Beating SMB Alt Lenders at Their Own Game


small-business-lending.png

Small businesses are an important segment for banks and credit unions with aggressive growth goals. In the United States, small businesses make up 99.7 percent of employer firms, according to the SBA FAQ Sheet. The top concern for these firms is managing their cash flow needs, which creates a great lending opportunity for banks and credit unions. Unfortunately, it can be a difficult opportunity for them to take advantage of because of their antiquated processes.

As Steven Martin, vice president of strategy at Sageworks, discussed during a recent webinar, the demographic composition of small business owners is shifting away from baby boomers and towards Gen X’ers and millennials. These younger business owners are more tech-savvy than their parents. They are more used to shopping online, including for credit and financing solutions. Additionally, many small business owners are too busy running their businesses to leave to visit a branch to begin the application process. When these small business owners go online looking for loans, they find that over 80 percent of banks and credit unions do not offer a way to apply for a loan online. This causes many small business owners to turn to alternative lenders for credit. These “alt lenders” can provide the funds faster and offer an end-to-end online experience. The number of small business owners who turn to alt lenders instead of banks and credit unions is growing. If financial institutions want to preserve and grow their SMB lending business, they will need to revisit two aspects of their loan origination strategy.

Small business borrowers deserve a better experience
Slow and complex loan application processes at many financial institutions frustrate small business borrowers. On average, an application for a small business loan takes two to four weeks. By the time borrowers submit an application, they have already spent an average of 26 hours researching capital options. Once borrowers decide they are ready to apply for a loan, they do not want to spend weeks waiting to receive their funding.

Many of the alternative online lenders charge much higher interest rates than banks and credit unions, yet, business borrowers short on time are increasingly willing to pay more in fees or interest rates to fix their cash flow problem.

Additionally, the difficulties of traveling to a branch and chasing hard copies of documents make the application process even more tedious. Improving the borrower experience is critical for banks and credit unions that want to grow their SMB portfolios.

Costly origination of SMB loans
A second challenge to growing the SMB portfolio is the cost of originating small loans. On average, the cost to originate a small business loan is almost as high as the cost to originate a much larger loan. The lower profits on smaller loans means that many banks and credit unions struggle with achieving sufficient profitability on SMB loans.

However, simply ignoring the SMB market narrows the institution’s opportunity to grow. Also, banks that already have a depository relationship with a small business may risk the entire relationship if they can’t provide a loan.

How then to increase profitability of small business lending?

First, the institution can reduce costs by making the job easier for lenders. Leveraging tools such as an online loan application, which allows borrowers to enter their information and submit documents online, saves loan officers the time of tracking down all the necessary documentation. Institutions can also reduce the time analysts spend entering data by utilizing a tool such as the Sageworks Electronic Tax Return Reader. The ETRR reads and imports data from the borrower’s tax return into the spreading software.

Another major cost of loan origination is the time spent analyzing and decisioning a loan, and automated tools can help here as well. For example, a bank that specializes in agricultural lending may be very familiar with equipment loans. This bank could see significant time savings by implementing loan decisioning software that can be tailored to its risk appetite for ag loans. The bank sets the required metrics and approval criteria, and the software provides a recommendation on the loan. This allows analysts to enter less information and make a faster decision while maintaining pre-existing credit standards.

Small business lending is an important segment for growth-minded banks and credit unions. However, frustrating borrower experiences and expensive application processes make it difficult for many institutions to build profitable SMB lending programs. By leveraging technology to improve the borrower experience and increase profitability for the institution, banks and credit unions can build a path to growth with business lending.

Making Sense of Fintech Lending Models



What type of fintech lending solution should your bank pursue? Mike Dillon of Akouba outlines what management teams and boards need to know about these lending models, and how each can benefit the bank.

  • The Three Fintech Lending Models
  • How Each Model Can Meet a Bank’s Strategic Needs
  • Benefits of Technology-Enabled Loans

Fintech Intelligence Report: Marketplace Lending


	intelligence-report-cover.PNGAs noted throughout our 2017 Acquire or Be Acquired Conference, partnerships between a bank and a tech company can take on many forms — largely based on an institution’s available capital, risk appetite and lending goals. With fintech solutions gaining momentum, many advisors at this year’s event encouraged banks to look at viable alternatives to meet consumer demands, maintain and expand their lending revenue and give formidable competition to those looking to take that market share.

