quick guide to · 2020. 6. 3. · – cleveland fed 2017 history shows a roadmap for opportunity...

Quick Guide to Digital Lending for Regional Banks ©Copyright 2020 Biz2X

Quick Guide to DIGITAL LENDING for REGIONAL BANKS


THE NEW DIGITAL REVOLUTION FACING REGIONAL LENDERS AND WHAT TO DO ABOUT IT.

Who should read this Quick Guide?

Banking executives at banks <$50B AUM

ChiefInformationOfficers(CIOs) at banks

Heads of Lending and Retail Business Banking

Risk managers at banks <$50B AUM

There are three primary marketplace challenges confronting community and regional banks. These

include economic downturns, national and global crises (COVID-19) and the rapidly changing competitive

landscape.

Outside of marketplace shocks such as the COVID-19 pandemic, regional banks are facing serious

competition from national digital lenders as well as larger national banks. In addition, the cyclical prospect

of an economic downturn could be a major threat for smaller banks.

Regional banks have traditionally been driven by relationships and knowledge of their customers, usually

on a one-to-one basis. It’s the advantage of relationship banking that community and regional banks

need to exploit to stay viable. However, there is a window of opportunity that is rapidly closing where

this advantage may simply become irrelevant as the need for cash becomes more urgent. Regional and

community banks must adapt to the new order of real-time digital banking or risk being surpassed by

fast-evolving technology companies.

It’s an opportunity that some small and regional banks are seizing with great results.



02 03 0401THE NEW LANDSCAPE

DEMANDS DIGITAL

Understanding the Three Risks Facing Regional Banks

Changing Economic Landscape

Extended Market Shocks and Unforeseen Changes in the Marketplace

Competition is Now About Necessity, Not Convenience

Blazing a New Trail: Adapting to Change and the Way Forward

What Can Community and Regional Banks Do to Avoid “the Inevitable”?

Mitigating Credit Risk by Eliminating Lending Bias

A Hybrid Approach to Underwriting: Machine Learning and Human

Intelligence Converge

Technology Makes Risk Averse Lending Easier for Banks

Creating the Automated Risk ‘Guidance System’ for Banks

What Does an Early-Warning System for Risk Look Like?

The Biz2X Platform

Biz2X In Action: Popular Bank

THE PLAYBOOK TO RESPOND TO DISRUPTION

SOLVING THE CRISIS IN BANKING

THE DIGITAL LENDING SOLUTION

WHAT’S INCLUDED IN THIS QUICK GUIDE?

SECTION SECTION SECTION SECTION


THE NEW LANDSCAPE DEMANDS DIGITALUnderstanding the Three Risks Facing Regional Banks Adigital-firststrategyhasbeenchampionedbyconsultantsandcommentatorsforyears.Butnow the convergence of three challenges that regional and community banks are facing puts intense pressure on banking leaders to complete the digital transformation of their institutions. A growing number of signs point to an urgent need for taking decisive steps into digital.

Changing Economic LandscapeInaneconomicdownturn,lendingdecisionsbyfinancialinstitutionsinherentlytakeonadditional (systemic) underlying risk. Lending during an economic downturn can skew the lending portfolio of a bank profoundly if the proper steps are not taken to account for changing economic conditions. Lending portfolio strategies must adapt during economic cycles to mitigate systemic risk while guarding against portfolio attrition. After all, what good is a risk strategy if it fails to provide proper ballast of lending activity? In that event, the greatest risk is limiting your bank’s capital opportunity.

Extended Market Shocks and Unforeseen Changes in the MarketplaceThe COVID-19 pandemic has exposed some glaring vulnerabilities in the era of globalization. In a fewshortmonthstheentirefinancialsystemhasbeenshatteredandmustnowre-assembleitself to adapt to the changes the pandemic has forced us all to deal with. The implications to regional banking will be profound and will last for several years to come. It is quite conceivable that in the aftermath of the pandemic that the overall workplace ecosystem will be forever changedascompanieshavebeenforcedintoreal-timeexperimentswithremotestaffingandtelecommuting.Theseexperimentsmayjustbeapreviewofadigital-firstrealitythathasalreadybegun. Banks now are also being forced to embrace social distancing in what is surely a litmus test of how they should be preparing for a new economic reality that is much closer than anyone ever thought possible.

