September 14, 2010

One reason why I'm using this blog to announce the importance of the commercial loan (CL) module of core systems is that not many people know it's the most valuable application in the suite. Here's a case in point. During my seminars for bank tech vendors, it is clear that the best people show up. It's as if my announcement said, "Don't send your rookies." Early on, as an attention grabber, I use the following hypothetical situation: "You are invited to make a 15-minute presentation to a body of astute bankers who are evaluating core systems. They are using this method to quickly trim a large list of core brands (68) to a manageable list of five. What are you going to pitch during your fifteen minutes in order to assure your company will be selected as one of the five?"

I have conducted a half dozen vendor seminars, and so far, no one has answered "correctly." I've heard some good answers such as, the General Ledger system; Customer Relationship system; our Risk Management suite; our customer support track record; our system architecture; our dedicated pursuit to keep all systems current; and a myriad of other best attributes according to each vendor. I'm pleased that no one ever mentioned "our DDA system." I even ask bankers the same question at various group gatherings, and they don't get it either.

And it's not a tricky question, folks. The reason the CL system is most important is because all the other core apps are primarily accounting systems, not trouble-detection systems. A banker could walk into a dark room, put his hand on one of ten icons representing ten top vendors, and walk out with a pretty good core system. But there's only a ten percent chance he would have the best CL system.

So why do I have this life-or-death mania with commercial lending? Here are my reasons:

1. Even though we are temporarily in a lending drought period, lending is the way banks make money if they're good at it. Making money on investments isn't systems-reliant, it's stock-market-roulette-reliant. Making money on fees these days is, well, fuggettaboutit.

2. Commercial lending, if not done properly, is also the quickest way to fail the bank.

3. Loan Review Committees should be heartless. As Bob Hope once said, if he ever needed a heart transplant he'd want it to come from a banker because it wouldn't have been used much. A good CL system is all about information, not feelings.

4. Lending offers opportunities for more creative offerings, and I'm not talking about subprime mortgages. Every borrower is not the same, so a CL system should be flexible. Don't stab the borrower in the heart with weird bank restrictions, and expect him to make payments on time.

5. A CL system is not just a debits, credits and balance accounting system. It's an information system.

6. Unlike granny's CD, a CL requires dynamic monitoring with interactive retrievals and updates.

7. A good CL system is very complex and sometimes hard to define completely. In my annual list of hot apps during the past four years, a reader won't find "commercial loan system," but he will find names such as loan pricing models, credit risk management, collateral management, loan origination, compliant document management, commercial straight thru processing, loan administration, commercial credit management system, and the pervasive business intelligence solution. These are all subsets of a sophisticated CL system.

8. A good CL system provides early detection alerts that can save the bank, as long as the loan officer is smart enough to use the system's warnings that the loan is showing signs of heading south.

9. A good CL system has the ability to create pay-back customization that recognizes industry peculiarities of the borrower. As an aside, I loved the idea that Installment Loan systems would give schoolteachers a break during summer recess.

10. While the top hundred U.S. banks are beginning to adopt core solutions from FIS and Fiserv, why is it they are looking within and at boutique vendors for CL systems? In my opinion, it says lenders at large banks believe CL must be important enough that they can be extremely picky. Some packaged software vendors are good at catering to picky customers, while others walk away and look for inside-the-box customers. 11. Good CL systems track more than borrowers. They also track loan officer performance. Isn't that a good thing? When slap-happy Dejavu Lender approves every deadbeat he meets at the bar after five, it's likely those loans will soon be red-flagged on one of the hundreds of CL performance reports as a suspect loan default.

Now that I have exposed 90% of the bank tech population to a severe infliction of CL system ostrichitis, let me tell you about a few vendor observations. My conversations with bank tech vendor execs are anything but casual. While they're talking, I'm learning and recording. Three guys out there would chuckle at my seminar contests because they know they would have won the cigar easily, even though they don't smoke. I've been watching them for more than 30 years, and the three who grew up to really earn the top spots as bank tech experts (as well as CEO, Chairman and COO of the top three core vendors) are Jack Prim, Don Dillon and Gary Norcross. They've got bank systems in their blood and even though they've got bigger issues on their plates today, they'll tell you a lot more about how to run banks successfully than most bankers can. That's why you've never seen their faces at Congressional hearings. Destroyers of banks get invited to those hot seats.

And if none of the above works for you, consider this. There are hundreds of books written about accounting systems which any good software developer would have referenced. But no one has ever written a book about how to build a comprehensive commercial loan system. As a result, bankers rely on the modern-day likes of Jack, Don and Gary for protection. That means 10,803 financial institutions didn't choose their core system in a dark room.