Fintech lending has grown from $12 billion in 2014 to $23.2 billion in 2015 and is expected to reach $36.7 billion in 2016, a year-over-year growth of 93 percent and 58 percent in 2015 and 2016. This market, according to Morgan Stanley Research, is expected to grow further and reach $122 billion by 2020.

With this in mind, we invite you to take a look at our new Fintech Intelligence Report on Marketplace Lending. The research paper, developed by FinXTech, a division of Bank Director, and MEDICI, a subscription-based offering from LetsTalkPayments.com, explores current market dynamics along with technology and partnership models. As noted in this report, the gains of new fintech companies were widely thought to be at the expense of banks; however, many banks recognize the potential value from collaboration and have built relationships with fintechs.

Tell us what you think! As we work to provide you the latest information and research as it pertains to the financial services industry, we would appreciate your feedback on the Fintech Intelligence Report. Please email us your comments and/or suggestions at news@finxtech.com.

The Perfect Complement: Community Banks and Alternative Lenders


lenders-2-8-17.pngArmed with cost and process efficiency, greater transparency, and innovative underwriting processes, alternative lenders are determined to take the lending space by storm. Alternative small business lenders only originated $5 billion and had a 4.3 percent share of the small business lending market in the U.S. in 2015. By 2020, the market share of alternative lenders in small business lending in the U.S. is expected to reach 20.7 percent, according to Business Insider Intelligence, a research arm of the business publication.

Being able to understand customer-associated risk by relying on alternative data and sophisticated algorithms allowed alternative lenders to expand the borders of eligibility, whether for private clients or small businesses. In fact, a Federal Reserve survey of banks in 2015 suggests that online lenders approved a little over 70 percent of loan applications they received from small-business borrowers—the second-highest rate after small banks, which approved 76 percent, and much higher than the 58 percent approved by big banks.

Coming so close in approval rates to banks and having lent billions employing a different, more efficient business model inevitably created an interest from banks. Some of the largest institutions have been taking advantage of the online lenders’ technology, but community and regional banks are still in the early stages of exploring partnership opportunities. While concerns over those types of partnerships are understandable, there are also important positive implications, which we will explore further.

Cost-Efficient Capital Distribution Channel
Online marketplaces represent an additional, cost-efficient channel for capital distribution, expanding the potential customer base. An opportunity to grow loan portfolios with minimal overhead and without the need for adoption or development of resource-consuming technology, led to a partnership between Lending Club and BancAlliance, a nationwide network of about 200 community banks. The partnership allowed banks to have a chance at purchasing the loans originated by Lending Club, and, in case those loans did not meet the requirements, they were offered to a larger pool of investors. Banks also have an opportunity to finance loans from a wider Lending Club portfolio.

Examples of partnerships also include Prosper and the Western Independent Bankers. These partnerships give more banks an opportunity to offer credit to their customers, and more consumers access to affordable loans.

Portfolio Diversification and Customer Base Expansion
Alternatives lenders can offer an easy application process, a quick decision and rapid availability of funds due to an alternative approach to the underwriting process. Use of alternative data to assess creditworthiness is an inclusive approach to loan distribution. In 2015, in the U.S., there were 26 million credit invisible consumers. Moreover, the Consumer Financial Protection Bureau suggests that 8 percent of the adult population has credit records that you can’t score using a widely-used credit scoring model. Those records are almost evenly split between the 9.9 million that have an insufficient credit history and the 9.6 million that lack a recent credit history.

Paul Christensen, a clinical professor of finance at Northwestern University’s Kellogg School of Management, believes there are positive implications for companies leveraging alternative data to make a credit decision.

“For companies, alternative credit rating is about reducing transaction costs. It’s about figuring out how to make profitable loans that are also affordable for most people—not just business owners,” he said in a September 2015 article.

For community banks, as regulated institutions, partnerships with alternative lenders that extend credit to parts of the population perceived as not creditworthy is an opportunity to reach new consumer segments and contribute to inclusive growth and resilience of disadvantaged households.

Customer Loyalty
Two Federal Reserve researchers noted in a 2015 paper that community banks can increase customer loyalty by referring customers to alternative lenders when banks cannot offer a product that meets the customer’s needs. “By providing customers with viable alternatives? it is more likely that these customers will maintain deposit and other banking relationships with the bank and return to the bank for future lending needs,” the researchers emphasized.