BACK TO TABLE OF CONTENTS 02 THE PLAYBOOK TO

RESPOND TO DISRUPTION01 THE NEW LANDSCAPE DEMANDS DIGITAL

SOLVING THE CRISIS IN BANKING03 04 THE DIGITAL LENDING

SOLUTION


Once relegated to a niche of smaller lending sizes (credits) or micro-credits, Fintech and online-only institutions are now responsible for more than 50% of sub $100k credits according to FFIEC data. But what is surprising is the velocity that these institutions are moving upstream into the $100k+ credit marketplace. Losing market share in a meaningful way to FinTechs in the $100k+ market is potentially devastating to regional and community banks.

What’sevenmoresignificantisthatsince2008,FinTechcompanieshaveslashedthespreadinthe cost of capital to become competitive with many of their traditional institution counterparts. It is easy to see where this is headed.

For banks, there is an answer to the encroachment of these competitors…adapt the new technology and embrace a hybrid approach to full-service business banking. The FinTech technologyisavailablenowandisextensibleenoughto“retrofit”banksandfinancialinstitutionsof any size.

WANT TO SEE HOW IT WORKS? JUMP AHEAD

Competition is Now About Necessity, Not Convenience

While relationships in business may never go out of style, the necessity of survival will undoubtedlysurpassfamiliarity.Putsimply,indifficulteconomictimes,businesseswillneedaccess to capital immediately (beyond government support, bail-outs and grants) and most business owners will care only that they can gain access to capital quickly – and not who they get it from. Unfortunately, as a result of the COVID-19 pandemic, there may be an unprecedented failure rate among small businesses around the globe.

However, one thing history has shown us is that there will be a fresh and steady stream of new entrepreneurs ready to usher-in the new order; an order that will be more immediate and will have all the hallmarks of the digital-native economy. Even beyond the effects of the pandemic, these trends are accelerating at an incredible pace. Community and regional banks simply need to be prepared for the real-time, digital experiences that these new customers will demand from banking and lending.

Community and regional banks held the relationship advantage for decades. However, if your productsandservicesdonotfittheneedsofevolvingbusinesses,thoserelationshipwillfall-offquickly. That is exactly what is happening at the lower tier lending level. Business borrowers are voting with their preference for real-time borrowing and the numbers are overwhelming.

Blazing a New Trail: Adapting to Change and the Way Forward

Technology and Business Banking: Rapid Changes are Transforming the Landscape Employing advanced technology in the lending decision-making process has shown that a profound level of efficienciescanbeleveragedbybankstomitigateriskandsimultaneouslyexpandthelendingportfoliobalancesheet.DuringtheGreatRecessionof2008,anentiremarketplaceknownasthe“FinTech” (Financial Technology) sector began to emerge as a sub-section, or alternative segment of commercial/business lending. A decade since their emergence, companies that employ loan decision-making technology are surpassing conventional lending institutions as a primary lending source.

02 THE PLAYBOOK TO RESPOND TO DISRUPTION01 THE NEW LANDSCAPE

DEMANDS DIGITALSOLVING THE CRISIS IN BANKING03 04 THE DIGITAL LENDING

SOLUTIONBACK TO TABLE OF CONTENTS

https://www.ffiec.gov/default.htm

From 2008 through 2015, more than 500 banks failed, according to Federal Deposit Insurance Corporation (FDIC) data. In contrast, in the 7 years that preceded the recession, 25 banks failed.

– Cleveland Fed 2017

History Shows a Roadmap for Opportunity During Economic Downturns

Economic downturns and marketplace shocks clearly have a profound effect on the regional and community banking system. Figure 1 (in the right) provides the evidence of this.

