Low interest rates, weaker loan demand and higher operating expenses are putting new pressures on banks to increase loan revenue. In the first quarter of 2021, both fees and loan balances declined from pre-pandemic levels, according to Fitch Ratings, which predicts negative loan growth to continue due to soft commercial and consumer demand.
Banks hoping to increase revenues can do so most efficiently with commercial loans, which are typically bigger than consumer loans and thus offer more interest income and profit potential. But to fully reap those profits, lenders must find ways to make commercial loans more efficient and cost-effective. A digital lending platform can help you achieve these goals.
Challenges to Growing Loan Revenue
In 2021 and onward, banks and credit unions hoping to increase commercial lending revenues face three key challenges:
1. More Competition
The past year has witnessed an increasingly competitive banking market. When the COVID-19 pandemic began and Paycheck Protection Program (PPP) loans were announced, many small and midsized businesses were left out in the rush for funds. Feeling ignored and ill-served by their existing financial institutions, many of those businesses turned to new sources to obtain loans. The experience made business owners more willing to leave even long-term banking relationships to get the financing they need. A July 2020 survey found 28 percent of SMBs that got PPP loans received them from a lender with whom they had no previous relationship or a financial institution other than their primary bank. Of those, 44 percent expect to transition some or all of their business to that lender.
2. More Risk
With many industries and regions still riding the pandemic rollercoaster, small business lending is riskier than ever before. Businesses failing and defaulting on loans isn’t the only danger: Market risks, inflation and unforeseen crises have the potential to decimate lenders’ return rates. With more risk factors to analyze, loan decisions take longer to make.
3. More Regulation
Constantly changing regulations present yet another hurdle to growing commercial loan revenues. This is especially true for lenders participating in government-backed loan programs such as Small Business Administration (SBA) loans.
Banks attempting to grow their commercial loan portfolios must perform a difficult balancing act: attracting and retaining customers in an extremely competitive market while minimizing risk, retaining adequate balance sheet reserves, and remaining in compliance with banking regulations.
The Promise of Commercial Lending
Their larger dollar value compared to consumer loans makes commercial loans an appealing way to increase revenue. Renewing lines of credit for existing business customers or upselling them into new loan products can help cement customer relationships and increase your bank’s profits. And with more small business owners willing to explore new banking relationships, now is a great time to cast your net for new commercial customers.
But new customers and new loans don’t necessarily mean new revenues. In addition to potential profit, commercial loans can also mean additional costs for processing, loan origination and servicing. Reducing “touch time” and risk, while increasing the number of loan applications and disbursements, is key to substantially increasing profitability for financial institutions, a McKinsey analysis suggests. This is where digital lending platforms come in.
9 Ways a Digital Lending Platform Can Grow Loan Revenue
1. Offer customers omnichannel ease
The pandemic has proven that consumers and business owners alike are willing—even eager—to transition to digital business models. When COVID-19 restrictions kept clients from visiting physical branches, they were forced to use bank websites or apps. Having recognized the efficiency and ease these digital tools offer, many small business customers will never return to the old days of visiting the bank in person. In fact, 42% of U.S. bank customers say they plan to visit physical branches less often after the pandemic ends, according to a survey by Simon-Kucher.
A digital lending platform fulfills customers’ desire for convenience by allowing them to engage with your bank the way they prefer—be it in person, online or on their smartphones—even when applying for a business loan. Online lenders have made applying for loans easy, and banks hoping to compete must do the same. Using an omnichannel platform, business owners can start a loan application in one place and complete it in another.
2. Streamline loan applications
Traditionally, the small business loan application process is time-consuming and tedious. With digital lending platforms, there’s no need to laboriously gather figures or fax documents. Instead, borrowers simply grant the bank access to their financial data. Bankers can view and verify real-time data such as cash flow, revenues, credit history, collateral value and debt-to-income ratio to determine creditworthiness in minutes, rather than days.
3. Profit from risk-based pricing
Accurate risk assessment is key to profitable commercial loans. An automated rules engine programmed to your risk management standards can measure a variety of risk, including those that formerly took a great deal of human effort and time to uncover. No longer must underwriters review financial statements, bank statements, tax returns and other documents manually. Instead, software using artificial intelligence (AI) and predictive analytics can quickly measure risk factors such as Internal Rate of Return (IRR), Loan to Value (LTV) Ratio, and Debt Service Coverage Ratio (DSCR). With a fuller picture of risk, you can improve your loan pricing strategies to minimize risk while maximizing revenue.
4. Speed loan decisioning and disbursement
Gathering and analyzing information aren’t the only steps in the loan process that a digital lending platform can accelerate. Such a solution can shorten loan processing time and provide a decision in a matter of minutes. If the borrower banks online, the loan proceeds can be disbursed as soon as the same day. Offering quick solutions to SMBs’ financial needs makes your bank more appealing and helps you compete with bigger institutions.
5. Monitor loan portfolios in real-time
Once a loan is funded, digital lending platforms can continue to assess risk, track key metrics and monitor compliance in real-time. With instant access to accurate data on outstanding loans and borrowers, the software can watch your loan portfolio for signs of trouble and alert bankers to take quick action if necessary. In addition to monitoring financial performance, digital lending solutions also give your regulatory oversight team ongoing visibility platforms into how loan programs are administered, enhancing compliance management.
6. Simplify compliance
Choosing a solution provider that can incorporate your underwriting requirements for specific types of loans into your credit decisioning software helps ensure that you meet compliance requirements, no matter how rapidly regulators change them. For example, the SBA and Federal Reserve issued new rules when PPP loans were introduced, then revised them multiple times to combat fraud. Human-based underwriting struggles to keep up with such frequent changes, which can lead to errors and oversights.
7. Grow your customer base
By taking much of the loan application process online, a digital lending platform can expand your commercial customer base to new markets far beyond your local area. It can expand your market in other ways, too. A well-designed decision engine can set pricing rules that remove unconscious bias, help prevent discrimination and make commercial loans available to a wider variety of borrowers. This increases both revenues and customer satisfaction.
8. Enhance customer service
The digital lending platform not only makes it easier to attract and serve new commercial customers, but can also provide better service to existing customers. For example, you can automate low-risk decisions such as whether to renew a customer’s line of credit, reducing interruption to the customer.
9. Increase efficiency
By eliminating time-consuming manual tasks from loan applications and underwriting, digital lending solutions save time and improve efficiency. Software can flag issues requiring human review; employees can focus on higher-value tasks like building customer relationships or evaluating more complex loan applications and decisions.
Digital Lending Platforms Mean More Efficient, More Profitable Loans
Going forward, success in banking requires financial institutions to demonstrate four key traits, according to Accenture: empathy, responsiveness, focus and efficiency. By better serving customers, responding to their needs, and increasing efficiency, a digital lending platform gives bankers more time to focus on their customers.
Despite the benefits to be gained from automated lending solutions, few banks are truly taking advantage of this tool. A survey by Moody’s Analytics reports that fewer than 20% of lenders have automated the key steps of loan processing and servicing; slightly more than 20% have automated credit analysis and decisions. Clearly, financial institutions that adopt a digital lending platform can enjoy a substantial edge compared to their competition--and substantial revenue growth as well.
