Coronavirus Underlines Digital Transformation Urgency

The passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act means up to $350 billion in loans guaranteed by the Small Business Administration is set to flow to small businesses by the June 30 funding deadline.

Community and regional institutions are, of course, the logical partners for distribution of this capital. But a challenge remains: How will those financial institutions reach out to the market when their lobbies may not be open, and businesses may not be comfortable with face-to-face interactions?

Banks have done little to change the way they interact with their business customers in the digital age. In good times, this lack of transformation allowed large technology companies like Amazon.com, PayPal Holdings and Square to siphon customers away. The current environment complicates efforts for banks that have not already transformed to be responsive to their customers immediate needs.

Customers prioritized convenience — now banks will be forced to. Even prior to social distancing, consumers prioritized speed and convenience, whether it came to new technology or where they banked.

Winning at business banking was always going to require banks to offer business customers a frictionless experience. But the ability to operate business banking functions digitally has taken on new meaning — from defining quality service to becoming a necessity during a pandemic.

Three Critical Points of Friction in Business Banking
Now more than ever, it should be every institution’s goal to make working with businesses as easy as possible, especially when distribution of SBA dollars is at stake.

To meet this moment, banks need to remove three critical friction points from their business banking experience:

  • The Application: Paper applications are long and tedious, and the process is even more difficult for SBA 7(a) loans. To remove friction, institutions need to focus on data and access. They should use available data and technology to pre-fill applications as much as possible, and provide them digitally either for self-service or with banker assistance.
  • The Decisioning: Underwriting loans is a labor-intensive process that can delay decisions for weeks. An influx of Paycheck Protection Program loan applications will only compound the inefficiencies of the underwriting process. Banks need to automate as much of the underwriting and decisioning process as possible, while keeping their risk exposure in mind. It’s critical that banks select companies that allow them to use their own, unique credit policies.
  • The Account Opening: Banks also need to think about long-term relationships with the businesses they serve during this time. That means eliminating common obstacles associated with opening a business deposit account. For example: If a business has already completed a loan application, their bank should have all the information they need for a new account application and shouldn’t ask for it twice. They need to ensure businesses can complete as much of this process remotely as possible.

At Numerated, the sense of urgency we hear from bank leaders is palpable. Our team has been working overtime — remotely — to provide banks with a quick-to-implement CARES Act Lending Automation solution. Banks have been working just as fast to understand the current environment and build strategies that will help them meet their customers’ rapidly shifting needs.

In many ways, the COVID-19 pandemic has forced banks to consider digital transformation as a solution to this problem. Still, many firms have held off for any number of reasons. Institutions that have focused on digital transformation will be the most successful in improving the business banking customer experience and will lead the way during this pandemic as a result.

From Eastern Bank Corp. in Boston that used digital lending to become the No. 1 small to midsized business lender in their competitive market, to First Federal Lakewood, in Lakewood, Ohio, that is using digital experiences to retain and grow strategic relationships, institutions of all sizes have launched new digital capabilities, better positioning them to face what’s ahead.

As the nation’s businesses grapple with this new reality, these financial institutions are examples for others exploring how to serve business customers when they can’t see them face to face. Doing so will require a reimagining of the way we do business banking.

Embracing Frictionless Loans by Eliminating Touch Points


lending-9-13-19.pngTo create a meaningful customer relationship, banks should drive to simplify and streamline the operational process to book a loan.

Automated touchpoints are a natural component of the 21st century customer experience. When properly implemented, technology can create a touch-free, self-service model that simplifies the effort required by both customer and bank to complete transactions. One area ripe for technological innovation is the lending process. Banks should consider how they can remove touch points from these operations as a way to better both customer service and resource allocation.

Frictionless loans can move from origination to fulfillment without requiring human intervention, which can help build or enhance relationships with clients. Your institution may already be working on decreasing touches and increasing automation. But as you long as your bank has an area of tactile, not strategic, contact between your staff and your customer, your bank — and customers — will still have friction.

