The popularity of credit unions continues to increase - with credit card loans, mortgages and deposit accounts increasing more rapidly than those at commercial banks. Credit union membership hit 93 million in 2012, according to the Credit Union National Association. Community banks similarly saw a boost from public sentiment turning against larger banks during the recession. With big banks’ risk-averse attitude to small business lending, many credit unions and community banks are seizing the opportunity to be a competitive alternative for businesses by finding better and more cost effective ways to facilitate loans through customer-facing technologies. During the recession, these financial institutions picked up the slack and issued a proportionally higher percentage of commercial loans than in previous times.
Due to their complexity, commercial loans require commitment from bank management to monitor and control risks, more so than with mortgage loans. Few community banks and credit unions have risk management policies in place, resulting sometimes in relaxed loan covenants or concessions to attract new clients. In order to increase commercial lending, which is a priority for financial institutions at all levels, banks must have the operational capacity to facilitate loan review and approval efficiently. Back-office improvements to data infrastructure are not enough, however.
Community banks have an advantage in forming long-lasting relationships with business owners in their regions, but if there are no clear directives and procedures across the involved departments, confusion or stagnation may result. Cloud-based Software-as-a-Service (SAAS) options provide bankers with dramatically increased transparency, providing key data points and insights that would be nearly impossible to keep track of manually. This allows them to remain competitive not only by increasing economies of scale, but providing profitable commercial customers access to online tools and forms.
Cloud-based technologies, such as those that facilitate borrowing base certificates and accelerate the loan approval process by removing lengthy paper forms, are slowly being implemented by credit unions and community banks as a way to build upon personal relationships and provide greater customer service that big banks can’t offer. Big names like Cisco are also getting into the area of cloud financial management, helping customers lower IT costs and increase transparency. Some commentators have even named 2013 as the year of SAAS financial management software, with the historically lagging banking sector facing more legitimate, cost-effective management and automation tools on the market. Lending is one area—albeit a critical one—where credit unions and smaller banks can greatly stand to improve the customer experience.
Currently, the lending process is shrouded in mystery with little or no transparency and oftentimes confusion and frustration from the business/borrower. But with cloud-based technologies that provide up-to-the-minute information and a greater understanding of the loan approval process through simplified forms and reports, it is absolutely imperative that credit unions and community banks adopt these technologies to capture the limited but lucrative loan opportunities that exist.
In the long run, banks that preemptively implement technology will be more attractive to borrowers and will build upon strong existing relationships through greater transparency and ease not provided by larger financial institutions.
Of course, by implementing any new system or technology, there are certain challenges to overcome. Privacy and security concerns are naturally top-of-mind for many bankers when thinking about cloud-based software. The good news is that many financial software providers offer stringent data encryption as a feature. Encryption, simply put, “renders data in the cloud unreadable to anyone who doesn't have access to the encryption keys that unlock the content, making the data available only to the people and applications entitled to access it,” according to Bill Hackenberger, CEO of HighCloud Security.
As the economic recovery continues, the commercial lending landscape will become increasingly competitive as financial institutions vie for high-quality borrowers. In order to remain competitive, credit unions and smaller banks would be wise to look into low-cost customer-facing software improvements.
Corey Ross is the vice president of sales for BBC Easy, a cloud-based financial management provider in Seattle, WA.