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.

Is Your Loan Origination Process Too Slow?

loan-origination-11-3-16.pngOne of the biggest disruptors to the banking industry in the past several years has been the rise of technologically based financial technology, or the fintech industry. Fintech has brought a new wave of competition by finding more efficient ways to offer many of the same services as banks, including—most recently—lending. As the OCC points out in a recent whitepaper, banks and credit unions need to start thinking seriously about incorporating technology into more of their processes if they are to compete and effectively service customers. As fintechs continue to encroach on core banking services, banks will need to begin to find ways to strengthen and quicken loan origination processes.

According to a 2015 study from McKinsey & Company, 9 percent of fintech companies tracked in the study were making headway in the commercial lending space, an area which made up 7.5 to 10 percent of global banking revenues in 2015. For banks to keep pace, bank management has to ensure that their back-office systems and procedures for loan origination are designed for efficient growth and risk mitigation.

Technology is shortening processing time for loans, and banks and credit unions, in response, need to speed up their loan origination. Fast turnaround time is the currency of the digital age. Perhaps the most striking example of speed in the lending world is Rocket Mortgage, a Quicken Loans app that launched in a splashy 2016 Super Bowl TV ad that boasted minutes-long pre-approval decisions for mortgages.

In order to increase speed in lending, institutions should start by identifying the biggest bottlenecks in their current origination process. For many institutions, it is data collection and entry. Implementing technology like an online client portal for borrowers to upload documents makes it easier to track down all the required paperwork and allows the loan officer to work in digital instead of paper files. Technology can automatically read tax returns and reduce the time loan officers spend on manual data entry.

Of course, getting the data is only half the battle. The loan still needs to be analyzed, risk rated, priced and reviewed by a loan committee, and by using integrated software and standardized templates, the entire process is streamlined, which means getting back to the customer more quickly.

Another competitive disadvantage that banks and credit unions must overcome is the level of regulatory scrutiny placed on loan decisions. When building a competitive loan origination system, banks should focus on implementing processes that accurately identify credit risk and enable defensible, well documented credit decisions. Three key components of a defensible origination solution include:

  • Automated data entry and calculations to avoid manual error
  • Comprehensive documentation at each step
  • Templates for processes and calculations to ensure consistency and objectivity

If an institution wants to process 100 more loans each year, they could hire more staff. Yet, a technology-based origination process also equips the institution to grow without increasing overhead costs and by better deploying staff to high-value activities. Platforms are available that realize time savings and better information flow, giving staff the tools needed to scale the institution.

The rise of fintech in recent years is indicative of the great potential efficiencies offered by technological innovations in banking, and progressive institutions are finding ways to lead this charge. To stay competitive with other institutions as well as fintech, banks and credit unions need to re-examine their back-office processes for loan origination to find ways to increase efficiency in loan origination. Banks can automate data entry and calculations, create consistency through templates for credit analysis, risk rating and loan pricing and prepare for audits and exams more easily with thorough documentation at each step. It prepares the institution to grow, remain competitive and better service its customers.

To learn more about technological solutions for your lending process, download the whitepaper “Tapping Growth Opportunities in the Business Loan Portfolio.”

On Your Mark….Loans Approved!


Scene 1: Adam approaches a reputed bank in his city to get a quick loan to expand his restaurant. A month later, he is still waiting for a green light.

Adam tries his luck with a marketplace lender, and his application is cleared in minutes. The money is wired to his account in no time at all.

Scene 2: Stacy approaches her bank to get a loan to expand her digital marketing firm. She needs cash quickly. Although she is currently a customer of the bank, her loan application review process takes time.

She instead applies for a loan online with an alternative lender. Her application is processed and approved, and the money is wired to her account in the shortest possible time.

Here’s a wakeup call for the banking industry: Customer loyalty, which banks have relied on for so long, is now decidedly elusive.

Banks are getting hit by a triple whammy. First, increased regulations have made loan processing more complex, resulting in higher costs and reduced margins to originate loans. Second, banks’ legacy systems and manual processes lead to delays in loan processing and constrain banks from meeting the expectations of today’s connected consumers. Finally, digital disruption by alternative and marketplace lenders is putting pressure on banks, as customers now have other choices.

Coping with Increased Regulations
Regulatory oversight is increasing, be it recent guidance from the Office of the Comptroller of the Currency on prudent risk management for commercial real estate lending, or the upcoming current expected credit loss (CECL) model from the Financial Accounting Standards Board. How can banks cope with this new normal? By automating the loan origination process, banks can ensure that they are fully compliant, and at the same time improve their efficiency in originating the loan by cutting down on paper-intensive and manual steps. Banks should consider investing in loan origination software that not only meets current regulations but is also agile and flexible to incorporate future regulatory changes.