Bankers looking to decrease this friction and make lending a smooth and seamless process for borrowers and originators alike should ask themselves these four questions:

How many human touchpoints does your bank still have in play to originate and fulfill a loan? Many banks allow customers to start a loan application online and manage their payments in the cloud, but what kind of tactile processes persist between that initial application and the payment? Executives should identify how many steps in their lending process require trained staff to help your customers complete that gap. Knowing where those touchpoints are means your digital strategy can address them.

What value can your bank achieve by reducing and ultimately eliminating the number of touches needed to originate a loan? Every touch has the potential to slow a loan through the application process and potentially introduce human error into the flow. But not all touchpoints are created equal.

Bankers should consider the value of digital data collection, or automating credit score and loan criteria review. They may be able to eliminate the manual review of applications, titles and appraisals, among other things. They could also automate compliant document creation and selection. Banks should assess if their technology enablement efforts produce a faster, simpler customer experience, and what areas they can identify for improvement.

Do you have the right technology in place to reduce those touchpoints? Executives should determine if their bank’s origination systems have the capabilities to support the digital strategy and provide the ideal customer experience. Does the bank’s current solution deliver an integrated data workflow, or is it a collection of separate tools that depend on the manual re-entry of data to push loans through the pipeline?

Does your bank have an organizational culture that supports change management? Does your bank typically plan for change, or does it wait to react after change becomes inevitable? Executives should identify what needs to happen today so they can capitalize quickly on opportunity and minimize disruptions to operations.

Siloed functional areas are prone to operational entrenchment, and well-intentioned staff can inadvertently slow or disrupt change adoption. These factors can be difficult to change, but bankers can moderate their influences by cultivating horizontal communication channels that thread organizational disciplines together, support transparency and allow two-way knowledge exchanges.

For banks, a human touch can be one of the most valuable assets. It can help build long lasting and meaningful relationships with clients and enable mutual success over time. This is precisely why banks should reserve it for business activities that have the greatest potential to add value to a client’s experience. Technology can free your bank’s staff from high-risk, low-return tasks that are done more efficiently through automation while increasing their opportunities to interact with customers, understand their challenges and cross-sell products.

Frictionless loan planning should intersect cleanly with your bank’s overall digital strategy. It could also be an opportunity for your bank to scale up planning efforts, to encompass a wider set of business objectives. In either case, the work you do today to identify and eliminate touch points will establish the foundation necessary to extend your bank’s digital reach and offer a competitive customer experience.

Three Ways Directors Can Solve the 3,000-Year-Old Credit Problem


credit-7-9-19.pngHistory has shown that knowledge is power. One place that could use the benefit of that knowledge is commercial credit.

Banks have been lending to businesses for 3,000 years and has yet to figure out the commercial credit process. But executives and directors have an opportunity to fix this problem using data and digital capabilities to make the process more efficient and faster, and become the lending legends of their institutions.

In 1300 B.C. Egypt, the credit process looked something like this: A seafaring trader would trade bronze bowls with a local bronze merchant for cloth and garments. But to make this transaction, the bronze merchant would need to borrow from multiple merchant lenders. This process required lenders to understand the business plans of the borrower, go “door to door,” have community knowledge and know the value of all those goods. There were a lot of moving pieces—and a great deal of time—involved for that one transaction.

Fast-forward to today. A lot has changed in 3,000 years, but the commercial credit process has actually gone backwards. It can take a lender 60 to 90 days and more than $10,000 per lead to identify potential leads—and that’s before they review the application. After a borrower applies, the lender must look up credit reports, collect and spread financial statements and decide on the terms and conditions. Finally, the application goes through the credit department, which can take another 30 to 45 days and cost $5,000 per application.

Lenders will have spent all that time and effort to process the loan—but may not end up with a new customer to show for it. Meanwhile, borrowers will have spent time and effort to apply and wait—and may not have a loan to show for it.

While this problem has persisted for 3,000 years, the good news is that executives and directors have an opportunity to fix the problem by turning their manual-lending process into a digital-lending one. This evolution entails three steps that transform the current process from weeks of work into days.

First, a bank would use a digital-lending portal to gather applicable demographics to identify prospective borrowers. In researching prospects, they see critical borrower information such as name, address, years in business, legal structure, taxpayer identification number, history, business description and management team. Rather than having to wait until later in the process to uncover this critical information, they can immediately identify whether to pursue this lead and quickly move on.

