Since the COVID-19 pandemic struck, banks have dealt with unprecedented disruptions and challenges. Commercial and business banking are two of the areas that have seen the greatest changes.
In 2020, the Paycheck Protection Program (PPP) transformed the financial services industry. Banks seeking to make PPP loans implemented digital banking practices basically overnight to quickly assess the risk factors of potential loans and process loans rapidly. With the Small Business Administration (SBA) delivering new guidance on these loans seemingly every day, smaller banks that we re nimble enough to respond quickly to changing rules benefited most from the challenge.
Thankfully, the chaos that was unleashed at the start of the pandemic proved a learning experience that was carried ahead into 2021. Still, pandemic-related financial services such as handling small business owners' PPP loan forgiveness applications continued to drive many of the top commercial banking trends in 2021.
Now, in 2022 the banking industry must prepare to deal with ongoing disruption in the commercial lending space. What are the top trends in commercial banking for 2022, and how can you position your financial institution to profit from them? We’ve prepared a helpful roundup for you of 2022 trends in this article.
Trend 1: Economic Recovery: Commercial Banking Opportunities and Challenges
Largely thanks to the efficient way banks handled PPP loan forgiveness applications, small business satisfaction with banks reached a new high in 2021, J.D. Power reports. Paul McAdam, senior director of banking and payments intelligence at J.D. Power, suggests that savvy banks will build on the goodwill they earned among their business banking clients in the past year by offering a more comprehensive range of services and access to timely credit to help small businesses recover from the pandemic.
However, when it comes to recovery, there is still a long way to go. Nearly one in three (28%) small businesses report that the pandemic continues to have a "major" or "severe" effect on their businesses, J.D. Power found. Just 52% of businesses are financially healthy, while 26% describe themselves as financially stressed and 23% as financially vulnerable.
The national and global prognosis for economic recovery is cautiously optimistic but constantly changing. In November 2021, the Conference Board predicted 3.9% global growth in 2022 but warned that higher financing costs, continuing labor shortages and supply-chain issues, and inflation could threaten that recovery. Meanwhile, Goldman Sachs lowered its U.S. economic growth targets to 4% for 2022, partly due to slower-than-expected rebounds in consumer spending due to supply chain problems.
Only 67% of small businesses were fully open in November 2021—down from 70% in October, according to a report from online small business network, Alignable . But while the majority of businesses were still struggling with COVID-19 challenges, others reported having their "best year ever." In other words, it's either feast or famine for small business owners.
Whether businesses are in survival mode or growth mode, access to capital is vital, offering ongoing opportunities for banks to meet this need. But there's still room for improvement on the part of regional banks; those that have captured new customers during the pandemic must now focus on customer retention. On average, national banks earn higher customer satisfaction scores than regional banks in J.D. Power's survey, indicating that smaller banks cannot rest on their laurels.
Trend 2: Digitization of Commercial Banking Business Models
Retail banking customers have eagerly embraced digital channels such as mobile banking. The pandemic forced commercial banks to catch up. Turning to digital channels allowed small and regional lenders to pivot rapidly during the pandemic, taking up the slack for small businesses that found themselves ignored by bigger banks. Community banks that made larger investments in technology before the pandemic made more loans and garnered more deposits on average than banks that did not significantly invest in technology, a recent FDIC report found.
Pandemic lockdowns forced small business customers to use digital banking, many of them for the first time. The expectation to interact with your bank digitally and in person has long been commonplace among younger customers. Still, it is now spreading to encompass small business owners in all age groups.
A combination of high-tech and high-touch can deliver the ideal commercial banking experience that your customers want. Digitizing the lending experience can streamline your loan application, underwriting, and disbursement processes by handing manual decisions over to algorithms.
Automation gives bankers more time to spend on the personalized service customers demand. The average satisfaction score for small business banking customers with an account manager is 859—73 points higher than small businesses with no assigned account manager, J.D. Power reports. Clearly, personalization matters and can be vital in retaining new customers you gained during the pandemic.
