What’s Changed In Business Lending



In today’s fast-moving world, business leaders expect quick decisions, and forward-thinking banks are speeding up the loan process to serve clients in less than three minutes. So what’s changed — and what hasn’t changed — in commercial lending? In this video, Bill Phelan of PayNet explains that relationships still drive business banking and shares how the development of those relationships has changed. He also provides an update on Main Street credit trends.

  • How Banks Are Enhancing Credit Processes
  • New Ways to Build Relationships
  • Small Business Credit Trends

The Great Payments Opportunity


payments-5-20-19.pngBanks have an opportunity to deepen relationships with their corporate customers facing payment challenges. One promising product could be integrated receivables solutions.

While most business-to-business payments are still done through paper check, electronic payments are growing rapidly. Paper checks remain at about 50 percent of business-to-business payments, according to the 2016 Electronic Payments Survey by the Association for Financial Professionals. But Automated Clearing House payments grew 9.4 percent in 2018, according to the National Automated Clearinghouse Association — a trend that is forcing businesses with high receivables volumes to look for ways to process electronic payments more efficiently.

Electronic payments create unique challenges for bank corporate customers. While the deposit is received electronically at the bank, the remittance and detailed payment information are typically sent separately in an email, document or spreadsheet. The corporate treasurer must manually connect, or re-associate, the remittance information to the deposit, which creates delays in crediting the customers’ account. As electronic ACH volumes increase, treasurers solve this problem by hiring more accounting staff to reconcile these payments.

Corporates also face added complexity from payment networks, which are becoming a more common way for large companies to pay their suppliers. While more efficient for the payer, this process requires treasury staff to log onto multiple payment network aggregation sites and download the remittance information. These downloaded files require manual re-association to the payment in order to credit the customer’s account, which requires adding more staff.

Corporates are also using mobile to accept field payments, like collecting payment on the delivery of goods or services, new customer orders or credit holds and collections. However, mobile payments again force treasurers to manually reconcile them. Moreover, most commercial banking mobile applications are designed for the treasurer of the business, with features such as balances, history and transfers. Collecting field payments needs to be configured so that field representative can simply collect the payments and remittance.

The corporate treasurer needs increased levels of automation to solve these challenges and problems. Traditional bank lockbox processing was designed for checks and relies on manual entry of the corporate’s payments and delivery of a reconciled file. This paper-based approach will be insufficient as more payments become electronic.

Treasurers should consider integrated receivables systems that match all payments types from all payment channels using artificial intelligence. A consolidated payment file updates the corporate’s enterprise resource planning system once these payments are processed. The integrated receivable solution then provides the corporate with a single archive of all their payments, rather than just a lockbox.

Right now, corporate customers are looking to financial technology firms for integrated receivable solutions because banks are moving too slowly. This disintermediates corporate customers from the banks they do business with. But almost 73 percent of corporate treasurers believe it is important or very important for their bank to provide integrated receivables, according to Aite.

This is an opportunity for bankers. The integrated receivable market offers many software solutions for banks so they can quickly ramp up and meet the needs of their corporate customers.

Bankers have a wide range of fintech partners to choose from for integrated receivables software and should look for one with expertise and knowledge of the corporate market. The solutions should leverage artificial intelligence and robotic process automation to process payments from any channel, include security with high availability and be easy for the bank and corporate customers to use.

Bridging The Gap Between Retail & Business Banking



Speed, ease of use and convenience define the customer experience today for both retail and commercial clients. In this video, First Data’s Christian Ofner and Eric Smith explain what retail and commercial customers expect from banks today—and you might be surprised to find they have similar needs. They also share how banks should enhance the experience.

  • Strengthening the Retail Experience
  • Enhancing Commercial Clients’ Experience
  • Technologies Banks Should Consider
  • Evaluating Your Bank’s Digital Strategy

Understanding the New Age of Integrated Payables


payments-7-25-18.pngUntil now, treasury management solutions have been focused almost solely on helping clients execute payments. These solutions have emphasized simplified payments and payment method flexibility. This can be referred to as Integrated Payables 1.0.

New and disruptive accounts payable automation has enabled banks to offer a more holistic solution, which caters to their customers’ end-to-end accounts payable process while addressing an even broader range of customer pain points. This can be called Integrated Payables 2.0.