Second, a bank uses a credit-decision engine to gather and analyze the applicable borrower data. Not only can the engine pull in consumer and credit bureau information, but it can also include automated financial collection, credit score and industry data for comparison. The bank can use data from this tool to determine terms and conditions, credit structure, purpose of credit facility, pricing, relationship models and cross-sell strategies.

Third and finally, the bank’s credit policy and process integrate with its credit-decision engine to enable an automated review of a loan application. This would include compliance checks, terms and conditions and credit structure. Since the data gathering and analysis has already taken place and automatically factored into the decision, there is no need to review all those pieces, as would be required with a manual process.

These three steps of this digital lending process have distilled a weeks-long process into about five days. Executives and directors can not only grow their institution in a shortened time period; they can do so without adding any risk. A bank I worked with that had $250 million in assets was able to add $20 million in loan volume without taking on any additional risk.

By using knowledge to their advantage and implementing a digital lending solution, bankers can save not just time and costs, but their institutions as well as their communities. They can now spend their limited time and resources where they matter most: growing relationships along with their banks. Having fixed the 3,000-year-old credit problem, they can place those challenges firmly in the past and focus on their future.

How Spreadsheets Add Risk to Construction Lending


lending-4-11-19.pngMillennials are entering the housing market with a force, yet low inventory across the country is stalling their dreams of homeownership. Now is the time for lenders to either begin or ramp up their construction loan programs. These niche loan products are a great addition to any book of business, but to be successful you have to be able to manage and service the loan after it closes.

Post close actions have traditionally been done with spreadsheets. This method, while fairly understood, is actually limiting and prone to formula errors. Additionally, spreadsheets naturally reach a tipping point in a team’s ability to scale and share reportable data with management and others in the organization. This puts loan completion in jeopardy and creates more risk to the lender.

The Limits of Spreadsheets to Manage Construction Lending
Spreadsheets can only do what they are designed to do—no more and no less. As your program grows, you are bound to reach the point where a spreadsheet is no longer functionally efficient and becomes a risky way to manage your pipeline.

  • Limited Visibility Into the Life of the Loan: Each loan has many different data points and touches over time, and housing them in a spreadsheet is basically burying important and vital information every time the loan is touched. It’s nearly impossible to see history, anticipate the future—and most importantly, clearly see problems before they arise. Spreadsheets force a reactive instead of a proactive method, which means a lender who is using spreadsheets is always playing catch-up.
  • No Reporting: Can you open up the spreadsheet right now and easily and accurately report on the pipeline, draw reports or consultant reports? The answer is probably no. And what do you do when you need to produce 1098 or 1099 reports? How do spreadsheets support these requirements? Getting your 1098s or 1099s from spreadsheets is a tedious, manual process prone to error. If you have a good quantity of construction loans, this is a large undertaking, and is difficult to scale. As you consider spreadsheets, consider the additional work that those spreadsheets will cost you over time.
  • A Finite Number Of Loans One Person Can Manage: Spreadsheets require a lot of time to properly manage one loan, and we have found that dedicated and experienced construction loan administrators can typically manage 35 to 50 loans using spreadsheets at one time. Any more than this usually adds to poor customer service.
  • Drains In-house Resources: If your program is doing well and your origination volume is growing, team members are limited in scale before a new hire must be acquired to take on more loans. Throwing bodies at the problem is not the best solution.
  • Location, Location, Location: Spreadsheets, no matter if they are stored on the cloud or on desktops, are still accessed by individual devices. You are now limited to these single failure points. What are the implications of losing this data, or the individual that knows how it works?
  • No Tracking: A spreadsheet does not offer tracking, task automation, complaint management, event monitoring, risk analysis and draw validations to ensure that the loan is meeting all of its milestones and risk requirements. As a workaround, lenders turn to the sticky note to help them keep track of important dates and actions. We all know the ineffective nature of this system, especially as key factors such as deadlines for draws, inspections, liens or permit expirations often get lost in the sticky note shuffle.
  • No Compliance Monitoring: Spreadsheets cannot keep you in compliance with government regulations, state statutes, loan program requirements, internal compliance, in-house policies/procedures or industry best practices. In order to maintain strict compliance, spreadsheets require constant vigilance. This may be their biggest limitation.