Access to Knowledge, Expertise and Technology
While the extent of integration may vary, one of the most important elements of partnerships that carry long-term organizational and industry benefits is mutual access to knowledge, expertise and technology. The combination of banks’ and alternative lenders’ different business models with an understanding of mutual strengths allows the whole industry to transform and provide the most efficient, consumer-facing model.

Finding Loans in All the Right Places


loan-growth-11-17-16.pngPennsylvania, Ohio, and New York might not offer the same growth opportunities as some other parts of the country, but that didn’t prevent Bank Services member S&T Bancorp from reporting record earnings in the third quarter of this year. Well managed institutions usually find a way to perform even when the conditions are less than optimal, or they’re located in slower growing markets. With $6.7 billion in assets, S&T is headquartered in Indiana, Pennsylvania, a small college town located about 50 miles northwest of Pittsburgh. It is an area that depends on manufacturing, service companies and Indiana University of Pennsylvania—the community’s largest employer—for jobs. Natural gas exploration in the Marcellus Shale formation, which runs through the region, also has been an ascending industry.

In recent years, S&T has expanded its lending activities into Ohio and Western New York, while also expanding its branch network west to the outer rim of Pittsburgh and east to Lancaster, Pennsylvania. Todd D. Brice, who has served as president and chief executive officer since 2008, talked recently with Bank Director Editor in Chief Jack Milligan about a range of issues, including loan growth in S&T’s three-state region.

What’s happening in the loan market in your three-state area?
Brice: I think it’s pretty steady. We’ve made some pretty significant investments over the last four years or so to diversify the company. Our roots are in Western Pennsylvania, but in 2012, we opened up a loan production office in Akron, Ohio, and in ’14 we jumped down to Columbus, Ohio, with another team of bankers. Last year we acquired Integrity Bank in the Harrisburg/Lancaster market, which was about an $800 million institution. That got us into the Central Pennsylvania market. We also opened up a loan production office in Rochester, New York.

What we’re finding out is that each market provides different opportunities, and it gives us the ability to shift. If you’re seeing a softness in one market, you can focus attention in another market. I think one of the hallmarks of our company has been our ability to grow organically over our history, and then augment that with select M&A.

Were these lending teams recruited away from other organizations?
Brice: Yes. In Akron, we originally had three people; today we have eight people in that office. In Columbus we started out with four people and we have eight. Western New York is a market that we’ve been lending into probably for 15 years. Our philosophy is not so much just to get into a market, but get into it with the right people. We were finally able to land a gentleman to lead the team up there, and then he was able to go out and recruit other high caliber bankers to the organization. All the bankers that we brought on board have very extensive experience in their respective markets.

In markets like Columbus and Akron, would it be logical to follow up those loan production offices with acquisitions at some point, if you found something that made sense?
Brice: We just haven’t found the right fit for us. I think if you look at our history, we’ve been pretty disciplined, and try and stick to a model that has seemed to work for us, but we’ll continue to keep our eyes open.

In Akron, we haven’t been able to find the right partner so we decided to open a full-service branch that will use a private banking-type model.

Are you worried about a recession?
Brice: I think you’re always worried about a slowdown. That’s why we’ve made significant investments over the last six years on the risk management side of the business. We monitor the loan portfolio in a number of different ways to try and keep an eye on concentrations, by product type or by markets, so if there is a downturn we can weather it a little better than some of the other folks.

The consumer financial services market is increasingly becoming mobile in its focus. Does that present challenges for S&T, or do you feel like that doesn’t really impact you because you’re [more of a commercial] bank?
Brice: Mobile is an important distribution channel for us. I won’t say we’re going to be the first to market with a new technology, but we have a good partner in FIS and they get us up to speed pretty quickly, so we feel we have a pretty competitive suite of products. We just did an analysis on how we rank in different categories, whether it be online, mobile, bill pay, online account openings on deposit side and loan side, online financial management tools, text alerts, mobile deposit, remote deposit capture. We think that we compare favorably with our competitors, but it’s something we definitely need to keep an eye on going forward because while commercial banking gets a lot of the spotlight, consumer has been a very strong line of business for us for many years. We’re a 114-year-old company and we’ve built up a nice little franchise over that period of time.

