The commercial lending space offers a huge opportunity for banks across the world to seek and safeguard sound levels of profitability post crisis. But this doesn’t come without challenges. Today banks are faced with a diminishing pool of credit worthy customers, tighter underwriting standards, an increased regulatory burden and greater capital requirements. At the same time, lending is a banks biggest source of business risk and loan portfolio issues pose a threat to performance and viability.
To climb the ladder to success in commercial lending, banks need to take steps towards true customer focus, cost reduction and sound risk management. These may all be much labored points, but they represent strategic areas towards the future survival and profitability of any bank today.
Let’s look at these three key steps in more detail:
Step 1 – Make everything you do be about the customer
The number of credit worthy customers has declined and a rise in outside competition threatens the industry, with large retailers and new start-ups joining the battle for business. Fewer borrowers and more players means competition to attract the most profitable customers is rife. That, in combination with the fact customer loyalty is diminishing, sets up the drivers for improved customer centricity.
To boost customer retention and acquisition, banks need to focus on delivering a flawless experience by improving product and service delivery capabilities to drive customer loyalty. Banks must make it easier to do business with them and make the loan approval process as painless as possible – today customers can effortlessly switch banks if they have a bad experience, or if they can get quicker service elsewhere. Banks must empower relationship managers with the right tools and information to deliver flawless services so they are positioned as trusted advisors in the eyes of the customer. This will forge stronger client relationships. Lastly banks need to be more price competitive. Lower levels of loyalty and higher competition makes it harder for banks to differentiate themselves and being competitive on price is key.
Step 2 – Automate and Integrate to Cut Costs
Regulators are requiring banks to hold more capital against their lending activities. To reach the same levels of return, banks need to either increase their lending rates or reduce their operating costs. Because increasing prices will hamper customer acquisition and custom retention, banks have no choice but to strategically reduce costs the cost to underwrite, process and service news loans in an effort to maintain and increase profitability.
As a result, cost reduction continues to remain a top priority for banks everywhere. The industry has experienced significant cost reduction in an effort to get leaner, yet much more is still needed. Long term cost effectiveness is achievable in two ways – by automating manual processes and by integrating systems. The only way to do this is by investing in the appropriate technologies to alleviate the burden brought on by manual processes and help deliver a single customer view. Automation and integration will significantly improve business efficiency to cut costs and risk, whilst helping banks deliver a better customer service to enhance the bank’s core business.
Step 3 – Rigorous, Robust Risk
Lending is the principle business activity for commercial banks, and thus, the loan portfolio is the largest asset and the predominant source of revenue. Therefore, it is one of the greatest sources of risk to a bank, and should portfolio problems occur, it will have a significant impact on performance and ultimately, the banks viability.
As a result, bank boards and senior management teams, along with the regulatory and audit communities, are requiring greater visibility, transparency and control over the portfolio and its associated risks. But, navigating through an ever-evolving regulatory landscape requires access to the right information and banks need access to all the elements of data within the lending process. When equipped with the right tools and information, relationship managers can have an ever evolving view of the customer’s credit quality.
In addition to the in-depth reporting requirements needed to achieve a more rigorous portfolio management standard, banks must develop a more rigorous approach to stress testing. Banks must have the capability to stress both macroeconomic factors, and borrower-level data elements to see what impact those changes will have on the health and performance of segments of the portfolio, and the portfolio as a whole.
In order to restore profitability to more acceptable and sustainable levels, better service customers, effectively manage risk and ensure regulatory compliance, banks need to make addressing the deficiencies in their commercial lending processes an urgent priority.
The post crisis world has completely changed the commercial lending market; in order for banks to seize future opportunities, they too must ride these waves of change by implementing new strategies around customer, cost and risk to reach the top.
Where’s the Value?