If Not Spreadsheets, Then What?
Spreadsheets just don’t cut it for construction loan management. Lenders who want to increase revenue while adding fewer additional resources need a digital construction loan management solution. Digital solutions reduce risk, improve efficiencies, allow scale and provide a better customer experience. Not to mention it keeps track of every small, yet critical, part of the construction loan. Never again will you be questioning if you are over-dispersing funds. Digital solutions, especially those that are cloud-based, can alleviate all the limitations of spreadsheets and the tipping point will be a thing of the past. Once you are running on this new level, you can bring more revenue and smart growth to your organization.

The Modern Roadmap To Gold



Today, data helps competitive banks identify key targets and make smarter—and quicker—loan decisions. In this video, Bill Phelan, president of PayNet, explains how data analysis is shifting loan decisioning, and how banks can survive and thrive through the next credit crisis. He also shares his outlook for business lending, and believes that Main Street America is still looking for capital to grow and improve their businesses.

  • Using Data to Make More Profitable Loan Decisions
  • How Credit Risks Analysis is Changing
  • Preparing for the Next Downturn
  • The Outlook for Business Lending

5 Critical Components for Construction Lending Success


lending-12-31-18.pngThe tough reality is that bankers are experiencing margin compression due to the current state of the yield curve and rising interest rates.

Without refinances to process, and new mortgages growing rarer, they must rely on other types of loan products. Enter construction loans.

Construction lending was once a vital part of a healthy loan product mix. Of course, many bankers will point directly at TRID, or the Know Before You Owe mortgage disclosure rules, as their roadblock to originating construction loans. Support for TRID, like many other regulatory rules, hasn’t been prevalent in the industry, and some bankers don’t have the information they need to mitigate risk.

So what now? Who is offering support for these regulations? And how can lenders begin construction lending again?

Instead of giving up on construction lending, most community banks have all the resources they need to start and maintain a successful construction lending program; it’s all at their fingertips.

To become successful in construction lending, you need these five components to all work together:

1. Support in the C-suite and boardroom
Before looking at solutions, your board must have a consensus on whether or not to even launch the program. Construction lending programs require effort from several C-level executives and the board. Everyone in the C-suite and boardroom need to be on the same page. Having this consensus helps assemble and maintain a successful program.

2. Your Loan Origination System (LOS)
Sometimes lenders don’t know where to begin with a construction loan program, particularly with respect to staying compliant with TRID. It can surprise lenders that the fields and forms required to support construction loans may be available through their LOS. Work with your LOS provider to diagnose how other lenders have utilized the LOS platform when offering construction loan products, particularly the production of the lender’s estimate (LE) and closing document (CD). If your LOS solution does not support construction loans, there are other workarounds in order to still reach the end goal, such as using a document service provider.

3. Specialized document service provider
Mitigating risk and pleasing all who are involved in a construction loan isn’t easy given how many moving parts are involved. It can be done with the proper resources. Document service providers are one of the most important elements to have. The provider gives lenders the specific form needed for each step of the project, no matter if the project is down the street or across state lines.

Before you sign on with any document service provider, make sure of three things:

  • They are able to produce both the LE and CD, particularly if your LOS doesn’t provide them. 
  • They are able to provide the state-specific documents that are going to be needed in the closing package.
  • They are able to guarantee that their documents will protect your first lien priority in each state.

4. In-house subject matter expert
Before the financial crash 10 years ago, construction loan expertise was abundant. But a decade after the recession, experts on construction lending can be difficult to find inside the bank. Finding or recruiting somebody like this on your team can be an amazing resource. They can be helpful in educating other lenders and assist in problem-solving loan structuring to benefit the entire company.

5. Post-close draw management and servicing
How do you manage the cost and process involved after you close that construction loan? Loan servicing is an integral piece of construction lending, and it is very hands-on and specific. Once the loan is closed, someone must be servicing this loan to ensure success for the duration of the construction loan: managing first lien priority, draw administration, inspections, and communication with key stakeholders such as the borrower and contractors. At the end of the day, you need someone to manage the lenders’ holdback, while simultaneously protecting the physical, financial, and legal interests of your bank.

