TRANSFORMING COMMERCIAL LENDING IMPROVING BANKS PRIMARY GROWTH ENGINE

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1 TRANSFORMING COMMERCIAL LENDING IMPROVING BANKS PRIMARY GROWTH ENGINE Richard Hastings FIS Consulting Services

2 Introduction Growing loans continues to be the primary means for bank executives to improve revenue. Within that area of focus, commercial loans offer the most opportunity for growth. However, commercial lending processes can hinder growth if their execution creates inefficiencies and redundancies. This white paper is a discussion of current challenges most banks experience and offers strategies for improving the commercial lending process. The Industry Challenges Bank executives are anxiously scrambling to grow their lending business. The findings of a recent FIS survey of financial institution CEOs highlights this priority: The CEOs indicated their primary concern is growing loans, followed very closely by compliance and risk management challenges and controlling costs. Given the intense competition for these loans, banks must deliver outstanding service in order to differentiate themselves from the competition, all while managing the expenses that contribute to that growth. Issue FIS 2015 Survey Top Issues Facing CEOs Important/ Very Important Growing Loans 93% Compliance and Risk Management Challenges 91% Manage Costs 89% Improve Lending Margins 85% Increasing Noninterest Income 85% Improve Customer/Member Service 84% Improve Solutions to Attract New Customers 84% Implement New Systems and Technologies 73% Increase Core Deposits and Customer Acquisition 69% Respond to Potential Changes in Capital Requirements 50% Minimize Impact of Nontraditional Competitors 50% Consolidate Acquisitions and/or Operations 36% Within lending, the commercial market offers the most opportunity for new growth and additional revenue. According to recent survey on revenue growth from Bank Director, the majority of banks plan to grow through originating more loans. And the greatest organic loan growth potential lies in commercial real estate, with 85 percent of respondents indicating that was an area of focus. Commercial and Industrial loans came in second with 56 percent of respondents focusing on that area 1. The focus on lending and then subsequent focus on commercial loans is shown in the following charts. 1 Bank Director, 2015 Revenue Growth Strategy Survey 2

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4 Challenges of Commercial Lending In a recent study of commercial lending at financial institutions, Aite found challenges throughout the entire lending life cycle. They found poor project management capabilities, culturally ingrained bad habits and a shortage of junior bankers result in lengthy and error-prone underwriting processes. 2 Commercial lenders collect information about a prospective business, analyze that information and make an informed judgement regarding the loan amount and interest rate. Things become complicated with the complexity of the deal, the depth of the financial information gathered, a bank s risk and credit management policies, the perfection of the collateral and the servicing of the loan. Commercial lending is a source of great opportunity but is also a potential area of great inefficiency. Another attribute of commercial lending that creates inefficiencies is the paper-intensive processes ingrained in many banks. One recent analysis of the workflows supporting commercial lending in a $4 billion institution uncovered 22 different paper processes within the pre- and post-close environments, and this is likely just the tip of the iceberg. That paper is oftentimes delivered manually from person to person, further slowing down the workflow. Commercial lenders tend to rule the roost within many regional banks, making transformational change (or any kind of change) difficult to achieve. The old guard at many financial institutions needs to embrace new technology supporting origination, pricing and servicing of commercial loans. At the same time, this same staff must adopt new business processes that streamline loan processing, improve regulatory reporting and allow banks to accomplish more with fewer loan operations resources. A key to successful transformational change is to have the commercial lending team work with external lending and technology experts who are skilled in building consensus, implementing new technology and managing change. The next section of this paper addresses describes a comprehensive approach to achieving profitable, commercial loan growth. Areas to Investigate The first action toward enabling change is to assess where current commercial lending processes and technology stand relative to best practices within the banking industry. Key functional employees and areas to meet with in order to understand their jobs and current work flows within the bank are: Chief Lending Officer Document Preparation Lending Manager Loan Processor Lender/Loan Officer Loan Boarding/Funding Administrative Assistant Collateral Processor Chief Credit Officer Imaging Processor Senior Credit Officer Servicing Processor Credit Analyst Vault Clerk Loan Operations Manager Collections Recovery Once a current state analysis exists for the roles and responsibilities within commercial lending, a more detailed business process improvement effort can follow. The key elements for transforming business processes are described below. 2 Commercial Lending, Why it s broken and how to fix it, Aite, September