The United States economy was enjoying a post-recession (2008) expansion that historically has reached maturity. Economic market cycles historically tend to ebb into recession following 10-15 years of expansion. That is to say, according to historical patterns, there is a strong cyclical likelihood that the economy will trend towards recessionary growth patterns into the 2020’s (not with standing the COVID-19 pandemic crisis). This is not a prediction and it may not be the case, but from a risk management perspective it is prudent for banks to be prepared for this scenario.

During and immediately after the Great Recession, US bank failures ballooned,

spiking to roughly 150 in both 2009 and 2010 since 2015, bank failures have fallen

to single -digit numbers.

*Number as of November 2017.+Includes assisted transactions typically made because of imminent failure.

Source: Federal Deposit Insurance Corporation

0

50

100

150

200 Recession

Figure 1- Source: Cleveland Fed

https://www.clevelandfed.org/en/newsroom-and-events/multimedia-storytelling/recession-retrospective.aspx




SOLUTION

THE PLAYBOOK TO RESPOND TO DISRUPTIONWhat Can Community and Regional Banks Do to Avoid “the Inevitable”?As the data from the Great Recession shows, most bank distress comes from default risk and liquidity deficiencies.Furthermore,asthesetwofactorsaremanifested,thepipelinefornewbusiness gets choked-off. It’s no secret then that the way to avoid stress is to mitigate default risk, and maintain the highest degree of vigilance on access to liquidity. Sounds simple, right? In a quickly-developing downturn, that’s tantamount to managing a small sailboat that has been overtakensuddenlybyahurricane,orchangingaflattireonacardoing60mph!Managingtherisks that a small bank has to deal with is anything but simple.

Below, we will get into greater detail about what risk aversity actually looks like in the 2020’s. In the past it was mainly about eliminating balance-sheet risk and default risk. Today, it’s becoming more about market share risk – the risk of being overtaken by faster, more digitally-equipped competitors.

The Fintech lender Biz2Credit (parent company of Biz2X) was founded at the start of the Great Recession in 2007. CEO and Founder, Rohit Arora,explains that, “An economic slowdown can actually be one of the best opportunities for a bank to make smart lending decisions that will build customer loyalty for the long-term.” Identifying the (recession) risk is important, but how banks will address it is critical. As the data from the Cleveland Fed indicates, banks that had over-weighted real estate lending exposure and/or uniform geographic exposure prior to the Great Recessionweretheinstitutionsmostsusceptibletoterminalfinancialstressandultimatelytheirdemise.

Economic downturns pose extraordinary risks due to sudden and unexpected events that can skew credit risks. However, one of the hidden risks is the loss of originations due to overly-stringent policies. In a competitive marketplace, the risk of constricting the lending pipeline too much has a high probability of causing its own distress in the medium to long-term.

BACK TO TABLE OF CONTENTS




SOLUTION

Mitigating Credit Risk by Eliminating Lending BiasLending portfolios over weighed by industry and/or geography inherently violate basic rules of portfolio diversity; and on the surface that can seem pretty self-evident. But as was the case with real estate lending in the early 2000’s, many bank executives discounted the default risk of real estatelendingbasedontheflawedpolicythatrealestatevalueswouldautomaticallycontinuetorise.

Inhindsight,wenowunderstandthattherewaswidespread,systemicbiasconfirmationpropping up this faulty theory. It was a theory so ingrained in the human-based decision-making process that any suggestion to the contrary was met uniformly with skepticism and rejection. Risk managers simply could not accept the prospect of a declining nationwide market for real estate so they continued to lend to even marginal borrowers with the erroneous assumption that rising real estate prices would cover any capital at risk.