What Your Bank Can Learn From McDonald’s


lending-11-29-18.pngIt’s noon. You’re halfway through your road trip, miles of highway behind you and your stomach tells you its lunchtime. Your passenger asks Siri for directions to the nearest McDonald’s. From the restaurant’s mobile app, he orders two No. 3 meals, selects a pick-up time, and pays—all in less than three minutes. You exit the highway, pull up to McDonald’s and in no time are back on the road, eating lunch.

This type of digital experience—what you want when you want it—is quickly becoming the standard for consumer expectations. As a recent digital lending study reported, McDonald’s CEO Steve Easterbrook rolled out the company’s app “to embrace change to offer a better McDonald’s experience” and has also said that “it’s pretty inevitable that our customers will increasingly engage with us as a brand and as a business through their phones.”

The McDonald’s experience is relevant because that type of experience is what consumers expect from financial institutions as well. In fact, by 2021, half of adults worldwide will use a smartphone, tablet, PC or smartwatch to access financial services—up 53 percent from 2017—according to Juniper Research.

Further, the 2016 MX Consumer Survey finds that 81 percent of consumers prefer to interact with their financial institutions by desktop, laptop and/or mobile device. The same study shows that 38 percent of consumers have reduced how often they bank somewhere due to a poor digital experience.

One of the greatest growth opportunities for community banks is end-to-end digital automation of the lending process, especially for small- and medium-size business loans. Not only do these loans lend themselves to process automation, but the competition—and market potential—is growing rapidly. By 2020, some media reports suggest the market for online business loans could exceed $200 billion.

Why it Works
Today, small business lending is a labor-intensive process for which most community banks see little financial reward. The majority of community banks use the same process to underwrite loans as small as $50,000 as they do for larger multi-million dollar loans, which include paper applications and documentation and multi-level approvals.

This mostly manual process can cost as much as $3,000 per $100,000 loan, according to industry research firms, far outweighing any income to be made. While some banks have continued to make these loans even at a loss to preserve existing customer relationships, many have stopped making them altogether.

The latter is unfortunate. Historically, community financial institutions have dominated this lending space, strengthening their customer relationships through personal attention, decision speed, and loan term flexibility.

In the aftermath of the 2008 financial crisis, many community banks pulled back on small business loan approvals, which gave rise to a plethora of online lenders like OnDeck and LendingTree, that embraced digital advancements. As a result of this convergence of technology, small business lending from community banks has fallen more than 20 percent since 2008.

Digital Changes the Business Case, Customer Experience
Fortunately, the opportunity to win back this business is encouraging. Digital lending technology automates the entire lending process, enabling banks to deliver loans more efficiently, maintain their traditional underwriting, pricing and compliance practices and provide a seamless, 24/7 digital experience.

Here are some benefits to using digital lending technology:

  • Your customer’s loan journey is entirely online, from application to closing. 
  • Borrowers can sign all documentation within the app.
  • Decisions can be made within 48 hours. 
  • Additional documentation (if needed) can be uploaded within the app.
  • Loans are automatically booked and funded to your bank’s core.

Adding this capability does not require expensive development resources either. The technology is often readily available through white-label products. Industry advocacy organizations including the ABA have reported these white-label, cloud-based solutions represent “a very strong option,” that can be implemented quickly, use a pay-per-volume model and have the ability to customize. They also allow the bank to maintain its underwriting criteria and standards, and hold the loans on your own books.

As with other retail experiences, your small-business customers expect ease and convenience in the lending process. If you do not provide it, others will.

Beyond Spreadsheets: Digitizing Construction Lending



Many banks rely on spreadsheets and personal contact to oversee and manage construction loans—methods that are ineffective today. How can financial institutions improve this process? In this video, Built CEO Chase Gilbert explains how upgrading technology and making the process digital creates efficiencies for both bank and borrower, and allows for better risk management capabilities.