Is the demand for mobile-based products, or mobile-based services, as strong in a smaller market like Indiana, Pennsylvania, as it would be in a larger urban area?
Brice: Some of the things you’re seeing in the metropolitan markets, like branches that rely more on technology than people, I would say some of the rural markets we’re in are probably not quite ready for that. We are looking at taking that approach in some of our urban markets. Everybody has a mobile phone and they want to stay connected, so it’s important for us to make sure that we have those products to offer them. Fifty percent of our customer base use our online baking product, and another 15 percent also use our mobile banking product, which compares favorable to the utilization rates of our competitors.

The bank reported record third quarter earnings in October. What were the two or three things that helped drive that performance?
Brice: We had a lot of things go our way. We were up 20 percent over the second quarter and another 9 percent over the third quarter of last year. Our average loan book was up about $100 million for the quarter. That helped to grow [net] interest income by about $1.7 million. Another area that we focus on pretty extensively is expense management. We were down approximately $400,000 quarter over quarter. We had a recovery on a prior loan that helped us out, but also our data processing costs are down about $600,000 a quarter. We renegotiated a contract which was effective July 1.

Then we had a nice little lift on fee income which was up about a $1 million quarter over quarter. Some of that was driven by mortgage activity and also increased debit card income. Credit costs were down about $2.3 million quarter over quarter. We had a little bit of a spike in the first quarter in credit losses, but we’re seeing that kind of come back into line.

How does the fourth quarter look?
Brice: I like how we’re positioned. I think we’ve demonstrated that we have a good team of bankers that is able to go out and grow the business organically. I like the markets that we’re in; they are going to provide varying degrees of opportunity. I think long-term, we’ll keep our eyes open. We don’t feel we have to go out and do anything immediately on the M&A side. If the right opportunity pops up, we’ll certainly take a look, but we’re going to be disciplined on how we evaluate it.

What do you expect from your board? How can the board be helpful to you?
Brice: When you look at the makeup of the board, we have three former bank CEOs. All of them have extensive knowledge of the industry, so they are great mentors, great sounding boards, and they give me a different perspective on how I would evaluate things from time to time. Our other board members who are not former bankers bring different skill sets, whether it’s specific industry knowledge or an understanding of the markets we operate in. I think we have a very effective board. They challenge management, but at the same time, they support us to make sure our management team is doing a good job for our shareholders.

Last question: What is your dream vacation?
Brice: I like to spend some time in the Del Mar, California, area. You get down by the beach in August and it’s 75 degrees in the afternoon and 65 at night. It’s just a nice little quiet getaway. My wife and I and the kids like to get out there from time to time.

You’ll have to do an acquisition in Southern California so you have a reason to go there.
Brice: (laughs) If I did that, then I’d have to go out there and work! That’s why I like to get out there and get away.

Lending Automation: The Risk of Delayed Entry


lending-1.png

Technology is rapidly enhancing the banking industry’s ability to comprehensively and efficiently evaluate the credit worthiness of businesses and consumers alike. The abundance of available information on borrowers and the effective management of big data enables banks to minimize risk, reduce defaults and maximize returns. The challenge is leveraging that data to realize its full potential value.

Data and technology go hand in hand. Banks already have a lot of great data on the customers they serve. The problem is, unless they take advantage of available technology, most banks won’t come close to maximizing the value of the customer information they have collected.

Only through technology can banks collect, aggregate and analyze massive amounts of data in a timely manner, allowing for quick, accurate decisioning of borrower information and the streamlining of the myriad of steps that make up the end-to-end lending process. Financial institutions that do the best job of adopting new financial technology stand to gain a huge competitive advantage over those that lag behind.

For those banks slow to adopt state-of-the-art lending technology, the risks of falling behind are significant. The failure to take advantage of the innovative resources available today puts the bank at a competitive disadvantage, and has negative impacts both financially and in terms of human costs.

Customers have grown to expect the convenience and speed that come with a digital experience and judge their financial institution by how it meets those technological expectations. As a result, customers are seeking out banks with a strong fintech brand. With both business and personal borrowers, one of the key drivers is the speed in which they can have access to the capital they need to solve their financial problems. Banks that respond the fastest typically have incorporated technology into the lending process. That results in increased customer retention and higher customer satisfaction scores.

