How to Identify the Right Partner — Beyond a Solution

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The decision to outsource a function or task is often a difficult one for banks. Executives need to consider many different factors. And once they decide to outsource, the search for the perfect vendor partner begins. An array of different solution partners often exist for banks to choose, so how can executives select the right partner for their needs?

Bankers should begin by evaluating vendors by inquiring into their implementation process — not solely by reviewing their technology. The key is to ask important questions early. Implementation is often filled with pain points and obstacles that banks and their partners must address; it is easy to forget about the huge implications of implementing new technology and processes. As the bank sheds older processes, how can their new partners help them connect the dots to ensure the end result for employees and customers improves?

Before the Process Begins
Bankers may need to ask themselves some hard questions before they begin the search for a partner. This process will disrupt the current status quo. Is their organization truly ready for changes associated with an implementation?

Usually, the people making partner decisions are not the ones who will have to work with the new technology on a regular basis. Bring the day-to-day employees into the conversation early: they can provide insights about how processes work today and management can give them with a realistic understanding of what the implementation process will look like. These employees have a unique perspective that might trigger additional questions that decision-makers had not thought to ask before.

There are two discussion-driving questions bankers can ask potential vendor partners to help when deciding on which solution is going to work best for their organization.

1. How do I get from Point A to Point B?
The goal is to uncover as many pain points as possible and discuss how the potential partner will work with the bank to solve them. Every implementation is going to have challenges, but many potential vendors do not mention challenges during the sales process without direct questions from the bank. Getting a good idea of what the overall process looks like helps prepare banks for where issues may arise. Executives should ask questions like:

• How does this new process pull data or connect to user information within the core?
• Are all processes automated? Does any human intervention need to occur?
• How does the vendor update the core to keep a single source of truth?

2. How strong is your project management?
Before bankers even have these conversations with a potential partner, they need to make sure they have a good understanding of the technology and workflow changes that will happen. Similarly, bankers need to ensure that their potential partner understands the realistic impact those changes will have on the institution. Shared empathy and understanding will provide both partners with a better implementation process.

Vendors typically have their own project management methodology. It is important to learn what that is and evaluate whether or not it will work for the bank’s team. Bankers should ask questions like:

• Who does the vendor project team consist of?
• Is there a timeline of key deliverables and accountability?
• What are the typical challenges that stall similar projects?
• How does the vendor help the bank overcome these challenges?
• Can they provide a sample testing plan?

Good partners will create and communicate a realistic timeline with drop dead dates to make sure that everything remains on target. Finding a partner that will be open and honest is priceless when it comes to ensuring a smooth implementation.

At the end of the day, the bank is going through a transformation. The ultimate goal is to provide the organization or the end user with better technology or an improved experience — maybe both. Doing due diligence and asking the hard questions early prepares the bank for a better implementation process. Working to understand all the implications that come with integrating new systems and a new partner will set banks up for success and help executives choose the right partner — beyond just a solution.

Evening the Score for Small Business Lending in a Down Market

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Small and medium-sized businesses (SMBs) are vital components of our local communities, yet they often face difficulties accessing the capital they need to operate. At the same time, community banks want to support their local SMBs but may hesitate to underwrite small business loans, especially for small dollar amounts.

All this is compounded during times of economic stress and uncertainty. The knee-jerk reaction of most banks is to tighten their lending standards and narrow the credit box — no surprise, given that banks historically face challenges in providing small dollar financing, even in the best of times. The reasons for this are myriad: on average, small loans tend to have a loss rate that is double the rate of larger loans, climbing even higher during bad economic times. Operating costs for small dollar loans are also an issue, as most lenders must scale down these costs by more than six times on average to achieve the same efficiency as their larger loan products.

