The Power of Business and Commercial Cards for Community Banks

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The research conducted by BAI highlights the increasing competition for consumer deposits in the banking industry.

Nearly two-thirds of bankers report experiencing this heightened competition, a stark rise from 37% in 2021. To stand out in this challenging environment, community banks must find innovative ways to differentiate themselves for deposit growth.

However, amidst this challenging environment, there is a silver lining that community banks can capitalize on. The same BAI research found that a staggering 79% of business owners use the same financial services organization for personal and business financial needs. This presents an exceptional opportunity for community banks to leverage their local presence and close-knit relationships within their communities. Providing comprehensive business and commercial card programs gives community banks a way to establish themselves as trusted financial partners for their small business and commercial customers.

Business and commercial cards play a pivotal role in enabling the growth and financial stability of businesses. These revolving credit and charge card products offer companies the means to efficiently manage their finances. Community banks can cater to a diverse range of customer preferences by providing tailored solutions for credit cards that align with the needs of their customers. Unique solutions include:

  • Low APR options.
  • Flexible reward programs.
  • User-friendly interfaces.
  • Local servicing.

By ensuring that these cards are equipped with features such as risk-based APRs and customizable credit lines, community banks enhance their customers’ ability to navigate their financial landscape with confidence. Personalized solutions position community banks as trusted advisors, empowering businesses to flourish and paving the way for enhanced deposit growth.

Community banks have the opportunity to invest in themselves to add value to their business customers by launching a comprehensive credit card program — without hiring staff or investing in infrastructure to offer their business customers all the digital capabilities on credit cards to meet the demands of modern business. Business admin interfaces can enable business administrators at companies to be in control at all times. They gain the power to issue physical, virtual and ghost cards, set credit limits on each card, implement spend controls, receive real-time alerts, manage expense reporting and access customizable reports.

In the fiercely competitive landscape of modern banking, community banks have a unique opportunity to drive deposit growth by offering comprehensive business and commercial card programs. By leveraging their local presence and close customer relationships, community banks can position themselves as trusted financial partners of small businesses and commercial clients by offering this much-needed modern and innovative solution.

Modernizing Business Lending to Drive Growth

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Digitization has altered the business lending landscape and created competitive pressure that will continue to push solutions modernization — and consumers and businesses are ready.

Digital efficiency here is key and underpins lending success. Most importantly, it improves consumer retention, upsell, and cross-sell opportunities for lenders. As the future of business lending caters to the needs of younger entrepreneurs, financial institutions will want to add solutions that offer seamless experiences. This includes a fully contactless digital lending process: seamless digital applications all the way to fast, automated loan decisions. Financial institutions can jump-start and grow digital business lending by implementing advanced technology solutions to digitally engage borrowers and optimize lending processes.

Digital-First Mindset Drives Growth
Millennials are the largest drivers of new loans. This makes sense considering there were more than 166 million individuals under the age of 40 in the U.S. in 2020 — more than half of the U.S. population.

Financial institutions are feeling the pressure all around. Digital banking reigns supreme as consumers increasingly prefer to manage their finances digitally and loyalty is waning. Institutions need to offer innovate lending solutions and reconsider how they engage consumers. Already, digital-savvy financial institutions are scooping up this business. According to the Bain Retail Banking NPS Survey, 54% of loans and 50% of credit cards in the U.S are opened at providers that consumers do not consider their primary financial institution. And more than three-quarters of those surveyed who received a direct offer from a competitive institution said they would have purchased from their primary institution had they received a similar offer.

As more and more lenders provide digital-first experiences, consumer expectations have evolved. Processes that used to take days can now happen in minutes. Technology has decreased the operational effort required of financial institutions and enables demand creation, so institutions can reach new consumers and foster deeper relationships with existing ones.

Pressure to Modernize Business Lending Solutions
Institutions that have not modernized business lending processes are feeling the pressure. Those that still rely on manual and paper-based loan approval procedures find they are out of step with a digitized world, affected by:

  • Slower decision times.
  • Burdensome data management.
  • Time-intensive manual processes that span disparate systems.
  • Inefficient application processes and communications with the borrower.
  • Expensive wet signatures.
  • Difficult document collection, management and storage.

The cumulative effects of these inefficiencies are compounded by the evolving landscape in lending. Nearly nine in 10 financial institutions believe they will lose some business to stand-alone fintech companies over the next five years. That fear is not unfounded.

Managing Credit Risk in a New Era
The business credit framework has not changed. Lenders still consider credit profile and history, firmographics and cash flow analytics when evaluating debt capacity. This requires the ability to collect and analyze data like macroeconomic factors, industry trends, digital presence, credit performance, financials, bank accounts, POS transactions and business credit reports.