Whiledigitaltechnology,suchasartificialintelligencesolutionsthatmanyFintechlendersareusing,isnotflawlessorperfect,itisinherentlyimmunetoconfirmationbiasandcognitivedissonance. A decisioning tool that will simultaneously assess risk on a per-case-basis and also flaganout-weightedportfolioissomethingpurehumandecisioninghasfailedtodoconsistently,leadingtorepeatedfinancialdistressamongbanks.Fintechdecisioningisrules-basedandextensiblewhereitbecomesthefirewallforboththeunder-correctingbiasthatcharacterizedthe led up to the Great Recession and the risk aversion bias that contributed to a painfully slow recovery.

A Hybrid Approach to Underwriting: Machine Learning and Human Intelligence ConvergeWhen he set out to found Biz2Credit, Arora understood that analyzing real-time company financialdatawithintheconstructofadisciplineddecision-logicschemacouldmitigateriskatmuchhigherratesofefficiencythaninthepurelyanalogue/human-baseddecisioningthatisthe de facto approach tothe lending process for most banks. The outcome was higher approval rates for loan requests for small-to-medium-sized businesses (SMB’s) combined with a lower repayment default rate.

Inadditiontotheseefficiencies,theloandecision-makingprocesswasstreamlinedandshortened, as was the data collection process. Biz2Credit was on the path to creating the foundationsforUnderwritingArtificialIntelligence(AI).

Biz2Credithasdevelopedareal-timeAIapplicationcalledBiz2Xthathasidentifiedandconstantly monitors critical factors in the client portfolio that manage and mitigate risk. Some of thesefactorsinclude:cashflow,customerriskdynamicprofiling,insolvencysignalsanddecision-making speed.





SOLUTION

SOLVING THE CRISIS IN BANKINGTechnology Makes Risk Averse Lending Easier for BanksWhat does it mean to be “risk-averse”? The answer may surprise even the most seasoned banker. Being

risk-averse does not mean that we don’t take risk. After all, banks get paid for taking risk, that’s the

essence of lending. Risk-aversity means taking a disciplined approach to the practice of lending that

conditionally mitigates risk; seen and unseen. It’s the “unseen” portion of risk that is the cause of great

consternation. Risk-aversity is the practice of seeking/accepting lower returns for known risk versus

higher returns for unknown risk.

Creating the Automated Risk ‘Guidance System’ for Banks

Thinkofthejobofanairlinepilotandcrew.Untilthe1970’s,properly-trainedandqualifiedpilotsand

crews with properly functioning aircraft were encountering catastrophic accidents, impacting unseen

terrain with no warning or awareness on the part of the crew. The obstacles they impacted (risks) were

unknown to them due to weather or other conditions as they performed their routine tasks. In 1974 the

US National Transportation Safety Board mandated that all large aircraft be equipped with a ground

proximity warning system to avoid unforeseen obstacles.

Strangely, it was not until 2002 that this system was mandated for smaller aircraft too. Starting to see

the analogy here? Today, the equivalent of a ground proximity warning system is available to banks and

financialinstitutionsofanysize.Asaneconomicdownturnbecomesmorelikely,likecloudsandfogto

apilot,theeffectswillverylikelyobscuretheriskprofileofmanysmall-to-medium-sizedcompanies.If

you had a warning system to alert you to default danger wouldn’t you want to have that safety?

For regional banks the opportunity is here to use new digital solutions to gain this same advantage and

avoid the catastrophes that hit many of their peers during the Great Recession more than 10 years ago.

The question is, why would you do business in today’s environment without it?



What Does an Early-Warning System for Risk Look Like?

The early warning system for risks starts with ensuring that your bank is prepared for the digital tidal

wave that is now overtaking the business loan sector. Your bank’s ability to enhance the origination

pipelinewithqualifiedapplicantsisofprimaryimportance.Efficientlysortinghigh-riskor,worse,

hidden-risk applications from the portfolio before the deals are originated is key.