  • Why Digitize Construction Lending
  • Efficiency Gains and Other Benefits
  • Confronting Common Obstacles

How To Make Construction Lending Less Risky


lending-8-14-18.pngWhen compared to the world economy as a whole, the construction industry lacks luster, at least in terms of its embrace (or lack thereof) of digital innovation. According to a 2017 report by the McKinsey Global Institute (MGI), the construction sector has grown by just one percent over the past two decades, while global economic growth has increased at nearly three times that rate. Construction was also the second-least digitized economic sector on MGI’s Digital Index, indicating a serious need for digitization, which could help boost the industry’s growth rate.

Another MGI report found a significant performance gap between industry members that leveraged digitization compared to those who don’t, “with the U.S. economy reaching only 18 percent of its digital potential.” The current lack of technology in the construction industry presents a clear opportunity for industry players establish industry leadership.

A Perfect Storm: Industry Growth Meets Digitization in a Burgeoning Economy
Despite political agitation and a series of natural disasters, 2017 proved to be a strong year for the housing market. Housing showed steady growth in spite of these external factors and a 10.5-percent decline between November 2015 and November 2016. Experts at Zillow believe the housing shortage will continue to drive housing market trends throughout 2018, swelling consumer demand for remodels and new construction.

Fueled by stable interest rates, a strong economy, and inventory shortages, the construction industry stands to enter a period of significant growth in 2018. As predicted by Dodge Data & Analytics, the industry could see a three percent increase with new construction starts in 2018 reaching an estimated $765 billion.

If the industry fails to digitize, it will likely struggle to keep pace with market demands. Currently, large construction projects take 20 percent longer than expected to reach completion and are up to 80 percent over budget. Not only do significant delays and expense oversights like these inhibit those working directly in the industry, such as contractors, sub-contractors, builders, and developers, but also those financing the projects. Missing project completion targets and budget goals makes improperly monitored construction lending a risky business. MGI lists improved “digital collaboration and mobility” as essential to the construction industry’s ability to meet its potential future growth.

Relieve Strain on Lender Resources with Digitization
Oldcastle Business Intelligence estimated in their 2018 Construction Forecast Report that construction, as a whole, would grow by 6 percent in 2018. This year is projected to see significant growth in single-family housing starts, estimated to increase 9 percent, with a predominant focus on Southern and Western regions. As housing and construction demands continue to climb, financial institutions stand to corner a substantial chunk of the growing market and increase revenue.

Historically, lenders have shied away from construction lending, viewing construction loan portfolios as administratively taxing and risky from both regulatory and credit decision perspectives. By bringing the construction loan administration process online through collaborative, cloud-based software, financial institutions can become industry leaders while relieving the burden on their lenders, mitigating risk, and improving the experience for everyone involved.

Reduce Risk with Construction Lending Software
The digitization of construction lending translates to less risk all around. Construction lending software streamlines the facilitation of compliance and regulatory timelines, reducing potential fines and penalties for non-compliance or loan file exceptions. In addition to the risks imposed on the industry by staunch government regulations, lenders also understand the high credit risk involved with traditional construction loans (and their many moving parts) due to their multifaceted, unpredictable nature.

Overseeing construction portfolios requires constant vigilance in tracking and monitoring cost estimates, advances, material purchases, labor costs, construction plans, and timelines, all while ensuring proper paperwork is filed and maintained for every transaction and correspondence.

Bringing the construction loan management process online gives lenders the ability to monitor their entire construction portfolio from one location. Real-time monitoring and alerts automatically highlight areas of concern, excessive advances, stale loans, maturities and overfunded projects. Digital oversight also allows lenders to foresee and correct potential problems with budget and timelines.

Increase Efficiencies Through Digitization
Financial institutions that implement a digital solution for construction loan administration drastically improve efficiencies, eliminating former portfolio limitations. By increasing efficiency, lenders can invest more time in bringing in additional business, approving more loans, and better serving existing clients.

Improve User Experience with Digital Lending
In addition to risk mitigation and efficiency gains, construction lending software also drastically improves the overall user experience in the construction loan administration process by providing a singular platform for communication throughout the life of each loan. Bringing the process online allows lenders, borrowers, builders, inspectors, and appraisers to collaborate and communicate in one place, preventing missed phone calls and the inevitable tangle of email correspondence.