Offering solutions that leverage automated processes can provide benefits for commercial banks they aren’t realizing with the legacy solutions. A couple of key benefits that offering Integrated Payables 2.0 technology provides to banks in comparison to traditional Integrated Payables 1.0 solutions include:

Addressing the end-to-end accounts payable process, instead of just payment execution, provides customers with more value.

The first step to understanding the benefits Integrated Payables 2.0 solutions provide is centered on understanding the end-to-end accounts payable process for their customers. This process, regardless of company or industry, generally involves four steps:

  1. Invoice Capture: Lifting data from vendor invoices and coding it into an accounting system.
  2. Invoice Approval: Confirming vendor invoices are accurate and reflect the agreed upon amount.
  3. Payment Authorization: Creating a payment run, getting the payment approved by an authorizer, and leveraging the correct payment type and bank account to use.
  4. Payment Execution: Sending money to vendors.

Within this process, Integrated Payable 1.0 solutions are only serving step #4: Payment Execution. The truth is every payment is the result of an invoice, and the process of making a payment includes all of the steps in between receiving the invoice and paying it. By not streamlining steps leading up to the payment, Integrated Payables 1.0 solutions allow opportunity to improve efficiency.

Integrated Payables 2.0 solutions streamline all four steps by providing one simple user interface that eliminates unnecessary manual processing. By offering Integrated Payables 2.0 solutions, banks provide more value to their customers by addressing the pain each of these manual steps brings throughout the AP process.

Becoming a strategic partner (instead of just a solution provider) to customers drives retention by creating switching costs.

There are a lot of costs associated with manual accounts payable that businesses face every day. Some are very straightforward and easy to track, like processing fees. But there are other costs that are less apparent, but have much broader cost implications on the business. These costs include:

  • Wasted time reconciling duplicate invoice payments.
  • Missed revenue from rebates and early-pay discounts.
  • Value-added projects that never get done.

With the middle-market businesses paying more than 100 invoices every month, costs add up tremendously over the course of a year. When you can eliminate these costs from your customers’ accounts payable process by providing them with an end-to-end accounts payable solution, you will be able to establish a loyal list of customers.

With only a small fraction of businesses currently automating accounts payable, it is clear Integrated Payables 2.0 solutions are still approaching it’s tipping point.

Banks have an opportunity to get ahead of competitors and differentiate themselves by offering a disruptive solution. Then, when their customers get offers from other banks to switch, the switching costs associated with going back to manual accounts payable are likely to dissuade them from making the switch.

Although Integrated Payables 1.0 solutions have been helpful to your customers for years, new disruptive technology is creating even greater capabilities for mid-sized businesses to efficiently pay their bills, and for you to further strengthen your relationships with customers by providing this technology in the form of a white-label solution.

Powering Payments For Your Business Customers



Business payments are evolving rapidly, with capabilities advanced by technology and rising expectations from business users for simple and seamless payments. In this video, Bill Wardwell of Bottomline Technologies explains:

  • The Business Payments Landscape
  • What Business Customers Want in a Solution
  • Exceeding Customer Expectations

How Strategic Plans for Community Banks Should Change


strategy-5-21-18.pngThe commercial banking industry is undergoing a structural transformation. The Federal Reserve’s response to the recession in the last decade has had a continuing, unanticipated impact on community banks. Yet most banks are relying on legacy strategic planning tools and processes that won’t allow them to see – and solve – upcoming problems.

Quantitative easing (QE) pumped funds in the marketplace (deposits), while banks contended with an extended low interest rate environment. Moving forward, as QE is reversed, deposits will be withdrawn while interest rates gradually rise. Already, the largest banks are sucking up the best deposits, which will leave community banks scrambling for funds.

All banks do strategic planning. Most banks tend to extrapolate accounting data to generate pro forma reports and analysis. Prior to 2008, this process worked well, and many consulting firms and banks developed analytical tools and processes to help in strategic planning.

But dependence on these traditional strategic planning tools and processes is risky. Accounting statements camouflage critical data that is relevant to bank pro forma performance and strategic planning. This data may not have mattered prior to the recession, but it is essential in today’s banking environment.

The monetary policy of the last decade has led to hidden time bombs in banks’ balance sheets, masked by traditional financial reporting and ignored by most market analysts. Unfortunately, the inevitable rising rate environment will expose this harm, blindsiding most bank management, investors and shareholders.

Year to date, declining gross loan yields have been offset by declining cost-of-funds (primarily deposits) and an increase in the supply of these deposits. During this extended post-recession period, net interest margins (NIMs) have remained relatively strong, creating a pattern of reasonable earnings, year after year. Unfortunately, in a rising rate environment this process will reverse itself.

