How Traditional Bankers Can Compete in a Virtual Marketplace

Technology and willingness to use innovative techniques in the underwriting process have allowed online bankers to grab a small but growing percentage of the market for loans to small and medium-size entities (SMEs). Having digitized the entire loan process, online bankers usually take just days to process applications — and some even approve loans in a matter of minutes.

For most traditional bankers, the application process can take weeks. Yet traditional banks have several advantages over online bankers. Here’s some guidance to help you compete in a virtual marketplace.

Leverage relationships with existing SMEs

Online borrowing is missing a personal connection between the banker and borrower. This is your primary competitive advantage. Evaluate how your bank currently nurtures its personal relationships with business owners. Then, identify additional ways that relationship managers can deepen that connection.

For example, you could offer to deliver coffee and donuts to a key customer and schedule a meeting while you’re on site to discuss year-to-date performance. Before the meeting, do some research: Are there any recent local news stories featuring the company? What’s new on the company’s website or Facebook page? It’s important not only to celebrate a borrower’s accomplishments, but also to understand the challenges and opportunities the owner faces. Doing so may help you identify needs for additional loans and other services, such as overdraft protection, corporate credit cards and online banking services.

Use data to develop predictive models

Banks have direct access to data that online bankers desperately want, such as historical bank account and credit card processing data. Brainstorm ways your bank could use that data to prequalify loan applicants.

For example, analyze your SMEs’ transactions to uncover payments to online bankers. Target those companies with innovative and enticing loan offers. Make sure that the marketing materials you provide spell out why it makes sense to borrow from your bank instead of an online banker. Focus on your bank’s competitive rates as well as its ability to close a loan quickly with minimal red tape.

And remember, online bankers use innovative underwriting approaches, including predictive modeling that considers a company’s e-commerce performance and online customer reviews. Consider supplementing your bank’s traditional underwriting with similar data analytics.

Evaluate the loan application process

A major deterrent to applying for a loan is the time it takes to complete the application. Look at the process through your customers’ eyes to uncover red tape, unnecessarily intrusive questions and burdensome requirements.

Take steps to streamline the process, without compromising your bank’s ability to meet regulatory expectations and vet prospective borrowers. Also consider surveying previous loan applicants for ideas on how to improve the process.

Digitize your application process

Online bankers are thriving due to the digitization of the loan application and underwriting process. At some point, your bank might consider jumping on the bandwagon.

Converting paper documents to digital will require careful planning. What technology should your bank adopt to digitize the loan process? Once digitized, how will you ensure regulatory compliance? Document the current loan application process and develop a road map detailing steps needed to digitize the process. The sooner your bank begins this process, the faster you’ll be able to reap the benefits of digitization. And after you digitize your application process, consider creating an additional revenue stream by licensing the technology to banks that operate outside of your footprint.

Partner with an online banker

If you can’t beat them, join them. In addition to continuing your efforts to originate loans, consider partnering with an online banker to buy loans it originated. This approach can increase your exposure to SME loans, which often have higher interest rates than traditional bank loans.

Some banks affiliate with online bankers in less conventional ways. For example, you might refer customers that you didn’t approve for loans to an online banker with a higher risk tolerance. Or you might become an equity investor in an online banking company or “white label” the online banker’s technology — in other words, use their technology to screen borrowers without disclosing their role in the process.

Adapt and thrive

When a SME wants to borrow money, it’s fairly simple and convenient for the owner to submit an online application with the growing list of online bankers. Don’t let online bankers take customers away from you. To thrive in today’s competitive banking market, you must be willing to adapt your relationship building and loan origination practices to the virtual world.

What attracts prospective borrowers to online bankers?

To compete with online bankers, it’s important to understand how they operate. Keep these lists in mind and consider adapting your loan process accordingly.

Key reasons SMEs apply online:

• Perceived likelihood of being approved,
• Speed of underwriting process,
• Ease of application,
• Availability and flexibility of loan products, and
• Beneficial terms and interest rates.

Examples of data used by online bankers:

• Social media account activity,
• Borrower’s education level and subjects studied,
• Personal and business checking account activity,
• Company shipping data gathered from UPS or FedEx,
• Personal and business cell phone, utility, and rental data,
• Online reviews, and
• Personal and business cash flows.

For more information on Smith and Howard’s commercial banking services, please contact Alan Najjar at 404-874-6244.