In the e-book entitled ENDANGERED SPECIES? The Threat That

Could End Community Banking, Biz2X outlines in detail some of the

most immediate risks to Community Banking Financial Institutions

(CBFI’s) in the decade ahead. The Biz2X study focuses on the emerging

competition that is poised to siphon-off transaction volume from

CBFI’s and notes that the market share of these institutions are

starting from only a small portion of the credit volumes in total.

This is a precarious situation for these institutions in combination with the volatility and liquidity risks of

a declining economic climate.

For regional banks and banks under $50 billion in asset size, the risks are very similar. The challenge is

clear:takedefinitiveactiontomitigatecompetitiveattritionofmarketsharewhilebolsteringportfolio

risk management.

The question is, how to achieve this? The answer is to put in place an end-to-end digital lending system

that is easy to activate and even easier to maintain over time.

Solutions such as Biz2X are one of the best ways to achieve all of these objectives at the same time.



SOLUTION

VIEW E-BOOK


https://cdn-biz2x.biz2credit.com/images/ebook/Endangered-Species-Ebook-FINAL_links.pdf?_ga=2.37004832.1866008818.1591010243-1712986108.1572953892


THE DIGITAL LENDING SOLUTIONTHE BIZ2X PLATFORM

ORIGINATION Omni channel experience - provide a digital experience for your bank’s lending process with consistent corporate branding, a configurable digital application and a seamless user experience (UX) across any device.

DECISION ENGINES

Proven Lending Policies - Automated processing technology like knock-out criteria and decision policies facilitate better risk management. Use an ‘android’ approach: A combination of human intelligence and machine-led decisioning will enable you to fight unpredictable risks.

Advanced technology - Automation turns something simple (like business cash flow) into a real-time signal that is accessible for in-the-moment corrections. Technology can intelligently adjust your underwriting strategies in response to macroeconomic changes – e.g. timing how changes in trade policy will affect a specific sector

WORKFLOWS

Speed and Certainty - Streamline bank procedures and achieve efficiencies up to 80% for all of your lending teams.

SERVICING

Scalable Operations - Handle end-to-end loan servicing in a fully digital environment with legal filings, collections and ongoing monitoring.

SECURITY

Tested and Audited - Certified SOC 2 and ISO 27001 compliant, built on top of the most reliable cloud infrastructure on the market.

EXTENSIBLE

Extend Anytime - Add machine learning with advanced data analytics to produce unmatched lending results

GET A DEMO OF BIZ2X

https://www.biz2x.com/#GetAdemo

BIZ2X IN ACTION: POPULAR BANK

Benefits:• Five-minute application process on bilingual portal on PopularBank.com

• Self-service application for customers with at-home

• and mobile access for added convenience

• Secure hosting on Amazon Web Services cloud

• Capture additional business out-of-branch

Top Goals:• Capture additional business out-of-branch

• Automate decisions between $5,000 - $1,000,000

• Increase loan underwriting by 2x

• New management reports and risk analysis

Results:• Increased Application Volume 170%

• Increased Loan Closure by 32%

• Increased Lending Upsell by 28%

Key Facts:Largest bank in Puerto Rico

ASSETS

$38bn USDLAUNCH

October 2018LANGUAGES

English, Spanish

Popular was looking to expand their

digital banking services and grow small

business lending customers 50% by end

of 2019

Biz2Credit was

selected after global

RFP to find solution

provider

CONCLUSION AND SUMMARY

Fintech companies now lend to their merchant customers seamlessly. Regional banks have the opportunity to use these same solutions, tailored to their own credit boxes and compliance requirements, to pair faster small business loans – and loan satisfaction – with the relationship focus they have always excelled at.

TherightFintechcansaveregionallenders.Imagineathird-partyplatformthatsimplifiessmallbusinesslendingfunctionswithup-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 bank’s loan portfolio, now and in the future.

Digital lending is no longer optional. It is the industry’s new ATM – a must-have for any lender that will survive the three trends conspiring against regional banks.

quick guide to · 2020. 6. 3. · – cleveland fed 2017 history shows a roadmap for opportunity...

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