Technology not only impacts the bank’s “customer experience,” it has a major impact on the quality of the “banker experience” as well. Technology enables bankers to focus their energies on activities that enhance their productivity. When customer data is quickly translated into actionable information, it allows bankers to ask better questions, solve more problems and meet more customer needs. This enhanced “banker experience” results in greater employee retention, loan portfolio growth and increased account penetration.

Efficiencies gained through technology also have a big impact on profitability. Loans that were once loss leaders are now able to be executed profitably. It costs just as much for a bank to take a $25,000 loan through the underwriting process as it does for a $900,000 loan. With the efficiencies gained through technology, smaller loans that were once loss leaders may now be executed profitably. This impact can best be seen in the critical small business lending space. Loans that have not been pursued by banks, and in some cases even turned away, are now able to be done profitably, which opens up new markets for banks and helps them better serve their local communities. Technology enables the collection, aggregation and analysis of data in a much more cost effective way and allows for automated, streamlined processes that enhance profitability.

Finally, regulators are also trending toward more comprehensive risk analysis and the expectation of predictive modeling as an objective way to make lending decisions and monitor loan portfolios. Current Expected Credit Loss standards (CECL) are being developed requiring “life of loan” estimates of losses. More and more, banks have to rely on their ability to manipulate available data as a way to meet the regulators’ demands. That kind of analysis is difficult to accomplish consistently and accurately using manual processes, but is much easier to achieve with technology.

Embracing financial technology is the key to survival in the lending world. Banks that adopt new lending technologies early will have significant advantages in the marketplace and will slow market share losses to aggressive, tech-oriented marketplace lenders.

On Your Mark….Loans Approved!


lending-10-7.png

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


challenge.png

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!

Cash for Truckers Turns Into Cash for Bankers


specialty-finance-7-15-16.pngCash4truckers.com* sounds like something you’d see on a roadside billboard, not a message coming from a community bank. In fact, the domain name is owned by Triumph Business Capital, a subsidiary of a $1.7 billion asset community banking company named Triumph Bancorp in Dallas, Texas.

“You’d have no idea it was a bank,’’ Triumph Bancorp Vice Chairman and CEO Aaron Graft said about the web site at a recent Bank Director conference. “We don’t wait for a customer to show up in one of our primary markets.”

Triumph Business Capital, then known as Advance Business Capital, was founded in 2004 and sold to a group of Dallas area investors in 2012 led by Graft. Triumph has very little presence in the Dallas market where it is headquartered but has 40 percent of its loan portfolio in specialty finance nationwide. It is doing something unusual for a community bank. It’s trying to compete in the realm of factoring and asset-based lending for small businesses, including construction, transportation and trucking businesses as small as one guy with his one truck. Triumph will buy an invoice from a trucker, for example, charging 1.5 or 2 percent of the size of the invoice. That has helped the bank achieve an adjusted net interest margin of 5.61 percent, 203 basis points higher than the average for banks $1 billion to $10 billion in asset size, according to data from the Federal Deposit Insurance Corp.

The trucker gets the cash and Triumph pursues collection from the customer who received the shipment. So the credit risk is analyzing whether or not the customer, not the trucker, will pay the bill. The trucker also gets additional services including discount fuel cards as well as having someone else manage invoices while they’re on the road.

Not a lot of banks want to get into this business. Larger companies are able to finance their working capital needs through the likes of big banks such as CIT Group. Small businesses take just as much work as the big companies to finance, but the loans are smaller. Many small banks don’t want to invest in that type of lending because it requires so much expertise to manage and keep track of the loans.

This is where Triumph comes in. “We are willing to serve the smaller end of the market because we think they need it more and because we think that’s where the opportunity is,” says Graft.

It’s a strategy born in an age of slow growth and low interest rates, where banks are scrambling to grow loan portfolios and profits. The Office of the Comptroller of the Currency recently warned in its semi-annual risk report that growing competitive pressures have led to lowering underwriting quality and increased credit risk.

Graft says he’s dealing with the risk inherent in his strategy by bulking up his specialty finance staffing and expertise. As an example, more than 100 people work in factoring with a loan book of about $150 million. The bank reviews invoices for fraud, hoping to catch people submitting false invoices. Graft says he’s dealing with regulatory risk by communicating the bank’s strategy to regulators, to serve both as a community bank and as a national specialty finance company. The bank’s subsidiaries offer business-related services such as treasury management and insurance, as well as branch banking through Triumph Community Bank in the Chicago area. Triumph also announced plans in March to purchase a bank based in Lamar, Colorado, with $759 million in assets and 17 branches, which will make Triumph a $2.5 billion asset holding company.

