Fintech Can Help Banks Make Connections and Identify Trading Opportunities

Community banks are constantly looking for ways to access greater liquidity and diversify their portfolios. While expanding the familiar network of banks that they can trade with is essential, it’s often complicated, time-consuming and opaque.

Fintech platforms are changing the way these deals occur, from buying, selling, participating and servicing loans to facilitating communication between buyers and sellers through private chat functions and shared document libraries. What once was a back-channel, quid pro quo marketplace, driven by common relationships, has been transformed by technology that provides greater transparency, better data and a wider range of trading options, all supporting community banks’ liquidity goals.

Understanding the Barriers Banks Face
The Federal Deposit Insurance Corp. reported in its 2020 community banking study that upwards of 80% of loans originated by community banks are to customers located within 50 miles of a branch. This overexposure to local, in-market customers is a risk that can be mitigated by strategic and well-executed out-of-market lending. Numerous barriers have historically existed for helping banks expand their connections and diversify out of their market.

The major barriers facing banks include:

• Regulatory constraints: As a bank director, you know that regulators will question your out-of-market lending volume. That’s why it’s so important for community banks to formally set aside capital for out-of-market lending — either as a percentage or a dollar amount — to show examiners that the bank and its board are diligently managing the inherent risks.
• Network and connections: Your bank’s access to buyers and sellers of loans is often limited by who your bank officers know and where former colleagues work. Much of the work to identify the right trading partners happens offline, requiring significant time and resources and commonly resulting in dead ends and wasted time.
• Loan size and lost customers: Community banks have often been limited when it comes to what type and size of loans they can trade. Your bank has likely lost bigger deals and large deposits with current customers and prospects due to lacking a sufficient network of banks willing to participate on the credit.
• Information access: To know if a deal is right, your bank will need to be able to ask questions, access detailed information and ensure that it meets credit and regulatory requirements. Historically, getting the information needed to move forward in a timely manner can be challenging, if not impossible. Your bank might encounter parties that don’t provide the level of transparency necessary to ensure the deal makes sense.

Seizing the Liquidity Opportunity
Fintech can help banks overcome these challenges, easily expand their networks with new connections, create liquidity and diversify their portfolio with intelligent exposure to new markets. New technology has centralized marketplaces of buyers, sellers and participants looking to trade different types of loans, making it easier for banks to identify and research trading partners and access loans they previously couldn’t.

These opportunities include:

• Enhanced liquidity opportunities driven by infinitely more buyers and sellers coming together in one place.
• Collaboration that’s transparent and out in the open, allowing for the easy flow of communication.
• Access to data and analytics that have historically been built for larger financial institutions.
• Document libraries that allow easy, drag-and-drop functionality along with naming convention requirements for easy navigation by counterparties, auditors and regulators.
• Servicing functionality for loan participations that allows for efficient reconciliation and communication between participants.

By having trading, collaboration and analytics all in one place, banks can access an unparalleled level of liquidity and manage risk from within their loan portfolio, where the bulk of the risk lies.

Follow the Banking Talent
There’s no stronger indicator of the seismic shift occurring in financial markets than the flow of talent from banking to fintech. Those who have struggled firsthand at banks, facilitating loan trading as both a buyer and seller, have long said, “There has to be a better way.” Now there is, and that better way is being built for bankers by bankers that have led countless community, regional and national banks.