Trend 3: Disruption of Traditional Credit & Underwriting Models
Concerns over bias in small business lending have long plagued the financial services industry. In 2022, the growth of initiatives to enable more fair small business lending will continue to disrupt traditional underwriting models in the banking industry.
Relying on a potential borrower's credit score, whether their personal FICO score or business credit score, often leads lenders to reject applications from smaller, newer or minority-owned businesses. Traditional underwriting models have sometimes left these important communities shut out of financing. Bankers nevertheless have struggled to overcome these systematic issues because often the business owners that are turned down through this process may have thin credit files, lower credit scores, or no business credit history.
Realizing the shortcomings of traditional credit scoring, banks are tak ing a cue from fintech companies and look at new data to make their decisions. In addition to a business's cash flow, key performance indicators such as debt service coverage ratios, gross profit ratios and net profit ratios can be analyzed to assess a borrower's likeliness to pay. By examining current and projected future financial information, rather than solely focusing on information about the past contained in credit reports and scores, lenders can gain actionable insights to more fairly analyze a borrower's creditworthiness while mitigating risk.
Technology such as artificial intelligence and machine learning can help automate this process. Lending solutions that can be customized to suit a lender's risk tolerance and lending criteria, such as Biz2Credit's BizAnalyzer, can provide a fuller picture of a small business's risk profile and creditworthiness in less time. Higher-risk borrowers who might once have been declined can gain access to the capital they need to improve their creditworthiness, grow their businesses, and become better bank customers.
Trend 4: Alternative Underwriting & Credit Data
Recognizing that the pandemic has greatly affected consumers' finances, consumer lenders have begun to expand their sources of information on potential borrowers to include data such as utility payments, rent payments, and employment records. In 2022, more commercial lenders will follow suit by turning to nontraditional information such as social media, credit card transactions or data from business bank accounts to assess a loan applicant's risk profile and creditworthiness.
Using alternative personal data can also help improve lending to startup businesses that don't yet have their credit histories and must rely on their credit scores to get loans.
AI and machine learning are critical to quickly analyzing and learning from patterns in alternative data. Cash flow analytics tools can measure an individual business's creditworthiness and enhance risk management. In the bigger picture, AI can continually monitor cash flow, insolvency signals, and customer risk to drive smarter loan decisions and improve loan profitability. Sophisticated AI tools can automatically adjust your institution's underwriting strategies to take macroeconomic factors into account.
Trend 5: Open Banking Enables Financial Services Providers
Taking the process of "screen scraping" to the next level, open banking uses open APIs to provide access to the financial data in customers' held-away accounts. Open banking gives customers greater control over their data and enhances cybersecurity while providing commercial banks with a clearer picture of a customer's financial status and creditworthiness.
Access to real-time data about a small business's bank accounts, cash flow, payment card accounts, vendor accounts and insurance policies, among other data, allows banks to make loans with greater confidence and better identify the products and services that will best serve a particular customer.
While the U.S. has not been a leader in embracing open banking, the concept is gradually gaining ground due to challenges, including customer privacy concerns and the regulatory environment. Financial services companies can help speed the adoption of next-generation digital transformation by educating small business customers about its many benefits. Borrowers benefit from a better customer experience during the loan application process, faster loan disbursement, and a more objective assessment of their creditworthiness than traditional loan application and underwriting processes allow. Commercial banks benefit by reducing risk, decreasing costs, improving efficiency, and increasing loan volume and profitability.
Better Commercial Banking in 2022
Certainly, there are many important trends that commercial banking is seeing in 2022. How much will your institution spend to take on these trends? Forrester predicts that banks' spending on technology will grow by double-digits in 2022. It’s proving to be the year that transforms banking digitally. Embracing these top commercial banking trends of 2022 can help ensure your bank remains competitive instead of being left behind.