5 The Foundation for Creating Improvement Change is difficult for most people and organizations. The best way to gain acceptance is to involve those affected by the changes in the development of improved processes. Aided by a knowledgeable facilitator and subject matter experts, teams of key staff members can analyze workflows and make recommendations for improvement, gaining buy-in from all individuals involved. These teams, often referred to as Action Teams, might be made up of commercial lenders, loan assistants, credit underwriting and analysis, pre-closing support and post-closing support. Additional input from IT and compliance/audit can also prove helpful in the development of improved processes. By having representation from all aspects of the commercial lending process represented, Action Teams can examine process from all angles, ensuring that improvements for one side of a process do not negatively impact the other side. The knowledgeable facilitator and subject matter experts are usually individuals from outside the organization with experience in leading process improvement initiatives and in the commercial lending process, from origination through collection. These individuals must be familiar with available technologies, not just the technologies in use at the bank. Action Team members from the bank should be top performers in their areas who are vocal about the current processes and open to improving those processes. The desirable characteristics of a team member include: An open, optimistic mind and ability to embrace change Has the courage to ask questions and voice opinions Has no perceived hidden agenda Demonstrates a desire to do things better Works well in a team environment Can balance job and team tasks Thinks both creatively and analytically Is a doer, not just a talker Represents the stakeholder in the discipline examined Sales Support Compliance/Audit IT The Steps for Creating Improvement Improving commercial lending business processes while maximizing enabling technologies is best done in a logical progression, starting with origination and progressing through post-closing. The following steps can serve as a guide for a commercial lending transformation initiative. 1. Understand the current commercial lending environment. When it comes to workflow design and automation, the commercial lending workflow has received less attention than simpler workflows because of the complexities of commercial lending process. Further, commercial lenders tend to be change-averse. Very likely, the bank has not optimized its commercial lending business processes. Experts in lending, with the unbiased eyes of neutral observers, are often in the best position to assess a bank s commercial lending operation. These outside experts first must fully understand the commercial lending processes and then document these workflows. Consideration should be given to workflow variations due to relationship size, size of the request, complexity, collateral and whether or not the loan is made to an officer or board member. This understanding 5

6 creates a fact and knowledge-based foundation from which to lay the groundwork for meaningful change and improvement. 2. Examine processes closely, looking for improvement opportunities. On completion of the thorough review of existing processes, the Action Team examines each workflow and process closely, looking for opportunities for improvement. Introducing new technology to support commercial lending processes can initiate the change needed to reach productivity improvements in commercial lending. Origination systems are available to handle the nuances of commercial lending. Substituting technology for manual inputs improves productivity. The application of emerging technologies and the optimization of technology platforms such as origination, imaging and servicing remain important for the improvement of productivity and reduction of paper processing. Additionally, vendor solutions in commercial lending can help spread the mounting compliance investment across multiple financial institutions. 3. Communicate thoroughly. As opportunities for improvement are identified, documented and implemented, a critical activity to build consensus and support in a transformation of commercial lending is frequent and detailed communication. Change is never easy, but communication can help all individuals in the commercial lending area understand what the plan is for improving their organization. Consistent written and verbal communication that supports and explains the changes in business processes also help ease fear and uncertainty. Many banks have established a temporary newsletter for the life of a lending transformation initiative. With the unique branding and management participation, these can go a long way to gaining employee buy-in. 4. Adjust as needed. Lending transformations are iterative endeavors. Once changes are implemented, the outside experts will need to assess their impact and effectiveness going forward. Processes will need refinement or in some cases may need to be thrown out and redesigned. Technology must fit the newly optimized business processes, not the other way around. Continuous improvement should be the goal even after the outside experts have left the transformation project. With the right mindset and management support, the groundwork established in the original effort should help employees seek ways to further optimize workflows and lending operations as a whole. Summary Commercial lending offers financial institutions significant opportunities for both revenue growth and efficiency improvements. Done correctly, a commercial lending business process improvement effort can achieve both goals. For More Information For more information on strategies to improve commercial loan growth and bank productivity, contact FIS Consulting Services at or visit fisglobal.com FIS and/or its subsidiaries. All Rights Reserved. 6