Many banks will attempt to use the ALCO process to mitigate these trends. Unfortunately, ALCO is primarily a short-term tuning process, not a long-term strategic tool. It is not designed to solve long-term gross yield and cost-of-funds issues. Given that the “Normalization Period” will extend for several years, corrective actions using ALCO may serve to further aggravate the long-term situation.

Community banks need to focus on methods designed to meaningfully change the mix, rate and duration of their asset portfolios. They must also recognize that deposits, whose availability and pricing have been taken for granted for several years, will be of increasing importance in the years to come.

Community banks need to be prepared to move away from their dependence on traditional analytics that cannot identify, quantify and provide solutions to these unprecedented problems in the U.S. community banking market.

Given the slow turnover rate of loan portfolios, any real change in a bank’s assets and their composition by type, rate and maturity can only be accomplished through the merger and acquisition (M&A) M&A process. Similarly, improving loan-to-deposit ratios and deposit composition can only be truly accomplished through M&A.

But many banks are not even including an M&A scenario in their strategic planning exercises. And that is a big mistake. While there is no guarantee that an appropriate target exists, or, if it exists, that it is available for sale at the appropriate price, it is imperative that community bank management explore this possibility thoroughly before resigning themselves to more traditional and less effective approaches to solving the upcoming problems.

Banks that successfully use M&A in an appropriate manner have an extraordinary opportunity to separate themselves from the pack.

For banks that are prepared to explore the M&A option, CEOs and boards should realize that times have changed. Traditional M&A valuation techniques and dependence on ratios such as multiple-to-book and payback period are no longer relevant and generally misleading.

It is necessary to analyze in depth, not only the fixed and floating interest rates built into a target’s loan portfolio, but also the individual duration and maturities of their loan portfolios as they extend into the future. Traditional accounting systems tend to obscure this critical data, and the commonly used extrapolations of GAAP financial statements generally lead to misleading and erroneous conclusions.

The increasing value of deposits needs to be quantified in the appropriate manner. Again, traditional techniques for valuing deposits are either too short-term oriented or based on methodologies used in entirely different economic environments, rendering their conclusions meaningless.

M&A can be a powerful catalyst to solve problems in today’s complicated banking environment. It does not have to tie up too much bank time or management resources, if it is done correctly with the right analytics.

Do You Have Effective Incentive Plans for Your Commercial Lenders?


incentive-6-23-17.pngCommercial banking is a core business for most regional and community banks. It is a key driver of profitability as well as organizational growth, and frequently serves as the entry point to many of the bank’s other businesses, such as wealth management, treasury services and deposit gathering. The competition for talent and growth within commercial lending has never been higher, and as a result, commercial lenders continue to be among the mostly highly paid and highly incentivized individuals in the bank. It is of critical importance therefore to think carefully about maximizing your bank’s return on its lender compensation by thoroughly evaluating your incentive programs for this group. Do the plans motivate the right behaviors, properly consider risk elements and successfully align compensation with performance?

Incentive Goals
The first step in evaluating the effectiveness of the incentive plan for the commercial lending group is evaluating the business priorities of the lending group.

  • What is the preferred balance between profit and growth for each of the commercial businesses?
  • How should your business segmentation impact your plan design? For example, does the bank need multiple incentive plans to align with segmentation between C&I and commercial real estate, or one incentive plan covering multiple loan types?
  • What are the cross-selling or referral expectations for lenders?
  • What products and behaviors should your lenders pursue in order to encourage sticky relationships with your commercial clients?
  • What is the performance culture of the commercial lending group, and how can the incentive plan reinforce it?
  • What are the bank’s goals for specific types of commercial business in terms of client type, industry and loan size? For example, if the bank prioritizes C&I loans due to their typically higher level of fee income and associated deposits, rather than larger CRE loans, the incentive plan should reflect that priority.

These are just a few examples of the types of questions that bank board members and executives should be asking right now as they evaluate their commercial lender incentive programs. In order to properly contribute to the bank’s overall success, the incentive plan design and performance goals must reflect the bank’s priorities for the commercial lending group.

