Commercial Lending Cradle to Grave Solutions

 NOTE:  This article has been co-authored with Paul Bird, a Manager in PwC’s Commercial Banking Advisory practice.  I leaned heavily on his broad knowledge of the competitive landscape and cutting-edge solutions.  The discussion below reflects his own opinions and is not representative of PwC’s ideas or private information.

Banks have been underwriting commercial loans essentially the same way since inception.  Our “sausage factories” are generally ugly, and the process for loan underwriting, origination, disbursement, maintenance and discharge convoluted and confusing.  Service level agreements with the credit department are typically absent, because each loan is different – by type, by documentation, by special circumstances, etc.

The financial crisis forced banks to take a hard look at expenses as margins severely compressed with flat yield curves and near-zero deposit rates.  In addition, disruptors offered the very low end of the borrowing market fully automated, convenient and fast alternatives, thereby snagging some share from banks and raising questions about the sustainability and advisability of sticking to the old underwriting rules and process.  They started looking for transformational alternatives to address process, regulatory and technology standardization solutions to their various commercial underwriting activities.

Several development companies saw this opportunity window and developed highly flexible (some say too flexible) workflow processes to offer alternatives to the current practices.  These new process models not only reduce costs, duplication of effort and paperwork; they also provide a much-improved customer experience and faster decisioning, both critical to the competitive posture of all commercial banks today and tomorrow.

Customer expectations of the commercial lending process have been evolving toward improved mobility, speed, digitization and security.  These emerging expectations look for a different value chain associated with commercial lending.  A robust servicing function, for example, is dependent on digital enablers that are deployed across the system and connected to the core servicing process.  Such connectivity is essential to facilitate self-service by the customer across devices, a highly coveted feature.

Today’s customers look to interact directly with the bank in a single, secure digital connection.  This functionality isn’t table-stakes yet, but it will be.  Today it can serve as a major differentiator and an acquisition tool for the evolving customer base.

The commercial lending value chain is comprised of several elements which will remain unchanged through time:

• The sales phase
• Loan origination, including:
  • Application processing
  • Loan underwriting
  • Document execution
  • Booking and boarding
• Loan servicing
  • Starts during the boarding process
  • Continues through loan servicing for the life of the loan
  • Loan monitoring
• • Payoff or collections
  • Payoff management
  • Default management

New technology solutions can enhance every element of the value chain:

• The sales phase can benefit from a centralized information on prospects and customers in a single platform, as well as strong sales management and CRM modules and functionality.  Self-service customers would enjoy entering their own data and monitoring process progress through generic “pings” provided by the system as process milestones are passed.
• Loan origination can be streamlined in many ways, from single data entry point to drive efficiency and compliance to improved reporting capabilities to speed up decisioning and data collection across the board.
• Loan servicing can move to a truly paperless environment while rationalizing workflow and data shortfall handling, as well as automated operational reporting to enhance accountability and transparency.

Several digital solutions have been developed to achieve the elusive cradle-to-grave ideal.  While none of them is there yet, some have made meaningful progress toward this ideal.

Salesforce is the uncrowned king of sales management, CRM and customer information management.  Its primary role is during the sales phase of the operation, but the information it contains can and should be used throughout the loan lifetime.  Competitors include Microsoft Dynamics, Act and other solutions.  Most are not integrated with other software solutions associated with the other phases of the loan value chain, but even those that are “integrated” into the workflow solutions find that seamlessness hasn’t been achieved as of yet.

The main commercial Loan Operating System providers in recent years are: AFS (less than 10 total bank installations as of early 2017); D&H (less than 20); LineData/CapitalStream (less than 40); Moody’s (no recent installations); nCino (over 150) and Provenir (less than 35).  NOTE: This information is based on current industry data and vendor marketing; it might not be fully accurate but it offers a relative sense of stage in the lifecycle of the product.

The benefits of a successful LOS installation are obvious.  Among them are:

• Cost reduction of 30%
• RM capacity release of around 30%
• Reduced cycle time and errors during the origination phase
• Improved loan servicing efficiency through reduced people cost and reduced errors, lower administrative burden on the RM, PM and their AAs
• Better client experience through self-service and faster response rates at every stage of the loan lifecycle
• Improved collection and loan retirement process

NOTE:  These benefits will only accrue if the process is rationalized before it is codified through automation.  The workflow should be carefully evaluated and modified to build in the efficiencies and shorter response times in the first place.  The system then will create a workflow that utilizes the process you select and adds efficiencies to it, such as a single data entry, prompts for customer contact and additional information requirements, customer self-service options etc.

The risks of an LOS installation are also considerable:

• Some of the vendor solutions are workflow solutions and not banking applications.  As a result, the vendor can’t recommend the best process for you; a bad process will remain bad even when automated.
• Some of the vendors have grown rapidly and are facing difficulties in meeting demand at every level of the project, from sales to implementation.
• Even the best processes and most perfect vendors cannot prevent the pain of data entry associated with initiating the system.  RMs, PMs and AAs all resent that massive time commitment, so providing installation assistance might be advisable.
• Invariably, the LOS solutions involved a multi-year process during which regulatory requirements change.  These may imply system changes to ensure that the bank meet the new reporting requirements, which are disruptive and expensive.
• The prolonged nature of the project will also be taxed with other requirement changes as the environment changes, products are introduced and even when Credit people change.  Change is expensive and painful.

An emphasis on standardization of process, especially the approval process, can help mitigate the risks mentioned above.  In addition, hiring an advisor who is experienced in bidding for, selecting the vendor and installing the system you selected is helpful.  The selection decision in critical and difficult, as no single vendor offers a perfect solution for you.  Understanding the options and making the key decisions regarding system “must haves” can happen more effectively with someone at your side to crystallize the key decision points and assist you in making them.  Plus, having staffing depth at hand can help shorten the implementation process and reduce organizational conversion pain.

In summary, there is no easy way to get this done; nevertheless, the long-term benefits far outweigh the medium-term angst and cost, plus, I believe, these new systems and faster decision times will become table stakes.

The key takeaways are:

• Spend much time upfront streamlining your process and creating major milestones to which your staff can be held accountable.
• Define and align system requirements across the various business lines within your commercial banking business to create a foundation of common, consistent practices to yield efficiency and seamlessness across the board.
• Establish program, release and change management processes upfront – as change is inevitable.
• Invest in thought and resources upfront to avoid preventable “fixes” later on.
• Create a common language to increase system usage effectiveness (e.g. define an opportunity, a prospect, a call and pipeline probabilities).
• Recognize and include the various system users from the very beginning.

We’re all looking for elegant, standardized solutions to our loan process.  It might not exist; it might not even be the right thing to do.  But not changing what we’re doing today is an active decision which carries costs with it – opportunity costs, lost customer acquisition costs, and hard dollar costs for daily operations.  I believe the LOS question is not whether you will do it but when.  Timing is sensitive.  How effectively you execute this pivotal project is even more important.