional banks and credit unions

Though only in charge of a small percentage of total assets theyrsquore disproportionately dominating small business lending

In 2018 community-based financial institutions made 52 of all small business loans even though they controlled only 16 of banking assets

Community-based financial institutions make 52 of all small business loans

They only control 16 of banking assets

52

16

Source Institute for Local Self-Reliance

Endangered Species The Threat to Community Banking | Biz2Xcom | 3

On the surface things are going well for community and regional banks and credit unions

Though only in charge of a small percentage of total assets theyrsquore disproportionately dominating small business lending

In 2018 community-based financial institutions made 52 of all small business loans even though they controlled only 16 of banking assets

Community-based financial institutions make 52 of all small business loans

They only control 16 of banking assets

52

16

Source Institute for Local Self-Reliance

Endangered Species The Threat to Community Banking | Biz2Xcom | 3

Well if yoursquore part of a community-based

financial institution (CBFI) you probably

already know that where your bank truly excels

is in offering customers significantly more time

per transaction than other larger financial

institutions can

Business and personal checking and savings

merchant services and the portfolio of lending

services all run more smoothly with this

personal attention

By investing time in each customer transaction

CBFIs are able to truly get to know their

borrowers and learn about their businesses and

needs while co-existing with them in the same

market

How did this happen

Sharing a community with their customers

means that CBFIs are privy to all kinds of info

about customer behavior ndash some explicit some

environmental ndash and can then turn that data

and market knowledge into products and

services that their customers need All while

providing a personal touch This becomes a

virtuous cycle

Itrsquos been CBFIsrsquo secret weapon Until now

Because that secret weapon is in danger

Small business lending opportunities are

experiencing a drastic shift And the industry

changes are deep and permanent

Endangered Species The Threat to Community Banking | Biz2Xcom | 4

The extinction of community banks Lending as battleground

Part 1 The Problem for Community Banks

CBFIs have always been at risk ndash whether itrsquos from getting bought out by a larger bank or from simply running out of customers (and therefore money)

Now CBFIs are also at risk of losing their core business to the companies innovating in the paytech and lendtech spaces

Lending especially small business lending is ground zero for this imminent disaster

Endangered Species The Threat to Community Banking | Biz2Xcom | 6

CBFIs have always been at risk ndash whether itrsquos from getting bought out by a larger bank or from simply running out of customers (and therefore money)

Now CBFIs are also at risk of losing their core business to the companies innovating in the paytech and lendtech spaces

Lending especially small business lending is ground zero for this imminent disaster

Endangered Species The Threat to Community Banking | Biz2Xcom | 6

PayPal and Square now lend to their merchant

customers seamlessly integrating small

business loans ndash and loan satisfaction ndash with

their pre-existing POS systems credit card

processing and other offerings

The logic goes if payment companies can lend

faster and better than a bank can merchants

are already using payment companies for

other services and as payment companies

add lending to those services then the nexus

of capital acquisition moves from traditional

lenders to payment companies

These payment upstarts have the additional

advantage of using the first-party customer

data that they already have access to Many of

these new lenders are willing to use alternative

data ndash like purchasing patterns geolocation

etc ndash to evaluate risk which leads to faster

underwriting

Which leads the merchant to have more incentive to borrow Which is a total end-run around banks All banks large and small

Endangered Species The Threat to Community Banking | Biz2Xcom | 7

And the smaller the bank is the bigger of an

issue this can be Customer loyalty is vital to

CBFIs But the way that theyrsquove won loyalty in

the past is now under threat A big CBFI selling

point is offering speedier funding to make up

for not being able to offer more competitive

rates When all types of lenders can offer fast

funding CBFIs need to innovate or risk being

pushed aside

Customers switch banks for any number

of reasons bad customer service products

that donrsquot suit their needs inflexible or

unsatisfactory problem solving difficult-to-

use apps and tools difficult access to financial

advice difficult access to credit

A good fintech platform can stop all of these problems before they start After all if a bankrsquos small business customers are going to Square for lending since theyrsquore already there for POS anyway that bank is in trouble

How bad is this risk For many banks and

CBFIs itrsquos a danger thatrsquos lurking just below the

surface

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Therersquos one simple problem thatrsquos setting up CBFIs for certain death The combination of lag time and imprecision

TOTAL NUMBER OF HOURS

Herersquos how long a manual loan origination process might take

Letrsquos look at the underwriting process

12

1 work-hour

Create new customer file and related activities

3 work-hours

Conduct customer due diligence

3 work-hours

Conduct underwriting

3 work-hours

Review for final approval

1 work-hour

Prepare loan package

1 work-hour

Fund loan

These hours arenrsquot necessarilycontiguous loan origination involves much

back-and-forth among colleagues

Now think about the overheadLabor costs The cost of capital itself

Loan officerrsquos salary $80000year

$330day

30 ($110) benefits

30 overhead

$660 per loan

Time cost

approximately 12 work-hours per loan

or 15 days per loan of work time ndash

turns into 7-10 days of real time(with delays in customer response other priorities etc)

$660 $660000X 1000

=

=

+

+

Endangered Species The Threat to Community Banking | Biz2Xcom | 9

we build out a 1-week maxi-mal campaign with a budget of $25k

Thatrsquos significant risk Particularly because analog underwriting isnrsquot just long and drawn out It also leaves CBFIs vulnerable to human error