The exhibit below highlights some of the most common productivity goals used for commercial lenders at regional and community banks. Data is taken from a flash survey of regional and community banks that was conducted by McLagan earlier this year and that covered a variety of commercial lending topics.

incentive-plan-chart.png

Aligning Pay With Performance
In addition to identifying plan goals vis-à-vis departmental priorities, it is important to evaluate the alignment of incentive awards with the performance necessary to earn those awards. In short, what is the bank’s return on its incentive payments to lenders? If performance and awards are not appropriately aligned, the bank may be overpaying for mediocre performance or not appropriately rewarding its high performers, either of which can have a negative impact on long-term corporate performance.

Robust performance and payout modeling is particularly important when a new or revised incentive program is implemented—changes to plan payout methodologies may necessitate changing performance expectations for lenders. For example, if incentive payout targets are increased in order to remain externally competitive, do performance targets need to increase as well in order to provide an appropriate return to the bottom line?

Risk Considerations
While lender productivity generally has the biggest impact on plan awards, incentive plans cannot ignore risk considerations. The actions of commercial lenders today can have a significant impact on the bank’s credit quality and profitability in future years, and incentive plans should be designed to mitigate any behaviors that are not in line with the bank’s risk policies. In some cases, risk factors may be included as specific objectives under the incentive plan. More frequently, mechanisms outside of the core plan are used to safeguard against risky behaviors or poor risk outcomes. Common plan mechanisms include credit quality payout triggers, clawbacks that seek to recapture pay that has already been awarded, and deferrals that pay out based on long-term risk outcomes, among others.

In summary, commercial lenders can have a significant impact on your bank’s organizational success, and your commercial incentive plan can have a significant impact on the business and behaviors that your lenders pursue. As you begin to plan for 2018, take time now to evaluate the alignment between goals and business needs, payouts and performance, and plan features and risk policies. Doing so will help your bank maximize the potential organizational impact of its commercial incentive dollars.

The Time Is Now for Artificial Intelligence in Commercial Banking


commercial-banking-4-25-17.pngYears ago, I had the good fortune to work for a bank with pristine credit quality. This squeaky-clean portfolio was fiercely protected by Ed, one of those classic, old-school credit guys. Ed had minimal formal credit training, and the bank had no sophisticated modeling or algorithms for monitoring risk. Instead, we relied on Ed’s gut instincts.

Ed had a way of sniffing out bad deals, quickly spotting flaws that our analysts had missed after hours of work. He couldn’t always put his finger on why a deal was bad, but Ed had learned to trust himself when something felt “off.” We passed on a lot of deals based on those feelings, and our competitors gladly jumped on them. A lot of them ended up defaulting.

Obviously, Ed wasn’t some kind of Nostradamus of banking. Instead, he was spotting patterns and correlations, even if he was doing it subconsciously. He knew he’d seen similar situations before, and they had ended badly. Most banks used to be run this way. It was one of those approaches that worked well—until it didn’t.

When Ed’s Not Enough
Why? Because some banks didn’t have as good a version of Ed. And some banks outgrew their Ed, and got big enough that they couldn’t give the personal smell test to every deal. Much of the industry simply ran out of Eds who had cut their teeth in the bad times. A lot of banks were using an Ed who had never seen a true credit correction.

It also turns out that humans are actually pretty bad at spotting and acting on patterns; the lizard brain leads us astray far more often than we realize. It was true even for us; Ed kept our portfolio safe, but he did so at a huge opportunity cost. The growth we eked out was slow and painful, and being a stickler on quality meant we passed on a lot of profitable business.

The surprising thing isn’t that banks still handle credit risk this way; the surprise is how many other kinds of decisions use the same approach. Most banks have an Ed for credit, pricing, investments, security, and every other significant function they handle. And almost all of them are, when you get right down to it, flying by the seat of their pants.

Bankers have spent decades building ever more sophisticated tools for measuring, monitoring, and pricing risk, but eventually, in every meaningful transaction, a human makes the final decision. Like my old colleague, Ed, they base their choices on how many deals like this they have seen, and what the outcomes of those deals were.

These bankers are limited by two things. First, how many experiences do they have that fit the exact same criteria? Usually it numbers in the dozens or low hundreds, and it’s not enough to be statistically significant. Second, are they pulling off the Herculean task of avoiding all the cruel tricks our minds play on us? The lizard brain—that part of the brain that reacts based on instinct—is a powerful foe to overcome.

Artificial Intelligence’s Time Has Come
This shortcoming, in a nutshell, is why artificial intelligence (AI) and machine learning have become the latest craze in technology. Digital assistants like Siri, Cortana and Alexa are popping up in new places every day, and they are actually learning as we interact with them. Applications are performing automated tasks for us. Our photo software is learning to recognize family members, our calendars get automatically updated by things that land in our email, and heck, even our cars are learning to drive.