Improving the Origination Process
Legacy systems go by that name for a reason. They are built on old technology. These systems are expensive to maintain and hard to modify. Commercial loans contribute significantly to a bank’s business. Yet, due to outdated legacy technology, the loan origination process is largely manual, requiring duplicate data entry at multiple steps. To solve this, banks should consider investing in loan origination software that seamlessly integrates multiple disparate systems, such as document generation, spreading and credit bureaus. By doing this, banks can significantly cut down the time it takes to originate a loan, and meet the expectations of their customers.

Commercial loan origination software can help a bank streamline its commercial lending business. Here’s how:

  • The software seamlessly integrates with legacy and external systems.
  • It serves as a single application window to cater to multiple business lines, such as CRE loans, commercial & industrial loans, small business loans and leases.
  • It automates the commercial lending lifecycle from origination to disbursement to servicing, making processes paperless in an automated workflow environment with minimal manual intervention.
  • Loan requests are captured from multiple channels.
  • Credit scoring and underwriting of loans is efficient, due to seamless integration with third-party credit bureaus.
  • Automating and centralizing business rules allows quicker lending decisions.
  • Effective tracking and analysis of the loan process means the bank can better comply with regulations.

Imagine loan officers spending significantly less time reviewing loans. The end result is a more efficient process for the bank and, more importantly, happy customers.

How Financial Institutions Can Meet the Marketplace Lending Challenge


What makes a bank a bank? When it comes to the commercial lending space, in a world of seemingly commoditized products and services, the true differentiation is defined by how a bank decides who they will lend to and who they won’t. It’s each individual bank’s unique credit policy that, however subtly, makes one bank different from another. All banks use many of the same metrics and scoring data to determine credit quality, and there is generally no secret sauce that one bank has and the rest don’t. Instead, it is often the nuances within those metrics and the interpretation and prioritization of the data that makes one bank different from another—and potentially, enables a business owner to get capital from one bank and not from the other.

Banks have spent a long time fine tuning their credit policies to match their risk appetite and even the history and culture of the bank. Their risk profile is integral to who they are. It is integrated into their brand, their mission statements and their core values. The bank’s credit policy is exclusive to that bank and helps define it as a lender.

Enter the fintech revolution, which has spawned a long list of marketplace lenders that have disrupted the business lending universe by essentially disregarding credit policies that took banks and credit unions decades to develop. Marketplace lenders like Lending Club, OnDeck and Kabbage are telling the business borrowing universe that they have a better solution than financial institutions when it comes to measuring a borrower’s credit worthiness.

Banks and credit unions are being driven to offer an online business lending solution by the need to improve the customer experience, increase customer acquisition and raise their profitability, while at the same time decreasing costs, streamlining workflow and reducing end-to-end time. As marketplace lenders aggressively court the business borrower, financial institutions need to do something in the online space just to remain competitive!

To replicate the technology that the disruptors have created would cost banks millions of dollars and years of development time and energy. The great news is, with innovation and evolution there is always the exploitation of every niche and iteration of a solution or model resulting in alternative means to attain the same outcomes.

There is a technological revolution within the fintech phenomenon that is being created by businesses that have the vision and mission to work with banks—not against them. Companies are hitting the marketplace with technology-only solutions that help banks help their business customers succeed. These “disruptors of the disruptors” are essentially selling financial institutions the technology needed to deliver loans easier, faster and more profitably, without forcing them to give up their credit policies, risk profile, relationships or control over the customer experience.

Banks and credit unions need to find these partners, and find them quickly, because they represent a way for those institutions to accelerate their entry into the online business lending space. Choose a partner that best meets your needs. Are you looking for an online application only, or an application and decisioning technology? Or, are you looking for an end-to-end solution that provides an omni-channel experience from application, through underwriting, docs and due diligence and even closing and funding? The type of partner you select depends on what’s driving your financial institution, whether that be increasing profitability, new customer acquisition, streamlining workflow, reducing end to end time or simply creating an enhanced customer experience for the businesses you serve. Explore all your options!

SoFi: Friend or Foe


At first an online alternative for student loan refinancing–but now moving into consumer lending and mortgages–SoFi has been making waves in the fintech industry. The company even ran a commercial during the Super Bowl, which could be taken as a sign that its has big ambitions.