Think about how many hands touch just one loan from application to funding Think about how many times someone from one department has to chase down information from someone in another department

There are a lot of cooks in this kitchen How many are in yours

Now take that dollar amount and weigh it against potential loss of business due to frustrated customers and negative online reviews Thatrsquos the bad news

The good news is that incorporating digital decisioning into the lending process can significantly reduce exposure ndash and save money in the process

And therersquos a way for every bank to do this

Endangered Species The Threat to Community Banking | Biz2Xcom | 10

The right fintech can save community lending

Imagine a third-party platform that simplifies small business lending functions with up-front KYC validation straight-through processing and other time savers

Think about what it would be like with a built-in proprietary risk assessment algorithm And now consider how much more secure and powerful this could make your lending

Herersquos the solution

Part 2 The Solution

It can seamlessly integrate with lendersrsquo core banking systems to solve these very pain points Configured to your specific credit policy the platform saves you time money and reputation by automating your loan decisions In addition to letting customers upload their own financial information it can also access third-party data like bank accounts credit bureaus and IRS information

This platform exists today Biz2XPart of the configuration process involves setting parameters around managing specific concerns like

bull BSAAML compliance (OFAC screening and other CIP tasks)bull Debt service coverage ratios and other financial ratiosbull Collateralbull HMDACRA reportable information Paired with the proprietary Biz2X algorithm you can easily see where a deal might fall out of credit or compliance

Also itrsquos easy to get started

Endangered Species The Threat to Community Banking | Biz2Xcom | 12

It can seamlessly integrate with lendersrsquo core banking systems to solve these very pain points Configured to your specific credit policy the platform saves you time money and reputation by automating your loan decisions In addition to letting customers upload their own financial information it can also access third-party data like bank accounts credit bureaus and IRS information

This platform exists today Biz2XPart of the configuration process involves setting parameters around managing specific concerns like

bull BSAAML compliance (OFAC screening and other CIP tasks)bull Debt service coverage ratios and other financial ratiosbull Collateralbull HMDACRA reportable information Paired with the proprietary Biz2X algorithm you can easily see where a deal might fall out of credit or compliance

Also itrsquos easy to get started

Endangered Species The Threat to Community Banking | Biz2Xcom | 12

What this all means is

You can decision a loan instantly ndash in a matter of moments instead of months

Endangered Species The Threat to Community Banking | Biz2Xcom | 13

New customer file

Duediligence

Underwriting

Review

Prepare loan package

Fund loan

ManualProcess

Originating a Commercial Loan

DigitalProcess

New customer file

Automatic underwriting

analysis

Underwriting review amp approval

Fund loan

Endangered Species The Threat to Community Banking | Biz2Xcom | 14

ldquoItrsquos a streamlined process The system is intelligent and depending on the type of loan that the customer is applying for it will tell them what type of documentation is required It provides the customer the user with flexibility They can actually start the application from home or from the business and they can complete the application there or they can finish the application by coming to one of our branches ldquo

ldquoFive years ago everything was going through traditional underwriting which is very expensive

As application volume increased we wanted to get something that was a little more efficient [With Biz2X] we can turn around an application in a number of hours Not weeks or monthsldquo

ndash Manuel Chinea COOPopular Bank

ndash Scott Green Senior VP amp Credit Manager Customers Bank

Endangered Species The Threat to Community Banking | Biz2Xcom | 15

What happens after a bank incorporates digital decisioning tools

ldquoHuman beings and machines will always produce better results together than either will alonerdquo

ndash Ash Gupta Biz2X Advisor and former Chief Risk Officer of American Express

Part 3 Making Change Work

Integrating new products and processes is always a large complex project with many moving parts For the first 90 days the work is to align all internal stakeholders ndash from Engineering to Marketing The goal is to make sure that every customer touchpoint is seamless

If a customer starts filling out a loan application online at home one evening puts it down and then walks into their bank branch the next day they should be able pick up where they leave off

Change management support can make a digital transition go smoothly

Itrsquos an excellent idea to engage a professional consultant experienced in shepherding organizations through the dynamics that happen with these kinds of shifts

Endangered Species The Threat to Community Banking | Biz2Xcom | 17

Integrating new products and processes is always a large complex project with many moving parts For the first 90 days the work is to align all internal stakeholders ndash from Engineering to Marketing The goal is to make sure that every customer touchpoint is seamless

If a customer starts filling out a loan application online at home one evening puts it down and then walks into their bank branch the next day they should be able pick up where they leave off

Change management support can make a digital transition go smoothly

Itrsquos an excellent idea to engage a professional consultant experienced in shepherding organizations through the dynamics that happen with these kinds of shifts

Endangered Species The Threat to Community Banking | Biz2Xcom | 17

Post-transition the CBFIrsquos secret weapon becomes magnified exponentially

More customer touchpoints mean more time and opportunities to devote to customer retention as well as space to figure out how best to deploy this new wealth of customer data and freed-up in-house resources

That ldquoget to know you in personrdquo quality ndash paired with a digital + human origination process ndash can become a real sustainable ace in the hole

This kind of CBFI wonrsquot just survive It will thrive

Endangered Species The Threat to Community Banking | Biz2Xcom | 18

Thrive with the AI-drivenlending platform

Learn more atBiz2Xcom

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