The proliferation of the cloud and the ever-falling costs of both data storage and computing power mean that now is a real thing that is commercially viable for all kinds of exciting applications. And that includes commercial banking.

Banking & AI = Peanut Butter & Jelly
In fact, we think banking might just be the perfect use case for AI. All those human decisions, influenced up to now by gut feel and scattered data, can be augmented by machines. AI can combine those disparate data sources and glean new insights that have been beyond the grasp of humans. Those insights can then be presented to humans with real context, so decisions are better, faster and more informed.

The result will be banks that are more profitable, have less risk, and can provide customized service to their customers exactly how they need it, when they need it most.

What Elizabeth Warren and Donald Trump Have in Common


GlassSteagall-7-28-16.pngIf ever there was an affirmation of the old adage that politics makes strange bedfellows, this is it: Republican presidential nominee Donald Trump and Sen. Elizabeth Warren have both called for the separation of commercial and investment banking, which would effectively reinstate a modern version of the Glass-Steagall Act of 1933.

Trump, of course, is a billionaire businessman who is not known to have ever voiced an opinion on Glass-Steagall until just recently. And Warren is a Democrat from Massachusetts who has been a fierce critic of big banks and has pushed for a return of Depression-era restrictions that would force several megabanks to divest their investment banking operations. To say that Trump and Warren dislike each other would be the understatement of the century. Trump, as is his tendency, has derided Warren in various tweets, calling her “Pocahontas” in reference to her claim that she is of Cherokee ancestry, and also referring to her as “Goofy Elizabeth Warren.” Warren has returned fire with several Twitter bombs of her own, including the suggestion that Trump delete his account.

While Warren’s position on Glass-Steagall was well known, Trump’s apparent support for the re-separation of commercial and investment banking took many people by surprise, including some Republicans in Congress who generally advocate for less rather than more regulation. The GOP platform, which was approved at last week’s Republican National Convention in Cleveland, contained this sentence: “We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high risk investment.” Party platforms don’t necessarily reflect fully the views of that party’s presidential candidate, except that it was Trump’s campaign manager, Paul Manafort, who brought the Glass-Steagall issue to the media’s attention during a news conference at the beginning of the convention, which is available through C-SPAN. Manafort said specifically that the platform “reflects Donald Trump’s impact” and was, in effect his platform.

Whether reinstating Glass-Steagall-era prohibitions would really make the country’s financial system safer is open to debate. The financial crisis was caused by a variety of factors, including nonbank mortgage originators, which were largely unregulated; governmental and regulatory tolerance of a burgeoning market for subprime mortgages and a variety of abusive practices that later ensued; and an accommodative monetary policy by the Federal Reserve that kept rates low for several years and eventually helped create a housing bubble. None of these factors had anything to do with the repeal of Glass-Steagall in 1991.

Given her populist tendencies, it’s no surprise that Warren is opposed to any policy or practice that adds complexity and risk to large financial institutions like JPMorgan Chase & Co., Bank of America Corp. and Citigroup, all of which acquired investment banking firms after the repeal of Glass-Steagall. But why would Trump jump on to the same bandwagon as Warren, whom he clearly detests? The candidate himself has not addressed the issue, but one possible explanation is simple politics—this is, after all, a presidential election year.

During the news conference, Manafort took pains to point out that the Democratic candidate for president, former Secretary of State Hillary Clinton, has received lots of financial support from Wall Street interests. “We believe the Obama-Clinton years have passed legislation that has been favorable to the big banks, which is one of the reasons why you see all of the Wall Street money going to her,” Manafort said. “They know she’s their champion and they support her fully. We support the small banks and Main Street.” Clinton has called for tougher regulation for the banking industry but has stopped short of advocating for a re-separation of commercial and investment banking.

There could be a couple of things going on here. First, this could be a play by Trump for the supporters of Clinton’s principal rival during the Democratic primaries, Vermont Sen. Bernie Sanders, who has also been a strong and vocal proponent for the reinstatement of Glass-Steagall. Another possible explanation is money. To date, Trump has lagged Clinton in fundraising for his campaign, and if Clinton has most of the Wall Street money locked down then perhaps he hopes to raise money from small banks instead.

Whatever his motivation might be, this is probably the only time in recorded history when Donald Trump and Elizabeth Warren agree on anything.