The process of banks supporting small businesses has too often been hindered by a lack of consumer insight and time-heavy lending processes. Where support is urgently required, traditional systems are struggling to satisfy demand whilst simultaneously protecting the interest of the lender.
Here to suggest a comtemporary solution to this problem is Kim Minor, the Senior Vice President of Marketing at Provenir. In this guest post for The Fintech Times, Kim explores the use of Decisioning-as-a-Service, and the potential benefits it could garner for the consumer-lender relationship.
Provenir powers disruptive financial services organisations across 40 countries and processes more than 2 billion transactions annually, helping fintechs, financial institutions, and payment providers make smarter decisions faster through data, decisioning, and insight.
Data is at the core of today’s digital business. The cloud has given birth to many new business models through speed to insights that provide competitive advantage and agility to ensure organisations have the right products, resources and strategies in place to best meet customer needs.
One such advent is Decisioning-as-a-Service which allows local banks and other small businesses with credit operations to access risk decisioning technology, an array of third-party data sources, and decisioning expertise on an on-demand basis to make accurate credit decisions in real-time without the high-dollar overhead of credit decisioning infrastructure. This streamlined process enables organisations to simply feed the applicant information into risk models, and via Decisioning-as-a-Service, receive decisions in real time.
One vertical industry where this is a game changer is in the small, local banking, lending and credit union sector. A report from UBS surveying more than 200 IT decision makers working in 175 banks across the country, reveals a huge disparity in technology budgets. According to the report, in 2019, JPMorgan had a technology spend of $11.4 billion. However, half of those surveyed from smaller banks with between $51 billion and $100 billion in assets spend less than $100 million on technology annually.
Assessing risk is vital for small businesses and banks to understand who to offer credit to, especially for unbanked and “thin file” or even invisible consumers, where traditional credit score information is not available. But having the right decisioning infrastructure and personnel in place can being incredibly cost-prohibitive, making it difficult for small banks to compete.
Local banks and credit unions need to stay on top of technology however, to meet the speed imperative. According to recent research, unless a financial institution can open a new account or complete a new loan application in less than five minutes, the potential for the consumer to abandon the account opening increases to as much as 60% or more. Alternatively, faster account openings reduce abandonment rates down to 25% or less.
Additionally, the Covid-19 pandemic has introduced a surge in business uncertainty that will present community banks with both challenges and possibilities, according to the FDIC Community Banking Study 2020. As earnings decline and credit losses materialise, community bank performance is likely to deteriorate, which means smaller banks must work harder than ever before to expand their book of business.
Decisioning-as-a-Service supports the quick onboarding of new customers and upselling to existing clients, but it also expands the reach of local banks and credit unions to empower them to serve more customers – including small and medium enterprises (SMEs). Despite holding a small share of total loans, community banks are a key provider of funding for many local businesses, most importantly by making CRE loans, small business loans, and agricultural loans.
This is important, as SMEs play a major role in most economies, accounting for the majority of businesses worldwide and are important contributors to job creation and global economic development, representing about 90% of businesses and more than 50% of employment worldwide.
However, access to finance is a key constraint to SME growth. Research shows that 44% of SMEs look to funding to meet operating expenses, and we can expect this number to grow considerably during emergencies and times of economic uncertainty. The same research found that 56% want funds to expand the business or pursue new opportunities.
According to McKinsey research, today in traditional banks, the average “time to decision” for small business and corporate lending is between three and five weeks and the average “time to cash” is nearly three months. To support SMEs with faster access to funds, lenders need to build lending processes specifically designed to quickly understand a business’ financial position and possible default risk.
Another benefit to local banks and credit unions leveraging Decisioning-as-a-Service in their credit risk management is they can benefit by being able to better respond to regulatory and compliance changes, “future-proofing” this aspect of their business.
The regulatory burden on small banks and credit unions is a significant challenge. A report from the Federal Reserve Bank of St. Louis examining compliance costs across all banks in a three-year period showed the burden was much greater for smaller banks with assets of less than $100 million. Their compliance costs averaged nearly 10%, while expenses for banks with assets of $1 billion to $10 billion averaged just over 5%.
Decisioning-as-a-Service is a tremendous innovation that can provide significant competitive advantage to local banks and small businesses, and even such sectors as utilities, giving them access to sophisticated cloud decisioning technology and expertise at a cost that is approachable.