So where can bankers and SMB owners find a balance that works for both? For banks, it is about balancing credit risk parameters while providing needed liquidity to small businesses in their communities. That work begins with access to richer data sets paired with newer, better expected loss credit models specifically designed for the challenges of small dollar small business lending. This level of intelligence can help bankers make more informed credit decisions faster, potentially reaching more borrowers and growing loan portfolios, even as competitors curtail their own lending programs.

The Limitations of Traditional Credit Scoring
While FICO scores are important and proven tools, the bulk of their data is still geared more towards individuals rather than businesses. Business bankers should leverage new alternative credit models that offer a better analysis of expected loss for SMBs and significantly better insights to support small dollar lending. Used in conjunction with traditional FICO/SBSS scoring, this new model enhances the credit view for banks and offers information well beyond the behavioral score, including macroeconomic, business, franchise and other important data.

An expected loss model is an additive component of a bank’s credit decisioning and augments other existing, traditional data sources to offer a much more comprehensive view of the borrower. This helps bankers better mitigate risk and provides further insights that could support an expansion of a bank’s existing credit risk appetite.

Incorporating both consumer and business credit data that is enhanced by other relevant economic and business factors, banks can gain a much more complete picture of their potential small business borrowers beyond the consumer credit score alone. Often, SMB borrowers with similar consumer credit scores can present vastly different risks that may not be easily seen, even within the same area or industry.

For example, two restaurant owners may appear very similar in terms of risk just looking at their FICO scores. However, a deeper view of the data may show that one has been operating for over 10 years in an metro area with low unemployment, while the other has been in business for less than a year in a city currently experiencing much higher unemployment rates. Likewise, differing FICO scores might not tell the whole story. A business owner with an 800 score may be in a more volatile industry or located in a city with extremely high unemployment or poverty rates, while an owner with a lower score may be experiencing the opposite.

Additionally, this enhanced data approach can help banks more effectively meet lending and/or financing mandates tied to environmental, social and governance (ESG) values, as more robust data enables banks to better reach underserved borrowers who may not meet traditional/standard FICO criteria. This has the potential to open up new markets for the bank.

Successful SMB lending does not end at origination, however. This richer data provides bankers with enhanced risk management capabilities over time, allowing them to continuously monitor their lending portfolios as they move forward or even run them on a “look back” basis. Banks can leverage technology solutions and platforms that offer advanced analytics and predictive modeling capabilities to better manage their small business lending portfolios to achieve this. These solutions can help banks detect early warning signs of potential defaults or other risks, allowing them to take proactive steps to mitigate those risks before they become larger issues.

Small and medium-sized businesses play a critical role in local economies; supporting their growth and success is essential. Leveraging new credit models and richer data sources allows banks to more effectively manage the risks associated with small dollar lending and expand their lending programs to reach more underserved SMBs in their communities. Doing so allows them to help level the playing field and provide much-needed liquidity to these businesses, enabling them to thrive even in challenging economic conditions.

Disrupting the All-or-Nothing Mindset in Banking

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Nine and a half times out of 10, you don’t eat the entire pie during dessert. Instead, you opt for a slice – maybe two.

It’s the same with financial institutions and their services.

Most banks don’t originate every type of loan or allow customers to open every type of account in the market. But when they are in need of a specific capability, such as banking as a service capabilities or acquisition, development and construction financing, it can be difficult to find a solution that does only that.

In certain cloud-hosted environments, however, banks can create the exact solution they need for their business and customers.

In this episode of Reinventing Banking, a special podcast series brought to you by Bank Director and Microsoft Corp., we speak to Robert Wint, senior product director at Temenos, a cloud-based banking technology solutions provider.

Wint describes how Temenos’ cloud banking focus is helping financial institutions spin out specific, individual technologies and launch them as stand-alone solutions. He brings to the table some impressive case studies, and introduces a potentially new term to our American audience: composable banking.

Temenos reports that its technology is used to bank over 1.2 billion people. Listen to find out how.

This episode, and all past episodes of Reinventing Banking, are available on FinXTech.com, Spotify and Apple Music.