Five Reasons Why You Should Reconsider Short-Term Loans


lending-7-16-18.pngFor the better part of a decade, regulatory agencies have placed obstacles in front of banks that all but prohibited them from offering short-term, small-dollar lending options for their customers. Now, at least one major regulator has signaled a shift in its opinion about those products, which should inspire banks to reconsider those options.

Here are five reasons banks often cite when discussing why they don’t offer short-term, small-dollar options, and a case why they should rethink those ideas.

You don’t think your customers need it
Perhaps many of your branches are in affluent areas, or you believe that your customers have access to other types of short-term liquidity. But the statistics regarding American personal finances may surprise you:

Nearly 50 percent of American consumers lack the necessary savings to cover a $400 emergency, according to the Federal Reserve.
The personal savings rate dipped to 2.8 percent in April 2018, the lowest rate in over a decade, according to the St. Louis Fed.
Each year 12 million Americans take out payday loans, spending $9 billion on loan fees, according to the Pew Charitable Trusts.

Based on these statistics, it’s likely that a portion of your customer base is affected by the lack of savings, or has a need for better access to liquidity, and chances are good that they’d be receptive to a small-dollar, short-term loan solution.

It’s Cost and Resource Prohibitive
For most financial institutions, introducing a traditional small-dollar loan program is cost-prohibitive–operationally, and from a staffing standpoint. From the cost of loan officers and underwriters to the overhead, the reality is it would take time and resources many banks do not have.

Enter fintech firms, bringing proprietary technology and the application of big data. The right fintech partner can manage the time, human and financial resources you may not have, such as application, underwriting and loan signing processes. In some cases, the whole thing can be automated, resulting in a “self-service” program for your customers, eliminating the human resource need.

Underwriting Challenges and Charge-Off Concerns
Another challenge is the loan approval process and how to underwrite these unique loans. A determination of creditworthiness by a traditional credit check does not adequately predict the consumer’s current ability to repay using recent behavior instead of a period of many years. Today’s fintech firms use proprietary technology to underwrite the loans, incorporating a variety of factors to mitigate charge-offs.

The OCC recently released a bulletin outlining “reasonable policies and practices specific to short-term, small-dollar installment lending.” It stated such policies would generally include “analysis that uses internal and external data sources, including deposit activity, to assess a consumer’s creditworthiness and to effectively manage credit risk.” The right fintech partner will apply big data solutions to assess creditworthiness using the OCC’s criteria and other factors.

Compliance Burdens
There’s no question short-term loan options have been heavily regulated over the past eight years. The CFPB placed predatory lending and payday loans under scrutiny. In 2013, the OCC and FDIC effectively ended banks’ payday loan alternative, the deposit advance. The CFPB cracked down even harder in October 2017 with their final payday lending rule, which had the potential to devastate the storefront payday loan industry, forcing consumers to seek alternative sources of quick liquidity.

The pressure is easing. The OCC was the first agency to encourage banks to make responsible and efficient small-dollar loans. If history has taught us anything, it’s that the other regulatory agencies likely will soon follow suit.

Concern About Cannibalizing Overdraft Revenue
Exclusive data collected by fintech firms experienced with overdraft management has shown there are two distinct groups of consumers managing their liquidity needs in different ways:

The Overdrafters
These are consumers that struggle with transaction timing and incur overdraft or NSF fees. A significant portion of this group might have irregular income streams, such as small business owners or commissioned salespeople. In many cases, these consumers are aware of their heavy overdraft activity, and will continue to overdraft, because for them, it makes financial sense.

The Loan-Seekers
A second group includes those consumers who simply lack the cash to promptly pay their bills, and either can’t obtain adequate overdraft limits or failed to opt-in to overdraft services. These consumers are actively seeking small-dollar loans to avoid the double whammy of hefty late fees and negative hits to their credit score for late payments.

Savvy financial institutions will ensure they have the programs in place to serve both groups of consumers, and fill the gap for the second category by using an automated small-dollar lending program with sound underwriting from a trusted fintech vendor.