“It’s a little outside the box,’’ says stock analyst Brad Milsaps of Sandler O’Neill + Partners, who covers the bank. He says Triumph is growing by buying community banks to acquire deposits and use those deposits to lend nationally. The bank’s return on assets was 1.20 percent in the first quarter, up from 1.10 percent in the same quarter a year ago, but some of that was the impact of bargain purchase gains from acquisitions, Milsaps says. “They’ve got the operational controls and experience in that business to hopefully mitigate the risk,’’ he says. “If you don’t have the systems and people in place in that space, you’ll get burned very, very quickly.”

*Note: Triumph owns cash4ftruckers.com but has begun redirecting viewers to invoicefactoring.com. Cashfortruckers.com has a similar name but is owned by a different company.

Address Your Commercial Clients’ Technology Needs


mobile-offerings-5-23-16.pngBy now, practically every traditional bank or credit union understands that they have to find ways to either compete with or embrace financial technology to attract and keep customers.

But it’s not just about retail customers, or millennials in particular, who have been raised to expect that technology should put just about every need at their fingertips. Fintech firms also have their eye on business customers, including a plethora of alternative financial services startups backed by investors and venture capitalists, lending money to small businesses that traditional institutions turn down–small businesses who then leave those institutions for good.

A 2015 World Economic Forum report estimates that marketplace lenders granted $12 billion to U.S. small and medium-sized businesses by the end of 2015. By 2020, annual U.S. volume could reach $47 billion, according to Morgan Stanley and Goldman Sachs.

How can a traditional bank or credit union compete? It can compete by providing products and services to make commercial customers’ lives easier, particularly using the mobile channel. This not only means offering mobile merchant services and treasury management solutions, such as remote cash deposit services, Check 21 compliant check images, expedited payments and interconnected vaults at merchant locations, but also an increasing array of cloud-based solutions.

Traditional banks and credit unions can even capitalize on the alternative lending movement. You name it, institutions can leverage any fintech solution that a business customer could possibly need. But how can institutions below the top 30 money center banks and large regionals—institutions with limited resources—offer solutions like that?

Let’s just look at one example at how challenging adopting fintech solutions on a piecemeal basis can be for one of those institutions: offering a mobile app for remote deposit capture. It’s seemingly a relatively simple app to offer, but to get that solution to market, an institution typically has to rely on its core processor to allow a third-party app developer to connect its solution to the core system. However, most core vendors do not want to open up their systems in real time for posting those deposits because they don’t want the third-party accessing the core—that’s a problem.

Then an institution has to figure out how to handle potential security issues that remote deposit capture poses. For example, a fraudster could take a picture of a fake check, or take a picture and deposit a real check remotely, but then immediately try to cash the check at the institution’s branch or at another institution. That’s another challenge. Working with a third-party app provider presents other problems as well. There could be issues importing images, and not getting upgrades delivered. On top of that, an institution has so much already on its plate that it can’t even imagine also handling sales and marketing of these third-party apps.

This example pales in comparison with what a bank or credit union has to do to provide its own solutions to commercial customers. While an institution’s niche may be primarily banking merchants and corporate entities, its focus may be just on commercial lending. However, to increase the stickiness of commercial customers, institutions should strongly consider offering a much fuller array of non-lending products, and those solutions must be cloud-based and easily accessible via mobile.

Therein lies the most daunting challenge of all: Contending with the financial industry’s own version of the Four Horsemen of the Apocalypse— operations, compliance, IT and sales. Banks and credit unions have options how to best overcome these challenges. They could invest in technologies to launch fintech solutions on their own and pay for the required expertise to appropriately manage those Four Horsemen themselves. They could also choose to partner with fintech vendors for each separate solution and try to coordinate management of the various operations, compliance, IT and sales duties that come with each solution. Alternatively, they could work with “concierge” partners that have wider menus of fintech solutions, as well as the expertise to help institutions manage the entire process.

Whichever approach banks and credit unions choose to compete in the new world, one thing is certain: They ignore fintech at their peril, as they risk losing business customers altogether.