The Good:
SoFi CEO Mike Cagney (who sneakily once worked at megabank Wells Fargo & Co.) has declared that “Our average borrowers are around 32 years old, they’ve got a 780 FICO, they make a $150K a year pre-bonus, over $5,000 a month of free cash flow.” As you can imagine, this make SoFi’s customers very desirable—and it also makes SoFi very attractive to investors, including banks and other large players that want to buy their loans.

For consumers, the rate that SoFi charges for loans is much cheaper than most traditional banks, and it doesn’t charge an origination fee like other website lenders such as Lending Club. And unlike a traditional bank you can apply online. In addition to the loan itself, SoFi also provides career counseling, wealth management services and even social events. It offers help if you are laid off, and says it wants to “be there” for their customers in time of need.

The Bad:
For a bank, it should be noted that Cagney has been very outspoken about his desire to lure consumers away from their banks, and if numbers speak the truth, the fact that they have funded over $2.5 billion in loans up through April of this year certainly shows some solid traction in the marketplace Cagney has said that he hopes to have his customers only rely on SoFi in the future, not just “in addition to” their primary institution. It is rumored that SoFi is looking at expanding into direct deposits and more, but it is important to note that these will not be backed by the FDIC, nor will they use deposits to fund their loans.

As of May 4, SoFi also announced that its subsidiary, SoFi Lending Corp also became an approved service/seller by Fannie Mae in the mortgage industry. This is just another step into the millennial market, as they offer greater speed and convenience throughout the entire process.

Our Verdict: Foe
As SoFi is starting to operate in other areas of lending, banks should certainly be taking note. If a fintech company can create a bond with millennial consumers at the beginning of their financial lives—such as when refinancing their student loans or buying their first home–the goodwill will certainly carry over. It’s not just that banks risk losing millennial customers to fintechs like SoFi—they might never get them in the first place.

Leveraging Technology to Strengthen the Enterprise


A Georgia bank CEO was recently quoted as saying that he doesn’t “need technology that is going to help make more loans,” but technology that will “help make the loans [he’s] already making more efficiently.” His comments represent a much larger discussion about the the role of financial technology to either disrupt the banking industry or enable banks to respond more quickly to changing consumer expectations for things like speed and convenience. While non-bank financial startups are centered around technology and exploring how it might revolutionize banking, banks are trying to understand how technology can impact their existing operations and customer experience.

Specific to commercial and small business lending, there are five key areas where banks can incorporate technology to position themselves for improved performance, service and longevity given today’s market conditions and competitive factors:

Measuring financial efficiency
There are two ways to measure efficiency; the first is the financial definition of efficiency, or the efficiency ratio. The second is the practical type, characterized by shortened turnaround times, faster processes and easier methods. Both types of efficiency can be influenced by technology, but the current lending landscape calls for more focus on the latter. Using technology to speed up processes and eliminate waste will ultimately create higher and more consistent profits, a more resilient risk profile and employees empowered to make better decisions.

Achieving efficiency through auto decisioning
In an era where the rise of alternative lenders has prompted customers to demand instant action on loan queries, banks must be able to quickly and accurately deliver loan verdicts. By implementing auto decisioning technology, banks can more effectively compete against digital-platform lenders, and then grow that business. Banks’ advantage over non-bank lenders lies in their funding stability and mindfulness of operational compliance. Getting up to speed—literally–in delivering quick, smart loan approvals can give them a big boost.

Embracing the digital relationship with business customers
Banks have an opportunity to leverage technology solutions to not only better connect with their current customers, but also to attract new ones by supplementing face-to-face interaction with digital tools. Arm bankers with tools in the field so that they may meet customers where they are, and perform the same functions they could in-branch. And provide customers with a digital channel so they can track the status of a loan or complete and return important documentation from their home.

Engaging in treasury management opportunities
Treasury management is a valuable business for banks, and an area that many experts predict will have an expanding role in coming years. However, the onboarding process can be a very complex one encumbered by manual processing and poor workflow management. Transitioning to electronic documents for onboarding and seeking to automate pricing, approval and even status tracking will offer significant rewards to banks’ commercial transaction goals.

Acquiring and retaining the right talent
In recent years, the industry has experienced an alarming trend in young talent either not being interested in banking or unexpectedly leaving the industry. A large factor in this decision is banks’ hesitation to replace dated legacy systems in favor of new, cutting-edge technologies. Employees want to work in an environment where the systems they use mirror the technology user experience they have in their personal lives — intuitive, streamlined and empowered.

I predict 2016 will be the year when bankers more completely embrace technology and view it as a tool that will take their institutions into the next generation by allowing them to do the same things they’ve always done, but with much greater speed and efficiency.