Solutions to manage risk, however, have modernized. Advancements in machine learning techniques have transformed risk analysis to consume thousands of data points and leverage insight and learning from decades of loan performance data. For business lenders, this means better, faster, more accurate and consistent decisions in compliance with the set credit policy. Digital-first lenders can:

  • Use superior workflow tools to aid in better decision-making and operational resiliency.
  • Leverage risk assessment techniques that cannot be performed by humans.
  • Improve accuracy and consistency of credit decisions.
  • Specialize and customize by industry based on business goals.
  • Leverage new data sources and decades of credit performance data.
  • Process large volumes of data in seconds alongside the ability to identify and focus on what matters most.

Financial institutions transitioning to digital channels enjoy more opportunities to better serve consumers, expand market share and drive more revenue.

How to Level the Playing Field Through Buy Now, Pay Later

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Buy now, pay later (BNPL) has exploded over the last few years and its momentum shows no signs of slowing. In fact, BNPL payments orders grew 85% and revenue increased 88% during Thanksgiving, Black Friday and Cyber Monday compared to the week before, according to Adobe Analytics. Not only is BNPL taking a growing share of lending from many community banks, BNPL platforms are now beginning to move into credit and debit card products too, potentially further eroding banks’ opportunities, and worse, the relationships with their current customers. Fortunately, several white-label solutions are now entering the market, enabling banks to meet the demands for BNPL and to better compete and retain market share of the customer’s wallet.

However, the increased usage and adoption of these solutions has also begun to highlight some of the problems this payment option can pose for both consumers and lenders alike. While it can present an easy way to buy items on credit, every purchase becomes multiple payments to manage and, unsurprisingly, 42% of BNPL users have missed a payment, with 33% of users overdrafting their checking accounts in just one month. As more of today’s borrowers take on an increasing number of BNPL payments, the chance for delinquencies will rise, especially for those customers living paycheck-to-paycheck. Keeping track of BNPL payments in addition to other expenses can get complicated quickly, and for many, one missed loan, credit card or bill payment could mean a long-term hit to their credit scores (and potentially a default for the lending bank).

With BNPL’s popularity and accessibility, it is unlikely to be going away anytime soon, so the question becomes how can banks make BNPL products better and safer for their customers while mitigating their risk? Luckily, banks have several advantages over pure-play fintechs they can leverage to deliver a superior BNPL experience.

  1. If limiting BNPL offerings to current customers, banks can use customer history to make ability-to-pay judgments prior to extending BNPL credit. Not only will this control potential losses, but it will also enable banks to make stronger offerings, whether providing more credit or as a tie-in with other products (e.g., bumped-up deposit account rates, reduced annual credit card fees, free overdraft protection).
  2. While banks can only encourage ACH autopay for BNPL payments, alternatively, they can require repayment through payroll-linked payments. This allows customers to simply “set it and forget it,” avoiding the need to manage multiple payment schedules for various purchases. It could also serve as an incentive to set up direct deposit for customers who are not already doing so (or to move their direct deposit).
  3. Banks can provide tracking tools for their BNPL customers. One key issue with BNPL is that the loans are not typically reported to credit bureaus (although some providers have started). This makes it impossible for lenders to know how many outstanding BNPL loans a customer has (referred to as “stacking” by the CFPB). It is also difficult for customers to track their payments, so banks can add real value by providing visibility, both for themselves as well as for their customers. Additionally, tracking provides greater insights to enhance future ability-to-pay decisions, allowing banks to continue improving their offerings.
  4. Banks should be fully transparent and go the extra mile for their disclosures. Per the Consumer Financial Protection Bureau, loans with four-or-less payments are not required to provide cost-of-credit disclosures, but doing so can be very useful for the customer. Clearly explaining that while BNPL is interest-free for them, the retailer is paying a fee in exchange for a sale, helps ensure customers better understand the process. Banks can even provide broad guidance on BNPL products for their customers, further enabling them to make good decisions about which payment method is best.
  5. Banks can create a big cross-selling opportunity by tying a debit card and, potentially, rewards points to a BNPL offering. This could be particularly effective with millennials and Gen Z customers who tend to be higher users of BNPL (and often lack or do not trust credit cards). While debit cards are not big money-makers for banks, they can act as effective relationship-builders that open the door for traditional deposit accounts and other products over time.

Consumer appetite for BNPL products is growing, as are the number of platforms available to meet that demand. In fact, many national banks are either in the process or have already rolled out their own BNPL offerings. While competition is increasing, the good news is that options like white-label solutions offer community banks the tools to become leaders in this popular market and can help level the playing field.

What’s more, as the CFPB introduces new regulations covering BNPL, banks’ competitive advantage versus pure-play BNPL players will likely increase, as most will be much better positioned to adapt and comply with future regulations. Today’s community banks should consider their options now and develop their BNPL strategies to both retain their existing customer relationships and compete for new ones in the future.